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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K

(Mark One)

For the fiscal year ended December 31, 2003

Or

For the transition period from                  to                 

Commission file number 000-20709

D&E Communications, Inc.

(Exact name of registrant as specified in its charter)

Registrant’s telephone number, including area code:

(717) 733-4101

Securities registered pursuant to Section 12(b) of the Act:

None.

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, par value $0.16 per share

(Title of Class)

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 þ No ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. Yes þ No ¨

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12B-2). Yes þ No ¨

The aggregate market value of the voting stock held by non-affiliates of the registrant is approximately $147,444,867. Such aggregate market value was computed by reference to the closing price of the registrant’s Common Stock as reported on the Nasdaq National Market on June 30, 2003. For purposes of making this calculation only, the registrant has defined affiliates to include all directors, executive officers and beneficial owners of more than ten percent of the Common Stock of the registrant.

The number of shares of the registrant’s Common Stock outstanding as of March 4, 2004 was 15,550,720.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s definitive proxy statement for its 2004 annual meeting of stockholders are incorporated by reference into Part III of this Form 10-K.

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TABLE OF CONTENTS

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PART I

Forward Looking Information is Subject to Risk and Uncertainty

Our disclosure and analysis in this report includes 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 or the ability to generate income or cash flows are forward-looking statements. Forward-looking statements involve certain risks and uncertainties. Our actual performance or achievements may differ materially from those contemplated by forward-looking statements.

You should understand that various factors, including those discussed in the section titled “Item 1. Business - 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.

Overview

Our common stock is listed for quotation on the National Market System of the National Association of Securities Dealers Automated Quotation System under the symbol “DECC”. Our internet address is www.decommunications.com. Electronic copies of the 2003 Annual Report on Form 10-K are available free of charge by visiting the “Investor Relations” section of www.decommunications.com. Electronic copies of quarterly reports on Form 10-Q and current reports on Form 8-K are also available at this internet address. These reports are posted as soon as reasonably practicable after they are electronically filed with the Securities and Exchange Commission (SEC).

We are a provider of integrated communications services to residential and business customers in markets throughout the eastern half of Pennsylvania. Including the operations of Conestoga acquired in May 2002, we have operated as a rural local exchange carrier (“RLEC”) in parts of Lancaster, Berks, Lebanon, Chester, Montgomery, Lehigh, Union and Northumberland counties in Pennsylvania since the early 1900’s and were among the first to deploy a 100% digitally switched network. In 1998, we began operating as a competitive local exchange carrier (“CLEC”) and currently operate in the Lancaster, Reading, State College, Pottstown, Williamsport, Altoona and Harrisburg, Pennsylvania areas, which we refer to as our “edge-out” markets. Today, we offer our customers a comprehensive package of communications services, including local and long distance telephone services, high speed data services, internet access services and video operations in the State College and Lewisburg areas. We also provide business customers with integrated voice and data network solutions.

As of December 31, 2003, we served 142,799 RLEC access lines, 35,140 CLEC access lines, 12,859 dial-up internet access subscribers, 7,303 digital subscriber line (“DSL”) subscribers, and 814 web hosting customers. For the year ended December 31, 2003, we generated revenue of $173.1 million, operating income of $23.8 million and net income of $4.1 million.

Historically, we have derived the majority of our revenues and operating income from the regulated RLEC segments. For the three years ended December 31, 2003, the RLEC segment accounts for approximately 58% of total revenues and virtually all of the operating income. The graphs below represent fiscal year revenues and operating income. The RLEC segment has consistently generated positive cash flow and has historically accounted for a majority of our total revenues and operating income.

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To augment our core voice and data communications services and enhance our position as an integrated communications provider, we offer systems integration services to businesses. We believe that the complexity of voice communications and data networks has increased the need for small and medium-sized businesses to seek a single provider for all of their communications and networking needs. We also believe that the convergence of voice communications and data networks technology further drives this outsourcing trend and increases the need for service providers that have expertise in both voice and data networks.

Historically, we also have made investments in foreign telecommunications service providers. We own a 38.16% interest, 9.28% through our one-third interest in EuroTel, LLC, and 28.88% directly, in Pilicka Telefonia Sp. z o.o. (“Pilicka”), which operates a telephone network in a region south of Warsaw, Poland. We presently maintain a minority interest in these ventures. We currently are exploring strategic alternatives with regard to our ownership interest in Pilicka.

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Our principal offices are located at 124 E. Main Street, Ephrata, Pennsylvania 17522, and we can be reached by telephone by calling (717) 733-4101 or through our website at www.decommunications.com. We are a Pennsylvania corporation.

Recent Developments

Debt Refinancing

We completed a $225 million refinancing of our current debt facilities on March 5, 2004. The new debt structure includes a 7½-year $25 million Senior Secured Reducing Revolving Loan, a 7½-year $50 million Senior Secured Term Loan A, and an 8-year $150 million Senior Secured Term Loan B. In addition to the $225 million, the new facility also includes the $35 million remaining debt assumed with the Conestoga acquisition. The debt was assigned a “BB-” rating by Standard & Poor’s Rating Services and a “Ba3” rating by Moody’s Investor Services.

Acquisition of Conestoga Enterprises, Inc.

On May 24, 2002, we completed our acquisition of Conestoga Enterprises, Inc., (“CEI” or “Conestoga”), an adjacent Pennsylvania RLEC providing integrated communications services. The merger consideration was approximately $273 million, which included the payment of approximately $149 million of cash and the issuance of approximately 7.9 million shares of our common stock. In addition, we also assumed existing Conestoga indebtedness totaling approximately $79 million.

The Company and CEI shared complementary footprints that have allowed the Company to realize additional growth opportunities in the eastern half of Pennsylvania as a result of the merger. We have realized increased cash flow through our ability to cross-sell enhanced telephone products developed using our Advanced Intelligent Network software, Internet services, and systems integration data services to a wider customer base in Conestoga’s territory. With minimal incremental expense, we have been able to expand our existing products into the CEI territories. We have realized significant synergies as a result of the merger due to our ability to eliminate redundant expense items over the two operations and spread fixed costs over a larger customer and revenue base. We originally forecasted approximately $4.6 million in annual cost savings primarily due to reductions in the number of employees ($3.6 million) and savings from reduced general and administrative costs ($1.0 million). We successfully achieved all projected synergies as scheduled throughout the year 2002, with approximately one half of the employee reduction occurring in May 2002 and the remaining half occurring in October 2002. Management anticipates realizing additional synergies in the area of subscriber billing. Annual savings after the billing conversion, anticipated to be completed during 2004, are estimated to be $1.6 million.

The Telecommunications Industry

The telecommunications industry is comprised of companies involved in the transmission of voice, data and video communications over various media and through various technologies from the point of origination to the point of termination. In recent years the industry has undergone rapid change due to competition, the construction of additional infrastructure and the introduction of new technologies, which has resulted in increased demand for telecommunications services. The Telecommunications Act of 1996 (“TA-96”) and its subsequent interpretation and implementation by the FCC has had a far reaching impact on telecommunications companies, regulators and customers as society moves forward to embrace an “information highway: available to all” approach.

There are two predominant types of local wireline telephone service providers in the telecommunications industry: Incumbent Local Exchange Carriers (“ILEC”) and Competitive Local Exchange Carriers (“CLEC”). Within the ILEC sector, generally there are Rural Local Exchange Carriers (“RLEC”), which operate in rural areas, RLEC aggregators, which operate multiple RLEC properties throughout the United States, and Regional Bell Operating Companies (“RBOC”), which were the telephone companies created from the break-up of AT&T in 1984.

The passage of the TA-96, with its stated goal of encouraging the rapid deployment of new telecommunications technologies and promoting competition to ensure lower prices and higher quality services for U.S. telecommunications customers, substantially changed the telecommunications industry. The TA-96 effectively permitted newly created CLECs to compete with ILECs. As a result, ILEC and CLEC operators increasingly seek to differentiate themselves by bundling their communications service offerings and providing high quality customer service. Both ILEC and CLEC operators face other competitive methods of delivering communications services including cable service, wireless telephones, satellite transmission and voice over the Internet protocol (“VoIP”) service.

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Despite competition introduced into the telecommunications industry as a result of the passage of the TA-96, many large RLECs continue to grow their business by capitalizing on their extensive networks, favorable demographic trends and the increasing demand for communications services, including new service offerings such as high speed data and enhanced telephone services. There are also a number of RLECs that operate in rural areas where competition from CLECs generally has been minimal due to regulatory factors, including exemptions from rules applicable to the RBOCs that require competitive access as mandated by the TA-96, and the unfavorable economics of constructing and operating competitive systems in rural areas. Additionally, there has been consolidation among RLECs, which has created economies of scale and the ability to cross-sell new services across a larger customer base. Nationally, there are a large number of RLECs similar to ours that operate in sparsely populated rural areas where competition from CLECs generally has been minimal due to regulatory factors and unfavorable economics of constructing and operating competitive systems. Most of these RLECs have fewer than 50,000 access lines.

