UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549 FORM 10-QSB (Mark One) x
QUARTERLY
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGEACT OF 1934
 For
the quarterly period ended September 30, 2006.  ̈
TRANSITION
REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
 For
the transition period from _______________________ to ______________________ Commission file number:
0-26525 BREDA TELEPHONE CORP.(Exact name of small
business issuer as specified in its charter) Iowa(State or other jurisdiction
of incorporation or organization)

42-0895882(I.R.S. Employer
Identification No.)
 112 E. Main, P.O. Box
190, Breda, Iowa 51436(Address of principal executive offices) (712) 673-2311
(Issuers telephone number)  Check
whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of
the Exchange Act during the past 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing requirements
for the past 90 days.
              Yes  x
  No   ̈ Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange  Act).      Yes   ̈
  No  x State the number of shares outstanding of each of the issuers classes of common equity, as of the latest practicable date: 31,016 shares of common stock, no par value, at October 31, 2006. Transitional
Small Business Disclosure Format (Check one): Yes   ̈
  No  x


PART I - FINANCIAL INFORMATION
  Item 1.
        Financial Statements.
     Breda Telephone Corp. And Subsidiaries Breda, IA    Condensed Consolidated Financial Statements For the Periods Ended September 30, 2006 and 2005 And the Year Ended December 31, 2005         2


BREDA TELEPHONE CORP. AND SUBSIDIARIES BREDA, IOWA  CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) September 30, 2006 and December 31, 2005  September
          30,
          2006
          (Unaudited)
        
        December
          31,
          2005
          (Unaudited)ASSETSCURRENT
          ASSETSCash
          and cash equivalents
        
        $          1,050,131
        
        $             739,741Marketable
          securities
        
        719,233
        
        635,409Accounts
          receivable
        
        962,272
        
        952,579Interest
          receivable
        
        95,179
        
        107,229Current
          portion of note receivable
        
        144,000
        
        144,000Inventory,
          at average cost
        
        221,499
        
        122,953Prepaid
          income taxes
        
        
        
        Other
        
        28,009
        
        42,196Deferred
          income taxes
        
        11,415
        
        22,7943,231,738
        
        2,766,901OTHER
          NONCURRENT ASSETSMarketable
          securities
        
        7,073,836
        
        5,463,298Investments
          in unconsolidated affiliates at equity
        
        5,711,334
        
        5,519,572Other
          investments at cost
        
        618,430
        
        790,066Goodwill
        
        896,812
        
        896,812Note
          receivable, less allowance of $219,691 in each 2006 and 2005
        
        76,283
        
        75,46914,376,695
        
        12,745,217PROPERTY,
          PLANT AND EQUIPMENT
        
        4,585,953
        
        5,215,291TOTAL
          ASSETS
        
        $        22,194,386
        
        $        20,727,409LIABILITIES
          AND STOCKHOLDERS EQUITYCURRENT
          LIABILITIESCurrent
          portion of long-term debt
        
        $             172,856
        
        $             164,513Accounts
          payable
        
        223,481
        
        428,211Accrued
          taxes
        
        70,769
        
        378,871Other
        
        112,269
        
        143,582579,375
        
        1,115,177LONG-TERM
          DEBT, less current portion
        
        1,184,230
        
        1,314,935OTHER
          NONCURRENT LIABILITIES
        
        1,031,843
        
        855,542STOCKHOLDERS
          EQUITYCommon
          stock - no par value, 5,000,000 shares authorized, 31,023shares
          issued and outstanding at $394 and $357stated
          values, respectively
        
        12,223,062
        
        11,075,211Retained
          earnings
        
        7,175,876
        
        6,366,54419,398,938
        
        17,441,755TOTAL
          LIABILITIES AND STOCKHOLDERS' EQUITY
        
        $        22,194,386
        
        $        20,727,409
  The accompanying notes are an integral part of these condensed consolidated financial statements.  3


BREDA TELEPHONE CORP. AND SUBSIDIARIES BREDA, IOWA  CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) For the Three and Nine Months Ended September 30, 2006 and 2005  For the Three Months Ended
        
        
        For the Nine Months Ended2006
        
        
        2005
        
        
        2006
        
        
        2005OPERATING REVENUES
        
        $
        2,321,612
        
        $
        1,857,614
        
        $
        6,365,120
        
        $
        5,511,439OPERATING EXPENSESCost of services
        
        
        1,034,199
        
        
        964,753
        
        
        2,881,540
        
        
        2,652,451Depreciation and amortization
        
        
        238,555
        
        
        220,691
        
        
        727,232
        
        
        686,307Selling, general, and administrative
        
        
        546,393
        
        
        508,810
        
        
        1,647,916
        
        
        1,499,4141,819,147
        
        
        1,694,254
        
        
        5,256,688
        
        
        4,838,172OPERATING INCOME
        
        
        502,465
        
        
        163,360
        
        
        1,108,432
        
        
        673,267OTHER INCOME (EXPENSES)Interest and dividend income
        
        
        103,427
        
        
        69,375
        
        
        272,993
        
        
        267,374Gain or (loss) on sale of investments
        
        
        (197
        )
        
        
        
        
        1,163,201
        
        
        (3,057
        )Loss on disposal of assets
        
        
        
        
        
        
        
        
        (21,714
        )
        
        Interest expense
        
        
        (25,698
        )
        
        (28,623
        )
        
        (79,331
        )
        
        (87,963
        )Income from equity investments
        
        
        467,882
        
        
        280,177
        
        
        1,143,951
        
        
        790,420Other, net
        
        
        8,716
        
        
        35,892
        
        
        12,027
        
        
        28,937554,130
        
        
        356,821
        
        
        2,491,127
        
        
        995,711INCOME BEFORE INCOME TAXES
        
        
        1,056,595
        
        
        520,181
        
        
        3,599,559
        
        
        1,668,978INCOME TAXES
        
        
        548,544
        
        
        196,337
        
        
        1,425,215
        
        
        600,835NET INCOME
        
        $
        508,051
        
        $
        323,844
        
        $
        2,174,344
        
        $
        1,068,143NET INCOME PER COMMON SHARE
        
        $
        16.38
        
        $
        10.43
        
        $
        70.09
        
        $
        34.33
  The accompanying notes are an integral part of these condensed consolidated financial statements.  4


BREDA TELEPHONE CORP. AND SUBSIDIARIES BREDA, IOWA  CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY  Common StockShares
     
     Amount
     
     RetainedEarnings
     
     TotalBalance at December 31, 2004 (Audited)
     
     31,170
        
     $  10,161,420
        
     $  5,736,268
        
     $  15,897,688Comprehensive income:Net Income
     
        
     
        
     1,814,736
        
     1,814,736Dividends paid
     
        
     
        
     (218,190
        )
     (218,190
        )Common stock redeemed, net
     (147
        )
     (52,479
        )
     
        
     (52,479
        )Stated value stock adjustment
     
        
     966,270
        
     (966,270
        )Balance at December 31, 2005 (Unaudited)
     31,023
        
     11,075,211
        
     6,366,544
        
     17,441,755Comprehensive
          income:Net Income
     
        
     
        
     2,174,344
        
     2,174,344Dividends paid
     
        
     
        
     (217,161
        )
     (217,161
        )Stated value stock adjustment
     
        
     1,147,851
        
     (1,147,851
        )Balance at September 30, 2006 (Unaudited)
     31,023
        
     $  12,223,062
        
     $  7,175,876
        
     $  19,398,938
  The accompanying notes are an integral part of these condensed consolidated financial statements.  5


BREDA TELEPHONE CORP. AND SUBSIDIARIES BREDA, IOWA  CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) For the Nine Months Ended September 30, 2006 and 2005  2006
        
        
        2005CASH
            FLOWS FROM OPERATING ACTIVITIESNet
            income
        
        $
        2,174,344
        
        $
        1,068,143Adjustments
            to reconcile net incometo
            cash provided by operating activities:Depreciation
            and amortization
        
        
        727,232
        
        
        686,307Deferred
            income taxes
        
        
        187,680
        
        
        (50,383
        )Amortization
            of investment tax credits
        
        
        
        
        
        (4,208
        )Amortization
            of investment premium/discount - net
        
        
        44,846
        
        
        48,319Equity
            income in unconsolidated affiliates, net of distributionsreceived
            of $952,189 and $740,251 in 2006 and 2005,respectively
        
        
        (191,762
        )
        
        (50,169
        )Note
            receivable discount
        
        
        (814
        )
        
        (4,717
        )Gain
            on sale of investments - at cost
        
        
        (1,170,211
        )
        
        Changes
            in assets and liabilities:(Increase)
            Decrease in assets:
        
        
        (82,002
        )
        
        8,548Increase
            (Decrease) in liabilities:
        
        
        (544,145
        )
        
        191,046Net
            cash provided by operating activities
        
        
        1,145,168
        
        
        1,892,886CASH
            FLOWS FROM INVESTING ACTIVITIESCapital
            expenditures
        
        
        (214,141
        )
        
        (1,031,403
        )Proceeds
            from the sale of assets
        
        
        116,247
        
        
        Purchase
            of marketable securities
        
        
        (2,527,911
        )
        
        (812,965
        )Purchase
            of equity investments
        
        
        
        
        
        (403,264
        )Purchase
            of other investments - at cost
        
        
        (1,854
        )
        
        Proceeds
            from the sale of marketable securities
        
        
        788,703
        
        
        378,622Proceeds
            from the sale of other investments - at cost
        
        
        1,343,701
        
        
        7,209Repayment
            of notes receivable
        
        
        
        
        
        5,000Net
            cash provided by investing activities
        
        
        (495,255
        )
        
        (1,856,801
        )CASH
            FLOWS FROM FINANCING ACTIVITIESRepayment
            of long term debt
        
        
        (122,362
        )
        
        (114,552
        )Common
            stock redeemed, net
        
        
        
        
        
        (47,838
        )Dividends
            paid
        
        
        (217,161
        )
        
        (218,190
        )Net
            cash used in financing activites
        
        $
        (339,523
        )
        $
        (380,580
        )Net
            Increase (Decrease) in Cash and Cash Equivalents
        
        $
        310,390
        
        $
        (344,495
        )Cash
            and Cash Equivalents at Beginning of Period
        
