D&E COMMUNICATIONS INC - 10-Q Quarterly Report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2002

or

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________

Commission File Number: 000-20709

D&E Communications, Inc.
(Exact name of registrant as specified in its charter)

PENNSYLVANIA
(State or other jurisdiction of
incorporation or organization)

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

Brossman Business Complex
124 East Main Street
P. O. Box 458
Ephrata, Pennsylvania 17522
(Address of principal executive offices)

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

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

Yes X No
------- -------

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

Class Outstanding at August 9, 2002
----- -----------------------------

Common Stock, par value $0.16 per share 15,396,575 Shares

D&E Communications, Inc. and Subsidiaries

Form 10-Q

TABLE OF CONTENTS

Item No. Page
- -------- ----

PART I. FINANCIAL INFORMATION

1. Financial Statements

Consolidated Statements of Operations --
For the three months and six months ended
June 30, 2002 and 2001 ............................... 1

Consolidated Balance Sheets --
June 30, 2002 and December 31, 2001 .................. 2

Consolidated Statements of Cash Flows --
For the six months ended June 30, 2002 and 2001 ...... 3

Consolidated Statements of Shareholders' Equity --
For the six months ended June 30, 2002 and 2001 ...... 4

Notes to Consolidated Financial Statements .................... 5

2. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................ 16

3. Quantitative and Qualitative Disclosures about Market Risk ........ 41

PART II. OTHER INFORMATION

1. Legal Proceedings ................................................ 42

6. Exhibits and Reports on Form 8-K ................................. 43

SIGNATURES........................................................ 44

i

Form 10-Q Part I - Financial Information
Item 1. Financial Statements

D & E Communications, Inc. and Subsidiaries
Consolidated Statements of Operations
(in thousands, except per-share amounts)
(Unaudited)

Three Months Ended Six Months Ended
June 30, June 30,
OPERATING REVENUES 2002 2001 2002 2001
-------- -------- -------- --------

Communication service revenues .................... $ 22,019 $ 15,337 $ 37,954 $ 30,066
Communication products sold ....................... 3,663 3,198 6,942 6,223
Other ............................................. 467 376 857 777
-------- -------- -------- --------
Total operating revenues ....................... 26,149 18,911 45,753 37,066
-------- -------- -------- --------

OPERATING EXPENSES

Communication service expenses (exclusive of
depreciation and amortization below) ........... 8,260 6,473 15,284 12,842
Cost of communication products sold ............... 3,098 2,602 5,874 5,051
Depreciation and amortization ..................... 5,581 3,693 9,465 7,222
Marketing and customer services ................... 2,713 2,523 4,862 4,578
Merger-related costs .............................. 1,058 -- 1,058 --
General and administrative services ............... 5,601 3,568 9,140 7,233
-------- -------- -------- --------
Total operating expenses ....................... 26,311 18,859 45,683 36,926
-------- -------- -------- --------
Operating income (loss) ................... (162) 52 70 140
-------- -------- -------- --------

OTHER INCOME (EXPENSE)

Equity in net income (losses) of affiliates ....... (702) 1,730 (1,177) 442
Interest expense .................................. (2,048) (465) (2,756) (918)
Other than temporary loss on investments .......... (2,999) -- (2,999) --
Other, net ........................................ 194 413 201 744
-------- -------- -------- --------
Total other income (expense) ................... (5,555) 1,678 (6,731) 268
-------- -------- -------- --------

Income (loss) from continuing operations
before income taxes and dividends on
utility preferred stock ................ (5,717) 1,730 (6,661) 408

INCOME TAXES AND DIVIDENDS ON UTILITY PREFERRED STOCK

Income taxes ...................................... (2,060) 136 (2,212) 244
Dividends on utility preferred stock .............. 17 17 33 33
-------- -------- -------- --------

Total income taxes and dividends
on utility preferred stock .................. (2,043) 153 (2,179) 277
-------- -------- -------- --------

Income (loss) from continuing operations .. (3,674) 1,577 (4,482) 131

Discontinued operations:
Loss from operations of discontinued D&E Wireless
segment prior to December 31, 2001, net of income
tax benefit of $881 and $1,552 ................ -- (1,644) -- (2,999)
Gain on disposal of discontinued D&E Wireless
segment, net of operating losses during phase-out
period and net of income taxes of $29,199 ..... 55,785 -- 55,785 --
Loss from operations of Conestoga Wireless, net
of income tax benefit of $121 ................. (159) -- (159) --
-------- -------- -------- --------

Income (loss) before extraordinary item ... 51,952 (67) 51,144 (2,868)

Extraordinary item, income tax benefit of $107 .... -- -- -- 107
-------- -------- -------- --------

NET INCOME (LOSS) ....................................... $ 51,952 $ (67) $ 51,144 $ (2,761)
======== ======== ======== ========

Weighted average common shares outstanding ........ 10,722 7,387 9,047 7,386

BASIC AND DILUTED EARNINGS (LOSS) PER COMMON SHARE

Income (loss) from continuing operations .......... $ (0.34) $ 0.21 $ (0.50) $ 0.02
Income (loss) from discontinued operations ........ 5.19 (0.22) 6.15 (0.41)
Extraordinary item ................................ 0.00 0.00 0.00 0.02
-------- -------- -------- --------
Net income (loss) per common share ............ $ 4.85 $ (0.01) $ 5.65 $ (0.37)
======== ======== ======== ========

Dividends per common share ........................ $ 0.13 $ 0.13 $ 0.25 $ 0.25
======== ======== ======== ========

See notes to consolidated financial statements.

1

D & E Communications, Inc. and Subsidiaries
Consolidated Balance Sheets
(in thousands, except share amounts)
(Unaudited)

June 30, December 31,
ASSETS 2002 2001
---- ----

CURRENT ASSETS
Cash and cash equivalents ............................................. $ 7,151 $ 615
Accounts receivable ................................................... 21,571 10,105
Accounts receivable - PCS ONE ......................................... 2,978 5,938
Inventories, lower of cost or market, at average cost ................. 3,747 1,781
Prepaid expenses ...................................................... 7,525 3,817
Other ................................................................. 1,030 494
---------- ----------
TOTAL CURRENT ASSETS ............................................... 44,002 22,750
---------- ----------
INVESTMENTS
Investments in and advances to affiliated companies ................... 5,962 6,431
Investments available-for-sale ........................................ 1,355 4,425
---------- ----------
7,317 10,856
---------- ----------
PROPERTY, PLANT AND EQUIPMENT
In service ............................................................ 295,422 178,274
Under construction .................................................... 9,467 5,034
---------- ----------
304,889 183,308
Less accumulated depreciation ......................................... 95,456 88,163
---------- ----------
209,433 95,145
---------- ----------
OTHER ASSETS
Conestoga Wireless assets held for sale ............................... 19,000 --
Goodwill .............................................................. 231,664 5,126
Intangible assets, net of amortization ................................ 30,455 1,017
Deferred income taxes ................................................. -- 905
Other ................................................................. 18,755 7,079
---------- ----------
299,874 14,127
---------- ----------

TOTAL ASSETS .......................................................... $ 560,626 $ 142,878
========== ==========

LIABILITIES AND SHAREHOLDERS' EQUITY

CURRENT LIABILITIES
Borrowings under line of credit ....................................... $ -- $ 1,757
Long-term debt maturing within one year ............................... 126 52
Accounts payable and accrued liabilities .............................. 22,259 16,319
Accrued taxes ......................................................... 22,832 352
Accrued interest and dividends ........................................ 1,885 333
Advance billings, customer deposits and other ......................... 5,645 3,668
---------- ----------
TOTAL CURRENT LIABILITIES .......................................... 52,747 22,481
---------- ----------
LONG-TERM DEBT .............................................................. 247,783 58,124
---------- ----------
OTHER LIABILITIES
Equity in net losses of discontinued D&E Wireless operations in
excess of investments and advances ................................ -- 10,388
Deferred income taxes ................................................. 36,995 --
Other ................................................................. 10,812 6,564
---------- ----------
47,807 16,952
---------- ----------
PREFERRED STOCK OF UTILITY SUBSIDIARY, Series A 4 1/2%,
par value $100, cumulative, callable at par at the option
of the Company, authorized 20,000 shares,
outstanding 14,456 shares ............................................ 1,446 1,446
---------- ----------
COMMITMENTS

SHAREHOLDERS' EQUITY
Common stock, par value $0.16, authorized shares 30,000,000 ........... 2,502 1,219
Outstanding shares: 15,386,444 at June 30, 2002
7,362,226 at December 31, 2001
Additional paid-in capital ........................................... 157,375 39,956
Accumulated other comprehensive income (loss) ........................ (2,876) (2,833)
Retained earnings .................................................... 58,946 10,637
Treasury stock at cost, 276,904 shares at June 30, 2002
276,900 shares at December 31, 2001 . .............................. (5,104) (5,104)
---------- ----------
210,843 43,875
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ........................... $ 560,626 $ 142,878
========== ==========

See notes to consolidated financial statements.

2

D & E Communications, Inc. and Subsidiaries

Consolidated Statements of Cash Flows
(in thousands)
(Unaudited)

Six Months Ended
June 30,
2002 2001
---------- ----------

CASH FLOWS FROM OPERATING ACTIVITIES OF
CONTINUING OPERATIONS ................................................ $ 5,448 $ 7,738
---------- ----------

CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures, net of proceeds from sales and removal costs ... (10,763) (17,221)
Business acquisition costs, net of cash acquired of $1,003 ........... (158,720) --
Proceeds from sale of temporary investments .......................... -- 17,336
Purchase of temporary investments .................................... -- (17,333)
Increase in investments and advances to affiliates ................... (1,267) (3,813)
Decrease in investments and repayments from affiliates ............... 550 374
---------- ----------

Net Cash Used In Investing Activities from Continuing Operations ... (170,200) (20,657)
---------- ----------

CASH FLOWS FROM FINANCING ACTIVITIES
Dividends on common stock ............................................ (2,718) (1,720)
Payments on long-term debt ........................................... (42,210) (36)
Proceeds from long-term debt financing ............................... 160,000 --
Payment of debt issuance costs ....................................... (7,922) --
Net proceeds from (payments on) revolving lines of credit ............ (11,757) 21,383
Proceeds from issuance of common stock ............................... 570 170
---------- ----------

Net Cash Provided By Financing Activities from
Continuing Operations .......................................... 95,963 19,797
---------- ----------

CASH PROVIDED BY (USED IN) CONTINUING OPERATIONS ........................... (68,789) 6,878

CASH PROVIDED BY (USED IN) DISCONTINUED OPERATIONS
Cash Provided by (Used in) Operating Activities of
Discontinued Operations ............................................ (110) 495
Cash Provided by (Used in) Investing Activities of
Discontinued Operations ............................................ 75,435 (9,343)
---------- ----------

Net Cash Provided By (Used In ) Discontinued Operations ............ 75,325 (8,848)
---------- ----------

INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ........................... 6,536 (1,970)

CASH AND CASH EQUIVALENTS
BEGINNING OF PERIOD .................................................. 615 3,527
---------- ----------

END OF PERIOD ........................................................ $ 7,151 $ 1,557
========== ==========

See notes to consolidated financial statements.