Strategic Initiatives

Our primary business objective is to be a leading, regional wireline-focused integrated communications service provider. To achieve this objective, we will continue to pursue the following goals:

Pursue Integrated Communications Provider Concept to Grow the Company

The evolution into an integrated communications provider is a key element in the future growth of the Company. With RLEC line counts declining and increasingly threatened, our Company must realize additional sources of revenue. The more services D&E provides to a customer, the more effectively it can build a long-term relationship with the customer, resulting in greater potential for revenue growth. The bundling of services, video, DSL and voice, is a key part of the Company’s strategy to grow revenue and strengthen the customer relationships while providing increased value. In addition, by offering a full range of services, D&E will be in a better position to compete with cable companies and other competitors as they begin to encroach on its traditional telephone service areas.

We find that business customers are looking for a single source provider for their communications services. Therefore, any one of the voice or data services that we provide can be an entry point for selling additional services. We believe that our ability to provide comprehensive solutions to our customers differentiates us from our competitors.

Improve Profitability of Every Business Segment

The Company’s focus on providing a high quality of service level to our customers is key to enabling us to reach our profitability goals. Adding additional services such as broadband, long distance, custom calling features and, in the future, video services, will help D&E increase the revenue per subscriber and help offset declining access line counts.

D&E’s recent growth in total line count has come from its “edge-out” CLEC markets. We will continue to operate under a disciplined strategy to increase our market share in our “edge out” markets by offering competitive communication service packages primarily to business customers. We believe there is still a great deal of potential for new customers and revenue in the CLEC markets. By providing excellent service to customers in these markets, the Company will seek to expand its positive image throughout central and eastern Pennsylvania. While our business plan is to increase revenues, we plan to do so in a manner which also increases net income.

Likewise, we believe that we can further expand our market share of the Internet services market by meeting or exceeding the customer service and technical requirements of individual and business customers whom we believe have been underserved by national providers of Internet services in the past. In addition, Conestoga did not actively market dial-up Internet services, which has provided us with an opportunity to introduce our Internet services to existing Conestoga customers following the acquisition of Conestoga. Since the introduction of Internet services in Central Pennsylvania, including the Conestoga territories, an additional 490 dial-up subscribers have been added, which results in additional annual revenue of approximately $100,000. While we intend to maintain our dial-up Internet access customer base, we also plan to leverage our success and further focus our sales and marketing efforts on selling our high speed data and web hosting services.

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Leverage Our Core Assets

We will continue to leverage our modern network infrastructure, established reputation, extensive local knowledge and significant operating experience to gain new customers and increase our market share in all our business segments. We will also continue to actively market our broad array of services to our existing CLEC customers. For example, as of December 31, 2003, the company provided long distance service to approximately 62% of our CLEC access lines, and approximately 10% of the CLEC business customers had subscribed to our high speed data services.

In addition, our operations are supported by computer systems that permit us to install service rapidly, analyze network problems, and provide customer billing. Also included are customers’ databases and the associated fiber, copper cable, switching and other equipment required to provide service. These systems are supported by personnel who have the expertise to provide advanced communications services to our customers.

Capitalize on the Convergence of Voice and Data Communications Technologies

We believe that the convergence of voice and data communications technologies provides us with opportunities to provide more comprehensive communications solutions to our customers and permits us to reduce our overall costs. It is this convergence that has increased the need for businesses to seek a single provider for all of their communications and data networking needs. Our systems integration business enhances our service offerings and positions us to be a single source provider of voice and data communications services to our business customers.

Convergence also makes possible the economic bundling of video, DSL and voice, which is a key part of the strategy to grow revenue and strengthen customer relationships. In addition, by offering a full range of services, we will be in a better position to compete with cable companies and other competitors as they begin to encroach on our traditional telephone service areas. The additional services and growth of customers made possible by our ability to capitalize on being a leader in adapting converged technologies, provides us with an additional source of revenue important to growing the company.

Continue to Focus on Customer Service

We believe that our commitment to customer service strengthens our relationships with our customers and enhances our competitive position. We will maintain our commitment to customer service through the continuous pursuit of technological enhancements to our operations, the ongoing training of our customer service and sales representatives in new service offerings and the development of brand-oriented community service programs and sponsorships. Customer service is provided 24 hours a day, 7 days a week and 365 days a year. Completing the final integration of systems and procedures with Conestoga is a top priority and will help to ensure that we deliver excellent service. These projects include integrating the subscriber billing systems and implementing a trouble management support system for the entire company for use in the network operations center. Other priorities include initiating common operational support systems across the company, as well as consolidating disaster recovery procedures, and developing a customer database that will enable better communication with customers for sales, marketing and operational purposes.

Selectively Pursue Strategic Acquisitions

We will endeavor to increase the scale and scope of our business through acquisitions of companies, including other RLECs that strategically fit with our integrated communications strategy. Acquisition targets may include companies that deepen our industry focus, broaden service territories and increase the breadth of our services.

Operations

RLEC Operations

Our RLEC segment of the business has provided telecommunications services to the RLEC territories since the early 1900s and was one of the first to deploy a 100% digitally switched network. Today, we market our RLEC services, including, local telephone, network access, long distance, data and enhanced telephone services, as Denver & Ephrata Telephone Company, The Conestoga Telephone and Telegraph Company and Buffalo Valley Telephone Company in three distinct service territories. Our RLEC strategy is

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to grow revenue by selling additional communications services, including high speed data and enhanced telephone services, and improve financial performance through operating efficiencies.

We operate in rural and suburban territories totaling 802 square miles, averaging 178 access lines per square mile as of December 31, 2003. As of December 31, 2003, the RLEC served 142,799 access lines. Approximately 74% of these access lines served residential customers and approximately 44% of the customers subscribed to one or more enhanced telephone services.

We offer our customers a broad array of enhanced telephone services including:

We also offer network access services that provide other telecommunications carriers, such as local exchange carriers, long distance carriers and wireless companies access to our local network facilities for the completion of their calls. Payment for providing these services comes either directly from our customers or from other telecommunications carriers that utilize our networks. Additional interstate access revenues are received from settlement pools administered by the National Exchange Carrier Association, Inc. (“NECA”) which we pay into to participate. In addition, we offer long distance telephone service to our RLEC customers and directory advertising to give customers business service information in addition to telephone number data.

Growth in access lines in 2001 reflected the population growth in our service territories, as well as our continued efforts to sell additional access lines to the existing customer base for dedicated fax and Internet access services. During 2002 and 2003, the access line count declined as a result of various factors that reflect national trends, including (i) the softening demand for second lines due to customers moving their Internet access to either DSL services provided by us, or to cable modems that are provided by competitors, (ii) the use of wireless service in place of second lines and in some cases primary lines and (iii) overall economic conditions. The following table reflects access line trends over the past three years on a pro forma basis, including Conestoga access lines before the Conestoga acquisition:

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CLEC Operations

Our CLEC began operations in 1998 and offers services similar to the RLEC, but primarily targets small and medium-sized business customers within the edge-out markets. We also provide services to residential customers in certain markets where economically prudent as part of bundled services with video, high speed Internet or long distance. By concentrating the CLEC strategy on markets surrounding the RLEC territories, we are able to leverage our existing human resources (including technical and engineering professionals), significant back office infrastructure and network assets. As a result, three of the CLEC markets are within 10 miles, three are within 50 miles and one is within 100 miles of one or more of the RLEC territories.

We provide our CLEC customers with high speed data services, local calling, customized extended local calling, long distance, data and enhanced telephone services. In addition, we have developed a broadband fiber and coaxial cable network in our State College market to offer bundled services, including cable television, to business and multi-dwelling unit residential customers. We plan to continue to focus primarily on business customers, leverage our existing facilities and construct new facilities when and where it is economically prudent.

The number of access lines served by our CLECs has increased from 22,139 access lines as of December 31, 2001, to 29,072 access lines as of December 31, 2002, and to 35,140 access lines as of December 31, 2003. We believe that market demand for an alternative communications provider combined with our sales efforts and quality reputation will contribute to continued growth. As of December 31, 2003, approximately 25% of access lines were served entirely on our own facilities. Approximately 61% were served through a combination of our facilities and leased facilities under our control, and 14% were served completely on lines of another provider. The lines on which we perform the switching function, including on our facility and including those on a combination with leased facilities, are referred to as “On-Net or On-Switch.” During 2003 we eliminated 1,128 business lines from the count for all three years presented to conform the method of counting CLEC lines to the same method used by the RLEC. The following table reflects our access line growth over the past three years on a pro forma basis, including Conestoga access lines before the Conestoga acquisition:

Internet Service Operations

As part of the strategy to provide a range of data services to customers, we began offering DSL service in the second half of 1999 and began bundling DSL and Internet access services to RLEC and CLEC customers when we launched our Internet service provider in the fourth quarter of 2000. Internet service offerings include dial-up and high speed Internet access and web hosting services. Internet services are offered to residential and business customers in a geographic region that includes and surrounds the RLEC and CLEC operations. This service is offered entirely on our own facilities in our RLEC territories and primarily on our own facilities in our CLEC markets. The following table reflects subscriber growth over the past three years:

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We believe that residential and business customers in rural markets have been underserved by national Internet service providers in the past and that this provides a significant opportunity for growth. Our local presence, focus on customer service and technologically advanced services provide us with a competitive advantage in our markets. While we plan to maintain our dial-up Internet access customer base, we also plan to focus our sales efforts on selling our high speed data and web hosting services as part of an integrated communications package. DSL subscribers continue to grow at a rapid pace, increasing by 1,688, or 30%, since December 31, 2002.