        
        739,741
        
        
        1,036,804Cash
            and Cash Equivalents at End of Period
        
        $
        1,050,131
        
        $
        692,309Supplemental
            Disclosures of Cash Flow InformationCash
            paid during the period for:Interest
        
        $
        79,331
        
        $
        87,963Income
            taxes
        
        $
        1,489,135
        
        $
        215,300
  The accompanying notes are an integral part of these condensed consolidated financial statements.  6


BREDA TELEPHONE CORP. AND SUBSIDIARIES BREDA, IOWA  NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  NOTE 1.
        CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
  In the opinion of management, the accompanying condensed consolidated financial statements contain all adjustments (consisting of only normal recurring items) necessary to present fairly the financial position as of September 30, 2006 and December 31, 2005 and the results of operation and changes in cash flows for the three and nine months ended September 30, 2006 and 2005.  Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted. It is suggested that these financial statements be read in conjunction with the financial statements and notes thereto included in the Companys December 31, 2005 10-KSB as filed on April 17, 2006. The results of operations for the three- and nine-month period ended September 30, 2006 are not necessarily indicative of the operating results of the entire year.  Certain reclassifications have been made to the 2005 financial statements to conform with the 2006 presentations.  NOTE 2.
        NONCASH INVESTING ACTIVITIES
  Noncash investing activities included $0 and $81,709 during the nine months ended September 30, 2006 and September 30, 2005, respectively, relating to plant and equipment additions under construction during the period, which are reflected in accounts payable at September 30, 2006 and September 30, 2005.  NOTE 3.
        OPERATING SEGMENTS
  The Company organizes its business into three reportable segments:  local exchange carrier (LEC) services, broadcast services and Internet service provider (ISP) services. The LEC services segment provides telephone, data services and other services to customers in the local exchanges. The broadcast services segment provides cable television services to customers in Iowa and Nebraska. The ISP services segment provides Internet access to customers within the local exchanges and the surrounding areas.  The Companys reportable business segments are strategic business units that offer different products and services. Each reportable segment is managed separately primarily because of different products, services and regulatory environments. LEC segments have been aggregated because of their similar characteristics.  The segments accounting policies are the same as those described in the summary of significant accounting policies.  7


BREDA TELEPHONE CORP. AND SUBSIDIARIES BREDA, IOWA  NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  NOTE 3.
        OPERATING SEGMENTS (Continued)
  Local
        
        
        
        
        InternetNine
            Months Ended
        
        Exchange
        
        
        
        
        ServiceSeptember
            30, 2006
        
        Carrier
        
        Broadcast
        
        
        Provider

      
        TotalRevenues
        
        $
        5,346,333
        
        $
        549,763
        
        
        $
        469,024
        

      

      $
        6,365,120Segment
            profit (loss)
        
        
        2,747,094
        
        
        (153,431
        )
        
        
        (419,319
        )

      

      
        2,174,344Local
        
        
        
        
        
        InternetNine
            Months Ended
        
        Exchange
        
        
        
        
        
        ServiceSeptember
            30, 2005
        
        Carrier
        
        Broadcast
        
        
        Provider

      
        TotalRevenues
        
        $
        4,471,387
        
        $
        614,226
        
        
        $
        425,826
        

      

      $
        5,511,439Segment
            profit (loss)
        
        
        1,432,743
        
        
        (143,352
        )
        
        
        (221,248
        )

      

      
        1,068,143Local
        
        
        
        
        
        InternetThree
            Months Ended
        
        Exchange
        
        
        
        
        
        ServiceSeptember
            30, 2006
        
        Carrier
        
        Broadcast
        
        
        Provider

      
        TotalRevenues
        
        $
        1,989,116
        
        $
        181,113
        
        
        $
        151,383
        

      

      $
        2,321,612Segment
            profit (loss)
        
        
        717,545
        
        
        (43,711
        )
        
        
        (165,783
        )

      

      
        508,051Local
        
        
        
        
        
        InternetThree
            Months Ended
        
        Exchange
        
        
        
        
        
        ServiceSeptember
            30, 2005
        
        Carrier
        
        Broadcast
        
        
        Provider

      
        TotalRevenues
        
        $
        1,516,787
        
        $
        200,374
        
        
        $
        140,453
        

      

      $
        1,857,614Segment
            profit (loss)
        
        
        462,618
        
        
        (46,531
        )
        
        
        (92,243
        )

      

      
        323,844
  NOTE 4.
        NET INCOME PER COMMON SHARE
  Net income per common share for September 30, 2006 and 2005 was computed by dividing the weighted average number of shares of common stock outstanding into the net income. The weighted average number of shares of common stock outstanding for the three and nine months ended September 30, 2006 and 2005 were 31,023 and 31,023 and 31,129 and 31,150, respectively.  NOTE 5.
        STOCK VALUE ADJUSTMENT
  During July 2006, the board of directors authorized a $37 increase in the stated value of each share of common stock from $357 to $394. There were 31,023 shares outstanding at the time of the value adjustment, which reduced retained earnings by $1,147,851.  During May 2005, the board of directors authorized a $31 increase in the stated value of each share of common stock from $326 to $357. There were 31,170 shares outstanding at the time of the value adjustment, which reduced retained earnings by $966,270.  8


Item 2.
        Managements Discussion and Analysis of Financial Condition and Results of   Operations.
  Various discussions and statements in this quarterly report contain
forward-looking statements, which can be identified by the use of
forward-looking terminology such as expects, estimates,
plans, anticipates, forecasts,
predicts, projects, believes,
should, could, or other similar expressions or
variations of those words, or by discussions of strategy. No assurance can be
given that the future results covered by the forward-looking statements will be
achieved. Some of the matters set forth in the Cautionary Statement on
Forward Looking Statements section of Bredas Annual Report on Form
10-KSB for the year ended December 31, 2005 constitute cautionary statements
identifying factors with respect to such forward-looking statements, including
certain risks and uncertainties, that could cause actual results to vary
materially from the future results indicated in such forward-looking statements.
Other factors could also cause actual results to vary materially from the future
results indicated in such forward-looking statements.  Overview  General  Breda is a small provider of telecommunication services to residential and business customers in the west central region and the southwest region of rural Iowa. Breda and its subsidiaries, Prairie Telephone Co., Inc., Westside Independent Telephone Company, Tele-Services, Ltd. and BTC, Inc., all conduct business under the names W.I.N. or Western Iowa Networks.  Breda and its subsidiaries operate seven telephone exchanges as the incumbent or historical local exchange carrier (ILEC). In October, 2003, BTC, Inc. began to offer competitive local exchange carrier services (CLEC) to residential and business customers in Carroll, Iowa, where Qwest is the incumbent local exchange carrier. Other telecommunications services provided include long distance services, dial-up and high speed Internet services, cable TV services, and satellite Internet services.  Operating Segments  Breda organizes its business into three reportable segments. Those segments are local exchange carrier services, broadcast services, and Internet service provider services. Breda has organized its business into those segments because the segments are each strategic business units that are managed separately and that offer different products and services in different regulatory environments.  Local Exchange Carrier Services.This segment provides telephone, data services, and other services to customers in the local exchanges served by Breda and its telephone subsidiaries. Breda also provides long distance services to its customers in all of its ILEC and CLEC exchanges and surrounding areas.  Broadcast Services.This segment provides cable television services to customers in a total of seventeen towns in Iowa and one town in Nebraska. Tele-Services, Ltd. sold its Neola, Iowa
cable TV system to Walnut Telephone Co. in September 2005, so Tele-Services, Ltd. now provides cable TV service to seventeen, instead of eighteen, towns in Iowa.  9


Internet Services.This segment provides Internet access to customers in the local exchanges and the surrounding areas and in the Carroll, Iowa market area through BTC, Inc.  The segments in which Breda and its subsidiaries operate are as follows:  Local Exchange Carrier Breda Prairie Telephone Co., Inc. Westside Independent Telephone Company BTC, Inc. (competitive local exchange carrier)  Broadcast Services Tele-Services, Ltd.  Internet Service Provider BTC, Inc.  Factors Affecting Bredas Operating Performance  Breda believes that a number of industry and company-specific factors are affecting and will continue to affect Bredas results of operations. These factors include the following:  
        The effect on Bredas revenues of declining numbers of access lines caused by younger customer migration to cell phone usage only; technology advances allowing the provisioning of Internet (data) services on the same access line as voice service; technology advances provisioning residential and business voice services over data circuits (VOIP); and the declining population base in the rural areas served by Breda.
  Bredas strategic response to this trend includes efforts to introduce and provide enhanced local services and additional services like voice mail, dial-up and DSL Internet access, long distance services, and to provide cellular services through its agency agreement with U.S. Cellular. During third quarter 2006, Breda successfully deployed new long-reach, high speed Internet technology in each of its ILEC towns that did not have high speed Internet services from Breda. Breda also seeks to maximize its telecom industry offerings by partnering with surrounding telephone companies in wireless service ventures and through investment in cellular partnerships within the state of Iowa and surrounding states. Breda has also undertaken to compete with Qwest for voice, long distance, and Internet service customers in the county seat of Carroll, Iowa.  
        The effect on Bredas revenues from current and potential future changes in access rate regulation at the state and federal levels.
  
        The effect on Bredas revenues from rate and pricing structure caused by the competition of multiple providers in the Carroll, Iowa market. The incumbent local exchange carrier (Qwest), the local cable TV provider (Mediacom) and additional outside competitors have all partnered with telecommunication providers that can bring additional service components to complete a bundled
  10


service offering to the customer in what is known in the industry as the triple play. Customers receive local phone service, blocks of long distance service minutes, Internet services, and video services (cable TV or satellite TV) for a competitive price. Breda now competes with the triple play bundled services offerings from both Qwest and Mediacom.
  Breda has implemented new switching capabilities for the Carroll, Iowa market that allows Breda to offer another flavor of high-speed Internet services, in addition to its voice, long distance and present Internet services. The new switching capabilities will also allow Breda to look at bringing fiber to the home, which would be an overbuild of the Carroll market, and would allow Breda to be self-reliant in providing communication services to that community by no longer needing to lease access lines from Qwest to provide services.  Breda continues to modify its package offerings, and to evaluate and adjust its pricing structures in order to attempt to remain competitive.  
        The effect on Bredas revenues from decreased customer counts for dial-up Internet as well as cable TV services. Competition and bundled services, declining population bases in some of Bredas rural service areas, and cost of technology upgrades play a role in the competition for and retention of customers. Breda continues to consolidate cable TV programming transmission equipment in its communities where it is geographically feasible, in order to reduce system and service costs which are incurred to provide the cable TV services.
  