3

D&E Communications, Inc. and Subsidiaries

Consolidated Statements of Shareholders' Equity

For the six months ended June 30, 2002 and 2001

(in thousands)
(Unaudited)

2002 2001
---- ----
Shares Amount Shares Amount
---------- ---------- ---------- ----------

COMMON STOCK
Balance at beginning of year .................................. 7,639 $ 1,219 7,608 $ 1,214

Common stock issued for acquisition ........................... 7,869 1,259 -- --
Common stock issued for Employee Stock Purchase, Long-
Term Incentive and Dividend Reinvestment Plans ............. 115 18 17 2
Common stock issued for stock options exercised ............... 40 6 -- --
---------- ---------- ---------- ----------
Balance at June 30 ............................................ 15,663 2,502 7,625 1,216
---------- ---------- ---------- ----------

ADDITIONAL PAID-IN CAPITAL
Balance at beginning of year .................................. 39,956 39,374

Common stock issued for acquisition ........................... 115,386 --
Common stock issued for Employee Stock Purchase, Long-
Term Incentive and Dividend Reinvestment Plans ............. 1,666 289
Common stock issued for stock options exercised ............... 367 --
---------- ----------
Balance at June 30 ............................................ 157,375 39,663
---------- ----------

ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Balance at beginning of year .................................. (2,833) 467

Unrealized gain (loss) on investments ......................... (1,868) 1,156
Loss realized on other-than-temporary decline, net of tax ..... 1,825 --
---------- ----------
Balance at June 30 ............................................ (2,876) 1,623
---------- ----------

RETAINED EARNINGS
Balance at beginning of year .................................. 10,637 18,366

Net income (loss) ............................................. 51,144 (2,761)
Dividends on common stock: $.25, $.25 per share ............... (2,835) (1,840)
---------- ----------
Balance at June 30 ............................................ 58,946 13,765
---------- ----------

TREASURY STOCK
Balance at beginning of year .................................. (277) (5,104) (226) (4,059)
Treasury stock acquired ....................................... -- -- (11) (209)
---------- ---------- ---------- ----------
Balance at June 30 ............................................ (277) (5,104) (237) (4,268)
---------- ---------- ---------- ----------
TOTAL SHAREHOLDERS' EQUITY .......................................... 15,386 $ 210,843 7,388 $ 51,999
========== ========== ========== ==========

Three Months Ended Six Months Ended
June 30 June 30
2002 2001 2002 2001
-------- -------- -------- --------

COMPREHENSIVE INCOME (LOSS)
Net income (loss) ............................................ $ 51,952 ($ 67) $ 51,144 ($ 2,761)
Unrealized gain (loss) on investments, net of income
taxes of ($774), $445, ($1,198) and $664 ................ (1,211) 691 (1,868) 1,156
Loss realized on other-than-temporary decline, net of tax
of $1,174 ............................................... 1,825 -- 1,825 --
-------- -------- -------- --------
Total comprehensive income (loss) $ 52,566 $ 624 $ 51,101 ($ 1,605)
======== ======== ======== ========

See notes to consolidated financial statements.

4

D&E Communications, Inc. and Subsidiaries
Part I - Financial Information (continued)

Item 1. Notes to Consolidated Financial Statements
(Dollar amounts are in thousands)
(Unaudited)

(1) BASIS OF PRESENTATION

The accompanying consolidated financial statements include the
accounts of D&E Communications, Inc. and its wholly owned subsidiaries.
D&E Communications, Inc., including its subsidiary companies, is defined
and referred to herein as D&E. On May 24, 2002, D&E completed its
acquisition of Conestoga Enterprises, Inc. (Conestoga). The following
subsidiaries of Conestoga are included in D&E's June 30, 2002 results
since the date of completion of the acquisition:

The Conestoga Telephone and Telegraph Company and Buffalo Valley
Telephone Company, which are independent local exchange carriers providing
both regulated and nonregulated communication services;

CEI Networks, Inc., which provides long distance and competitive
local telephone services;

Conestoga Mobile Systems, Inc., which provides paging communication
services;

Infocore, Inc., which provides communication consulting services
including the design and installation of communications systems;

Conestoga Investment, Inc., an investment holding company; and

Conestoga Wireless Company, which provides wireless personal
communication services (PCS) and has been reported as a discontinued
operation.

The accompanying financial statements are unaudited and we have
prepared them pursuant to generally accepted accounting principles and the
rules and regulations of the Securities and Exchange Commission (SEC). In
the opinion of management, the financial statements include all
adjustments (consisting of normal recurring adjustments) necessary to
present fairly our results of operations, financial position and cash
flows for the periods presented. Certain items in the financial statements
for the three months and six months ended June 30, 2001 have been
reclassified for comparative purposes to conform to the current periods'
presentation. In addition, certain information and footnote disclosures
normally included in financial statements prepared in accordance with
accounting principles generally accepted in the United States of America
have been condensed or omitted pursuant to SEC rules and regulations. The
use of generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amount of revenues and
expenses during the reporting period. Actual results could differ from
those estimates. We believe that the disclosures made are adequate to make
the information presented not misleading. These financial statements
should be read in conjunction with D&E's financial statements and notes
thereto included in our Annual Report on Form 10-K/A for the fiscal year
ended December 31, 2001 and with D&E's Current Report on Form 8-K related
to the completion of its acquisition of Conestoga filed with the
Securities and Exchange Commission on June 10, 2002.

5

D&E Communications, Inc. and Subsidiaries
Part I - Financial Information (continued)

ITEM 1. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts are in thousands)
(Unaudited)

(2) ACQUISITION OF BUSINESS

On May 24, 2002, we completed the acquisition of Conestoga
Enterprises, Inc. (Conestoga), a neighboring rural local telephone company
providing integrated communications services throughout the eastern half
of Pennsylvania. The acquisition was completed through the merger of
Conestoga with and into D&E Acquisition Corp., a wholly-owned subsidiary
of D&E, pursuant to the Amended and Restated Agreement and Plan of Merger,
dated as of January 9, 2002.

Total purchase price and transaction costs were approximately $272,423 as
follows:

Cash consideration to Conestoga stockholders.................................... $149,554
D&E Communications stock to Conestoga stockholders (7,868,570 shares) at 114,645
$14.57 per share based on 3-day average market price per share prior to
close of the merger on May 24, 2002........................................
Fair value of Conestoga stock options........................................... 2,000
Estimated transaction expenses.................................................. 6,224
--------
Total purchase price and transaction costs............................ $272,423

The final allocation will be determined by D&E based on reports of
independent appraisers. The final allocation will include, if applicable,
recognition of any further adjustments to tangible assets and liabilities
to state them at their fair values, and recognition of any additional
identifiable intangible assets at their fair values. The residual effect
of such adjustments will be recorded as goodwill.

D&E has accrued as a cost of the acquisition and as part of goodwill
approximately $3,099 for the estimated costs of severance and retention
bonuses to be paid to Conestoga employees. The costs for terminating
certain of D&E employees, totaling $225, are included in merger-related
costs in the statement of operations. D&E terminated approximately 20
employees in June 2002 and an additional 30 will be terminated after a
transition period. Most of the severance payments will be made during the
remainder of 2002.

The following unaudited pro forma combined results of operations is
provided for illustrative purposes only and assumes that this acquisition
had occurred as of the beginning of each of the periods presented. The
following unaudited pro forma information should not be relied upon as
necessarily being indicative of the historical results that would have
been obtained if this acquisition had actually occurred during those
periods, nor the results that may be obtained in the future.

6

D&E Communications, Inc. and Subsidiaries
Part I - Financial Information (continued)

Item 1. Notes to Consolidated Financial Statements
(Dollar amounts are in thousands)
(Unaudited)

Three months ended Six months ended
June 30, June 30,
2002 2001 2002 2001
---- ---- ---- ----

Pro forma operating revenues $39,626 $39,820 $81,300 $79,270
Pro forma income (loss) before extraordinary
items 48,871 $(733) 47,250 $(3,856)
Pro forma net income 48,871 $(733) 47,250 $(3,749)
Pro forma income (loss) per share $3.19 $(0.05) $3.08 $(0.25)

(3) DISCONTINUED OPERATIONS

D&E WIRELESS

D&E's fifty percent partnership interest in D&E/Omnipoint Wireless
Joint Venture, L.P. (PCS ONE) and the related contract services D&E
provides to PCS ONE constitute a separate segment of our business. On
October 17, 2001, D&E entered into a definitive agreement to sell its
interest in PCS ONE to VoiceStream Wireless Corporation for $117,000 less
working capital and long-term debt adjustments. The related contract
services we provide to PCS ONE will be discontinued subsequent to the
sale, but will continue for up to six months post closing.

During December 2001, D&E obtained required lender approvals and
passed compliance of the Hart-Scott-Rodino Act requirements. Remaining
regulatory approvals and other customary closing conditions were deemed to
be perfunctory. As such, the assets and liabilities and results of
operations of D&E Wireless are reported as discontinued operations in
accordance with APB Opinion No. 30 with a measurement date of December 31,
2001. The only assets or liabilities held for sale were the equity in net
losses of PCS ONE, which were classified as equity in net losses of
discontinued D&E Wireless operations in excess of investments and advances
in the balance sheet.

In accordance with EITF 85-36, beginning January 1, 2002, through
disposal date (the phase-out period), losses from D&E Wireless
were deferred because it was reasonably assured that the ultimate
disposition of this business would result in the recognition of a gain.
Losses were deferred until a gain on sale was recognized.

On April 1, 2002, we consummated our sale of PCS ONE. We received
$74,168 in cash, which remains subject to post closing adjustments as set
forth in the sale agreement that are expected to be finalized in the third
quarter of 2002. In addition, we received equipment with a fair value of
approximately $2,014. Selling and other estimated costs, offset by
estimated post-closing adjustments, are approximately $175 and associated
income taxes are estimated at

7

D&E Communications, Inc. and Subsidiaries
Part I - Financial Information (continued)

Item 1. Notes to Consolidated Financial Statements
(Dollar amounts are in thousands)
(Unaudited)

$29,164. The gain on sale recognized was $55,736 after eliminating the
$8,893 liability for the equity in net losses of discontinued D&E Wireless
operations in excess of investments and advances. The proceeds from the
sale of PCS ONE were used to help finance the acquisition of Conestoga
Enterprises, Inc. (see Note 2). Contract services will continue into the
third quarter of 2002.

Summarized financial information for the discontinued operations of
D&E Wireless Services is as follows:

Three months ended June 30, Six months ended June 30,
--------------------------- -------------------------
2002 2001 2002 2001
---- ---- ---- ----

Revenue $ 1,230 $ 2,884 $ 4,012 $ 5,571
Expenses 1,146 2,659 3,591 5,110
------- ------- ------- -------
Operating income 84 225 421 461
Equity in net loss of PCS ONE -- (2,779) (1,605) (5,044)
Phase-out losses deferred until sale -- -- 1,268
Gain on sale of PCS ONE 84,900 -- 84,900 --
Other income (expense) -- 29 -- 32
------- ------- ------- -------
Income (loss) from D&E wireless
operations before taxes 84,984 (2,525) 84,984 (4,551)
Income taxes 29,199 (881) 29,199 (1,552)
------- ------- ------- -------
Income (loss) from D&E wireless
operations, net of taxes $55,785 ($1,644) $55,785 ($2,999)
------- ------- ------- -------

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

Three months ended June 30, Six months ended June 30,
--------------------------- -------------------------
2002 2001 2002 2001
---- ---- ---- ----

Net sales $ -- $10,592 $12,312 $20,266
Net loss -- ($5,558) ($3,211) (10,088)
Our share of loss -- ($2,779) ($1,605) (5,044)

CONESTOGA WIRELESS

On May 24, 2002, we acquired Conestoga Enterprises, Inc. (see Note
2). From the date of acquisition, D&E had committed to a plan to sell the
assets of Conestoga's wireless segment. As such, the assets and results of
operations of the Conestoga wireless segment are reported as discontinued
operations in accordance with Statement of Financial Accounting Standards
No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets."
The assets are not depreciated while they are held for sale. D&E expects
to sell the business within a year from acquisition. No liabilities are
expected to be included as part of the sale. The carrying amount of the
major classes of assets included as part of the Conestoga wireless
business to be sold are as follows:

8

D&E Communications, Inc. and Subsidiaries
Part I - Financial Information (continued)

Item 1. Notes to Consolidated Financial Statements
(Dollar amounts are in thousands)
(Unaudited)

June 30, 2002
-------------

Inventories $ 1,250
Property & equipment 16,550
PCS licenses 1,200
-----------
Total $ 19,000
-----------

Summarized income statement information for the discontinued
operations of the Conestoga wireless segment were as follows:

May 24, 2002 through
--------------------
June 30, 2002

Revenue $ 765
Expenses 1,045
-----------
Operating loss (280)
Income taxes (121)
-----------
Loss from Conestoga wireless operations,
net of taxes $ (159)
-----------

(4) INVESTMENTS IN AFFILIATED COMPANIES

As of December 31, 2001, we owned a one-third investment in EuroTel
L.L.C. (EuroTel), a domestic corporate joint venture. EuroTel held a 100%
investment in PenneCom, B.V. (PenneCom), an international
telecommunications holding company that held a 100% investment in Pilicka
Telefonia, Sp.zo.o (Pilicka), a telecommunications company located in
Poland.