Systems Integration Operations

To augment our core voice and data communications services and enhance our position as a provider of integrated communications services, we offer a full range of data and voice system services to businesses, government agencies and educational institutions. We believe that the complexity of voice communications and data networks has increased the need for small and medium-sized businesses to seek a single provider for all of their communications and networking needs. We believe that the convergence of voice communications and data networks technology further drives this outsourcing trend and increases the need for service providers that have expertise in both voice and data networks. In addition, systems integration services can serve as an entry point to business customers to better position us to capture more of their total communications services spending.

We offer services to support the design, implementation and maintenance of local and wide area networks and telecommunications systems. We also sell data and voice communications and wireless networks, and provide custom computer programming and security services. We market these products and services primarily in our RLEC and CLEC service areas. Our sales team targets businesses, government agencies and educational institutions with comprehensive solutions for their voice and data communication networking needs.

Wireless Operations

In connection with our strategy to exit the mobile and wireless business, we completed the sale of an investment in PCS ONE on April 1, 2002.

Remaining consistent with our focus on wireline communications, we completed the sale of Conestoga Wireless on January 14, 2003. The results of operations of Conestoga Wireless are not reported as discontinued operations due to the continued obligations that we have after the sale related to our guarantees on cell site leases and our responsibility under a Build-to-Suit agreement. Conestoga Wireless reported revenues of $7.6 million from May 24, 2002, the date of acquisition, through December 31, 2002. The operating loss for 2002 was $1.8 million.

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Investments

Our company currently owns minority investments in foreign telecommunications service providers. We own a 38.16% interest, 9.28% through our one-third interest in EuroTel, LLC, and 28.88% directly, in Pilicka, which operates a telephone network in a region south of Warsaw, Poland. We are currently exploring strategic alternatives with regard to our ownership interest in Pilicka.

Competitive Strengths

Customer Service

We believe there is a high correlation between service quality and the likelihood that our customers will remain with us when presented with a competitive alternative. Our commitment to personalized customer service includes: (1) locating call centers in the communities that we serve; (2) minimizing the use of automated attendant call routing systems, so that live representatives answer calls directly, a service not offered by many of our competitors; and (3) providing a single point of contact for service calls by cross-training all customer service personnel in RLEC, CLEC, long distance and Internet service offerings. Call centers provide convenient access for customers to place their orders and make billing inquiries.

Multiple customer retention measures are employed, for larger RLEC business customers and for our CLEC customers who are more likely to be targeted by competitors. These customer retention measures include performance and satisfaction measures, such as monthly customer surveys to ensure customer satisfaction and loyalty. The focus on customer service was evident in the 2003 survey responses, in which 98% of the respondents said that the overall service was good or excellent. Additionally, in areas such as call completion, customer-out-of-service reports and service order completion, our performance consistently exceeds guidelines established by the Pennsylvania Public Utility Commission.

In addition, personnel at our network operations centers coordinate provisioning and maintenance for our customers. Our network is monitored, and repair service is available, 24 hours a day, 365 days a year. Inbound maintenance requests, field personnel dispatches and service order monitoring are all coordinated through this center. Our primary network operations center also provides us with remote network management, maintenance and repair capabilities, which we believe increases our engineers’ productivity and reduces potential service interruptions for our customers.

Sales and Marketing

We instituted a strategic branding awareness campaign, “Delivering Excellence”, in the second half of 2003. The branding campaign is a key factor to provide name and brand recognition to the Company to support our business success and sustain competitive advantage. The “Delivering Excellence” brand recognizes the quality customer service for which our customers recognize the Company. Our employees are immersed in a culture that values and acts upon delivering a positive customer experience which is a vital part of the D&E brand. The quality of the Company’s work and our responsiveness to meeting customer needs are critical for the success of the brand and the Company and drive successful financial performance. The strategic branding initiative, with a budget of $1.4 million, is expected to be completed in 2006.

The convergence of voice, data, and video provide a key strategic growth strategy for us as an Integrated Communications Provider (“ICP”). We believe that the bundling of services for consumers (e.g., phone, Internet and video) provides an opportunity to increase revenue growth and strengthen customer relationships by offering an integrated bundle. We offer video over the Company’s cable operations in State College, Pennsylvania and have commenced a trial offering over the Company’s copper system in Union County, Pennsylvania. For businesses, convergence means providing VoIP systems with professional information technology (“IT”) services for integrating high speed networks and assisting customers’ migration to data packet based networks.

We employ a relationship-based sales and marketing approach. This approach, and a commitment to customer service, builds brand loyalty and increases the effectiveness of sales efforts. We also grow our general brand awareness through corporate and product awareness campaigns that utilize local television, billboard and print ads as well as sponsorship of community events. Corporate spokesman, Dick Vermeil, is an important component to the brand awareness strategy. Joe Paterno also helps promote our Company’s products and services. With respect to non-RLEC businesses, we support an aggressive integrated marketing communications strategy with targeted direct sales efforts. Customer service representatives are located throughout the service territories and are supported by local sales efforts.

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We manage our sales organization by our four primary customer types: residential, business, government agencies and educational institutions. Customer service representatives proactively market a complete service portfolio to residential customers through regular calling programs and consultative analyses of customers’ services on incoming calls. We have developed up-sell and cross-sell programs in our customer service call centers with sales representatives who are cross-trained in all segments of our business to market the service offerings more effectively. Aggressive monthly sales targets are established for the customer service representatives and their efforts are coordinated with the marketing incentives designed to promote a given service at the same time. Marketing programs and sales initiatives are coordinated with the calling efforts to maximize their effectiveness.

In 2003 Conestoga customer representatives were integrated into the up-sell and cross-sell programs that D&E had implemented. For example, in early 2003, the dial-up and DSL services at all locations were standardized in terms of pricing and provisioning and branded with the Jazzd name. Incentives were offered to the three RLEC customer service groups, where each team had certain targets that had to be met in order to be eligible for the incentive award that month. Each of the three customer service groups focused their attention on cross-selling DSL to RLEC customers and up-selling to the dial-up customers.

The direct sales force targets government and educational institutions, as well as small and medium-sized businesses, and is divided between communication services and systems integration services. Both sales groups make direct calls to existing and prospective customers, make product recommendations and offer a cost comparison of the service package. The sales personnel work closely with the network engineers and systems integrators to design solutions to satisfy customers’ needs.

Network Architecture and Operations Support Systems

We were one of the first local exchange carriers in the nation to deploy a 100% digitally switched network. We continue to utilize a technologically advanced, fiber-rich network based on digital switching, fiber optic transport technology and host/remote call switching architecture. We operate our own Signaling System 7 network that provides efficient call routing and allows enhanced features to travel across the national telephone network. During 2001, we completed a new network operations center, which monitors network performance 24 hours a day, 365 days a year and allows us to maintain high network performance standards.

The RLEC has digital host switches in Ephrata, Lititz, Birdsboro and Lewisburg, Pennsylvania and delivers dial tone to an extensive network of remote switches and access nodes that are connected with fiber optic cable. Connection to customers, or the “last mile”, is provided over the RLEC’s copper or fiber outside plant. The host/remote architecture concentrates network intelligence in the four host offices, enabling the RLEC and CLEC operations to leverage this network and provide short customer loop lengths in our copper cable plant. Short customer loop lengths and the packet information delivery network system facilitate the delivery of advanced high speed services such as DSL. We are capable of providing DSL service to approximately 94% of RLEC customers.

The CLEC’s network strategy is to leverage the core switching architecture of the RLEC network and to own the key elements of the local exchange network. These elements include remote access nodes and the facilities connecting the host switches to the remote access nodes, including both the fiber optic cable and the optical transport electronics. In addition, where economically viable, the CLEC builds copper/fiber distribution facilities between the remote access nodes and customers’ premises. The network strategy allows the CLEC to provide high quality and reliable service and helps to minimize customer turnover. In addition, we have one host switch and three remote access nodes supporting the broadband fiber network in State College, Pennsylvania. As of December 31, 2003, the CLEC had most of its access lines connected to the RLEC switch and approximately 25% of its access lines completely on our network.

The network is supported by computer systems called operations support systems that provide the ability to install service for customers on a short interval basis and to analyze network problems in many instances before the customers are affected. These systems include databases of all RLEC and CLEC customers and the associated facilities such as the fiber and copper cable and the associated central office switching connections that serve them. In certain markets, we also use geographic information systems to map our outside plant cable and associated structure of poles and underground conduit. These same systems allow us to verify quickly the capability of the plant for high speed data service. We have a system that stores the inventory of central office and transmission equipment that is accessed for the automatic provisioning of customized services for customers. These systems also have monitoring and troubleshooting capabilities to insure the reliability of the network. In addition, the company has recently established the capability to interface with the operations support systems of Verizon and Sprint to assure fast and accurate provisioning of services for the CLEC customers.

At the time of the Conestoga acquisition, D&E was using an in-house billing system and Conestoga was using an external provider. A comprehensive evaluation of both systems has since been completed and the D&E platform was selected. A new contract

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has been negotiated with Conestoga’s provider to support the D&E platform, which will result in substantial savings to D&E. Conversion of Conestoga customers from their billing system to the D&E billing system is expected to be completed by October 31, 2004. The anticipated cost savings is $1.6 million in annual service charges.