        The effect on Bredas revenues from decreased access revenue caused by a decrease in the number of long distance calls originating from, or terminating to, an access line in one of Bredas telephone exchanges. The proliferation of wireless (cell) phone usage, and the designation of new technology by the FCC as data services, instead of voice services, has both decreased the minutes of use on Bredas networks, which results in less access revenue, and caused the industry access payment structure to be renegotiated by the new technology providers and wireless providers.
  Breda has negotiated an interconnection agreement with six wireless carriers and continues to work with industry associations in order to receive some form of payment for the use of its networks. Breda also implemented tandem switching capabilities on September 1, 2005, with the installation of its new switch in Carroll, Iowa, and since January 2006 has been able to receive payments for consolidating and switching its own traffic. Beginning July 1, 2006, Breda finalized agreements to also consolidate and switch the traffic of two surrounding telcos. During third quarter 2006, Breda partnered with
vendors that allowed Breda to offer conference bridging services over its networks. Breda bills and receives access revenue for the conference bridge traffic actually utilizing its networks. Breda continues to investigate new opportunities in the industry that the installation of the soft switch in Carroll now allows because of its capacity to handle significant amounts of traffic that were not possible with Bredas older technology switches.  11


Revenues  The following table reflects, on a consolidated basis for Breda and its subsidiaries, the approximate percentage of Bredas and its subsidiaries aggregate revenue which was derived from the three segments described above and from investments for the three-month periods ended, respectively, September 30, 2006, and September 30, 2005:  Three Months EndedSeptember 30,
     
     % of Total Revenuesfor the Three MonthsEnded September 30,2006
     
     2005
     
     2006
     
     2005OPERATING REVENUESLocal exchange carrier services
     $    1,989,116
        
     
     $    1,516,787
        
     
     85.7
        %
     
     81.7
        %Broadcast services
     181,113
        
     
     200,374
        
     
     7.8
        %
     
     10.8
        %Internet services
     151,383
        
     
     140,453
        
     
     6.5
        %
     
     7.6
        %$    2,321,612
        
     
     $    1,857,614
        
     
     100.0
        %
     
     100.0
        %
  The following table summarizes Bredas revenues on a consolidated basis from these same sources for the nine-month periods ended, respectively, September 30, 2006, and September 30, 2005:  Nine Months EndedSeptember 30,
     
     % of Total Revenuesfor the Nine MonthsEnded September 30,2006
     
     2005
     
     2006
     
     2005OPERATING REVENUESLocal exchange carrier services
     $    5,346,333
        
     
     $    4,471,387
        
     
     84.0
        %
     
     81.1
        %Broadcast services
     549,763
        
     
     614,226
        
     
     8.6
        %
     
     11.1
        %Internet services
     469,024
        
     
     425,826
        
     
     7.4
        %
     
     7.7
        %$    6,365,120
        
     
     $    5,511,439
        
     
     100.0
        %
     
     100.0
        %
  Local Exchange Carrier Services.Bredas revenue in this segment comes from the following sources:  1.
        Local Network Services.These revenues include monthly subscription charges for basic service and enhanced calling features, such as voice mail and caller ID, which are billed to individual residential and business customers.
  2.
        Network Access Services.These revenues are generated from charges established to compensate Breda for the origination, transport and termination of calls generated by the customers of long distance carriers and for calls transported and terminated to the customers of wireless carriers. These revenues are received from carriers such as AT&T, Verizon, MCI, and Sprint. Breda also receives federally administered universal service support as a result of the interstate switched access support provisions put into place by the Federal Communications Commission. The Universal Service Fund was started as a mechanism to promote phone service accessibility for everyone at affordable rates and comparable service. The access charges for long distance services within Iowa are based on rates approved by the Iowa Utilities Board. Switched and
special access charges for interstate and international services are based on rates approved by the Federal Communications Commission. The transport and termination charges paid by wireless carriers are specified in interconnection agreements negotiated with each individual wireless carrier.
  12


3.
        Long Distance Services.Breda generates revenues for providing long distance services to its customers. This revenue category also includes fees related to the provision of directory assistance and operator assistance services.
  4.
        Cellular Services.Breda is an agent for the U.S. Cellular service area in Iowa. As an agent for U.S. Cellular, Breda generates commission revenue from the sale of the wireless calling plans offered by U.S. Cellular to Bredas customers. Breda also generates revenue from the sale of phones and accessories needed to receive wireless phone service.
  5.
        Billing and Collection Services.Breda receives revenue for performing billing and collection services for long distance carriers. Breda receives a minimal percentage of the long distance call dollars that Breda receives and processes through its customer billing system. The customer receives one bill, which includes both local and long distance charges, instead of receiving a separate bill from their long distance carrier.
  6.
        Miscellaneous.Phone-related services generated by Breda include revenues from directory publishing, directory advertising, inside line care, the sale and maintenance of customer premise equipment, the sale and maintenance of phone systems, and the sale of pager services. A significant revenue source is the rental of Bredas fiber optic toll trunks to other telecommunication providers.
  Broadcast Services.Revenues are generated in this segment from the monthly fees charged to customers for basic and premium cable TV services.  Internet Services.Monthly dial-up and high-speed Internet access services fees billed to residential and business customers generate the bulk of this segments revenue. Revenues are also generated from the sale of Internet equipment modems and routers, and from customer trouble-shooting and maintenance support fees. Revenue generated through the offering of a new satellite-based Internet service in September 2005 is also included in Internet Services revenues.  Operating Expenses  Operating Expense Categories.  Bredas operating expenses are categorized as cost of services; depreciation and amortization; and selling, general and administration.  Cost of Services.This category includes expense for salaries and wages relating to plant operation and maintenance; network access costs; long distance provisioning costs; salary,
wage, equipment, training, and advertising costs for cellular and retail services; postage; utilities; and Internet service provisioning costs.  Depreciation and amortization.This category of costs includes depreciation of the telecommunication equipment and network; Internet services equipment; cable TV programming equipment and transmission equipment; buildings; and amortization of intangible assets.  13


Selling, General and Administration.This category includes expenses for legal and accounting services; wages and benefits; contract service payments; travel, meals and lodging; investment fees; board of director fees and expense reimbursements; insurance premiums; supplies; advertising and promotion costs; dues and subscriptions; property taxes; and all customer service operations, marketing and sales operations, and administrative operations costs.  Results of Operations  The following table sets forth certain items reflected in Bredas consolidated statements of operations for the periods indicated, expressed as a percentage of total revenues:  Three Months EndedSeptember 30,
     
     Nine Months EndedSeptember 30,2006
     
     2005
     
     2006
     
     2005Operating revenues
     
     100
     %
     
     
     100
     %
     
     
     100
     %
     
     
     100
     %Cost of services
     45
        %
     
    
     52
        %
     
     45
        %
     
     48
        %Depreciation and amortization
     10
        %
     
     12
        %
     
     11
        %
     
     12
        %Selling, general and administrative
     24
        %
     
     27
        %
     
     26
        %
     
     27
        %Operating income
     21
        %
     
     9
        %
     
     18
        %
     
     13
        %Other income (expenses)
     24
        %
     
     19
        %
     
     39
        %
     
     18
        %Income taxes
     24
        %
     
     11
        %
     
     22
        %
     
     11
        %Net income
     21
        %
     
     17
        %
     
     35
        %
     
     20
        %
  Three Months Ended September 30, 2006 and 2005  The table below sets forth the components of Bredas revenues for the three months ended September 30, 2006, compared to the same period in 2005.  Three Months EndedSeptember 30,
     
     Change2006
     
     2005
     
     Amount
     
     PercentageOPERATING REVENUESLocal Exchange CarrierLocal network services
     $    230,490
        
     
     $    212,381
        
     
     $    18,109
        
     
     8.5
        %Network access services
     1,210,045
        
     
     768,840
        
     
     441,205
        
     
     57.4
        %Long distance services
     62,934
        
     
     80,437
        
     
     (17,503
        )
     
     -21.
        8%Cellular services
     415,463
        
     
     378,251
        
     
     37,212
        
     
     9.8
        %Billing and collection services
     3,391
        
     
     6,335
        
     
     (2,944
        )
     
     -46.
        5%Miscellaneous
     66,793
        
     
     70,543
        
     
     (3,750
        )
     
     -5.3
        %$ 1,989,116
        
     
     $ 1,516,787
        
     
     $  472,329
        
     
     31.1
        %Broadcast Services
     $    181,113
        
     
     $    200,374
        
     
     $   (19,261
        )
     
     -9.6
        %Internet services
     $    151,383
        
     
     $    140,453
        
     
     $    10,930
        
     
     7.8
        %$ 2,321,612
        
     
     $ 1,857,614
        
     
     $  463,998
        
     
     25.0
        %
  There was an increase in total operating revenues for the three-month period ended September 30, 2006, when compared to the three-month period ended September 30, 2005, of $463,998, or 25.0%.  14