As of December 31, 2001, PenneCom was indebted to EuroTel for
$10,656 and to the investors in EuroTel for $36,751 (including $14,623 to
D&E). PenneCom agreed with EuroTel and the EuroTel investors to satisfy a
portion of its indebtedness to EuroTel and the founders by transferring
PenneCom's entire equity interests in Pilicka to EuroTel and the founders.
PenneCom satisfied $3,384 of its indebtedness to EuroTel by transferring
22.56% of the capital stock of Pilicka to EuroTel, satisfied $4,650 of its
indebtedness to D&E by transferring 31.00% of the capital stock of Pilicka
to D&E, and satisfied $6,966 of indebtedness to the other EuroTel
investors by transferring 46.44% of the capital stock of Pilicka to the
other EuroTel investors. The total amount of indebtedness satisfied by
PenneCom was equal to the total estimated fair value of Pilicka at
December 31, 2001. These transactions were effective as of January 1,
2002. As a result of these transactions, D&E now has a 31.00% direct
ownership in Pilicka and an indirect 7.52% ownership in Pilicka, through
its continuing one-third interest in EuroTel. D&E accounts for both its
investment in EuroTel and its investment in Pilicka using the equity
method of accounting.

9

D&E Communications, Inc. and Subsidiaries
Part I - Financial Information (continued)

Item 1. Notes to Consolidated Financial Statements
(Dollar amounts are in thousands)
(Unaudited)

The summarized results of operations of EuroTel were as follows:

Three months ended June 30, Six months ended June 30,
--------------------------- -------------------------
2002 2001 2002 2001
---- ---- ---- ----

Net sales $ -- $1,966 $ -- $3,674
Net income (loss) ($ 354) $5,909 (1,047) 2,046
Our share of income (loss) ($ 118) $1,730 ( 349) 442

The summarized results of operations of Pilicka were as follows:

Three months ended June 30, Six months ended June 30,
--------------------------- -------------------------
2002 2002
---- ----

Net sales $2,415 $4,723
Net loss ($1,136) ($1,924)
Our share of loss ($ 352) ($ 596)
Investment amortization ($ 232) ($ 232)
Total loss ($ 584) ($ 828)

(5) ACCOUNTING CHANGES AND RECENT ACCOUNTING PRONOUNCEMENTS

On January 1, 2002, we adopted Statement of Financial Accounting
Standards No. 142, "Goodwill and Other Intangible Assets" (SFAS 142),
which addresses the accounting for goodwill and intangible assets
subsequent to their acquisition. With the adoption of SFAS 142, goodwill
is no longer subject to amortization. As an indefinite lived asset,
goodwill is still subject to at least an annual assessment for impairment.
We have completed our transitional intangible impairment test, and based
upon a discounted future cash flows model, the goodwill has been deemed to
not be impaired.

The elimination of goodwill amortization would have reduced net loss
by approximately $226 for the three months and $472 for the six months
ended June 30, 2001, or $0.03 and $0.06 respectively per basic and diluted
share. Pro forma net loss and loss per share information are shown as if
the provisions of SFAS No. 142 were in effect for fiscal 2001.

10

D&E Communications, Inc. and Subsidiaries
Part I - Financial Information (continued)

Item 1. Notes to Consolidated Financial Statements
(Dollar amounts are in thousands)
(Unaudited)

Three months ended June 30, Six months ended June 30,
--------------------------- -------------------------
(Dollars in thousands, except
per share amounts) 2002 2001 2002 2001
---- ---- ---- ----

Reported net income (loss) $ 51,952 ($ 67) $ 51,144 ($ 2,761)
Add: Goodwill amortization -- 226 -- 472
-------- -------- -------- --------
Adjusted net income (loss) $ 51,952 $ 159 $ 51,144 ($ 2,289)
-------- -------- -------- --------

Basic and diluted earnings per share:
Reported net income (loss) $ 4.85 ($ 0.01) $ 5.65 ($ 0.37)
Add: Goodwill amortization -- 0.03 -- 0.06
-------- -------- -------- --------
Adjusted net income (loss) $ 4.85 $ 0.02 $ 5.65 ($ 0.31)
-------- -------- -------- --------

During the first quarter 2002, we also adopted Statement of
Financial Accounting Standards No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets" (SFAS 144) which addresses issues relating
to the implementation of Statement of Financial Accounting Standards No.
121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of." We have determined that there is no
impairment to any long-lived assets. We have also accounted for the
planned sale of the Conestoga wireless operations in accordance with SFAS
144 (Note 3).

Statement of Financial Accounting Standards No. 143, "Accounting for
Obligations Associated with the Retirement of Long-Lived Assets" (SFAS
143) was recently issued to provide accounting guidance for legal
obligations associated with the retirement of long-lived assets. SFAS 143
is effective for fiscal years beginning after June 15, 2002. We are
currently evaluating the impact this statement will have on our financial
position and results of operations.

6) LONG-TERM DEBT

During the second quarter of 2002 in connection with the Conestoga
acquisition (Note 2), we incurred additional indebtedness to finance a portion
of the acquisition and to repay certain existing indebtedness and related fees
and we also assumed certain existing indebtedness of Conestoga. In addition, in
the second quarter we incurred $833 of costs in connection with an abandoned
note offering which have been expensed in merger-related costs in the statement
of operations. The following table sets forth total long-term debt outstanding:

11

D&E Communications, Inc. and Subsidiaries
Part I - Financial Information (continued)

Item 1. Notes to Consolidated Financial Statements
(Dollar amounts are in thousands)
(Unaudited)

Interest June 30, December 31,
Description rate Maturity 2002 2001
- ----------------------------------------------------------------------------------------

Senior Secured Term Loan B 5.69% 2010 $125,000 $ --
Senior Secured Term Loan A 5.97% 2011 50,000 50,000
Senior Secured Revolving Credit Facility 5.65% 2009 35,000 8,000
Secured Term Loan 9.34% 2014 20,000 --
Secured Term Loan 9.36% 2014 15,000 --
Capital lease obligations 2,909 176
-----------------------
247,909 58,176
Less current maturities 126 52
-----------------------
Total long-term debt $247,783 $ 58,124
=======================

Senior Secured Term Loan B:

We have outstanding a new 8-1/2-year variable rate Senior Secured Term Loan B
("Term Loan B") for $125,000. Term Loan B bears interest at our option at either
the U.S. prime rate plus 1.75% to 3.00% or at LIBOR plus 2.50% to 4.00%,
depending on our total leverage ratio. At June 30, 2002 the average interest
rate was 5.69%. Term Loan B requires interest only payments for two years with
increasing quarterly principal payments from the third quarter of 2004 through
the fourth quarter of 2010.

Senior Secured Term Loan A:

The Secured Senior Term Loan A ("Term Loan A") bears interest at a base rate or
at one, two, three or six month LIBOR rates plus an applicable margin based on
our leverage ratio. At June 30, 2002 the average interest rate was 5.97%. The
Term Loan A requires interest only payments for three years with increasing
quarterly principal payments from the third quarter of 2004 through the second
quarter of 2011.

Senior Secured Revolving Credit Facility:

The Senior Secured Revolving Credit Facility ("Credit Facility") is a $75,000
8-1/2-year senior secured reducing revolving credit facility. The Credit
Facility requires interest only payments for two years with increasing quarterly
principal reductions of the amount available to borrow from the third quarter of
2004 through the fourth quarter of 2010. Interest is payable at a base rate or
at one, two, three or six month LIBOR rates plus an applicable margin based on
our leverage ratio. At June 30, 2002 the interest rate was 5.65%. The Credit
Facility also requires a quarterly commitment fee on the unused portion.

9.34% Secured Term Loan:

The 9.34% Secured Term Loan was assumed as a result of the Conestoga acquisition
(Note 2) and has been recorded at its book value, which approximates fair value.
The 9.34% Secured Term Loan requires interest to be paid quarterly at the stated
rate and also requires principal to be paid in quarterly installments of $500
from 2005 through 2014.

12

D&E Communications, Inc. and Subsidiaries
Part I - Financial Information (continued)

Item 1. Notes to Consolidated Financial Statements
(Dollar amounts are in thousands)
(Unaudited)

9.36% Secured Term Loan:

The 9.36% Secured Term Loan was assumed as a result of the Conestoga acquisition
(Note 2) and has been recorded at its book value, which approximates fair value.
The 9.36% Secured Term Loan requires interest to be paid quarterly at the stated
rate and also requires principal to be paid in quarterly installments of $375
from 2005 through 2014.

Our indebtedness requires that we maintain certain financial and operational
covenants. The most restrictive covenant is the total leverage ratio. At June
30, 2002, we were in compliance with all covenants. We are also required to
maintain interest rate protection on one-half of the total amount of senior
indebtedness outstanding, with a weighted average life of at least 2 years,
beginning on November 24, 2002.

Based on the borrowing rate currently available to us for bank loans, the book
value of long-term debt approximates the fair market value.

Maturities of long-term debt, for each year ending December 31, 2002 through
2006, are as follows:

Year Aggregate Amount
---- ----------------

2002 $ --
2003 --
2004 2,500
2005 5,000
2006 5,000

At December 31, 2001, we had $1,757 outstanding under our lines of credit with
domestic banks. As of May 24, 2002, we terminated our lines of credit and repaid
all amounts outstanding.

Capital lease obligations:

As a result of the Conestoga acquisition, we assumed a long-term lease
agreement for a building that requires monthly rent payments of approximately
$24, including interest at 7.95% through April 2020. In addition, D&E has
equipment leases that require monthly payments of $5 through October 2004.

(7) INVESTMENTS, AVAILABLE-FOR-SALE

During the second quarter of 2002, the company determined that the
decline in value of two of its available-for-sale securities was other
than temporary. As such, D&E recorded a $2,999 realized loss with a
corresponding tax benefit of $1,174.

(8) BUSINESS SEGMENT DATA

Our segments, excluding the Wireless Services segment, which is now
reported as a discontinued segment, are RLEC, CLEC, Internet Services and
Systems Integration. In the first

13

D&E Communications, Inc. and Subsidiaries
Part I - Financial Information (continued)

Item 1. Notes to Consolidated Financial Statements
(Dollar amounts are in thousands)
(Unaudited)

quarter of 2002 we renamed our ILEC segment our "RLEC" segment and our
Networking Services segment our "Systems Integration" segment to better
define these businesses. The measure of profitability for our segments is
operating income.

14

D&E Communications, Inc. and Subsidiaries
Part I - Financial Information (continued)

Item 1. Notes to Consolidated Financial Statements
(Dollar amounts are in thousands)
(Unaudited)

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

External Revenues Intersegment Revenues Operating Income (Loss)
Three months ended Three months ended Three months ended
June 30, June 30, June 30,
Segment 2002 2001 2002 2001 2002 2001
------- -------- -------- -------- -------- -------- --------

RLEC $ 14,867 $ 10,171 $ 955 $ 1,211 $ 1,712 $ 2,666
CLEC 3,903 1,729 120 58 (1,012) (902)
Internet Services 981 365 37 4 (180) (487)
Systems Integration 5,996 5,650 18 14 (631) (1,160)
Corporate, Other
and Eliminations 402 996 (1,130) (1,287) (51) (65)
-------- -------- -------- -------- -------- --------
Total $ 26,149 $ 18,911 $ -- $ -- $ (162) $ 52
======== ======== ======== ======== ======== ========

External Revenues Intersegment Revenues Operating Income (Loss)
Six months ended Six months ended Six months ended
June 30, June 30, June 30,
Segment 2002 2001 2002 2001 2002 2001
------- -------- -------- -------- -------- -------- --------

RLEC $ 25,467 $ 20,033 $ 1,801 $ 2,185 $ 4,002 $ 4,904
CLEC 5,592 3,410 227 111 (1,885) (1,590)
Internet Services 1,860 618 43 11 (469) (1,140)
Systems Integration 11,486 11,349 25 38 (1,328) (1,913)
Corporate, Other
and Eliminations 1,348 1,656 (2,096) (2,345) (250) (121)
-------- -------- -------- -------- -------- --------
Total $ 45,753 $ 37,066 $ -- $ -- $ 70 $ 140
======== ======== ======== ======== ======== ========

Segment Assets
--------------------------
June December
Segment 30, 2002 31, 2001
------- ---------- ----------

RLEC $ 518,926 $ 151,303
CLEC 48,748 12,232
Internet Services 4,800 1,775
Systems Integration 17,708 14,787
Corporate, Other
and Eliminations (29,556) (37,219)
---------- ----------
Total $ 560,626 $ 142,878
========== ==========

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 Six months ended
June 30, June 30,
2002 2001 2002 2001
-------- -------- -------- --------

Operating income (loss) from reportable segments $ (111) $ 117 $ 320 $ 261
Corporate, other and eliminations (51) (65) (250) (121)
Equity in net income (losses) of affiliates (702) 1,730 (1,177) 442
Interest expense (2,048) (465) (2,756) (918)
Loss on investments (2,999) -- (2,999) --
Other, net 194 413 201 744
-------- -------- -------- --------
Income (loss) from continuing operations
before income taxes and dividends
on utility preferred stock $ (5,717) $ 1,730 $ (6,661) $ 408
======== ======== ======== ========

15

D&E Communications, Inc. and Subsidiaries
Part I - Financial Information (continued)

Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
(Dollar amounts are in thousands)

The following discussion should be read in conjunction with our
consolidated financial statements, including the notes thereto, included
in this quarterly report on Form 10-Q. Monetary amounts presented in the
following discussion are rounded to the nearest thousand dollars. Certain
items in the financial statements for the three months and six months
ended June 30, 2001 have been reclassified for comparative purposes.