Competitive Environment

The Telecommunications Act of 1996 introduced competition among providers of local telephone services enabling customers to switch to services offered by local exchange carriers and cable companies. Several other factors are further increasing competition in local telephone service, including growing customer demand for communications products and services, development of fiber optics and digital electronic technology and legislation and regulations designed to promote competition.

To date, our RLECs have faced limited competition and, to the best of our knowledge, have not lost any access lines to a wireline competitor since the Telecommunications Act was passed in 1996. The primary reason for this insulation from competition is that our RLECs maintain a rural exemption from the more burdensome interconnection provisions of TA-96. Further, the Pennsylvania Public Utility Commission had granted our RLECs a temporary suspension of many of the interconnection requirements under the TA-96. This suspension expired in January 2003. Consequently, competitors are now allowed to seek removal of the rural exemption from the more burdensome interconnection obligations for the purposes of entering our territory and using our services and facilities through interconnection agreements to provide competitive services. Similarly, to the extent that other RLECs are denied a continuation of their own rural exemptions, our CLECs will have opportunities to compete in those RLEC markets.

We believe that our RLECs have competitive advantages based on several factors, including the lack of concentration of any large business customers, a strong customer service record and high level of customer satisfaction and the service territories’ high cost of facilities-based entry due to low population density and other regulatory factors. Our RLECs experience competition from wireless operators in our service territories, which serve as an alternative service to wireline local and long distance services. Wireless competitors include AT&T Wireless, Verizon Wireless, Cingular Wireless, Sprint PCS, Nextel and T-Mobile Wireless. Consistent with national trends, our RLECs experienced a 3.0% decline in network access minutes in 2003.

Our CLECs compete principally with the services offered by the incumbent local exchange carriers, Verizon Communications, Sprint and other competitive providers, including other CLECs, inter-exchange carriers, cable television companies, wireless service providers and private networks built by large business customers. The edge-out markets served by our CLECs are served by one or more other CLECs. In addition, in providing long distance service, our RLECs and CLECs are in competition with major carriers such as AT&T, MCI, Sprint, and most recently, Verizon Communications as well as the wireless companies listed above.

Our systems integration business competes with large, regional and national companies that provide a wide variety of services to their customers. These competitors include Morefield, Williams, IntelliMark and Weidenhammer Systems Corp. We also compete with numerous smaller service providers. As a result of this competition, we may lose customers or have difficulty acquiring new customers. Barriers to entry to the markets for these services are generally low. As a result, new competitors may enter this market. The existing and new sources of competition place pressure on the pricing of these services.

The market for Internet services is highly competitive. We compete for dial-up customers with national, regional and local Internet service providers as well as cable companies and direct broadcast satellite companies. These competitors include AOL, EarthLink, MSN, Adelphia Communications, Comcast and Pencor Services. We also compete for business customers with long distance and local communications providers in selling high speed data services. The existing and new sources of competition in this market place pressure on the pricing of these services.

Regulatory Environment

Overview

Our communications services are subject to federal, state and local regulation. We hold various regulatory authorizations for our service offerings. At the federal level, the Federal Communications Commission, or FCC, exercises jurisdiction over all facilities of telecommunications common carriers, such as us, to the extent those facilities are used to provide, originate, or terminate interstate or international communications. State regulatory commissions exercise jurisdiction over such facilities and services to the extent those facilities are used to provide, originate or terminate intrastate communications.

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Pursuant to TA-96, state and federal regulators share responsibility for implementing and enforcing the domestic pro-competitive policies introduced by that legislation. In particular, state regulatory agencies have substantial oversight in the provision by ILECs of interconnection and non-discriminatory network access to competitive communications providers. Local governments often regulate the public rights-of-way necessary to install and operate networks, and may require communications services providers to obtain licenses or franchises regulating their use of public rights-of-way.

Federal Regulation

We must comply with the Communications Act of 1934, as amended, which requires, among other things, that communications carriers offer services at just and reasonable rates and on non-discriminatory terms and conditions. Our RLECs also must comply with TA-96. TA-96 encourages competition in local telephone service by requiring ILECs to open their networks and markets to competition. Because unique market characteristics are typically present in the areas served by RLECs, TA-96 granted an exemption to RLECs from the interconnection requirements applicable to non-rural ILECs. This exemption remains in place until an RLEC receives a request for interconnection and the state public service commission determines that the request will not have a negative impact on universal service, will not be unduly economically burdensome, and is technically feasible. State public utility commissions may also grant a suspension of the interconnection requirements under TA-96 to ILECs that have fewer than 2% of the nation’s subscriber lines, such as our RLECs. Our RLECs received a temporary suspension of these requirements that expired in January 2003. Even though our RLECs are not protected by the exemption under the Act, our RLECs will continue to be protected from competition until the Pennsylvania Public Utility Commission, or PA PUC also grants a competitor’s request to terminate our RLECs rural exemption. Such a request has been made by a wireless carrier relative to our RLECs and is currently pending at the PA PUC. Our RLECs and the wireless carrier have entered into a Memorandum of Understanding outlining the key terms of a traffic exchange agreement, which will be developed and executed in the first quarter of 2004. As a result of the Memorandum of Understanding, the wireless carrier has petitioned to withdraw its request. Our RLECs are subject to rate of return regulation at the FCC level. Each participates in the National Exchange Carrier Association access tariffs and are nationwide average schedule companies for access revenue settlement purposes.

Pennsylvania Regulation

Our RLECs are subject to regulation by the Pennsylvania Public Utility Commission. In 2001, we entered into an alternative regulatory framework with the PA PUC, commonly known as Chapter 30, for our intrastate operations under which we agreed to meet certain broadband service delivery parameters in exchange for a price cap formula, rather than a rate of return regulation. As a result of the alternative regulatory framework, profits are not directly limited by the PA PUC as they were under the former rate of return system of regulation. Instead, our RLECs received the flexibility to increase intrastate rates annually based on inflation less 2 percentage points. In exchange for the indexed price cap on rates, the RLECs get the benefit of any increase in margin resulting from their ability to reduce operating costs. Our RLECs can also seek to rebalance rates periodically within or between various intrastate service categories, such as local, toll and access. Additionally, our RLECs have the ability to request relief on a dollar-for-dollar basis for certain events deemed outside of their control that result in reduced revenue or increased expenses. The enabling state law that created the RLEC’s alternative regulatory framework expired, or sunset, on December 31, 2003. The PA PUC has subsequently issued a policy statement indicating its belief that the current rules governing alternative regulation and network deployment are still applicable and enforceable even though the enabling law has expired. The state legislature has been working to develop and enact replacement legislation, which could occur in 2004. We are unable to discuss the potential outcome of this process with any degree of certainty at this time. Our RLECs rebalanced rates in July 2002 and July 2003. These filings were revenue neutral and resulted in increases to local service rates that were offset by reductions to intrastate access charges. Our RLECs pay into and receive intrastate Universal Service Fund (“USF”) support from the Pennsylvania USF. See “Promotion of Universal Service.”

Our CLECs are also subject to regulation by the PA PUC in relation to intrastate services, including local telephone, regional long distance and network access services. Under the PA PUC’s current practices, our CLECs’ rates and services are generally subject to much less regulatory scrutiny than those of the RLECs in their markets.

The PA PUC must also approve any issuance of stock, incurrence of long-term debt, or acquisition or sale of material utility assets by our RLECs and CLECs. In addition, the PA PUC must approve any change in controlling interest of either our RLECs and CLECs or their holding companies. The PA PUC defines a “controlling interest” as an interest held by a person or group acting in concert, which enables the beneficial holders to control at least 20% of the voting interest in the utility or its parent, regardless of the remoteness of the transaction.

Under TA-96, the PA PUC also has authority to arbitrate any disputes over the terms and conditions of interconnection between our CLECs and the ILECs in our CLEC markets, including the prices of various unbundled network elements that our CLECs

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purchase. The PA PUC has taken a number of actions over the past several years affecting the prices for network elements, as well as the terms and conditions under which these elements are provided. Further decisions by the PA PUC may have a material effect on our CLECs’ costs and profitability.

Telecommunications Act of 1996

One of the key goals of TA-96 is to encourage competition in local telephone service. To do this, TA-96 provides three means by which communications service providers can enter the local telephone service marketplace:

Resale. ILECs are required to permit new communications service providers to purchase their services for resale to the public at a retail rate or a wholesale rate that is less than the rate charged by the ILEC to their retail customers.

Access to Network Elements. ILECs are required to lease to new communications service providers the various elements in their network that are used to provide local telephone service. The leased parts of the ILEC’s networks are known as “unbundled network elements.” The ILEC must make unbundled network elements available at rates that are based on their forward-looking economic costs.

Construction of New Facilities. New communications service providers may also enter the local telephone service market by building their own facilities.

To facilitate new communications service providers’ entry into local telephone markets using one or more of the above three methods, TA-96 imposes on non-rural ILECs the obligation to open their networks and markets to competition. When requested by competitors, non-rural ILECs are required to negotiate in good faith agreements that lay out terms governing interconnection to their network, access to unbundled network elements and discounted resale. Non-rural ILECs also must allow competing carriers to “co-locate”, or place their own equipment in the non-rural ILECs’ central offices. Rural local exchange carriers, including our RLECs, have a rural exemption from the interconnection requirements of TA-96. This exemption may only be terminated by the PA PUC following a bona fide request for interconnection to our RLECs and a PA PUC finding that such interconnection request is not unduly economically burdensome, is technically feasible, and is consistent with the universal service provisions in TA-96.