Local Exchange Carrier Services - $472,329  Local exchange carrier services revenues accounted for 85.7% of all operating revenues in the three-month period ended September 30, 2006. There was a $472,329, or 31.1%, increase in local exchange carrier services revenues for the three-month period ended September 30, 2006, when compared to the three-month period ended September 30, 2005.  Local network services revenues increased $18,109, or 8.5%, for the three months ended September 30, 2006, as compared to the same period in 2005, primarily because of the increased number of customers taking phone service from BTC, Inc. in Carroll, Iowa. Bredas long distance services revenue decreased $17,503, or 21.8%, for the three months ended September 30, 2006, as compared to the three-month period ended September 30, 2005. Although Breda has seen an increase in its long distance customer base when comparing the two periods, the increase is offset by a decrease in the average minutes used by each customer on a monthly basis, as well as a decrease in the price that Breda is charging its customers for Bredas long distance service offerings. The rate decreases for bundled service offerings began on July 1, 2006. Breda has received a good response to its package offerings
that include local and long distance service from both residential and business customers.  Network access services increased $441,205, or 57.4%, for the three-month period ended September 30, 2006, when compared to the three-month period ended September 30, 2005. This increase mainly resulted from increased originating and terminating access revenues received on toll traffic generated by Bredas Internet service subscribers in Bredas southern Iowa exchanges to reach Bredas Internet service equipment in Breda, Iowa. This method of provisioning allows Breda to offer its own Internet services to these customers instead of reselling the Iowa Network Services Internet product. Breda also negotiated wireless agreements with five wireless carriers in the first quarter of 2005, and is now billing and receiving payments from those carriers; although the overall wireless payment rate is significantly less than what Breda originally received in access revenues from
interexchange carriers for this traffic. Bredas access revenue has also increased because, as noted previously, BTC, Inc. installed a new switch in its Carroll, Iowa location, and is now able to receive tandem switching payments for consolidating and switching its traffic from six of Bredas own seven telephone exchanges. There is no corresponding tandem switching revenue for the three-month period ended September 30, 2005. There was also some increase in Bredas access revenue because of an increased customer base taking Bredas long distance services. These customers generate access revenue when they use Bredas networks to make long distance calls. As noted earlier, Breda has contracted with conference bridge vendors for the transport of long distance calls over Bredas networks. Breda began billing for these services in September 2006, and there is no corresponding conference bridge access revenue for the three-month period ended September 30, 2005.  Cellular services increased $37,212, or 9.8%, for the three-month period ended September 30, 2006, when compared to the three-month period ended September 30, 2005. Breda began offering two-year contracts, instead of one-year contracts in August 2002, when U.S. Cellular revamped its commission structure to encourage two-year contracts. This change in contract length causes a delay every other year in new contract sign-ups for retentionable customers. Customers may migrate to new contracts without penalty once they have fulfilled eighty
        percent of the original contract term, so Breda anticipated that the first customers obtaining 24-month contracts in 2004 would be eligible for new contracts beginning in May and June of 2006. While Bredas new cellular customer count was nearly identical during the three-month  15


periods ended September 30, 2006, and September 30, 2005, respectively, its retentionable, returning customer base did increase during the three month period ended September 30, 2006, when compared to the three month period ended September 30, 2005, and this increase was the cause of the increased cellular revenue during the three month period ended September 30, 2006. Breda anticipates that retention commissions will continue gradually increasing to their customary level.  Miscellaneous revenues decreased $3,750, or 5.3%, for the three-month period ended September 30, 2006, when compared to the three-month period ended September 30, 2005. The main component of miscellaneous revenue is the receipt of rent from other telephone companies or industry carriers for the lease of capacity over fiber optic rings owned by Breda, or owned jointly with neighboring telephone companies, and this decrease mainly represents changes in fiber optic rental contracts between the two three-month periods.  Broadcast Services  ($19,261)  Broadcast services decreased $19,261, or 9.6%, for the three-month period ended September 30, 2006, when compared to the three-month period ended September 30, 2005. Bredas subsidiary, Tele-Services, Ltd., sold its Neola, Iowa cable system in September 2005, so there is no revenue for the Neola customers for the three-month period ending September 30, 2006, when compared to the same three-month period ended September 30, 2005. Tele-Services continues to lose customers and to face stiff competition from satellite providers, who are able to provide extensive channel line-up packages, and who are now also able to include local channels in their package offerings. Tele-Services completed a fiber construction project during the quarter ended September 30, 2005, and another project during quarter ended June 30, 2006, which allowed it to combine cable TV head ends. Breda continues to
explore other consolidation opportunities in Tele-Services cable TV communities in order to reduce operating costs through consolidation of equipment and maintenance costs. Rate increases were implemented in November 2005, and August 2006, respectively, for the two communities that received additional channels from the consolidation of head ends. Tele-Services upgraded its software and operating systems on its local channel equipment during the third quarter of 2005, which enabled Tele-Services to implement a paid advertising program for businesses and individuals on the local channels in the communities that have the local channels. Breda hopes to generate some customer loyalty through this avenue of information on local community events, as well as the weather and local news. Another factor faced by Tele-Services is the declining population base in the small rural communities served by Tele-Services.  Internet Services  $10,930  Internet services revenue increased $10,930, or 7.8%, for the three-month period ended September 30, 2006, when compared to the three-month period ended September 30, 2005. The increase is directly attributable to the increase in high-speed Internet customers, which offset the decrease in BTC, Inc.s dialup Internet service customer base. The decrease in dialup Internet customers is the result of the intense competition by multiple suppliers in the Carroll, Iowa market area. Breda is gaining high-speed Internet customers in the Carroll, Iowa area
because BTC, Inc. is offering bundled services packages that include Internet services, as well as local telephone and other communication services. Breda also began offering high-speed satellite Internet service in the fourth quarter of 2005 to its rural and other customers who were not able to access Bredas other high speed Internet products because of distance constraints. Some of the Internet services increase for the three-month period ended September 30, 2006 is  16


the result of this new high speed satellite Internet offering, and for which there was no corresponding revenue for the three-month period ended September 30, 2005.  With the advent of newer technologies that expand the range for high speed
Internet services from Bredas central office, Breda began offering new
longer-reach, high speed Internet services in its remaining five outlying ILEC
communities that previously were not able to receive those services from Breda.
Breda also expanded its high-speed Internet offerings in two of its ILEC towns
to include the long reach technology options. These service offerings were begun
during the three-month period ended September 30, 2006, and for which there was
no corresponding revenue for the three-month period ended September 30, 2005.
Breda has had a very favorable response to these new technology Internet
offerings.  OPERATING EXPENSES  The table below sets forth the components of Bredas operating costs for the three months ended September 30, 2006, compared to the same period in 2005.  Three Months EndedSeptember 30,
     
     Change2006
     
     2005
     
     Amount
     
     PercentageOPERATING EXPENSESCost of services
     $1,034,199
        
     
     $   964,753
        
     
     $     69,446
        
     
     7.2
        %Depreciation and amortization
     238,555
        
     
     220,691
        
     
     17,864
        
     
     8.1
        %Selling, general and administration
     546,393
        
     
     508,810
        
     
     37,583
        
     
     7.4
        %$1,819,147
        
     
     $1,694,254
        
     
     $   124,893
        
     
     7.4
        %
  Cost of Services - $69,446  Cost of services increased $69,446, or 7.2%, for the three-month period ended September 30, 2006, when compared to the three-month period ended September 30, 2005. The increased costs primarily arose from labor rate increases implemented in 2006, and increased provisioning costs for the new long reach, high-speed Internet product rolled out in third quarter 2006, and for which there were no corresponding costs for the three-month period ended September 30, 2005. Bredas costs also increased for the provisioning of Bredas own Internet service now offered in its southern Iowa exchanges as more customers bundled their Internet with other services that they were already receiving from Breda. Although a greater number of customers continued to use Bredas long distance services, their average minutes of use per month are decreasing. The decreased minutes of use, along with
Bredas switch to a new underlying carrier on August 20, 2006, contributed to a decrease in Bredas cost to provide long distance service. Breda also incurred additional costs for repair and maintenance expenditures for its central offices, equipment and buildings and grounds during the three-month period ended September 30, 2006, when compared to the three-month period ended September 30, 2005. Tele-Services overall customer growth for cable TV services declined, so
Tele-Services programming costs decreased in spite of increases in the programming rates paid by Tele-Services in order to offer its cable TV offerings. Breda is allocating a portion of shared provisioning costs between BTC, Inc.s CLEC operation and its Internet services operation.  17


Depreciation and Amortization  $17,864  Depreciation and amortization expense increased $17,864, or 8.1%, for the three-month period ended September 30, 2006, when compared to the three-month period ended September 30, 2005. Breda added over $1,000,000 in new switch plant assets in its Carroll, Iowa operations and Emergency Alert Equipment in its cable TV operations in the fourth quarter of 2005. Those assets and equipment began generating additional depreciation expense when the assets and equipment were placed into service in the fourth quarter of 2005. There was no corresponding expense for the three-month period ended September 30, 2005.  Selling, General and Administration  $37,583  Selling, general and administration expenses increased $37,583, or 7.4%, for the three-month period ended September 30, 2006, when compared to the three-month period ended September 30, 2005. While labor and benefits decreased during the three-month period ended September 30, 2006, when compared to the same period in 2005, because of reduced full time equivalents in the Customer Service Department and the Marketing Department, this decrease was offset by an increase in administrative labor expense with the hiring of a CEO and a COO on July 1, 2006. There were also increased outside legal, consulting, and accounting services to facilitate the preparation of SEC filings and to pursue new business opportunities in the industry during the three-month period ended September 30, 2006, when compared to the three-month period ended September 30, 2005.  OTHER INCOME (EXPENSE)  The table below sets forth the components of other income (expense) for the three-month period ended September 30, 2006, compared to the same period in 2005.  Three
        Months EndedSeptember
        30,
    
    Change2006
    
    2005
    
    Amount
    
    PercentageOTHER
        INCOME (EXPENSE)Interest
        and dividend income
    
    $
    103,427
    
    
    $
    69,375
    
    
    $
    34,052
    
    
    49.1
    %Gain
        on sale of investments
    
    
    (197
    )
    
    
    
    
    
    
    (197
    )
    
    -100.0
    %Gain
        on disposal of assets
    
    
    
    
    
    
    33,341
    
    
    
    (33,341
    )
    
    -100.0
    %Interest
        expense
    
    
    (25,698
    )
    
    
    (28,623
    )
    
    
    2,925
    
    
    10.2
    %Income
        from equity investments
    
    
    467,882
    
    
    
    280,177
    
    
    
    187,705
    
    
    67.0
    %Other,
        net
    
    
    8,716
    
    
    
    2,551
    
    
    
    6,165
    
    
    241.7
    %$
    554,130
    
    
    $
    356,821
    
    
    $
    197,309
    
    
    55.3
    %
  Interest and Dividend Income.Interest and dividend income increased $34,052, or 49.1%, for the three-month period ended September 30, 2006, when compared to the three-month period ended September 30, 2005. This increase is attributable to increased investments and rates earned on investments in both temporary investments and marketable securities on which Breda generates interest income for the three-month period ended September 30, 2006, when compared to the three-month period ended September 30, 2005.  Gain on disposal of assets.The $33,341 decrease in gain on disposal of assets for the three-month period ended September 30, 2006, represents the gain from the sale of the Neola cable system in September 2005, for which there is no corresponding entry in the same three-month period in 2006.  18