OVERVIEW

We are a leading rural local telephone company providing integrated
communications services to residential and business customers in markets
throughout south central Pennsylvania. We operate an incumbent rural
local telephone company, or RLEC, in parts of Berks, Lancaster, Union and
smaller portions of three other adjacent counties in Pennsylvania, and a
competitive local telephone company, 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, high speed data, and
Internet access services. We also provide business customers with
integrated voice and data network solutions.

Our segments, excluding the wireless services segment, which, as
discussed below, is now reported as a discontinued segment, are RLEC,
CLEC, Internet Services and Systems Integration. In the first quarter of
2002 we renamed our ILEC segment our "RLEC" segment and our Networking
Services segment our "Systems Integration" segment to better define these
businesses. The measure of profitability for our segments is operating
income.

Our RLEC revenue is derived primarily from network access charges,
local telephone service, enhanced telephone services and regional toll
service. Network access revenue consists primarily of charges paid by long
distance companies for access to our network in connection with the
completion of long distance telephone calls and payments from end-users.
Local telephone service revenue consists of charges for local telephone
services, including monthly charges for basic local service. Enhanced
telephone services revenue is derived from providing special calling
features, such as call waiting, caller ID, voicemail and PhoneGuard(TM), a
telemarketer call-blocking service. Regional long distance revenue is
derived from providing regional long distance services to our RLEC
customers.

16

D&E Communications, Inc. and Subsidiaries
Part I - Financial Information (continued)

Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
(Dollar amounts are in thousands)

Our CLEC revenue is derived primarily from network access charges,
local telephone service, enhanced telephone services and long distance
service revenue. Network access revenue consists primarily of charges paid
by long distance companies and other non-CLEC customers for access to our
network in connection with the completion of long distance telephone and
local calls and the delivery of other services. Local telephone service
revenue consists of charges for local telephone services, including
monthly charges for basic local service. Enhanced telephone services
revenue is derived from providing special calling features, such as call
waiting, caller ID, voicemail and PhoneGuard(TM). Long distance revenue
consists of charges for both national and regional long distance services,
a portion of which are provided on a resale basis.

Our Internet Services revenue is derived from dial-up and high speed
Internet access services, in addition to web hosting services. We market
these services primarily in our RLEC and CLEC service areas.

Our Systems Integration revenue is derived from sales of services
that support the design, implementation and maintenance of local and wide
area networks and telecommunications systems. In addition, we sell data
and voice communications equipment and provide custom computer programming
service. We market these products and services primarily in our RLEC and
CLEC service areas.

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

We incur access line-related capital expenditures associated with
access line growth, expenditures for upgrading existing facilities and
costs related to the provision of DSL and dial-up Internet services in our
RLEC and CLEC territories. We believe that our capital expenditures
related to CLEC access line growth are generally associated with
additional customers and therefore tend to result in incremental revenue.
We believe that our additional capital expenditures relating to our
investment in software and systems will provide us with a competitive
advantage in the marketplace and generally allow for corresponding
reductions in operating expenses.

As of December 31, 2001, we owned a one-third investment in EuroTel
L.L.C. (EuroTel), a domestic corporate joint venture. EuroTel held a 100%
investment in PenneCom, B.V. (PenneCom), an international
telecommunications holding company that held a 100% investment in Pilicka
Telefonia, Sp.zo.o (Pilicka), a telecommunications company located in
Poland.

17

D&E Communications, Inc. and Subsidiaries
Part I - Financial Information (continued)

Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
(Dollar amounts are in thousands)

As of December 31, 2001, PenneCom was indebted to EuroTel and the
investors in EuroTel, including D&E. PenneCom agreed with EuroTel and the
EuroTel investors to satisfy a portion of its indebtedness to EuroTel and
the founders by transferring PenneCom's entire equity interests in Pilicka
to EuroTel and the founders. The total amount of indebtedness satisfied by
PenneCom was equal to the total estimated fair value of Pilicka at
December 31, 2001. As a result of these transactions, we now have a 31.00%
direct ownership in Pilicka and a 7.52% indirect ownership in Pilicka,
through our continuing one-third interest in EuroTel. We account for both
our investment in EuroTel and Pilicka using the equity method of
accounting. We currently are exploring strategic alternatives with regard
to this investment.

On April 1, 2002, we completed the sale of our investment in PCS
ONE, which has been reported as a discontinued segment, resulting in a
gain of $55,785. In the corresponding quarter in 2001, D&E's net loss
included a loss of $1,644 from the wireless services segment. In
addition, our share of losses from our European investments declined from
an income of $1,730 in the second quarter of 2001 to a loss of $702 in the
quarter ended June 30, 2002.

On May 24, 2002, we completed our acquisition of Conestoga
Enterprises, Inc. ("Conestoga"), a neighboring rural local exchange
carrier providing integrated communications services throughout the
eastern half of Pennsylvania. The acquisition was completed through the
merger of Conestoga with and into D&E Acquisition Corp. (the "Merger
Sub"), a wholly-owned subsidiary of D&E, pursuant to the Amended and
Restated Agreement and Plan of Merger, dated as of January 9, 2002 (the
"Merger Agreement"), by and among D&E, Conestoga and the Merger Sub (the
"Merger"). We paid cash consideration of $149,554 and issued 7,868,570
shares of D&E common stock to Conestoga shareholders pursuant to the
Merger Agreement. We also assumed existing indebtedness of Conestoga and
outstanding options issued pursuant to Conestoga equity compensation
plans.

In connection with the Merger, D&E entered into an Amended and
Restated Credit Agreement dated May 24, 2002 (the "Credit Agreement") with
CoBank, ACB ("CoBank"), as a lender and administrative agent and certain
other lenders. The Credit Agreement provides for a new $125 million 8-1/2
year variable rate senior secured term loan and a $25 million increase to
D&E's existing $50 million revolving credit facility provided by CoBank.
The Credit Agreement is also the governing document for D&E's existing $50
million term loan from CoBank. On May 24, 2002, D&E borrowed the $125
million term loan and $35 million under the revolving credit facility.
These borrowings, along with the proceeds from the sale of our interest in
PCS ONE, were used to pay the cash portion of the Merger as well as to
repay certain existing indebtedness and related fees and expenses. The
$125 million term loan and borrowings under the $75 million revolving
credit facility bear interest at D&E's option at either the U.S. prime
rate plus 1.75% to 3.00% or at LIBOR plus 2.50% to 4.00%, depending on
D&E's total leverage ratio. The $50 million term loan bears interest at
D&E's option at either the U.S. prime rate plus 2.00% to 3.125% or at

18

D&E Communications, Inc. and Subsidiaries
Part I - Financial Information (continued)

Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
(Dollar amounts are in thousands)

LIBOR plus 2.625% to 4.125%, depending on D&E's total leverage ratio. D&E
is also required to maintain interest rate protection on one-half of the
total amount of senior indebtedness outstanding, with a weighted average
life of at least 2 years, beginning on November 24, 2002.

The access line data presented below counts access lines associated
with T-1 carrier systems related to our acquired Conestoga business using
a different methodology than our non-Conestoga business. We are in the
process of conforming these two access line count approaches. Management
expects the access line count to be conformed during the third quarter of
2002. We anticipate that any adjustment to our disclosed access line data
(a) will be a positive adjustment and (b) will be immaterial as T-1
carrier system lines are a relatively small population of our access
lines.

RESULTS OF OPERATIONS

The following table is a summary of our operating results by segment
for the three months ended June 30, 2002 and 2001:

CORPORATE,
INTERNET SYSTEMS OTHER AND TOTAL
RLEC CLEC SERVICES INTEGRATION ELIMINATIONS COMPANY
---------- ---------- ---------- ---------- ---------- ----------

JUNE 30, 2002

Revenues - External $ 14,867 $ 3,903 $ 981 $ 5,996 $ 402 $ 26,149
Revenues - Intercompany 955 120 37 18 (1,130) --
---------- ---------- ---------- ---------- ---------- ----------
Total Revenues 15,822 4,023 1,018 6,014 (728) 26,149
---------- ---------- ---------- ---------- ---------- ----------

Depreciation and Amortization 4,159 423 111 332 556 5,581
Other Operating Expenses 9,951 4,612 1,087 6,313 (1,233) 20,730
---------- ---------- ---------- ---------- ---------- ----------
Total Operating Expenses 14,110 5,035 1,198 6,645 (677) 26,311
---------- ---------- ---------- ---------- ---------- ----------

Operating Income (Loss) 1,712 (1,012) (180) (631) (51) (162)
---------- ---------- ---------- ---------- ---------- ----------

Adjusted EBITDA (1) 5,871 (589) (69) (299) 505 5,419
---------- ---------- ---------- ---------- ---------- ----------

Net cash provided by continuing
operating activities 5,027
Net cash provided by / used in
continuing investing activities (164,452)
Net cash provided by / used in
financing activities 91,177

JUNE 30, 2001

Revenues - External $ 10,171 $ 1,729 $ 365 $ 5,650 $ 996 $ 18,911
Revenues - Intercompany 1,211 58 4 14 (1,287) --
---------- ---------- ---------- ---------- ---------- ----------
Total Revenues 11,382 1,787 369 5,664 (291) 18,911
---------- ---------- ---------- ---------- ---------- ----------

Depreciation and Amortization 2,664 198 50 659 122 3,693
Other Operating Expense 6,052 2,491 806 6,165 (348) 15,166
---------- ---------- ---------- ---------- ---------- ----------
Total Operating Expenses 8,716 2,689 856 6,824 (226) 18,859
---------- ---------- ---------- ---------- ---------- ----------

Operating Income (Loss) 2,666 (902) (487) (1,160) (65) 52
---------- ---------- ---------- ---------- ---------- ----------

Adjusted EBITDA (1) 5,330 (704) (437) (501) 57 3,745
---------- ---------- ---------- ---------- ---------- ----------

Net cash provided by continuing
operating activities 5,889
Net cash provided by / used in
continuing investing activities (9,280)
Net cash provided by / used in
financing activities 12,358

19

D&E Communications, Inc. and Subsidiaries
Part I - Financial Information (continued)

Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
(Dollar amounts are in thousands)

- --------

(1) We compute Adjusted EBITDA by adding depreciation and amortization expense
to operating income. Adjusted EBITDA is presented because we believe it is
frequently used by securities analysts, investors and other interested parties
in the evaluation of companies in our industry. However, other companies in our
industry may calculate Adjusted EBITDA differently than we do. Adjusted EBITDA
is not a measurement of financial performance under generally accepted
accounting principles and should not be considered as a substitute for cash flow
from operating activities as a measure of liquidity or a substitute for net
income as an indicator of operating performance or any other measure of
performance derived in accordance with generally accepted accounting principles.