As a result of the passage of TA-96, local exchange carriers, including our RLECs, face the prospect of being subject to competition for the first time in the provision of local telephone and regional long distance services. TA-96 also provides for the codification of the principles of “universal service” and establishes safeguards to foster the provision of communications services in the areas served by ILECs by adopting a federal universal service support fund, or USF. See “ Promotion of Universal Service.”

TA-96 makes competitive entry into the telecommunications industry more attractive to non-ILECs by, among other things, removing most state and local barriers to competition. In particular, after notice and an opportunity for comment, the FCC may preempt any state requirement that prohibits or has the effect of prohibiting a carrier from providing intrastate or interstate communications services. In addition, TA-96 establishes procedures under which an RBOC can enter the market for long distance services within the area where it provides local telephone service. To date, RBOCs have been granted authority by the FCC to provide such regional long distance services in nearly every state, including Pennsylvania. The provision of regional long distance services by RBOCs permits them to offer “one-stop shopping” of local and long distance services, enhancing their competitive position generally in our RLEC and edge-out markets, should they seek to enter these markets. Currently there are no CLECs providing service in our RLEC territories.

Promotion of Local Service Competition

As discussed above, TA-96 provides generally for the removal of barriers to entry into the telecommunications industry in order to promote competition for the provision of local telephone service. Congress, however, has recognized that states should not be prohibited from taking actions necessary to preserve and advance universal service and has further recognized that special consideration should be given to the appropriate conditions for competitive entry in areas served by RLECs.

Pursuant to TA-96, local telephone companies, including both ILECs and CLECs, are required to: (i) allow others to resell their services at retail rates; (ii) ensure that customers can keep their telephone numbers when changing carriers; (iii) ensure that competitors’ customers can use the same number of digits when dialing and receive nondiscriminatory access to telephone numbers, operator service, directory assistance and directory listing; (iv) ensure access to telephone poles, ducts, conduits and rights of way; and

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(v) compensate competitors for the competitors’ costs of completing calls to competitors’ customers. Competitors are required to compensate the ILEC for the cost of providing these interconnection services.

TA-96, with certain exceptions described below, requires ILECs to: (i) interconnect their facilities and equipment with any requesting telecommunications carrier at any technically feasible point; (ii) unbundle and provide nondiscriminatory access to network elements, such as local loops, switches and transport facilities, at nondiscriminatory rates and on nondiscriminatory terms and conditions; (iii) offer their retail services for resale at wholesale rates; (iv) provide reasonable notice of changes in the information necessary for transmission and routing of services over the ILEC’s facilities or in the information necessary for interoperability; and (v) provide, at rates, terms and conditions that are just, reasonable and nondiscriminatory, for the physical co-location of equipment necessary for interconnection or access to unbundled network elements at the premises of the ILEC. Competitors are required to compensate the ILEC for the cost of providing these interconnection services.

At its February 20, 2003 public meeting, the FCC voted on rules concerning ILECs’ obligations to make elements of their networks available on an unbundled basis to new entrants. The Order (“the TRO”) was published on August 21, 2003. According to the TRO, ILECs would not be obligated to give competitors unbundled access to broadband and fiber lines that the ILEC’s deploy in the future to provide broadband service. The FCC planned to limit the ILECs’ obligations to unbundle access to other elements of their systems, such as switches. The FCC established an impairment standard to determine whether ILECs must open elements of their systems to competitive providers. The standard is whether economic and operational impairment exists in a particular market necessitating the unbundling of elements of the ILECs’ systems for competitive providers. The state public utility commissions were tasked with conducting proceedings to apply the stated impairment standards to their specific markets. The PA PUC undertook its proceedings and was in the final decision stage when, on March 2, 2004, the United States Court of Appeals for the District of Columbia Circuit invalidated significant portions of the TRO. Most relevantly, the Appeals Court ruled that the FCC had delegated too much authority to the states and had not established sufficient bases for its order to unbundle mass market switches and transport facilities. Further, the Appeals Court affirmed the FCC’s decision not to require unbundling of hybrid loops, fiber-to-home loops and line sharing, but partially remanded the FCC’s rules on enhanced extended loops (“EELs”) used for provision of long distance service. The Court temporarily stayed its vacating of the rules until the later of 60 days or the denial of any petition for rehearing. The PA PUC has not yet stated its position as concerns the pending state proceedings under the original TRO and we are uncertain as to the outcome of this process. ILECs and CLECs may now turn to tariffs and/or market-based contract pricing to continue to purchase the vacated unbundled elements for the immediate future.

Congress specifically recognized that the movement towards increased competition under TA-96 requires accommodation for the different market characteristics of areas served by RLECs. For these areas, TA-96 included provisions which anticipate that the public interest may be best served by exempting RLECs from the more burdensome interconnection obligations. RLECs’ characteristics make these markets much more vulnerable to target market entry (i.e. “cream skimming”) by new entrants. TA-96 recognized that selective customer targeting in areas served by RLECs could have an adverse impact on universal service and the overall public interest.

Congress recognized that interconnection requirements must be carefully constructed, modified or suspended in order to ensure that new entrants targeting primarily lower cost, higher volume customers do not leave the RLECs with only high cost, low volume customers from whom to recover relatively unchanged network costs. Accordingly, TA-96 provides RLECs, including our RLECs, an automatic blanket exemption (“rural exemption”) from certain interconnection requirements. Therefore, an RLEC is exempt from the more onerous interconnection requirements until that RLEC receives a bona fide request for interconnection and the state public service commission determines that the request is not unduly economically burdensome, is technically feasible, and is consistent with universal service principles.

Under TA-96, ILECs with fewer than 2% of the nation’s subscriber lines, such as our RLECs, may request from state PUCs suspension or modification of any or all of the requirements described above. A PUC may grant such a request if it determines that such suspension or modification is consistent with the public interest and necessary to avoid a significant adverse economic impact on communications users and to avoid imposing a requirement that is technically unfeasible or unduly economically burdensome. Pursuant to TA-96, our RLECs, along with other RLECs in Pennsylvania, received a temporary suspension of specific interconnection requirements. This suspension expired on July 10, 2002; however, we were granted an interim extension until January 15, 2003, while the PA PUC contemplated our request for another three-year extension. This request was subsequently denied by the PA PUC. Although the extension of the suspension was denied, the rural exemption under TA-96 is still in effect, so that we are still exempt from the more onerous interconnection requirements until we receive a bona fide request for interconnection and the Pennsylvania PUC determines that the request is not unduly economically burdensome, is technically feasible, and is consistent with universal service principles. A wireless carrier has petitioned the Pennsylvania PUC for the removal of the rural exemption for our three RLECs. This was done, however, in conjunction with negotiations for a wireless traffic exchange agreement, not for competitive entry. Those

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negotiations have been completed, and the wireless carrier has petitioned to withdraw its petition. In addition, according to the recent Appeals Court decision on the FCC’s TRO, our RLECS may not have to unbundle all elements of our system to competitors, including our broadband and DSL deployment and some of our switches. However, the denial of the renewal of our temporary suspension may put us in a position of having to provide interconnection to other providers without adequate compensation, cause us to incur administrative and regulatory costs as a result of administrative proceedings to determine whether the provider requesting interconnection has met its burden under the rural exemption of TA-96, cause our operating costs to increase as a result of having to make such interconnections, and at the same time cause us to suffer a loss of customers to such competitive providers.

To the extent we seek to enter the local telephone service business in other RLEC territories, we could encounter difficulties in obtaining interconnection with those RLECs, particularly if those RLECs are entitled to the same protections we enjoyed in our RLEC territories. In particular, in those circumstances, we might be unable to obtain access to the RLECs’ networks, which could significantly detract from our ability to implement our CLEC strategy in those areas.

Even if an ILEC in a territory that we wished to enter were not entitled to such protections, we could nonetheless be unable to obtain interconnection on favorable terms. The FCC has issued rules implementing the interconnection and resale provisions of TA-96, but those rules have been, and continue to be, subject to administrative and judicial appeals. Thus, there is continuing uncertainty about individual rules governing pricing of interconnection and unbundled network elements, and the terms and conditions of interconnection agreements. This may make negotiating these agreements more difficult and time-consuming. It also could require renegotiations of relevant provisions of existing interconnection agreements or subject them to additional court or regulatory proceedings.

Promotion of Universal Service

The Federal Universal Service Support Fund (“USF”) and the Pennsylvania State Universal Service Fund (“PA USF”) pay our RLECs from their funds to support the high cost of our operations in rural markets. Our three RLECs paid in approximately $311,000 to the PA USF and received support payments of approximately $2,518,000 in 2003 from this fund. In addition, the three RLECs received $5,835,000 from the Federal USF. The RLECs also contributed to the fund, but this expense is recovered in full through the NECA pooling process.

Newly codified universal service principles are being implemented by the FCC. One of the implemented principles provides that USF funds will be distributed only to carriers that are designated as eligible telecommunications carriers, or ETCs, by the PA PUC. Our RLECs have been designated as ETCs pursuant to TA-96. However, under TA-96, competitors could obtain the same support payments as we do if the PA PUC determined that granting such support payments to competitors would be in the public interest. If such universal service support payments were to become available to potential competitors, our RLECs might not be able to compete as effectively or otherwise continue to operate as profitably as they have historically. RLECs will receive USF payments pursuant to existing mechanisms for determining the amounts of such payments with some limitations, such as on the amount of corporate operating expense that can be recovered from the USF.