Interest Expense.The $2,925, or 10.2%, decrease in interest expense for the three-month period ended September 30, 2006, when compared to the three-month period ended September 30, 2005, is the result of the reduction of the Rural Telephone Finance Cooperative loan balance on which interest is calculated because of the payment of the scheduled principal payments on the loan. There has been no change in interest rate and no additional loan proceeds have been obtained.  Income from Equity Investments.Income from equity investments increased $187,705, or 67.0%, for the three-month period ended September 30, 2006, when compared to the three-month period ended September 30, 2005. The equity investments income shown on Bredas financial statements is Bredas pro-rata share of the net income or net loss of each equity investment, based on Bredas percentage of ownership in each equity investment. The increase in equity investments income reported on Bredas income statement for the three-month period ended September 30, 2006 is a reflection of the net increases and decreases in the net income of Bredas equity investments. Most of Bredas equity investments are in cellular partnerships. Some of these cellular investments now receive universal service funding which has increased their overall operating
revenue. An additional source of income from equity investments arises from Bredas ownership interest in Alpine Communications, L.C., an operating telephone company in northeastern Iowa.  Other, Net.The $6,165, or 241.7%, increase in other net income for the three-month period ended September 30, 2006, when compared to the three-month period ended September 30, 2005, is mainly attributable to decreased partnership-related expenses.  Income Tax Expense.Income taxes increased $352,207, or 179.4%, for the three-month period ended September 30, 2006, when compared to the same period in 2005. The increase is a direct reflection of the increased income generated from operations and other income sources. The effective tax rate for the three-month period ended September 30, 2006 is 51.9%, compared to a 37.7% tax rate for the same three-month period in 2005. The effective tax rate differs from the U.S. statutory rate due to state income taxes and the proportion of income from investments which are exempt from income tax.  Net Income.Net income increased $184,207, or 56.9%, for the three-month period ended September 30, 2006, when compared to the same period in 2005.  Nine Months Ended September 30, 2006 and 2005  The table below sets forth the components of Bredas revenues for the nine months ended September 30, 2006, compared to the same period in 2005.  19


Nine Months EndedSeptember 30,
        
        Change2006
        
        2005
        
        Amount
        
        PercentageOPERATING REVENUESLocal Exchange CarrierLocal network services
        
        $
        672,251
        
        $
        622,134
        
        $
        50,117
        
        
        
        8.1
        %Network access services
        
        
        3,203,922
        
        
        2,303,430
        
        
        900,492
        
        
        
        39.1
        %Long distance services
        
        
        244,574
        
        
        199,415
        
        
        45,159
        
        
        
        22.6
        %Cellular services
        
        
        1,090,089
        
        
        1,100,682
        
        
        (10,593
        )
        
        
        -1.0
        %Billing and collection services
        
        
        11,149
        
        
        16,506
        
        
        (5,357
        )
        
        
        -32.5
        %Miscellaneous
        
        
        124,348
        
        
        229,220
        
        
        (104,872
        )
        
        
        -45.8
        %$
        5,346,333
        
        $
        4,471,387
        
        $
        874,946
        
        
        
        19.6
        %Broadcast Services
        
        $
        549,763
        
        $
        614,226
        
        $
        (64,463
        )
        
        
        -10.5
        %Internet services
        
        $
        469,024
        
        $
        425,826
        
        $
        43,198
        
        
        
        10.1
        %$
        6,365,120
        
        $
        5,511,439
        
        $
        853,681
        
        
        
        15.5
        %
  There was an increase in total operating revenues for the nine-month period ended September 30, 2006, when compared to the nine-month period ended September 30, 2005, of $853,681, or 15.5%.  Local Exchange Carrier Services - $874,946  Local exchange carrier services revenues accounted for 84.0% of all operating revenues in the nine-month period ended September 30, 2006. There was a $874,946, or 19.6%, increase in local exchange carrier services revenues for the nine-month period ended September 30, 2006, when compared to the nine-month period ended September 30, 2005.  Local network services revenues increased $50,117, or 8.1%, for the nine months ended September 30, 2006, as compared to the same period in 2005, primarily because of the increased number of customers taking phone service from BTC, Inc. in Carroll, Iowa. Bredas long distance services revenue increased $45,159, or 22.6%, for the nine months ended September 30, 2006, as compared to the nine-month period ended September 30, 2005, for the same reason. Breda has received a good response to its package offerings that include local and long distance service from both residential and business customers.  Network access services increased $900,492, or 39.1%, for the nine-month period ended September 30, 2006, when compared to the nine-month period ended September 30, 2005. This increase mainly resulted from increased originating and terminating access revenues received on toll traffic generated by Bredas Internet service subscribers in Bredas southern Iowa exchanges to reach Bredas Internet service equipment in Breda, Iowa. This method of provisioning allows Breda to offer its own Internet services to these customers instead of reselling the Iowa Network Services Internet product. Breda also negotiated wireless agreements with six wireless carriers in the first quarter of 2005, and is now billing and receiving payments from those carriers; although the overall wireless payment rate is significantly less than what Breda originally received in access revenues from
interexchange carriers for this traffic. Bredas access revenue has also increased because, as noted previously, BTC, Inc. installed a new switch in its Carroll, Iowa location, and is now able to receive tandem switching payments for consolidating and switching its traffic from six of Bredas own seven telephone exchanges. There is no corresponding tandem switching revenue for the nine-  20


month period ended September 30, 2005. There was also some increase in Bredas access revenue because of an increased customer base taking Bredas long distance services. These customers generate access revenue when they use Bredas networks to make long distance calls. As noted previously, Breda has contracted with conference bridge vendors for the transport of long distance calls over Bredas networks. Breda began billing for these services in September 2006, and there is no corresponding conference bridge access revenue for the nine-month period ended September 30, 2005.  Cellular services decreased $10,593, or 1.0%, for the nine-month period ended September 30, 2006, when compared to the nine-month period ended September 30, 2005. Breda began offering two-year contracts, instead of one-year contracts in August 2002, when U.S. Cellular revamped its commission structure to encourage two-year contracts. This change in contract length causes a delay every other year in new contract sign-ups for retentionable customers. Customers may migrate to new contracts without penalty once they have fulfilled eighty percent of the original contract term, so Breda anticipated that the first customers obtaining 24-month contracts in 2004 would be eligible for new contracts beginning in May and June of 2006. Breda anticipates that retention commissions will gradually increase to their customary level.  Miscellaneous revenue decreased $104,872, or 45.8%, for the nine-month period ended September 30, 2006, when compared to the nine-month period ended September 30, 2005. The main component of miscellaneous revenue is the receipt of rent from other telephone companies or industry carriers for the lease of capacity over fiber optic rings owned by Breda, or owned jointly with neighboring telephone companies. During the nine-month period ended September 30, 2006, a one-time payment in the amount of $142,936 was made to a partner of a jointly-owned ring after a true-up of fiber optic revenue proceeds had been jointly undertaken. There was no corresponding entry during the nine-month period ended September 30, 2005, and no future payments are due because all telephone companies owning the ring are currently being paid directly from the leasing company.  Broadcast Services  ($64,463)  Broadcast services decreased $64,463, or 10.5%, for the nine-month period ended September 30, 2006, when compared to the nine-month period ended September 30, 2005. Bredas subsidiary, Tele-Services, Ltd., sold its Neola, Iowa cable system in September 2005, so there is no revenue for the Neola customers for part of the nine-month period ended September 30, 2006, when compared to the same nine-month period ended September 30, 2005. Tele-Services continues to lose customers and to face stiff competition from satellite providers, who are able to provide extensive channel line-up packages, and who are also now able to include local channels in their package offerings. Tele-Services completed a fiber construction project during the quarter ended September 30, 2005, and again during the quarter ended June 30, 2006, which allowed it to combine cable TV head ends. Breda continues to
explore other consolidation opportunities in Tele-Services cable TV communities in order to reduce operating costs through consolidation of equipment and maintenance costs. Rate increases were implemented in November 2005, and August 2006, respectively, for the two communities that received
additional channels from the consolidation of head ends. Tele-Services upgraded its software and operating systems on its local channel equipment during the third quarter of 2005, which enabled Tele-Services to implement a paid advertising program for businesses and individuals on the local channels in the communities that have the local channels. Breda hopes to generate some customer loyalty through this avenue of information on local community  21


events, as well as the weather and local news. Another factor faced by Tele-Services is the declining population base in the small rural communities served by Tele-Services.  Internet Services  $43,198  Internet services revenue increased $43,198, or 10.1%, for the nine-month period ended September 30, 2006, when compared to the nine-month period ended September 30, 2005. The increase is directly attributable to the increase in high-speed Internet customers, which offset the decrease in BTC, Inc.s dialup Internet service customer base. The decrease in dialup Internet customers is the result of the intense competition by multiple suppliers in the Carroll, Iowa market area. Breda is gaining high-speed Internet customers in the Carroll, Iowa area because BTC, Inc. is offering bundled services packages that include Internet services, as well as local telephone and other communication services. Breda also began offering high speed satellite Internet service in the fourth quarter of 2005 to its rural and other customers who were not able to access Bredas other high speed Internet
products because of distance constraints. Some of the Internet services increase for the nine-month period ended September 30, 2006 is the result of this new high speed satellite Internet offering, and for which there was no corresponding revenue for the nine-month period ended September 30, 2005.  With the advent of newer technologies that expand the range for high speed Internet services from Bredas central office, Breda began offering new longer-reach, high speed Internet services in its remaining five outlying ILEC communities that previously were not able to receive those services from Breda during the third quarter of 2006. Breda also expanded its high-speed Internet offerings in two of its ILEC towns to include the long reach technology options. These service offerings were begun during the quarter ended September 30 2006, and for which there was no corresponding revenue for the nine-month period ended September 30, 2005. Breda has had a very favorable response to these new technology Internet offerings.  OPERATING EXPENSES  The table below sets forth the components of Bredas operating costs for the nine months ended September 30, 2006, compared to the same period in 2005.  Nine
            Months EndedSeptember
            30,
        