The following table is a summary of our operating results by segment for
the six months ended June 30, 2002 and 2001:

CORPORATE,
INTERNET SYSTEMS OTHER AND TOTAL
RLEC CLEC SERVICES INTEGRATION ELIMINATIONS COMPANY
---------- ---------- ---------- ---------- ---------- ----------

JUNE 30, 2002

Revenues - External $ 25,467 $ 5,592 $ 1,860 $ 11,486 $1,348 $ 45,753
Revenues - Intercompany 1,801 227 43 25 (2,096) --
---------- ---------- ---------- ---------- ---------- ----------
Total Revenues 27,268 5,819 1,903 11,511 (748) 45,753
---------- ---------- ---------- ---------- ---------- ----------

Depreciation and Amortization 7,275 669 209 646 666 9,465
Other Operating Expenses 15,991 7,035 2,163 12,193 (1,164) 36,218
---------- ---------- ---------- ---------- ---------- ----------
Total Operating Expenses 23,266 7,704 2,372 12,839 (498) 45,683
---------- ---------- ---------- ---------- ---------- ----------

Operating Income (Loss) 4,002 (1,885) (469) (1,328) (250) 70
---------- ---------- ---------- ---------- ---------- ----------

Adjusted EBITDA (1) 11,277 (1,216) (260) (682) 416 9,535
---------- ---------- ---------- ---------- ---------- ----------

Net cash provided by continuing
operating activities 5,448
Net cash provided by / used in
continuing investing activities (170,200)
Net cash provided by / used in
financing activities 95,963

20

D&E Communications, Inc. and Subsidiaries
Part I - Financial Information (continued)

Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
(Dollar amounts are in thousands)

CORPORATE,
INTERNET SYSTEMS OTHER AND TOTAL
RLEC CLEC SERVICES INTEGRATION ELIMINATIONS COMPANY
---------- ---------- ---------- ---------- ---------- ----------

JUNE 30, 2001

Revenues - External $ 20,033 $ 3,410 $ 618 $ 11,349 $ 1,656 $ 37,066
Revenues - Intercompany 2,185 111 11 38 (2,345) --
---------- ---------- ---------- ---------- ---------- ----------
Total Revenues 22,218 3,521 629 11,387 (689) 37,066
---------- ---------- ---------- ---------- ---------- ----------

Depreciation and Amortization 5,179 416 95 1,306 226 7,222
Other Operating Expense 12,135 4,695 1,674 11,994 (794) 29,704
---------- ---------- ---------- ---------- ---------- ----------
Total Operating Expenses 17,314 5,111 1,769 13,300 (568) 36,926
---------- ---------- ---------- ---------- ---------- ----------

Operating Income (Loss) 4,904 (1,590) (1,140) (1,913) (121) 140
---------- ---------- ---------- ---------- ---------- ----------

Adjusted EBITDA (1) 10,083 (1,174) (1,045) (607) 105 7,362
---------- ---------- ---------- ---------- ---------- ----------

Net cash provided by continuing
operating activities 7,738
Net cash provided by / used in
continuing investing activities (20,657)
Net cash provided by / used in
financing activities 19,797

CONSOLIDATED OPERATIONS

Three months ended June 30, 2002 compared to the three months
ended June 30, 2001

Consolidated operating revenues from continuing operations increased
$7,238, or 38.3%, to $26,149 for the three months ended June 30, 2002 from
$18,911 in the same period of 2001. The revenue increase was primarily due
to $7,342 in incremental revenue attributable to the acquisition of
Conestoga on May 24, 2002.

Consolidated operating income from continuing operations decreased
$214 to a loss of $162 for the three months ended June 30, 2002 from
income of $52 in the same period of 2001. The decrease was primarily
attributable to $833 of financing costs expensed as merger-related costs
during the current quarter related to an abandoned debt offering, $225 of
severance charges expensed as merger-related costs during the current
quarter for D&E employees terminated as a result of the merger and a
charge to bad debt expense of $490 for WorldCom receivables due as of June
30, 2002 as a result of their bankruptcy filing. Management anticipates an
additional expense of $176 in the third quarter related to providing
service to WorldCom from the end of the quarter to the date of their
bankruptcy filing. The decrease was partially offset by the discontinuance
of goodwill amortization in 2002 due to the adoption of

21

D&E Communications, Inc. and Subsidiaries
Part I - Financial Information (continued)

Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
(Dollar amounts are in thousands)

SFAS 142 (see Note 5 to our consolidated financial statements), and lower
Internet Services advertising and marketing costs.

Other income and expense was a net expense of $5,555 in the second
quarter of 2002 compared to a net income of $1,678 in the same period of
the prior year. The equity in the operations of our European affiliates
decreased to a loss of $702 in the second quarter of 2002 from income of
$1,730 in 2001 as a result of a portion of an arbitration award included
in 2001. Interest expense increased to $2,048 from $465 in the second
quarter of 2001, as a result of increased borrowings to finance the
acquisition of Conestoga. A loss of $2,999 was recognized in the second
quarter of 2002 for the decline in market value of certain publicly traded
investments that were determined to be other than temporary declines.

Income taxes were a benefit of $2,060 in the second quarter of 2002
compared to an expense of $136 in the same period of 2001. Discontinued
operations from D&E Wireless resulted in after-tax income of $55,785 in
the second quarter of 2002 primarily from the completion of the sale of
our wireless partnership interest, compared with the loss of $1,644 in the
second quarter of 2001. The discontinued operation of Conestoga Wireless
for the one month included in the second quarter of 2002 was a loss of
$159 after taxes. Our net income was $51,952, or $4.85 in the second
quarter of 2002 compared to a net loss of $67, or $0.01 in the second
quarter of 2001.

Six months ended June 30, 2002 compared to the six months ended June
30, 2001

Consolidated operating revenues from continuing operations increased
23.4% to $45,753 for the six months ended June 30, 2002 from $37,066 in
the same period of 2001. The revenue increase was primarily due to $7,342
in incremental revenue attributable to the acquisition of Conestoga on May
24, 2002 as well as an increase of approximately 80% in the number of
D&E's customers in our Internet Services segment and 35% more access lines
in our CLEC segment before including Conestoga's lines.

Consolidated operating income from continuing operations decreased
$70 to an income of $70 for the six months ended June 30, 2002 from $140
in the same period of 2001. The decrease was primarily attributable to
$833 of financing costs expensed as merger-related costs during the
current quarter related to an abandoned debt offering, $225 of severance
charges expensed as merger-related costs during the current quarter for
D&E employees terminated as a result of the merger and a charge to bad
debt expense of $490 for WorldCom receivables due as of June 30, 2002 as a
result of their bankruptcy filing. Management anticipates an additional
expense of $176 in the third quarter related to providing service to
WorldCom from the end of the quarter to the date of their bankruptcy
filing. The decrease was partially offset by the discontinuance of
goodwill amortization in 2002 due to the adoption of SFAS 142 (see Note 5
to our financial statements), and reduced Internet Services advertising
and marketing expense.

Other income and expense was a net expense of $6,731 in the first
half of 2002 compared to

22

D&E Communications, Inc. and Subsidiaries
Part I - Financial Information (continued)

Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
(Dollar amounts are in thousands)

a net income of $268 in the same period of the prior year. The equity in
the operations of our European affiliates decreased to a loss of $1,177 in
the first half of 2002 from an income $442 in 2001 as a result of a
portion of an arbitration award included in 2001. Interest expense
increased to $2,756 from $918 in the first half of 2001, as a result of
increased borrowings to finance the acquisition of Conestoga. A loss of
$2,999 was recognized in the second quarter of 2002 for the decline in
market value of certain publicly traded investments that were determined
to be other than temporary declines.

Income taxes were a benefit of $2,212 in the first half of 2002
compared to an expense of $244 in the same period of 2001. Discontinued
operations of D&E Wireless resulted in an income of $55,785 after tax in
the first half of 2002 primarily from the completion of the sale of our
wireless partnership interest, compared with the loss of $2,999 in the
first half of 2001. The discontinued operation of Conestoga Wireless for
the one month included in the first half of 2002 was a loss of $159 after
taxes. Our net income was $51,144, or $5.65 in the first half of 2002
compared to a net loss of $2,761, or $0.37 in the first half of 2001.

RLEC SEGMENT RESULTS

THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
2002 2001 Change 2002 2001 Change
---- ---- ------ ---- ---- ------

Revenues Revenues:
Local Telephone Service $ 4,889 $ 2,927 $ 1,962 $ 8,425 $ 6,031 $ 2,394
Network Access 8,248 6,511 1,737 13,957 12,396 1,561
Other 2,685 1,944 741 4,886 3,791 1,095
-------- -------- -------- -------- -------- --------
Total Revenues 15,822 11,382 4,440 27,268 22,218 5,050
-------- -------- -------- -------- -------- --------

Depreciation and Amortization 4,159 2,664 1,495 7,275 5,179 2,096
Other Operating Expenses 9,951 6,052 3,899 15,991 12,135 3,856
-------- -------- -------- -------- -------- --------
Total Operating Expenses 14,110 8,716 5,394 23,266 17,314 5,952
-------- -------- -------- -------- -------- --------

Operating Income 1,712 2,666 (954) 4,002 4,904 (902)
-------- -------- -------- -------- -------- --------

Access Lines at June 30 146,902 61,720 146,902 61,720
-------- -------- -------- --------

RLEC segment revenues increased 39.0% to $15,822 in the second
quarter of 2002 from $11,382 in the same period of 2001. The Conestoga
acquisition added $4,749 while our D&E RLEC revenue decreased $309 from
the same period of 2001. Our D&E local telephone service revenues
increased 20.0% to $3,514 in the second quarter of 2002, from $2,927 in
the same period of 2001, driven by a rate increase effective in December
2001. We experienced a decrease of 13.9% to $5,607 in D&E's network access
revenues in the second quarter of 2002, from $6,511 in the same period of
2001, as a result of lower call volumes and a decrease in certain network
access rate elements. The access line increase was the result of 287
additional D&E lines and 84,895 Conestoga lines acquired.

23

D&E Communications, Inc. and Subsidiaries
Part I - Financial Information (continued)

Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
(Dollar amounts are in thousands)

RLEC operating expenses increased 61.9% to $14,110 in the second
quarter of 2002 from $8,716 in the same period of the prior year. The
increase was primarily attributable to financing costs expensed during the
quarter related to an abandoned debt offering, severance related costs
and a charge to bad debt expense of $428 for WorldCom receivables due as
of June 30, 2002 as a result of their bankruptcy filing. Depreciation
expense increased $1,495 as a result of the Conestoga acquisition and
D&E's capital additions in the prior year, primarily from a new building
placed into service in July 2001.

RLEC segment revenues increased 22.7% to $27,268 in the first half
of 2002 from $22,218 in the same period of 2001. The Conestoga acquisition
added $4,749 while our D&E RLEC revenue increased $301 from the same
period of 2001. Our D&E local telephone service revenues increased 16.9%
to $7,051 in the first half of 2002, from $6,031 in the same period of
2001, driven by a rate increase effective in December 2001. We experienced
a decrease of 8.7% to $11,316 in D&E's network access revenues in the
first half of 2002, from $12,396 in the same period of 2001, as a result
of lower call volumes and a decrease in certain network access rate
elements.

RLEC operating expenses increased 34.4% to $23,266 in the first half
of 2002 from $17,314 in the same period of the prior year. The increase
was primarily attributable to financing costs expensed during the quarter
related to an abandoned debt offering, severance related costs and a
charge to bad debt expense of $428 for WorldCom receivables due as of June
30, 2002 as a result of their bankruptcy filing. Depreciation expense
increased $2,096 as a result of the Conestoga acquisition and D&E's
capital additions in the prior year, primarily from a new building placed
into service in July 2001.

CLEC SEGMENT RESULTS

THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
2002 2001 Change 2002 2001 Change
---- ---- ------ ---- ---- ------

Revenues:
Local Telephone Service $ 1,041 $ 346 $ 695 $ 1,601 $ 631 $ 970
Network Access 611 401 210 995 745 250
Long Distance 2,279 803 1,476 3,054 1,582 1,472
Other 92 237 (145) 169 563 (394)
-------- -------- -------- -------- -------- --------
Total Revenues 4,023 1,787 2,236 5,819 3,521 2,298
-------- -------- -------- -------- -------- --------

Depreciation and Amortization 424 198 226 669 416 253
Other Operating Expenses 4,611 2,491 2,120 7,035 4,695 2,340
-------- -------- -------- -------- -------- --------
Total Operating Expenses 5,035 2,689 2,346 7,704 5,111 2,593
-------- -------- -------- -------- -------- --------

Operating Loss (1,012) (902) (110) (1,885) (1,590) (295)
-------- -------- -------- -------- -------- --------

Access Lines at June 30 29,541 5,571 29,541 5,571
-------- -------- -------- --------

24

D&E Communications, Inc. and Subsidiaries
Part I - Financial Information (continued)

Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
(Dollar amounts are in thousands)

CLEC segment revenues increased 125.1% to $4,023 in the second
quarter of 2002 from $1,787 in the same period of 2001. Of this increase,
the Conestoga acquisition added $2,046 while our D&E CLEC revenue
increased $190 from the same period of 2001. The D&E increase was
primarily from the addition of access lines for new customers that
increased basic area service revenues. The access line increase was the
result of 3,550 additional D&E lines and 20,420 Conestoga lines acquired.