The Federal – State Joint Board on Universal Service recently issued its recommendations to the FCC. The Joint Board provided recommendations addressing the growth of the USF, eligibility criteria for receipt of funds, and the cost basis for fund payment to Competitive Eligible Telecommunications Carriers. The FCC is expected to initiate a rulemaking proceeding and seek comment on the Joint Board’s recommendation. A final ruling by the FCC may not occur in the coming year, and we are unable to address the potential outcome with any degree of certainty.

Access Charge Reform

For the year ended December 31, 2003, approximately 50% of our RLECs’ revenues came from network access charges, which are paid to us by end users and intrastate and interstate long distance carriers for originating and terminating calls in the territory served by our RLECs. The amount of network access revenues that we receive is calculated based on guidelines set by federal and state regulatory bodies, and such guidelines could change at any time. Both the PA PUC and the FCC have made and are continuing to consider various reforms to the existing rate structure for charges assessed on long distance carriers for connection to local networks. These reforms are designed to move these network access charges, over time, to lower, cost-based rate levels and structures. These changes will reduce access charges and could shift recovery to end-user customers rather than long distance carriers. As a result, the aggregate amount of network access charges paid by long distance carriers to access providers, such as our RLECs, will decrease.

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In July 2000, the PA PUC created a state universal service fund accompanied by intrastate regulatory access reform, resulting in revenue shifts for our RLECs among local telephone, long distance and network access service categories. On November 9, 2001, the FCC released an order changing its interstate access charge rules and universal service support system for rate-of-return RLECs. The new rules change the sources of funding under the average schedule formulas, but not the amounts paid to participants. These modifications include a reduction in access charges to long distance companies, an increase in subscriber line charges to local service customers, and the creation of a universal funding mechanism funded by all telecommunications carriers.

In February 2004, the FCC took additional steps to provide rate-of-return carriers greater flexibility to respond to changing marketplace conditions by resolving certain outstanding issues in the Multi-Association Group proceeding. The FCC modified the “all or nothing” rule to permit rate-of-return carriers to acquire price cap exchanges and convert them to rate-of-return regulation without the need of a waiver. The FCC also allowed rate-of-return carriers the ability to geographically de-average access transport and special access charges to respond to competitive conditions in their marketplaces. Finally, the FCC merged long term support into interstate common line support to replace implicit support in access charges. Our RLECs are not impacted at this time by these changes.

It is expected that the FCC will issue a notice of proposed rulemaking addressing potential modifications to the current access charge system in 2004. There is no guarantee that a final order will be issued in 2004, and we are unable to address the potential outcome with any degree of certainty.

Potential Internet Regulatory Obligations

In connection with our Internet access offerings, we could become subject to laws and regulations as they are adopted or applied to the Internet. There is currently only a small body of laws and regulations applicable to access to or commerce on the Internet. As the significance of the Internet expands, federal, state and local governments may adopt rules and regulations, or apply existing laws and regulations to the Internet. We cannot predict the nature of these regulations or their impact on our business.

Employees

We had 727 employees as of December 31, 2003, of which 90 employees are covered by a collective bargaining agreement.

Factors Affecting Our Prospects

Our indebtedness could restrict our operations.

As of December 31, 2003, we had approximately $233,766,000 of total indebtedness, including current maturities, most of which was incurred in connection with the Conestoga acquisition. This indebtedness could restrict our operations due to the following factors, among others:

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The convergence of voice and data communications technologies could eliminate our competitive advantages and may, in fact, put us at a competitive disadvantage.

The convergence of voice and data communications technologies is making significant inroads in the communications industry. For several years, telephone companies and cable companies have been able to provide data transmission with telephone companies having the advantage in voice and cable companies the advantage in video. Technology may be eliminating those advantages. The further development of VoIP has reduced voice communication to a packet data transmission process, which will place cable companies in a competitive situation with telephone companies. Furthermore, there is not consistent regulation of VoIP offerings at this time, placing VoIP at a possible regulatory advantage over telephone services. To maintain our voice business, we may in the near future have to offer VoIP over our network system. We are now able to offer video over our fiber-copper system that is fully capable of competing with the video services offered by cable companies. Adding to the complexity of the competitive environment, wireless offerings in voice and data are becoming more capable and competitive; and it appears technology has been developed that will enable electric power transmission lines to compete in the communications industry. In the future, service offerings of telephone, cable and electric companies in voice, data and video may be similar, while wireless is a significant provider in voice and data. All of these developments will result in a highly competitive environment in which four types of companies are very likely to be in direct competition with each other in many locations. This development could cause telephone companies to lose their competitive edge in their territories and consequently result in significant inroads into their business.

The agreements governing our indebtedness could restrict our operations and ability to make acquisitions.

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 place restrictions on our ability and the ability of our subsidiaries to, among other things;

The communications industry is increasingly competitive, and this competition has resulted in pricing pressure on our service offerings. We may experience increased competitive pressures which could have a negative effect on our revenues and earnings.

As an integrated communications provider, we face competition from:

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Many of our competitors are, or are affiliated with, major communications companies. These competitors have substantially greater financial and marketing resources and greater name recognition and more established relationships with a larger base of current and potential customers than we. Accordingly, it may be more difficult to compete against these large 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 any of our markets.

We may be unable to successfully complete the integration of 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 continues to 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 completely integrate. Even though the integration of the operating systems and employees has continued as planned, the amount of management attention diverted to integration efforts may still limit their ability to work on other business matters.

We have continuing involvement in the Conestoga wireless segment after its sale which may adversely affect the continuing operations of the business.

In connection with the acquisition of Conestoga, we committed to a plan to sell the assets of Conestoga’s wireless segment. The sale was completed on January 14, 2003. We have continuing involvement after the sale as a result of our continued guarantees on cell site leases and our responsibilities under a Build-to-Suit agreement. Payments required under the build-to-suit agreement and payments, if any, that become due under the cell site guarantees could restrict our operations by reducing the funds available for working capital, capital expenditures, acquisitions and other general corporate purposes.

We may be unable to secure unbundled network elements at reasonable rates, or our 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’ facilities and other telephone companies’ maintenance of these facilities. We must also maintain efficient procedures for ordering, provisioning, maintaining and repairing facilities from these other telephone companies. We may not be able to obtain facilities and services of satisfactory quality from other telephone companies, or on 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 equipment, we rely on other telephone companies. TA-96 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 could harm our CLEC business.

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 we may not be able to do so in a cost-effective manner. Federal and state regulatory trends toward a more competitive market place through reduced competitive entry standards are likely to have negative effects on our business and our ability to compete. In this regard, the regulatory environment governing ILEC operations has been and will likely continue to be very liberal in its approach to promoting competition and network access, which may increase the likelihood of new competitors offering similar services to our service areas. The

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introduction of new competitors could have a negative effect on our ILEC operating results yet at the same time present operating benefits to our CLEC business.

We no longer have a limited suspension from certain interconnection requirements of the Telecommunications Act of 1996. As a result, we may be subject to additional competition for telecommunications services.

Our RLEC services held a limited suspension until January 2003 from certain interconnection requirements of the TA-96. The suspension protected our RLEC markets by excluding us from requirements to allow competitors to have access to our customers by relying upon our services and facilities. Since we did not receive additional extensions of this suspension, competitors will be allowed to seek removal of our rural exemption for the purposes of entering our territory and using our services and facilities through interconnection agreements to provide competitive services. The introduction of new competitors could result in the loss of customers and have a negative effect on our revenues and earnings.

The Systems Integration Segment could be affected by the overall economic climate.

The sale of equipment and services in the systems integration business is dependent upon the willingness of companies to invest in improvements in their information and communications systems. General economic conditions play a role in companies’ investment decisions that directly affect the potential sales of Systems Integration equipment and services. The current economic climate may negatively impact the willingness of companies to make these types of investments.

Our properties consist primarily of administration buildings, central office switch facilities, telephone lines and related equipment and other land and buildings related to telephone operations. Our major owned facilities include our corporate headquarters and central office switching facility, totaling 112,900 square feet in Ephrata, Pennsylvania; an office building including our network operations center totaling 80,000 square feet in Brownstown, Pennsylvania; and six other buildings that serve a variety of functions including offices, warehouse, vehicle service center and switching facilities; totaling approximately 107,400 square feet. We lease 96,200 square feet in seven other buildings throughout our service territories primarily for offices, switching facilities and a garage. There are more than one hundred other smaller locations totaling over 100,000 square feet, either owned or leased, that are used for various purposes such as housing switching equipment. All our assets are maintained and upgraded on a continuing basis to assure our customers of receiving the highest quality service available.

We have transmission facilities referred to as our outside plant, consisting of cables, wires, terminals and necessary supporting structures such as poles, conduit and manholes. Our cables are installed on poles, underground in conduit or directly buried in the earth. In addition to plant and equipment that we wholly own, we utilize poles, towers and cable and conduit systems wholly-owned by, or jointly-owned with, other entities.