        Change2006
        
        2005
        
        Amount
        
        PercentageOPERATING
            EXPENSESCost
            of services
        $
        2,881,540
        
        $
        2,652,451
        
        $
        229,089
        
        8.6
        %Depreciation
            and amortization
        
        727,232
        
        
        686,307
        
        
        40,925
        
        6.0
        %Selling,
            general and administration
        
        1,647,916
        
        
        1,499,414
        
        
        148,502
        
        9.9
        %$
        5,256,688
        
        $
        4,838,172
        
        $
        418,516
        
        8.7
        %
  Cost of Services - $229,089  Cost of services increased $229,089, or 8.6%, for the nine-month period ended September 30, 2006, when compared to the nine-month period ended September 30, 2005. The increased costs primarily arose from labor rate increases implemented in 2006, and increased provisioning costs for the new long reach, high-speed Internet product rolled out in third quarter 2006, and for which there were no corresponding costs for the nine-month period ended September 30, 2005. Bredas costs also increased for the provisioning of Bredas own Internet service now offered in its southern Iowa exchanges as more customers bundled their Internet with other services that they were already receiving from Breda. The cost of long distance  22


services also increased as a greater number of customers continued to use Bredas long distance service. Breda also incurred additional costs for repair and
maintenance expenditures for its central offices, equipment and buildings and grounds during the nine-month period ended September 30, 2006, when compared to the nine-month period ended September 30, 2005. Tele-Services overall customer growth for cable TV services declined, so Tele-Services programming costs decreased in spite of increases in the programming rates paid by Tele-Services in order to offer its cable TV offerings. Breda is allocating a portion of shared provisioning costs between BTC, Inc.s CLEC operation and its Internet services operation.  Depreciation and Amortization  $40,925  Depreciation and amortization expense increased $40,925, or 6.0%, for the nine-month period ended September 30, 2006, when compared to the nine-month period ended September 30, 2005. Breda added over $1,000,000 in new switch plant assets in its Carroll, Iowa operations and Emergency Alert Equipment in its cable TV operations in the fourth quarter of 2005. Those assets and equipment began generating additional depreciation expense when the assets and equipment were placed into service in the fourth quarter of 2005.  Selling, General and Administration  $148,502  Selling, general and administration expenses increased $148,502, or 9.9%, for the nine-month period ended September 30, 2006, when compared to the nine-month period ended September 30, 2005. While labor and benefits decreased during the nine-month period ended September 30, 2006, when compared to the same period in 2005, because of reduced full time equivalents in the Customer Service Department and the Marketing Department, this decrease was offset by an increase in administrative expense and legal expense to oversee the process of hiring a new CEO and a COO, as well as an increase in outside legal, consulting, and accounting services to facilitate the preparation of SEC filings and to pursue new business opportunities in the industry. Administrative labor expense also increased with the addition of both a CEO and a COO being hired on July 1, 2006.  OTHER INCOME (EXPENSE)  The table below sets forth the components of other income (expense) for the nine-month period ended September 30, 2006, compared to the same period in 2005.  Nine Months EndedSeptember
            30,
        
        Change2006
        
        2005
        
        Amount
        
        PercentageOTHER
            INCOME (EXPENSE)Interest
            and dividend income
        $
        272,993
        
        
        $
        267,374
        
        
        $
        5,619
        
        
        2.1
        %Gain
            or (loss) on sale of investments
        
        1,163,201
        
        
        
        (3,057
        )
        
        
        1,166,258
        
        
        38150.4
        %Gain
            or (loss) on disposal of assets
        
        (21,714
        )
        
        
        33,304
        
        
        
        (55,018
        )
        
        -165.2
        %Interest
            expense
        
        (79,331
        )
        
        
        (87,963
        )
        
        
        8,632
        
        
        9.8
        %Income
            from equity investments
        
        1,143,951
        
        
        
        790,420
        
        
        
        353,531
        
        
        44.7
        %Other,
            net
        
        12,027
        
        
        
        (4,367
        )
        
        
        16,394
        
        
        375.4
        %$
        2,491,127
        
        
        $
        995,711
        
        
        $
        1,495,416
        
        
        150.2
        %
  Interest and Dividend Income.Interest and dividend income increased $5,619, or 2.1%, for the nine-month period ended September 30, 2006, when compared to the nine-month period ended September 30, 2005. This increase is attributable to increased investments and rates earned on investments in both temporary investments and marketable securities on which Breda generates  23


interest income for the nine-month period ended September 30, 2006, when compared to the nine-month period ended September 30, 2005.  Gain or (loss) on sale of investments.The $1,166,258 increase in gain on sale of investments for the nine-month period ended September 30, 2006, when compared to the nine-month period ended September 30, 2005, is mainly the result of the gain from the Rural Telephone Bank stock sale in April 2006, for which there is no corresponding entry in the same nine-month period in 2005.  Gain or (loss) on disposal of assets.The $55,018 decrease in gain on disposal of assets for the nine-month period ended September 30, 2006, when compared to the same nine month period in 2005, is attributable to the loss of $21,714 on the sale of a building at 526 N. Carroll Street, Carroll, Iowa, in May 2006,  when compared to the $33,304 gain on the sale of the Neola cable system during the nine-month period ended  September 30, 2005.  Interest Expense.The $8,632, or 9.8%, decrease in interest expense for the nine-month period ended September 30, 2006, when compared to the nine-month period ended September 30, 2005, is the result of the reduction of the Rural Telephone Finance Cooperative loan balance on which interest is calculated because of the payment of the scheduled principal payments on the loan. There has been no change in interest rate and no additional loan proceeds have been obtained.  Income from Equity Investments.Income from equity investments increased $353,531, or 44.7%, for the nine-month period ended September 30, 2006, when compared to the nine-month period ended September 30, 2005. The equity investments income shown on Bredas financial statements is Bredas pro-rata share of the net income or net loss of each equity investment, based on Bredas percentage of ownership in each equity investment. The increase in equity investments income reported on Bredas income statement for the nine-month period ended September 30, 2006 is a reflection of the net increases and decreases in the net income of Bredas equity investments. Most of Bredas equity investments are in cellular partnerships. Some of these cellular investments now receive universal service funding which has increased their overall operating
revenue. Breda also had additional equity investment income in the nine-month period ended September 30, 2006, resulting from Prairie Telephones purchase of additional ownership interests in Bug Tussel Wireless, LLC in July 2005, and for which there is no additional equity investment income for the nine-month period ended September 30, 2005. An additional source of income from equity investments arises from Bredas ownership interest in Alpine Communications, L.C., an operating telephone company in northeastern Iowa.  Other, Net.The $16,394, or 375.4%, increase in other net income for the nine-month period ended September 30, 2006, when compared to the nine-month period ended September 30, 2005, is mainly attributable to decreased partnership-related expenses.  Income Tax Expense.Income taxes increased $824,380, or 137.2%, for the nine-month period ended September 30, 2006, when compared to the same period in 2005. The increase is a direct reflection of the increased income generated from operations and other income sources, including the gain on the redemption of the Rural Telephone Bank stock. The effective tax rate for the nine-month period ended September 30, 2006 is 39.6%, compared to a 36.0% tax rate for the same nine-month period in 2005. The effective tax rate differs from the U.S. statutory rate due to state income taxes and the proportion of income from investments which are exempt from income tax.  24


Net Income.Net income increased $1,106,201, or 103.6%, for the nine-month period ended September 30, 2006, when compared to the same period in 2005.  Liquidity and Capital Resources  Bredas short-term and long-term liquidity requirements arise primarily from the following:  operations and working capital requirements; capital expenditures; interest payments on the long term financing from the Rural Telephone Finance Cooperative; dividend payments on Bredas common stock; redemption of Bredas common stock; and potential industry-related acquisitions or investments.  Breda intends to fund the operations, working capital requirements, capital expenditures, interest payments, dividend payments, and stock redemptions from cash from operations. Breda also intends to fund smaller industry-related acquisitions or investments from cash from operations. For the nine months ended September 30, 2006 and 2005, cash provided by operating activities was $1,145,168 and $1,892,886, respectively.  To fund any significant future acquisitions or investments, Breda would consider the redemption of its short-term and long-term marketable securities investments; the use of its revolving lines of credit with the Rural Telephone Finance Cooperative; or the addition of long-term debt from industry lenders. Breda presently has an unused line of credit with the Rural Telephone Finance Cooperative of $1,500,000, and Prairie Telephone has an unused line of credit with the Rural Telephone Finance Cooperative of $500,000. Bredas present revenues would be able to sustain the costs of additional debt if the need arose. However, all potential acquisitions or investments would be evaluated on their own merits for cash and revenue production, and if the return on investment was sufficient to incur the additional debt.  Breda has historically funded its operations and capital expenditure requirements primarily from cash from operations. The following table summarizes Bredas short-term liquidity, as of September 30, 2006, and December 31, 2005.  As ofSeptember 30,2006
     
     December 31,2005Short-Term LiquidityCurrent Assets
     $        3,231,738
        
     
     $        2,766,901Current Liabilities
     579,375
        
     
     1,115,177Net Working Capital
     $        2,652,363
        
     
     $        1,651,724Cash and Cash Equivalents
     $        1,050,131
        
     
     $           739,741Short Term Marketable Securities
     $           719,233
        
     
     $           635,409Available on Line of Credit
     $        2,000,000
        
     
     $        2,000,000
  Current liabilities decreased $535,802 for the nine-month period ended September 30, 2006, when compared to the year ended December 31, 2005. Accounts payable decreased $204,730 when comparing the two periods, which is mainly attributable to liabilities incurred as of December 31, 2005 for the installation of the tandem switch, and for which there are no corresponding liabilities at September 30, 2006. Accrued taxes decreased $308,102 for the nine-month period ended September 30, 2006, when compared to the year ended December 31, 2005. The decrease is attributable to additional estimated tax payments made in the second quarter of 2006 related to the gain on the Rural Telephone Bank stock redemption, and for which there were no corresponding payments in 2005. There was also a decrease of $17,619 in  25


accrued payroll and $11,530 decrease in accrued pension liability for the nine-month period ended September 30, 2006, when compared to the year ended December 31, 2005.  The following table summarizes Bredas sources and uses of cash for the nine months ended September 30, 2006 and 2005.  For the Nine Months EndedSeptember 30,2006
     