CLEC operating expenses increased 87.2% to $5,035 in the second
quarter of 2002 from $2,689 in the same period of the prior year. The
increase was primarily related to the Conestoga acquisition and additional
network operating costs consistent with the larger customer base, higher
depreciation expense for additional equipment added and increased sales
and marketing expense related to commencement of operations in our
Harrisburg, Pennsylvania market. The expenses included a charge to bad
debt expense of $62 for WorldCom receivables due as of June 30, 2002 as a
result of their bankruptcy filing.

CLEC segment revenues increased 65.3% to $5,819 in the first half of
2002 from $3,521 in same period of 2001. The Conestoga acquisition added
$2,046 while our D&E CLEC revenue increased $252 from the same period of
2001. The D&E increase was primarily from the addition of access lines for
new customers that increased basic area service revenues.

CLEC operating expenses increased 50.7% to $7,704 in the first half
of 2002 from $5,111 in the same period of the prior year. The increase was
primarily related to the Conestoga acquisition and additional network
operating costs consistent with the larger customer base, higher
depreciation expense for additional equipment added and increased sales
and marketing expense related to commencement of operations in our
Harrisburg, Pennsylvania market. The expenses included a charge to bad
debt expense of $62 for WorldCom receivables due as of June 30, 2002 as a
result of their bankruptcy filing.

INTERNET SERVICES SEGMENT RESULTS

THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
2002 2001 Change 2002 2001 Change
---- ---- ------ ---- ---- ------

Revenues $ 1,018 $ 369 $ 649 $ 1,903 $ 629 $ 1,274

Depreciation and Amortization 111 50 61 209 95 114
Other Operating Expenses 1,087 806 281 2,163 1,674 489
-------- -------- -------- -------- -------- --------
Total Operating Expenses 1,198 856 342 2,372 1,769 603
-------- -------- -------- -------- -------- --------

Operating Loss (180) (487) 307 (469) (1,140) 671
-------- -------- -------- -------- -------- --------

Customers at June 30
DSL 2,729 1,450 2,729 1,450
Dial-up Access 11,906 6,296 11,906 6,296
Web-hosting Services 560 310 560 310

25

D&E Communications, Inc. and Subsidiaries
Part I - Financial Information (continued)

Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
(Dollar amounts are in thousands)

Internet Services segment revenues increased 175.9% to $1,018 in the
second quarter of 2002 from $369 in the same period of 2001. Dial-up
services for single user residential and business customers, as well as
DSL customers and web-hosting subscribers increased over 80% in the second
quarter of 2002 from the second quarter 2001. A minimal portion of the
increase was attributable to the Conestoga acquisition. Customer count
increases are attributable only to D&E.

Internet Services segment operating expenses increased 40.0% to
$1,198 in the second quarter of 2002 from $856 in the same period of the
prior year. The direct cost of operations increased as a result of
providing service to the larger customer base.

Internet Services segment revenues increased 202.5% to $1,903 in the
first half of 2002 from $629 in the same period of 2001. Dial-up services
for single user residential and business customers, as well as DSL
customers and web-hosting subscriber increases accounted for the revenue
increase, with a minimal portion of the increase attributable to the
Conestoga acquisition.

Internet Services segment operating expenses increased 34.1% to
$2,372 in the first half of 2002 from $1,769 in the same period of the
prior year. The direct cost of operations increased as a result of
providing service to the larger customer base.

SYSTEMS INTEGRATION SEGMENT RESULTS

THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
2002 2001 Change 2002 2001 Change
---- ---- ------ ---- ---- ------

Revenues $ 6,014 $ 5,664 $ 350 $ 11,511 $ 11,387 $ 124

Depreciation and Amortization 332 659 (327) 646 1,306 (660)
Other Operating Expenses 6,313 6,165 148 12,193 11,994 199
-------- -------- -------- -------- -------- --------
Total Operating Expenses 6,645 6,824 (179) 12,839 13,300 (461)
-------- -------- -------- -------- -------- --------

Operating Loss (631) (1,160) 529 (1,328) (1,913) 585
-------- -------- -------- -------- -------- --------

Systems Integration segment revenues increased 6.2% to $6,014 in the
second quarter of 2002 from $5,664 in the same period of 2001. The
Conestoga acquisition added $610, D&E's product sales increased $202 and
D&E's service revenues decreased $462 from the second quarter of 2001. We
believe the decrease partially relates to the effects of a slowing economy
and reductions in customer spending for communications related
infrastructure and consulting services.

Systems Integration segment operating expenses decreased 2.6% to
$6,645 in the second quarter 2002 from $6,824 in the same period of the
prior year. The decrease in depreciation and amortization primarily
relates to the discontinuance of amortizing goodwill from two acquisitions

26

D&E Communications, Inc. and Subsidiaries
Part I - Financial Information (continued)

Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
(Dollar amounts are in thousands)

in 2000 due to the adoption of a new accounting pronouncement which
amounted to $226 in the second quarter of 2001. Other operating expense
changes in the second quarter of 2002 primarily related to increased cost
of equipment sold offset by lower computer services expense.

Systems Integration segment revenues increased 1.1% to $11,511 in
the first half of 2002 from $11,387 in the same period of 2001. The
Conestoga acquisition added $610, D&E's product sales increased $415 and
D&E's service revenues decreased $901 from the first half of 2001. We
believe the decrease partially relates to the effects of a slowing economy
and reductions in customer spending for communications related
infrastructure and consulting services.

Systems Integration segment operating expenses decreased 3.5% to
$12,839 in the first half 2002 from $13,300 in the same period of the
prior year. The decrease in depreciation and amortization primarily
relates to the discontinuance of amortizing goodwill from two acquisitions
in 2000 due to the adoption of a new accounting pronouncement, which
amounted to $472 for the six-months ended June 30, 2001. Other operating
expense changes in the first half of 2002 primarily related to increased
cost of equipment sold offset by lower computer services expense.

OTHER INCOME (EXPENSE)

Other income (expense) for the three months ended June 30, 2002 was
a net expense of $5,555, compared to a net income of $1,678 in the same
period of 2001. The equity in the operations of our European affiliates
decreased to a loss of $702 in the second quarter of 2002 from an income
$1,730 in 2001 as a result of a portion of an arbitration award included
in 2001. Interest expense increased to $2,048 from $465 in the second
quarter of 2001, as a result of increased borrowings for the Conestoga
acquisition and capital expenditures. A loss of $2,999 was recognized in
the second quarter of 2002 for the decline in market value of certain
publicly traded investments that were determined to be other than
temporary declines.

Other income (expense) for the first half of 2002 was a net expense
of $6,731, compared to a net income of $268 in the same period of 2001.
The equity in the operations of our European affiliates decreased to a
loss of $1,177 in the first half of 2002 from an income of $442 in 2001 as
a result of a portion of an arbitration award included in 2001. Interest
expense increased to $2,756 from $918 in the first half of 2001, as a
result of increased borrowings for the Conestoga acquisition and capital
expenditures. A loss of $2,999 was recognized in the second quarter of
2002 for the decline in market value of certain publicly traded
investments that were determined to be other than temporary declines.

INCOME TAXES

Income taxes were a benefit of $2,060 in the second quarter of 2002
compared to an expense of $136 in the same period of 2001. The change in
tax primarily resulted from the taxable income in 2001 changing to a
taxable loss in 2002.

27

D&E Communications, Inc. and Subsidiaries
Part I - Financial Information (continued)

Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
(Dollar amounts are in thousands)

Income taxes were a benefit of $2,212 in the first half of 2002
compared to an expense of $244 in the same period of 2001. The change in
tax primarily resulted from the taxable income in 2001 changing to a
taxable loss in 2002.

DISCONTINUED OPERATIONS

On April 1, 2002, we completed the sale of our investment in PCS
ONE, which has been reported as a discontinued segment resulting in a gain
of $55,785. In the corresponding quarter in 2001, our loss included a loss
of $1,644 from the wireless services segment.

On May 24, 2002, concurrent with the completion of the Conestoga
acquisition, we classified the Conestoga wireless business as a
discontinued operation.Since the acquisition date, Conestoga Wireless
recorded a loss of $159 after taxes as part of the discontinued
operations.

EXTRAORDINARY ITEM

As a result of moving to an alternative form of regulation during
the first quarter of 2001, in accordance with SFAS 101 "Regulated
Enterprises - Accounting for the Discontinuation of Application of FASB
No. 71," $107 of previously established regulatory tax liabilities were
eliminated.

FINANCIAL CONDITION

LIQUIDITY AND CAPITAL RESOURCES

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

Net cash provided by continuing operations was $5,448 in the first
half of 2002 compared with $7,738 in the same period of the prior year.
Increased operating expenses relating to the expansion of our CLEC and
Internet Services segments and payments related to severance and merger
acquired liabilities paid in the second quarter of 2002 were the major
causes of the decline.

Net cash used in investing activities was $170,200 in the first half
of 2002 primarily due to $158,720 in business acquisition costs. Other
capital additions were $10,763 for the period. Capital additions were
primarily for $5,597 for network infrastructure expansion plus $2,284 for
CLEC additions and $1,537 for computers. In the first half of 2001,
$17,221 was invested in capital additions including $6,260 for
construction of an office building.

28

D&E Communications, Inc. and Subsidiaries
Part I - Financial Information (continued)

Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
(Dollar amounts are in thousands)

Net cash provided by financing activities was $95,963 in the first
half of 2002. Long-term debt was increased $160,000. The majority of the
additional debt was used to fund the Conestoga acquisition. Of the
remainder, $61,889 was used to repay other long-term loans and lines of
credit and to pay debt issuance costs. Quarterly dividends paid were
$2,718, which included dividends paid on shares issued to Conestoga
shareholders in the Merger. In the first half of 2001, $21,383 was
provided from bank lines of credit and $1,720 was used to pay quarterly
dividends.

EXTERNAL SOURCES OF CAPITAL AT JUNE 30, 2002

During the second quarter of 2002, we abandoned an offering of
senior notes due to market conditions. We completed our financing from a
bank to amend our existing credit facility to provide a new 8-1/2-year
variable rate senior secured term loan for $125,000 and a $25,000 increase
to our existing 8-1/2-year revolving credit facility. In connection with
the amended agreement, we incurred debt issuance costs of approximately
$7,922, which will be amortized over the 8-1/2-year life of the debt. We
amended our existing credit facility to, among other things, increase
certain interest rate provisions, grant the lender a secured position with
respect to all credit facility borrowings and include additional financial
covenants.

As of June 30, 2002, we had $285,000 in credit facilities consisting
of the following:
- $50,000 single draw 10-year term loan, of which $50,000 was
outstanding,
- $75,000 senior reducing revolving credit loan for 8-1/2 years,
of which $35,000 was drawn,
- $125,000 single draw 8-1/2-year term loan, of which $125,000 was
outstanding,
- $35,000 single draw 12-year term loan, of which $35,000 was
outstanding.

The $50,000 term loan requires interest only payments for three
years with increasing quarterly principal payments from the third quarter
of 2004 through the second quarter of 2011. The revolving credit facility
requires interest only payments for two years with increasing quarterly
principal reductions of the amount available to borrow from the third
quarter of 2003 through the fourth quarter of 2009. The $125,000 term loan
requires interest only payments for two years with increasing quarterly
principal payments from the third quarter of 2004 through the fourth
quarter of 2010. The $35,000 term loan requires interest only payments for
three years with equal quarterly payment from the first quarter of 2005
through the fourth quarter of 2014. Interest on both the $50,000 and
$125,000 term loans and the revolving credit facility is payable at a base
rate or at LIBOR rates plus an applicable margin based on our leverage
ratio. Interest on the $35,000 term loan was fixed at 9.34% for $20,000
and 9.36% for the remaining $15,000 supplement. A commitment fee must be
paid on the unused portion of the revolving credit facility. We are
required to maintain interest rate protection on one-half of the total
amount of senior indebtedness outstanding, with a weighted average life of
at least 2 years, beginning on November 24, 2002.

29

D&E Communications, Inc. and Subsidiaries
Part I - Financial Information (continued)

Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
(Dollar amounts are in thousands)

The credit facilities include 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 indebtedness to total capitalization
ratio, a maximum leverage ratio, a debt service ratio and a fixed charge
ratio.

Upon completion of the sale of our interest in PCS ONE on April 1,
2002, we received approximately $74,168 and subsequently repaid the
outstanding balances on our revolving credit facility and our bank lines
of credit. As of May 24, 2002 we discontinued the previous two lines of
credit totaling $20,000.

For further information regarding our lines of credit and long-term
debt, see Note 6 to our consolidated financial statements included in this
Quarterly Report on Form 10-Q.