We were one of the first local exchange carriers in the nation to deploy a 100% digitally switched network, which enables us to economically provide a broad portfolio of advanced voice and data communications services. We have designed and installed 1,030 route miles of fiber in our network in a pattern of multiple rings, which provide a high level of redundancy in the event of a service failure. Our primary network operations center further leverages network design with remote network management, maintenance and repair capabilities to pinpoint network problems, minimize technician deployment and improve operating efficiency. Our network is monitored 24 hours a day, 365 days a year and continual upgrades to network elements ensure the uninterrupted delivery of quality services to customers.

In July 2002, EuroTel’s subsidiary PenneCom, initiated a legal action in United States District Court for the Southern District of New York against an investment bank, and an individual, alleging violations of applicable law relating to the advice given by the investment bank and the individual to a prospective buyer not to close on the purchase of Pilicka. The suit was dismissed by the United States District Court for the Southern District of New York and PenneCom has appealed that decision to the Second Circuit Court of Appeals. On February 5, 2004, that appeal was heard and the parties are awaiting a decision from the Second Circuit Court of Appeals. Management of EuroTel continues to believe that, based on the advice of its legal counsel, the suit is meritorious. However, the ultimate outcome of the litigation cannot be determined and no amount has been recognized for possible collection of any claims in the litigation. Legal costs are expected to continue to be incurred in pursuit of such litigation.

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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, results of operations or cash flows.

There were no matters submitted to a vote of the shareholders during the fourth quarter of 2003.

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PART II

Our common stock trades on The NASDAQ Stock Market under the symbol DECC. The table below sets forth the high and low bid prices of our common stock during each of the periods indicated, as reported daily by the NASDAQ National Market.

The bid quotations reflect inter-dealer quotations, do not include retail markups, markdowns, or commissions, and may not necessarily represent actual transactions. The bid information stated is, to our knowledge, the best approximate value at the time indicated.

The closing price on December 31, 2003, was $14.51. Based on records that we maintain, the approximate number of record holders of our common stock, as of December 31, 2003, was 2,334.

During the two most recent fiscal years, cash dividends on our common stock have been declared quarterly in the annual amount per share of $0.50 in 2003 and in 2002. Dividends are paid as and when declared by our Board of Directors and in accordance with restrictions set forth in covenants contained in our debt agreements.

The information required under this Item relating to equity compensation plans is incorporated by reference from the material captioned “Executive Compensation” in our definitive proxy statement for our annual meeting which will be filed within 120 days after the end of the fiscal year covered by this report.

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The following table sets forth selected consolidated summary financial information as of December 31 and for each of the last five fiscal years ended December 31, 2003. This information should be read in conjunction with our consolidated financial statements, including the notes thereto, and Management’s Discussion and Analysis of Financial Condition and Results of Operations, both of which are included in this annual report. Certain amounts have been reclassified for comparative purposes.

Overview

This Overview is intended to provide a context for the following Management’s Discussion and Analysis of Financial Condition and Results of Operation. Management’s Discussion and Analysis of Financial Condition and Results of Operation should be read in conjunction with our consolidated financial statements, including the notes thereto, included in this annual report. We have attempted to identify the most important matters on which our management focuses in evaluating our financial condition and operating performance and the short-term and long-term opportunities, challenges and risks (including material trends and uncertainties) which we face. We also discuss the actions we are taking to address these opportunities, challenges and risks. The Overview is not intended as a summary of, or a substitute for review of, Management’s Discussion and Analysis of Financial Condition and Results of Operation. For comparative purposes, certain amounts have been reclassified to conform to the current-year presentation. The reclassifications had no impact on net income. Monetary amounts presented in the following discussion are in thousands, except per share amounts.

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Business Segments

Including the operations of Conestoga acquired in May 2002, we have operated as a rural local telephone company providing integrated communications services to residential and business customers in markets throughout the eastern half of Pennsylvania. We operate an incumbent rural local exchange carrier, or RLEC, in parts of Berks, Lancaster, Union and smaller portions of five other adjacent counties in Pennsylvania, and a competitive local 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 services, high speed data, Internet access and video services. We also provide business customers with integrated voice and data network solutions.

Our segments, excluding our D&E Wireless and paging services, which are reported as discontinued segments, are RLEC, CLEC, Internet Services, Systems Integration and Conestoga Wireless. The measure of profitability for our segments is operating income since individual segment managers are not responsible for such items as interest and taxes that are reported below operating income.

As of December 31, 2003, we served 142,799 RLEC access lines, 35,140 CLEC access lines, 12,859 dial-up Internet access subscribers, 7,303 digital subscriber lines (“DSL”) and 814 web hosting customers. For the year ended December 31, 2003, we generated total revenues of $173,125 and operating income of $23,767. Our principal business segments are our RLEC, CLEC, Internet services and systems integration segments. The measure of segment results used by management is operating profit.

Historically, we have derived a majority of our revenues from the regulated RLEC segments. The RLEC segment accounts for approximately 61% of total 2003 revenues and substantially all of our operating income. The decrease in RLEC access lines experienced in 2002 and 2003 is significant, as access lines have traditionally been monitored as an important measure of RLEC performance. Our total RLEC lines decreased by 1.5% in 2002 and an additional 1.7% in 2003. These decreases were primarily due to the fact that, as customers have migrated to broadband services, such as DSL and wireless services, the demand for second lines has somewhat diminished. However, we find it noteworthy that, despite the decrease in RLEC access lines, our RLEC revenues have increased slightly as a result of an increase in enhanced services and dedicated lines and circuits. The fact that we have succeeded in adding Internet service customers at a substantial rate over the past three years demonstrates that our customers are willing to pay more for advanced services. We believe the opportunity to provide such services is an important component of our business plan.

Our RLEC revenue is derived primarily from network access charges, local telephone service, enhanced telephone services and regional toll service. Network access revenue consists of charges paid by long distance and wireless companies for access to our network in connection with the completion of long distance telephone calls. 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 caller ID, call waiting and Privacy Call Manager, a telemarketer call-blocking service. Regional long distance revenue is derived from providing regional long distance services to our RLEC customers.

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 of charges paid by long distance companies and other telecommunications carriers customers for access to our network in connection with the completion of long distance telephone calls. 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 caller ID, call waiting and a telemarketer call-blocking service. Long distance revenue consists of charges for both national and regional long distance services, a portion of which is provided on a resale basis.

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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, as well as the eastern Pennsylvania and greater Philadelphia market areas.

Conestoga Wireless revenue is derived from providing wireless Personal Communication Service, including local and long distance telephone services, and from the sale of wireless communications equipment. We marketed these products and services in certain of our RLEC and CLEC markets until this segment was sold in January 2003.

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 wages and employee benefit costs, and equipment and materials used in the course of the installation and provision of our products and services. Our Conestoga Wireless segment incurred costs related to network facilities to provide wireless personal communications service, engineering costs, network access costs and costs of wireless communications equipment sold.

We incur access line-related capital expenditures associated with access line additions, 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.

Business Strategy

Our primary business objective is to be a leading, regional wireline-focused integrated communications service provider. To achieve this objective, we will continue to pursue the following goals:

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Business Risks

Our primary business risks include the external threat of increased competition in the telecommunications industry and the internal risk of our debt financing, which was primarily incurred in connection with the acquisition of Conestoga in 2002.

It is basic policy of the FCC and the Pennsylvania Public Utility Commission to encourage competition in the communications industry. The limited suspension that we held until January 2003 from certain interconnection requirements of TA-96 has been discontinued. This development means that we could be required to allow competitors to have access to our customers by our competitors seeking the removal of our rural exemption, entering our territory and using our services and facilities through interconnection agreements to provide local services.

The convergence of voice and data communication technologies is dramatically changing the communications industry. For several years, telephone and cable companies have been able to provide data transmission, with telephone companies having the advantage in voice and cable companies having the advantage in video. Technology may be eliminating those advantages. The further development of VoIP has reduced voice communication to a packet data transmission process, which will place the cable companies in a competitive situation with the telephone companies. Furthermore, there is not consistent regulation of VoIP offerings at this time, placing VoIP at a possible regulatory advantage over telephone services. To maintain our voice business, we may in the future have to offer VoIP over our network system. We are now able to offer video over our fiber-copper system that is fully capable of competing with the video services offered by the cable companies.

To make the competitive picture even more complex, wireless offerings in voice and data are becoming more capable and competitive, and it appears technology has been developed that will enable electric power transmission lines to compete in the communications industry. In the future, service offerings of telephone, cable and electric companies in voice, data and video may be similar, while wireless is a significant provider in voice and data. All of these developments will result in a highly competitive environment in which four types of companies are very likely to be in direct competition with each other in many locations. This development could cause the telephone companies to lose their competitive edge in their territories and could result in significant inroads into their business.

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

The foregoing opportunities and risks require management to attempt to balance several aspects of our business. Our relatively stable RLEC business segment provides cash flow both to pursue our business plan to evolve a leading, regional wireline-focused integrated communications service provider and to provide a current return on investment to our shareholders in the form of our regular dividend. However, since our resources are limited and the manner in which the communications industry will develop is uncertain, both in terms of technology and competition, we will not be able to pursue every possible avenue of development and critical decisions will need to be made at various stages of our evolution as a company. These decisions can be made more difficult by our desire to balance our short-term goals of maintaining our RLEC business segment and dividend return and our long-term goal of providing voice, data and video services. Maintaining

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our dividend payout may be challenging due to the need to invest in our future and restrictions under our financing facilities, both in the form of an annual limitation of $10,000 in dividends and the requirement to remain in compliance with financial covenants.