     2005Net Cash Provided (Used)Operating Activities
     $    1,145,168
        
     
     $    1,892,886Investing Activities
     (495,255
        )
     
     (1,856,801
        )Financing Activities
     (339,523
        )
     
     (380,580
        )
  For the nine months ended September 30, 2006 and 2005, cash provided by operating activities was $1,145,168 and $1,892,886, respectively.  Cash provided by investing activities increased $1,361,546 for the nine-month period ended September 30, 2006, when compared to the nine-month period ended September 30, 2005. During the first quarter of 2005, Prairie Telephone purchased 5,000 units of Bug Tussel Wireless, L.L.C. for $200,000, and made additional capital contributions to Carroll County Wireless, L.L.C. and Guthrie County Wireless, L.L.C. of $30,000 and $50,000, respectively. There were no corresponding expenditures in the first quarter of 2006. There was also an increase in proceeds from the redemption of marketable securities of $410,081 for the nine-month period ended September 30, 2006, when compared to the same period in 2005. In addition, there was an increase in proceeds from the redemption of the Rural Telephone Bank stock and from the sale of the building at 526 N. Carroll Street, in Carroll, Iowa.  Cash used in financing activities was $339,523 for the nine-month period ended September 30, 2006, and $380,580 for the nine-month period ended September 30, 2005. These amounts
represent the cash used to repay Rural Telephone Finance Cooperative long-term debt, the cash used for the redemption of stock, and the cash used to pay dividends to shareholders.  Long Term Debt  As of September 30, 2006, Breda had $1,357,086 of long-term debt with the Rural Telephone Finance Cooperative. This debt carries a fixed rate of interest of 7.35%. Substantially all of the assets of Breda are pledged as security for the long-term debt. The Rural Telephone Finance Cooperative notes are to be paid in equal quarterly installments covering principal and interest until paid in full by the year 2013.  The security and loan agreements underlying the Rural Telephone Finance Cooperative notes contain certain restrictions on distributions to stockholders, investment in or loans to others, and payment of management fees or an increase in management fees. Breda is restricted from making any distributions, except as might be specifically authorized in writing in advance by the Rural Telephone Finance Cooperative note holders, unless Bredas net worth meets the minimum requirements set forth in the loan agreement, and distributions are limited to certain levels of prior year cash margins. In addition, Breda is required to achieve a debt service coverage ratio of not less than 1.25 to 1 and a times interest earned ratio of not less than 1.5 to 1.  26


Obligations and Commitments  Bredas ongoing capital commitments include capital expenditures and debt service requirements. For the nine months ended September 30, 2006, capital expenditures were $214,141.  Bredas contractual obligations as of September 30, 2006 are:  September - December 2006
     
     $          42,1512007
     175,7292008
     187,7102009
     200,5072010
     214,1772011 and After
     536,811
  Breda believes that cash provided by operations and current cash balances will be adequate to meet Bredas foreseeable operational, capital expenditure, and debt service requirements. However, Bredas actual cash needs and the availability of required funding may differ from Bredas expectations and estimates, and those differences could be material. Future capital requirements will depend on many factors, including, among others, the demand for Bredas services in Bredas existing markets and regulatory, technological and competitive developments.  Off-Balance Sheet Risk and Concentration of Credit Risk  Breda has no off-balance sheet exposure or risk.  Breda has certain financial instruments which could potentially subject Breda to concentrations of credit risk. These financial instruments consist primarily of trade receivables and cash and temporary cash investments.  Breda adheres to its investment policy with respect to marketable securities, which allows investments in:  a.
        Securities issued or guaranteed by the U.S. Government or its agencies.
 b.
        Corporate or municipal bonds rated A or better by a major rating service.
 c.
        Money market funds investing in U.S. Government, U.S. Agency or highly rated municipal securities.
  Recent Accounting Pronouncement  In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections, a replacement of APB Opinion No. 20 and SFAS No. 3. SFAS No. 154 requires retrospective application to prior periods financial statements of a voluntary change in accounting principle unless it is impracticable. SFAS No. 154s retrospective application requirement replaces APB No. 20s requirement to recognize most voluntary changes in accounting principle by including the cumulative effect of changing to the new accounting principle in net income of the period of the change. SFAS No. 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005 (as of January 1, 2006, for Breda). Breda does not expect adoption of SFAS No. 154 to have a material effect on its results of operations or financial position.  27


Other Activities and Issues  Access charge revenues constitute a substantial part of Bredas consolidated revenues, and the regulation of access charge rates by the Federal Communications Commission (FCC) and the Iowa Utilities Board (IUB) creates a material risk to Breda and its subsidiaries.  The FCC currently has an open docket on inter-carrier compensation, which was initiated to identify a unified approach to intercarrier compensation. The current intercarrier compensation system distinguishes between different types of carriers and services, such as local and long-distance or wireless and wireline, and the FCC has indicated that the FCC plans to replace the current system with a unified intercarrier compensation system. The FCC initiated a rule making proceeding to consider this matter and the questions that the FCC are examining include the effect that any change in the compensation system will have on consumers and the universal service fund.  Breda continues to work with two Iowa industry associations in reviewing and submitting comments on the Missoula Plan, which is now before the FCC. The FCC had sought initial comments on the Missoula Plan by October 25, 2006. The Missoula Plan is a set of proposals put together by a coalition of telecom companies, including the Rural Alliance. The Rural Alliance is a combination of the Expanded Portland Group and the Alliance for Rational Intercarrier Compensation. The Missoula Plan grew out of a set of proposals to counter the big carriers and the original FCC plan to use bill and keep for intercarrier compensation. Bill and keep would have meant that companies such as Breda, would each bill its own customers and get no payments from any other carrier, such as AT&T or MCI, for the use of its networks to carry toll traffic.  Breda believes that changes in access charges will likely occur, and that if any of the plans known today are adopted, as currently proposed, there will be substantial reductions in access revenues. Since access charge revenues constitute a substantial portion of Bredas total consolidated revenues, this is an area of material risk to Breda and its subsidiaries.  Breda and its subsidiaries are also subject to risk regarding changes in intrastate access charge rates because concerns have been raised by the Iowa legislature and the IUB regarding intrastate rates, and whether alternative intrastate intercarrier compensation mechanisms should be investigated. Breda does not believe, however, that it is possible to predict at this time whether intrastate access rates will be lowered, or if intrastate access rates are lowered, the amount of the decrease in those rates. It is therefore uncertain at this time whether this issue will result in an adverse effect on Bredas operating income. Breda does, however, anticipate continuing pressure for the lowering of intrastate access charge rates.  Universal service funding is also an important part of Bredas consolidated revenues, and the regulation of universal service funding by the FCC is another area of material risk to Breda and its subsidiaries. The universal service funds are also now being paid to more telecommunications providers than in the past. Breda anticipates that there may be changes in the future on how universal service funds are disbursed among the numerous eligible telecommunications providers.  In August 2005, the FCC opened an extremely broad comment proceeding on Universal Service Funding (USF), in which it sought input on a variety of specific USF proposals offered by members of the Federal-State Joint Board on Universal Service. State industry associations have been meeting with FCC staff members and with various Washington legislative staff  28


members to discuss proposed legislation preserving and improving USF, including how funds are expended and assessing levels of broadband deployment in Iowa.   The issues at stake are both on how the revenue is assessed and generated for the universal service fund, and the criteria for the disbursement of funds from the universal service pool. Some of the suggested changes on the revenue side of the debate would be to have all current entities paying into the USF continue to pay into the fund; have any service provider that uses
telephone numbers, IP (Internet Protocol) addresses or their functional equivalents to provide real-time voice communications pay into the fund; and any provider that offers a network connection for a fee to the public, including DSL, cable modem connections, WiMax and broadband over power lines, pay into the fund. This would increase the revenue base to more than just carriers providing telephone line services.  On the disbursement side, some proposals would limit the number of eligible telecommunication carriers by specifying the criteria that must be met by recipients, including that the provider must provide service throughout their service area; remain functional in emergency situations; and satisfy both consumer protection and service quality standards. Unlike present USF payments, the proposals include that USF payments would allow recovery based on actual costs, rather than the incumbent carriers costs.  Breda believes that federal universal service fund changes will occur but is unable to determine an estimated time frame or estimated financial ramifications as of the date of this filing  The Communications Assistance For Law Enforcement Act (CALEA) was passed in 1994 and sets forth the assistance capabilities that telecommunications carriers need to maintain so that they can support law enforcement in the conduct of lawfully authorized electronic surveillance. Breda, Prairie Telephone and Westside Independent had been granted various extensions from time to time for compliance with the various requirements of the Act, with the most recent extension ending on June 30, 2006. Breda installed a soft switch in its CLEC exchange in the last quarter of 2005, and the technology in this switch allows for CALEA compliance in both its CLEC exchange of Carroll, Iowa, and its ILEC exchange in Breda, Iowa. Breda currently is working through an upgrade plan for its remaining, stand-alone switches in five small exchange locations throughout its service territory. Breda estimates that
its final cost to upgrade the remaining switches could be close to $2,000,000.  Earlier this year, the Federal Communications Commission adopted an order whereby all broadband Internet and interconnected voice over Internet protocol (VoIP) providers must comply with CALEA surveillance regulations by May 14, 2007. Since it is not clear whether standard technology for CALEA compliance will be available by the May 14, 2007 deadline, Breda and other carriers offering these services are investigating implementing non-standard compliance systems to meet the FCCs requirements. As of the date of this filing, Breda did not yet have definitive cost or technology implementations finalized.  Telephone services providers like Breda, Prairie Telephone, Westside Independent and BTC, Inc. are subject to competition from other providers. As a result of the Telecommunications Act of 1996, telephone companies are no longer afforded exclusive franchise service areas. Under that Act, competitors can now offer telephone services to Bredas, Prairie Telephones, Westside Independents and BTC, Inc.s subscribers, and also request access to their lines and network facilities in order to offer any type of service that can be provided through those lines and facilities. The Act and the regulations promulgated by the FCC and state regulatory agencies to implement various parts of the Act could have a material adverse effect on Breda, Prairie Telephone, Westside Independent and BTC, Inc. because they open up Breda, Prairie  29