COMMITMENTS, CONTINGENCIES AND PROJECTED USES OF CAPITAL

Having completed the Conestoga acquisition, we believe that our most
significant commitments, contingencies and projected uses of funds in
2002, other than for operations, include capital expenditures, the payment
of annual common stock dividends and other contractual obligations.

We hold a 31% direct interest in Pilicka and a 33% interest in
EuroTel, both of which we account for under the equity method of
accounting. Thus, neither the assets nor the liabilities of Pilicka or
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, certain of its operating cash needs. In 2001, we made advances
of $9,920 pursuant to this commitment. We advanced $674 in funds to
EuroTel in the six months ended June 30, 2002, and we expect that our
total 2002 funding requirements for EuroTel will be approximately $1,000.
We have provided a letter of commitment to advance funds to EuroTel for
2002.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

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. The preparation of the financial
statements requires us to make estimates and judgments that affect the
reported amounts. On an on-going basis, we evaluate our estimates,
including those related to intangible assets, income taxes, revenues,
contingencies and impairment of long-lived assets. We base our estimates
on historical experience and other assumptions that are believed to be
reasonable under the circumstances. Actual results may differ from these
estimates under different assumptions or conditions, as further described
below.

30

D&E Communications, Inc. and Subsidiaries
Part I - Financial Information (continued)

Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
(Dollar amounts are in thousands)

Note 2 to our consolidated financial statements included in our
Annual Report on Form 10-K for the year ended December 31, 2001 provides a
summary of all significant accounting policies that we follow in the
preparation of our financial statements. We have identified the following
critical accounting policies as those that are the most significant to our
financial statement presentation and that require difficult, subjective
and complex judgments:

Revenue Recognition

Revenues for all of our business segments are generally recorded
when services are provided or products are delivered. Our RLEC and CLEC
pricing is subject to oversight by both state and federal regulatory
commissions. 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
and CLEC segments from settlement pools in which we participate with other
telephone companies through the National Exchange Carrier Association,
Inc. (NECA). These pools were established at the direction of the FCC and
are funded by interstate access service revenues, which the FCC regulates.
Revenues earned through this pooling process are initially recognized
based on estimates and are subject to adjustments that may either increase
or decrease the amount of interstate access revenues. If the actual
amounts that we receive from the settlement pools differ from the amounts
that we have recorded as accounts receivables on our balance sheets, we
would be required to record the amount of such a reduction or increase as
an adjustment to our earnings. Historically, we have not experienced
significant adjustments to our revenues as a result of our participation
in these pools.

Regulated Asset Depreciation

We use a composite group remaining life method and straight-line
composite rates to depreciate the regulated property assets of our RLEC
and CLEC segments. Under this method, when we replace or retire such
assets, we deduct the net book value of these assets and charge it to
accumulated depreciation. The effect of this accounting is to amortize any
gains or losses on dispositions over the service lives of the remaining
regulated telephone property assets rather than recognizing such gain or
loss in the period of retirement.

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

Goodwill and Intangible Assets:

31

D&E Communications, Inc. and Subsidiaries
Part I - Financial Information (continued)

Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
(Dollar amounts are in thousands)

Purchase price accounting requires extensive use of accounting
estimates and judgments to allocate the purchase price to the fair market
value of the assets and liabilities purchased. In our recording of the
purchase of Conestoga Enterprises, we have engaged a valuation expert to
assist us in determining the fair value of these assets and liabilities.
Included in the preliminary asset valuation for this purchase was the
valuation of intangible assets that will be amortized over their estimated
useful lives.

Effective January 1, 2002, we adopted SFAS No. 142, "Goodwill and
Other Intangible Assets" which requires that goodwill and indefinite-lived
intangible assets resulting from business combinations no longer be
amortized, but instead be reviewed for recoverability which may result in
periodic write-downs. We will assess on an annual basis the fair values of
the reporting units holding the goodwill and any intangibles and, if
necessary, assess on an interim basis for any impairments. Any write-offs
would result in a charge to earnings and a reduction in equity in the
period.

Impairment of Long-Lived Assets

Based upon the provisions of SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," we review assets and
finite-lived intangibles for impairment whenever events or changes in
circumstances indicate that the carrying value of the asset may not be
recoverable. Our assets subject to SFAS No. 144 include our property,
plant and equipment and certain intangibles. A determination of impairment
is made based on estimates of future cash flows. While we have never
recorded an impairment charge under SFAS 144, future events or changes in
circumstances could result in a charge to earnings.

Investment in Unconsolidated Affiliates

We have investments and advances to affiliated entities that are
accounted for under the equity method of accounting. We periodically
evaluate whether there have been declines in value in these investments,
and if so, whether these declines are considered temporary or
other-than-temporary. Other-than-temporary declines would be recognized as
realized losses in earnings. Evidence of a loss in value includes, but is
not limited to, our inability to recover the carrying amount of the
investment or the inability of the investee to sustain an earnings
capacity, which would justify the carrying amount of the investment. The
fair value of an investment that is less than its book value may indicate
a loss in value of the investment. Our evaluations are based on many
factors, including the duration and extent to which the fair value is less
than carrying amount; the financial health of and business outlook for the
investee, including industry performance, changes in technology, and
operational and financing cash flow factors; and our intent and ability to
hold the investment, including strategic factors.

Retirement Benefits

32

D&E Communications, Inc. and Subsidiaries
Part I - Financial Information (continued)

Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
(Dollar amounts are in thousands)

Retirement benefits are a significant cost of doing business and yet
represent obligations that will be settled in the future. Retirement
benefit accounting is intended to reflect the recognition of future
benefit costs over the employee's approximate service period based on the
terms of the plans and the investment and funding decisions made by a
company. 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 differently for our financial
statements than we do for income tax purposes, we record the tax effects
of those differences as deferred tax assets and liabilities in our
consolidated balance sheets. These deferred tax assets and liabilities are
measured using the enacted tax rates that are currently in effect.

Management judgment is required in determining the provision for
current income taxes, deferred tax assets and liabilities, and any
valuation allowance recorded against the net deferred tax assets. A
valuation allowance is established for any deferred tax asset that we may
not be able to use in the preparation and filing of our future tax
returns. We have recorded a valuation allowance due to uncertainties
related to the ability to utilize some of the deferred tax assets,
consisting primarily of equity income losses carried forward before they
expire.

RECENT ACCOUNTING PRONOUNCEMENTS

During the first quarter 2002, we adopted Statement of Financial
Accounting Standards No. 142, "Goodwill and Other Intangible Assets" (SFAS
142), which addresses the accounting for goodwill and intangible assets
subsequent to their acquisition. Annual goodwill amortization of
approximately $1,440 ceased as of January 1, 2002 as a result of adopting
SFAS 142. During the first quarter 2002, we also adopted Statement of
Financial accounting Standards No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets" (SFAS 144) which addresses issues relating
to the implementation of Financial Accounting Statement No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of." We have determined that there is no impairment
to any long-lived assets. However, we have accounted for our planned sale
of Conestoga's wireless segment in accordance with SFAS 144 as described
in Note 3 to our consolidated financial statements included in this Form
10-Q.

33

D&E Communications, Inc. and Subsidiaries
Part I - Financial Information (continued)

Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
(Dollar amounts are in thousands)

Statement of Financial Accounting Standards No. 143, "Accounting for
Obligations Associated with the Retirement of Long-Lived Assets" (SFAS
143) was recently issued to provide accounting guidance for legal
obligations associated with the retirement of long-lived assets. SFAS 143
is effective for fiscal years beginning after June 15, 2002. We are
currently evaluating the impact this statement will have on our financial
position and results of operations.

FORWARD-LOOKING STATEMENTS

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

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

FACTORS AFFECTING OUR PROSPECTS

THE COMMUNICATIONS INDUSTRY IS BECOMING INCREASINGLY COMPETITIVE, AND THIS
COMPETITION HAS RESULTED IN PRICING PRESSURE ON OUR SERVICE OFFERINGS.

As a provider of integrated communications services, we face competition
from:

- competitive local exchange carriers, including Adelphia Business
Solutions (which has received regulatory approval to compete with us in
our RLEC territory using its own facilities), Commonwealth Telephone
Enterprises and XO Communications;

- Internet service providers, including AOL, EarthLink and MSN;

34

D&E Communications, Inc. and Subsidiaries
Part I - Financial Information (continued)

Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
(Dollar amounts are in thousands)

- cable television companies, including Adelphia Communications,
Comcast, AT&T Broadband and Pencor Services;

- wireless services providers, including AT&T Wireless, Cingular
Wireless, Sprint PCS and VoiceStream Wireless;

- providers of communications services such as long distance services,
including, AT&T, MCI WorldCom and, as a consequence of its recently
received regulatory approval to provide long distance services in
Pennsylvania, Verizon Communications; and

- systems integration providers, including Morefield, Williams,
IntelliMark and Weidenhammer Systems.

Many of our competitors have substantially greater financial, technical
and marketing resources, greater name recognition and more established
relationships with a larger base of current and potential customers than
us. Accordingly, it may be difficult to compete against these
communications providers. In addition, we cannot assure you that we will
be able to achieve or maintain adequate technology to remain competitive.
Accordingly, it may be difficult to compete in our markets.

WE ARE SUBJECT TO A COMPLEX AND UNCERTAIN REGULATORY ENVIRONMENT THAT MAY
REQUIRE US TO ALTER OUR BUSINESS PLANS AND FACE INCREASED COMPETITION.

The United States communications industry is subject to federal, state and
other regulations that are continually evolving. As new communications
laws and regulations are issued, we may be required to modify our business
plans or operations and may not be able to do so in a cost-effective
manner. Federal and state regulatory trends toward a more competitive
marketplace through reduced competitive entry standards are likely to have
negative effects on our business and our ability to compete. The
regulatory environment governing ILEC operations has been and will likely
continue to be very liberal in its approach to promoting competition and
network access, which may increase the likelihood of new competitors
offering similar services to our service areas. The introduction of new
competitors could have a negative effect on our operating results.

WE HAVE RECEIVED A LIMITED SUSPENSION FROM CERTAIN INTERCONNECTION
REQUIREMENTS OF THE TELECOMMUNICATIONS ACT OF 1996. UPON EXPIRATION OF THE
SUSPENSION, WE MAY BE SUBJECT TO ADDITIONAL COMPETITION FOR
TELECOMMUNICATIONS SERVICES.

Congress specifically recognized that the movement towards increased
competition under the Telecommunications Act of 1996 (TA-96) requires
accommodation for the different market characteristics of areas served by
rural and small incumbent carriers. In this regard, the Pennsylvania
Public Utility Commission (PA PUC) previously granted our RLECs a limited
suspension until July 2002 from certain interconnection requirements of
the TA-96. The suspension reduces our interconnection obligations in the
RLEC territory by excluding us from requirements that would allow
competitors access to our customers by relying upon our service

35

D&E Communications, Inc. and Subsidiaries
Part I - Financial Information (continued)

Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
(Dollar amounts are in thousands)

and facilities.

In June 2002, our RLECs petitioned the PA PUC for an extension of certain
protections provided in the original suspension. Our RLECs anticipate PA
PUC action on the petition during the third quarter of 2002. While the
request is under review, the terms and conditions of the original
suspension remain in effect. Although narrower in scope, the June 2002
petition, if granted, would continue to preclude the use of our RLEC
services and facilities by a competitor. If our RLECs do not receive
additional extensions of this suspension, competitors will be allowed to
seek removal of our rural exemption for the purposes of using our services
and facilities through interconnection agreements to provide competitive
services. If this event were to occur, our RLECs would exercise their
right to petition the PA PUC to deny the competitor's request. The
prospective competitor would have the burden of proof to show that the
request is not unduly economically burdensome, is technically feasible,
and is consistent with universal service principles.

The introduction of new competitors could result in the loss of customers
and have a negative effect on our operating results. However, such loss
would be partially offset by charges paid to our RLECs by said competitors
for utilization of our services and networks.

WE MUST SECURE UNBUNDLED NETWORK ELEMENTS AT REASONABLE RATES OR CLEC
GROWTH MAY BE DELAYED AND THE QUALITY OF SERVICE MAY DECLINE.

In providing our CLEC service, we interconnect with and use other
telephone companies' networks to access certain of their customers.
Therefore, we depend, in certain circumstances, upon the technology and
capabilities of these other telephone companies, the quality and
availability of other telephone companies' lines and other telephone
companies' maintenance of these lines. We must also maintain efficient
procedures for ordering, provisioning, maintaining and repairing lines
from these other telephone companies. We may not be able to obtain the
lines and services of satisfactory quality that we require from other
telephone companies, or on other satisfactory terms and conditions, in
which case we may experience delays in the growth of our competitive local
exchange carrier networks and the degradation of the quality of our
service to customers.