We have recently refinanced our indebtedness. The effect of the refinancing was to lower the interest rates on our indebtedness, provide greater flexibility in our financial covenants and spread out the amortization of principal. The refinancing also lifts restrictions on the expansion of our CLEC edge-out market and eliminates the requirement of the prior loan agreement that excess cash flow be applied to prepayments of principal. This new structure, pursued to manage our balance sheet in order to better pursue our business plan, decreases the risks associated with our indebtedness. However, our indebtedness of approximately $233,766 as of December 31, 2003 could restrict our operations because:

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Results of Operations

The measure of segment results used by management is operating profit. In 2003, D&E moved responsibility for some products to different segment managers. Certain amounts from prior years have been reclassified to conform to the current presentation. The following table is a summary of our operating results by segment:

Consolidated Operations

Overview of 2003 Compared to 2002

Consolidated operating revenues from continuing operations in 2003 increased $35,791, or 26.1%, to $173,125 in 2003 from $137,334 in 2002. The revenue increase was primarily due to the inclusion of $95,965 of Conestoga’s revenues for the full twelve months in 2003, compared to only $60,933 for seven months in 2002, after the May 24, 2002 acquisition. Conestoga revenues include the decrease in revenues due to the sale of Conestoga Wireless in January 2003, which resulted in decreased revenue of $7,180.

Consolidated operating income from continuing operations for 2003 increased $16,492, to $23,767 in 2003 from $7,275 in 2002. The increased operating income in 2003 was primarily attributable to Conestoga’s $18,629 contribution to income for twelve months rather than $7,513 for the seven months in 2002. Further, in 2003, we did not incur the same $973 of expense due to the merger related costs experienced in 2002. D&E and Conestoga also benefited from the reduction of expenses primarily related to staff reductions at the date of the merger and over the following six months.

Income from continuing operations increased $10,982 to income of $3,877 in 2003 from a loss of $7,105 in 2002 primarily due to the increase in operating income discussed above, net of taxes. Also, in 2003, there was an increase of $3,789 in realized gains/losses

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on the disposition of investments available for sale, a $892 reduction in expenses from reduced equity losses in affiliates, and other miscellaneous income increases. This reduction was offset by the $6,179 increase in interest expense related to larger borrowings for the full twelve months.

Overview of 2002 Compared to 2001

Consolidated operating revenues from continuing operations in 2002 increased $61,279, or 80.6%, to $137,334 in 2002 from $76,055 in 2001. The revenue increase was primarily due to the inclusion of Conestoga’s revenues, totaling approximately $60,933, for the balance of the year after the May 24, 2002 acquisition of Conestoga by D&E. The former D&E operating divisions realized increased revenue primarily from increases in their customer bases in the CLEC and Internet Services segments, offset by decreased service and product sales revenues in the Systems Integration segment. Before corporate eliminations, the former D&E segment’s CLEC revenues increased $1,912, or 27.4%, Internet Services revenue increased $1,824, or 91.5% due to an increase in new customers, and D&E Systems Integration segment’s revenues decreased $3,615, or 15.5% due to slower sales from a weak economy.

Consolidated operating results from continuing operations was an income of $7,275 compared to a loss of $530 in 2001. The increased operating income in 2002 of $7,805 was primarily attributable to Conestoga’s $7,513 contribution to income. Operating losses in our former D&E CLEC, Internet Services and Systems Integration segments were smaller by $211, $1,220 and $1,147 respectively. We experienced a decrease of $1,299 in operating income from our D&E RLEC primarily due to merger related costs. Goodwill amortization was discontinued as of January 1, 2002 as a result of adopting Statement of Financial Accounting Standard No. 142, “Goodwill and Other Intangible Assets,” (SFAS 142), which resulted in $1,436 less expense in 2002.

Income from continuing operations decreased $8,915 to a loss of $7,105 in 2002 from an income of $1,810 in 2001. Equity in income of affiliates decreased $3,520 as a result of an arbitration award received by a subsidiary of our EuroTel affiliate in 2001. Interest expense increased $9,653 to $11,895 in 2002, primarily from increased debt incurred to complete the Conestoga acquisition. Realized gains/losses on investments available for sale changed $6,035 to a loss of $2,999 in 2002 from a gain of $3,036 in 2001. Other income decreased $1,124 and 2001 included $3,623 of debt extinguishment expense in 2001 previously reported as extraordinary, but reclassified to other expense as a result of adopting Statement of Financial Accounting Standard No. 145, “Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections as of April 2002” (SFAS 145). These increased expenses were offset by the $7,805 increase in operating income discussed above. Income taxes in 2002 were a benefit of $3,586 compared with an income tax benefit of $3,597 in 2001 which included a decrease in our valuation allowance for deferred tax assets.

RLEC Segment Results

Summary Operating Results — RLEC Segment

RLEC segment revenues increased $29,288, or 34.9%, to $113,294 in 2003. In 2003, the Conestoga acquisition added $64,512 of revenue, versus $36,794 for the seven months included in 2002. D&E revenues increased $1,570, to $48,782 in 2003, from $47,212 in 2002. D&E local telephone service revenues increased $792, or 5.4%, to $15,509 in 2003, from $14,717 in 2002 as a result of increases in enhanced services sold and rate increases in July 2003. D&E network access revenues increased $994, or 4.2%, to $24,427 in 2003, from $23,433 in 2002. This increase resulted partially from a favorable change in the National Exchange Carrier Association (NECA) average schedule settlement formula for interstate access that took effect in July 2003. Other revenue increased

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$5,220 in 2003 from 2002 as a result of the additional Conestoga revenue that was primarily from directory revenue. D&E other revenue decreased $213 in 2003 compared to 2002 primarily from a decrease in long distance revenues. RLEC segment revenues increased $38,328, or 83.9%, to $84,006 in 2002. Revenues in 2002 included $36,794 of revenue from Conestoga since the acquisition in May 2002. D&E revenues increased $1,534, to $47,212 in 2002, from $45,678 in 2001. D&E local telephone service revenues increased $2,455, or 20.0%, to $14,717 in 2002, from $12,262 in 2001 as a result of rate increases in December 2001 and July 2002. D&E network access revenues decreased $1,392, or 5.6%, to $23,434 in 2002, from $24,826 in 2001 as a result of lower call volumes and a decrease in certain network access rate elements. The Conestoga RLECs experienced similar trends that resulted largely from regulatory policy of decreasing network access charges and offsetting them by higher local telephone service charges in order to more accurately reflect actual costs. The other revenue increase in 2002 from 2001 is attributable to the inclusion of Conestoga for seven months after the acquisition. D&E other revenue increased $471 in 2002 compared to 2001 as a result of increases in directory revenue, custom calling features, repair services and rent, offset by a long distance revenue decrease. Local telephone revenues are anticipated to increase as the result of rate increases and sales of local dedicated circuits offsetting the effect of continued line count erosion. Network access revenues are likely to decrease slightly due to a decline in minutes of use and a reduction in state access rates as regulatory trends move toward transferring cost to the local telephone end user. Other revenues, which include enhanced services, directory advertising and other miscellaneous services are likely to continue the trend of steady increases, while we expect an offset from long distance.

RLEC segment operating expenses increased $13,283, or 20.0%, to $79,632, in 2003 and $29,284, or 79.0%, to $66,348 in 2002. These increases were primarily attributable to including twelve months in 2003 of Conestoga operating expenses and seven months since the acquisition in 2002. Operating income increased $16,005, or 90.6%, in 2003 to $33,663 and increased $9,044, or 105.0%, in 2002 to $17,658. The synergies resulting from the Conestoga acquisition, including staff reductions and other cost savings have contributed to the improved profitability in 2003, but are not likely to result in similar increases in operating income in future years.

CLEC Segment Results

Summary Operating Results — CLEC Segment

CLEC segment revenues increased $13,649, or 61.7%, to $35,753 in 2003 and $15,119, or 216.4%, to $22,104 in 2002. In 2003, the Conestoga acquisition added $24,294 of revenues versus $13,682 in 2002. D&E’s revenues increased $3,037, to $11,459, in 2003, from $8,422 in 2002. D&E’s revenues, other than from Conestoga, increased $1,437, to $8,422, in 2002, from $6,985 in 2001. The increases in 2003 and 2002 were attributable to the Conestoga acquisition and the expanding of the CLEC business customer base in our edge-out markets.

CLEC segment operating expenses increased $13,283, or 50.5%, to $39,590 in 2003 and $16,314, or 163.3%, to $26,307 in 2002. These increases were partially attributable to including twelve months in 2003 of Conestoga operating expenses and seven months since the acquisition in 2002 and due to increased costs of services related to an increase in our customer base. The increase in 2002 was also partially attributable to the expansion of our fiber optic network and the migration of many of our CLEC customers onto our own facilities. This expansion includes expenses for engineering design and network administration. Operating losses decreased $366, or 8.7%, to $3,837 in 2003 and increased $1,195, or 39.7%, to $4,203 in 2002 primarily due to changes in operating efficiencies as the customer base grew. Operating results are expected to continue to improve as more customers are added to cover the fixed costs of operations and as we expand the number of customers completely on our own network. During 2003 we eliminated 1,128 business lines from the count for all three years presented to conform the method of counting CLEC lines to the same method used by the RLEC.

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Internet Services Segment Results

Summary Operating Results — Internet Services Segment