We also provide digital subscriber line services. To provide unbundled
DSL-capable lines that connect each end-user to our equipment, we rely on
other telephone companies. The Telecommunications Act of 1996 generally
requires that charges for these unbundled network elements be cost-based
and nondiscriminatory. Charges for DSL-capable lines and other unbundled
network elements may vary based on rates proposed by other telephone
companies and approved by state regulatory commissions. Increases in these
rates or reductions in ILEC unbundling obligations could harm our CLEC
business.

Many of the FCC's rules governing the rates, terms and conditions on which
unbundled network elements are offered by ILECs are under challenge in
various Courts of Appeal and the U.S. Supreme Court. Any decision which
limits the FCC's ability to regulate the rates, terms and

36

D&E Communications, Inc. and Subsidiaries
Part I - Financial Information (continued)

Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
(Dollar amounts are in thousands)

conditions on which unbundled network elements are offered to CLECs may
adversely impact our ability to compete. Additionally, the FCC's rules
concerning the availability of unbundled network elements and the
regulatory status of the rates, terms and conditions on which they are
offered are subject to revision. If the FCC constricts the list of
elements it regulates as unbundled network elements, such an action may
have an adverse impact on our ability to compete.

IF WE EXPAND OUR CLEC OPERATIONS INTO NEW MARKETS, THE SUCCESS OF THIS
EXPANSION WILL BE DEPENDENT ON INTERCONNECTION AGREEMENTS, PERMITS AND
RIGHTS-OF-WAY, AND THE FAILURE TO OBTAIN THESE AGREEMENTS AND PERMITS
COULD HAMPER ANY SUCH EXPANSION.

If we expand our CLEC operations into new markets, our success will
depend, in part, on our ability to manage existing interconnection
agreements and to enter into and implement new interconnection agreements
with other telephone companies. Our failure to obtain these agreements and
permits could hamper this expansion. Interconnection agreements are
subject to negotiation and interpretation by the parties to the agreements
and are subject to state regulatory commission, FCC and judicial
oversight. If the terms of these interconnection agreements need to be
renegotiated, we may not be able to renegotiate existing or enter into new
interconnection agreements in a timely manner or on favorable terms. We
must also maintain existing, and obtain new, local permits, including
rights to utilize underground conduit and pole space and other
rights-of-way. We may not be able to maintain our existing permits and
rights or obtain and maintain other required permits and rights on
acceptable terms. Cancellation or nonrenewal of interconnection
agreements, permits, rights-of-way or other arrangements could
significantly harm our business.

DEMAND FOR OUR SYSTEMS INTEGRATION OFFERINGS IS SENSITIVE TO DOWNTURNS IN
THE UNITED STATES ECONOMY GENERALLY.

Unlike our RLEC, CLEC and Internet services businesses which generate
revenues of a monthly recurring nature, demand for our systems integration
offerings is generally more sensitive to downturns in the United States
economy. In an economic downturn, consumers and businesses often curtail
spending on voice and data network infrastructure. As a result, we may
experience lower than expected revenues for our systems integration
business during an economic downturn. Reduced demand for our systems
integration offerings could adversely affect the operating profitability
of our systems integration segment, which could have an adverse effect on
our operating results and financial condition.

OUR CHAIRMAN AND FOUR OTHER MEMBERS OF OUR BOARD OF DIRECTORS CAN
SIGNIFICANTLY INFLUENCE THE ELECTION OF DIRECTORS AND OTHER MATTERS IN
THEIR CAPACITIES AS TRUSTEES OF A VOTING TRUST.

Certain of our shareholders are parties to a Voting Trust Agreement, dated
as of November 19, 1992, pursuant to which the voting trustees have the
right to exercise sole voting power on all matters submitted to our
shareholders for a vote. The trustees of the voting trust are our chairman
and four of our other directors. The shares represented by the voting
trust are voted in accordance with resolutions adopted by a majority of
the voting trustees. The Voting Trust

37

D&E Communications, Inc. and Subsidiaries
Part I - Financial Information (continued)

Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
(Dollar amounts are in thousands)

Agreement will expire on November 19, 2002. It is our understanding that
the parties to the voting trust intend to renew this agreement, although
the terms, including the number of shares covered by the agreement, of any
such renewal may differ from the terms of the current agreement.

As of August 9, 2002, the voting trust beneficially owned 18.9% of our
outstanding shares of common stock. As a result, these directors are able
to significantly influence the election of directors and other matters
submitted to shareholders for a vote. There can be no assurance that the
interests of the trustees of the voting trust will not conflict with the
interests of our other security holders.

WE MAY BE UNABLE TO INTEGRATE SUCCESSFULLY THE BUSINESS OPERATIONS OF D&E
AND CONESTOGA AND SUCH INABILITY COULD HAVE AN ADVERSE IMPACT ON OUR
PROFITABILITY.

The integration of the systems and operations of D&E and Conestoga will
involve significant risks. D&E and Conestoga have different operating
support systems, including billing, accounting, order management, toll
rating, trouble reporting and customer service systems, which may be
difficult to integrate. In addition, some of Conestoga's employees are
members of a labor union and are subject to the terms of a collective
bargaining agreement. Because D&E employees are not unionized, our
management may face difficulties in integrating employees with different
work rules. Even if integration of the operating systems and employees is
ultimately successful, the amount of management attention diverted to
integration efforts may limit their ability to work on other business
matters.

OUR INCREASED INDEBTEDNESS COULD RESTRICT OUR OPERATIONS.

As of June 30, 2002, we had approximately $247,909 of total indebtedness,
including current maturities, which increased in connection with the
Conestoga acquisition. This increased indebtedness could restrict our
operations due to the following factors, among others:

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

- our indebtedness may limit our ability to obtain additional
financing on satisfactory terms, if at all;

38

D&E Communications, Inc. and Subsidiaries
Part I - Financial Information (continued)

Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
(Dollar amounts are in thousands)

- insufficient cash flow from operations may cause us to attempt to
sell assets, restructure or refinance our debt, or seek additional equity
capital, which we may be unable to do at all or on satisfactory terms;

- our level of indebtedness may make us more vulnerable to economic or
industry downturns;

- we may not have the ability to pay dividends to our shareholders;
and

- our debt service obligations increase our vulnerabilities to
competitive pressures, as we may be more leveraged than many of our
competitors.

OUR CREDIT FACILITIES WILL CONTAIN COVENANTS THAT WILL SIGNIFICANTLY
RESTRICT OUR OPERATIONS.

The agreements governing our indebtedness contain covenants imposing
financial and operating restrictions on our business. These restrictions
may limit our ability to take advantage of potential business
opportunities as they arise and adversely affect the conduct of our
business. These covenants will place restrictions on our ability and the
ability of our subsidiaries to, among other things:

- incur more indebtedness;

- pay dividends, redeem or repurchase our stock or make other
distributions;

- make acquisitions or investments;

- use assets as security in other transactions;

- enter into transactions with affiliates;

- merge or consolidate with others;

- dispose of assets or use asset sale proceeds;

- create liens on our assets; and

- extend credit.

In addition, our credit facilities require that we maintain specified
financial ratios. Our ability to maintain these financial ratios can be
affected by operating performance or other events beyond our control.
Accordingly, we cannot assure you that we will meet these ratios. Our
ability to comply with the provisions governing our indebtedness may be
adversely affected by our operations and by changes in economic or
business conditions or other events beyond our control. In addition, our
failure to comply with our indebtedness-related obligations could result
in an event of default under our credit facilities or future indebtedness.

39

D&E Communications, Inc. and Subsidiaries
Part I - Financial Information (continued)

Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
(Dollar amounts are in thousands)

THE INABILITY TO SELL THE WIRELESS BUSINESS OF CONESTOGA WOULD RESULT IN A
REDUCTION OF OUR EXPECTED RESOURCES AVAILABLE FOR THE OPERATION OF OUR
BUSINESS, AND MAY ADVERSELY AFFECT THE CONTINUING OPERATIONS OF OUR
BUSINESS.

We intend to dispose of Conestoga's wireless assets and business. Until
the Conestoga wireless business is sold, we will continue to operate this
business, which incurred operating losses of $8.2 million for the year
ended December 31, 2001. The continued operation of the wireless business
will negatively impact our results from discontinued operations and may
adversely affect our business by requiring additional financing to fund
operations. The proceeds to be realized by us from a sale of Conestoga's
wireless assets and business are uncertain.

In addition, pursuant to certain non-competition covenants in our
agreement with VoiceStream Wireless Corporation, for three years following
the sale of our interest in PCS ONE, we may be restricted from providing
mobile voice wireless communications services in the York-Hanover,
Lancaster and Reading, Pennsylvania markets. As a result of the
restrictions imposed by these non-competition covenants, we may be
required within 240 days after the Conestoga acquisition to dispose of
that portion of Conestoga's wireless business operated in the Reading,
Pennsylvania market, which represents approximately 37% of the population
area serviced by such business. Due to the significant amount of fixed
costs associated with Conestoga's wireless business, if we were unable to
dispose of that portion of the Conestoga wireless business and were
restricted from providing services in the Reading, Pennsylvania market, we
may incur significantly greater losses from that business than those
previously incurred by Conestoga.

40

D&E Communications, Inc. and Subsidiaries
Part I - Financial Information (continued)

Item 3. Quantitative and Qualitative Disclosures about Market Risk

D&E does not invest in derivative financial instruments or other
market risk sensitive instruments for the purpose of managing its foreign
currency exchange rate risk or for any other purpose.

41

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 4. Submission of Matters to a Vote of Security Holders

(a) Date of meeting. The Annual Meeting of Shareholders was held on May 23,
2002.

(b) Matters Voted Upon at Annual Meeting. The vote tabulations in respect to the
three matters voted upon at the 2002 Annual Meeting were as follows:

(1) Election of the following directors to hold office for a three year
term to expire in 2004.

Director For Withheld
-------- --- --------

John Amos 6,545,194 85,091
G. William Ruhl 6,475,728 154,357
W. Garth Sprecher 6,469,214 161,071

(2) Approval of the acquisition of Conestoga Enterprises, Inc.

For Against Abstain
--- ------- -------

4,768,341 1,414,465 37,078

(3) Ratification of the Board of Directors' selection of
PricewaterhouseCoopers LLP as independent accountants in 2002.

For Against Abstain
--- ------- -------

6,597,128 13,743 19,414

42

D&E Communications, Inc. and Subsidiaries
Part II - Other Information

Item 6. Exhibits and Reports on Form 8-K

(a) Exhibits:

Exhibit Identification Reference
No. of Exhibit ---------
------- ----------

99.1 Certification of Chief Executive Officer Filed herewith.

99.2 Certification of Chief Financial Officer. Filed herewith.

(b) Reports on Form 8-K:

A current report on Form 8-K dated April 15, 2002, was filed during the
quarter ended June 30, 2002. The report announced the completion of the sale of
our partnership interest in the D&E/Omnipoint Joint Venture on April 1, 2002.

A current report on Form 8-K dated May 1, 2002, was filed during the
quarter ended June 30, 2002. The report announced our earnings results for the
first quarter of 2002 and disclosed information that could become public in
regard to a possible offering of senior notes under Rule 144A of the Securities
Act.

A current report on Form 8-K/A dated May 2, 2002, was filed during the
quarter ended June 30, 2002. The report corrected certain inadvertent errors on
our May 1, 2002 8-K.

A current report on Form 8-K dated June 10, 2002, was filed during the
quarter ended June 30, 2002. The report announced the completion of our merger
with Conestoga and the terms of the related debt financing also completed on May
24, 2002.

43

D&E Communications, Inc. and Subsidiaries

Signatures

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

D&E Communications, Inc.

Date: August 14, 2002
By: /s/ G. William Ruhl
--------------------------------
G. William Ruhl
Chief Executive Officer

Date: August 14, 2002
By: /s/ Thomas E. Morell
--------------------------------
Thomas E. Morell
Senior Vice President, Chief
Financial Officer and Treasurer

44

D&E Communications, Inc. and Subsidiaries

INDEX TO EXHIBITS

Exhibit Identification Reference
No. of Exhibit ---------
------- ----------

99.1 Certification of Chief Executive Officer. Filed herewith.

99.2 Certification of Chief Financial Officer. Filed herewith.

45