Telephone, Westside Independent and BTC, Inc. to
competition that they were not subject to in the past.  There are numerous telephone companies which have filed to provide telephone services throughout all of Iowa, and Breda anticipates that more of those types of filings will be made by other telephone companies. To date, however, no company has chosen to compete in any of Bredas, Prairie Telephones or Westside Independents service areas. Breda does not know the plans of any companies, but Breda currently believes the possibility of any company entering any of those service areas in 2006 is small.  BTC, Inc., however, provides telephone services in the Carroll, Iowa market area, and there are already other companies providing telephone services in that area. Breda also believes that there will be additional local exchange carriers entering the Carroll, Iowa market area in 2006. For example, Mediacom, which is the 9th largest cable television operator in the United States and the local cable provider in the Carroll, Iowa market, is now providing a phone service offering through Mediacoms partnership with Sprint. The IUB also granted Mediacom a
certificate of public convenience to offer service in numerous areas throughout Iowa.  Breda also anticipates that it will face new competition from other providers of newer VoIP (voice over internet protocol) technologies, such as Vonage and Skype, in all of its exchanges.  Breda anticipates that Mediacoms and any such other offerings will result in a reduction of revenue. A reduction in revenue will also likely occur if any other telephone companies at some point determine to provide services in any of Bredas, Prairie Telephones, Westside Independents or BTC, Inc.s service areas.  Breda continues to investigate new technology and product offerings in the Internet field that it can provide to its customers, or that could be considered value-added features to its already existing product. For example, Breda now offers a dial-up accelerator product, which allows Internet service providers, such as BTC, Inc., to deliver data services over their existing dial-up and wireless networks at up to six times the normal speed. In May 2005, Breda began to offer its dial-up and high-speed Internet customers a value-added product which is intended to eliminate customer problems due to Internet security threats. This product is fully-automated and integrated, and protects against viruses, spyware, and popups. The product also automatically installs tested Microsoft Security patches and performs diskeeper functions. Breda has had good response from its Internet customers for this product.  During the third quarter of 2006, Breda completed the launch of high-speed Internet service offerings in all of its telephone exchanges that currently did not have the capability to offer this type of service. These offerings utilize the Internet product technologies currently used by Breda, as well as new technologies that allow customers outside the normal high speed service area to still receive a high bandwidth connection. These customers in the past were not able to receive high-speed Internet services using standard provisioning equipment because of distance restrictions in most high speed Internet technologies. Breda has had an excellent response to these longer-range, high-speed Internet service offerings.  Breda entered into a marketing and distribution agreement with the National Rural Telecommunications Cooperative (NRTC) on May 13, 2004, for the distribution of high speed Internet service via satellite. One reason Breda entered into this agreement was so that Breda would have a means to provide high speed Internet service to its rural customers who may otherwise lack the opportunity to obtain high speed Internet service through existing broadband  30


options, such as cable modem, DSL, and wireless, because of distance and location factors. NRTC has a master distribution agreement with WildBlue Communications, Inc., through which NRTC has obtained rights to market, promote, sell and distribute satellite-based Internet access services and related products to end users in the continental United States, including through NRTCs eligible members, such as Breda. Bredas marketing
campaign originated on September 1, 2005, and Breda received good response to this service. Breda and the other satellite Internet providers in WildBlues satellite Beam 26 were notified in January 2006 that because of the huge success of this product, the capacity in Beam 26 was filling up, and no additional customers could be added once capacity reached a designated limit in order to not degrade the service for the customers already using the service. Breda stopped taking applications for this service on March 13, 2006. NRTC and WildBlue anticipate that additional satellite capacity will be available in early 2007, at which time Breda will again be able to offer this service to its customers. With the roll-out of Bredas newer, longer range, high-speed
Internet technologies in all of its ILEC exchanges, Breda expects a lower take rate for the Wild Blue satellite Internet services when Breda is again able to offer this product.  Breda believes, however, that it will need to continue to pursue new marketing approaches in order to attempt to retain and increase its Internet customer base, and that there will be continuing competitive pressures to lower dial-up rates and to provide higher speed Internet access.  Prairie Telephone became a 10% owner of Desktop Media, L.L.C. on May 2, 2001.   Prairie Telephone also loaned $500,000 to Desktop Media, L.L.C. on May 2, 2001, and advanced an additional $45,307 on June 9, 2004 to fund operational expenses until service revenues were collected. Prairie Telephone signed a principal deferral agreement with Desktop Media, L.L.C. on September 17, 2003, which deferred the principal payments due in the months of September through December 2003, and which also provided that Prairie Telephones ownership in Desktop Media, L.L.C. would be increased from 10% to 17% if at any time in the year 2004 Desktop Media, L.L.C. was not able to generate a minimum sustainable monthly profit of $36,000, or was unable to make a regularly scheduled principal payment. Both of these stipulations were not met in the first quarter of 2004, and Prairie Telephone accordingly
acquired an additional 7% ownership of Desktop Media, L.L.C. Prairie Telephone, along with the other owners of Desktop Media, L.L.C., is negotiating a purchase agreement to sell their interests in Desktop Media, L.L.C. Breda anticipates that a sale may be finalized by early 2007.  Prairie Telephone purchased 5,000 units of Bug Tussel Wireless, L.L.C. for
    $200,000 in March 2005, which gave Prairie Telephone a 7.87% ownership interest.
    Prairie Telephone purchased an additional 2,462.264 units of Bug Tussel Wireless,
    L.L.C. in July 2005 for $113,264.15, which gave Prairie Telephone a 9.75%
    interest in Bug Tussel Wireless, L.L.C. Bug Tussel Wireless, L.L.C. is located
    in Green Bay, Wisconsin, and its operating plan involves erecting tower sites
    for wireless services.  At its quarterly meeting on August 4, 2005, the Board of Directors of the Rural Telephone Bank approved the liquidation and dissolution of the Bank. On November 10, 2005, the liquidation and dissolution process was initiated with the signing of the 2006 Agriculture Appropriations bill by President Bush, which paved the way for all Bank stock to be redeemed. Breda received liquidation funds on April 13, 2006, of $1,336,000, which was the par value of Bredas investment in the Bank stock. Bredas net of tax gain on the liquidation of this investment is approximately $760,640.  31


Item 3.
        Controls and Procedures.
  The principal executive officer and the principal financial officer of Breda have evaluated the effectiveness of Bredas disclosure controls and procedures as of the end of the period covered by this quarterly report, and they have concluded that the disclosure controls and procedures have been effective for the purposes for which they are intended.  No change in Bredas internal control over financial reporting occurred during the period covered by this quarterly report that has materially affected, or is reasonably likely to materially affect, Bredas internal control over financial reporting.   PART II - OTHER INFORMATION  Item 1.
        Legal Proceedings.
  As of the date of this quarterly report, Breda was not aware of any pending legal proceeding to which Breda was a party or to which any of Bredas property was subject, other than for any routine litigation, if any, that was incidental to Bredas business. As of the date of this quarterly report, Breda was not aware that any governmental authority was contemplating any proceeding against Breda or any of Bredas property.  Item 2.
        Unregistered Sales of Equity Securities and Use of Proceeds.
  Breda did not issue any shares of its common stock during the period of July 1, 2006 through September 30, 2006.  Breda did not purchase any shares of its common stock from shareholders during the period of July 1, 2006 through September 30, 2006.  There were transfers of shares of Bredas common stock during the period of July 1, 2006 through September 30, 2006 with respect to which Breda did not exercise Bredas right of first refusal to purchase the shares. One transaction involved 30 shares which were sold for $400 per share. Another transaction involved 80 shares which were sold for $400 per share. Another transaction involved one share which was sold for $357. Another transaction involved 20 shares, 10 of which shares were sold for $410 per share and 10 of which shares were sold for $400 per share. There were also two transfers that did not involve the payment of any consideration. One of those transactions involved 212 shares which were transferred out of an estate to two individuals, and the other transaction involved 120 shares which were transferred by gift among four individuals.  Item 3.
        Defaults Upon Senior Securities.
  There was no material default or any material arrearage or delinquency by Breda of the type required to be reported under this Item during the period of July 1, 2006 through September 30, 2006.  Item 4.
        Submission of Matters to a Vote of Security Holders.
  No matters were submitted to a vote of the shareholders of Breda, through the solicitation of proxies or otherwise, during the period of July 1, 2006 through September 30, 2006.   32


Item 5.
        Other Information.
  The annual meeting of the shareholders of Breda was held on October 25, 2006. The only matters voted upon by the shareholders at the annual meeting were the election of three directors for Breda and the ratification of the appointment of Bredas auditors for the year 2006.  Bredas board of directors consists of seven members, divided into three classes based upon the length of their term. Each member of the board of directors is elected to a three year term and until his or her successor is elected, or until his or her death, resignation or removal. The terms of office of the directors are staggered, so that three of the directors terms expire in one year, two expire the next year, and two expire the following year.  The term of three of Bredas directors expired at the 2006 annual meeting of the shareholders, and, as indicated, one of the purposes of the annual meeting of the shareholders of Breda was to elect three directors. The directors whose term expired at the annual meeting were Dean Schettler, John Wenck and Rick Anthofer. Mr. Schettler and Mr. Wenck had served three consecutive terms as a director, and under Bredas policies, Mr. Schettler and Mr. Wenck must be off the board of directors for at least one year.  There were four nominees for the three director positions. The nominees were Rick Anthofer, Clifford Neumayer, Mark Hoffman and Robert Buelt. Mr. Anthofer, Mr. Neumayer and Mr. Buelt were elected to serve as directors of Breda until the annual meeting of the shareholders of Breda to be held in the year 2009.  The number of votes cast for, against or withheld, and the number of abstentions and broker non-votes, with respect to the four nominees for election as a director of Breda was as follows:  Against
        Broker
 Name
        For
        or Withheld
        Abstentions
        Non-Votes
  Rick Anthofer
        178
        ---
        ---
        ---
 Clifford Neumayer
        167
        ---
        ---
        ---
 Mark Hoffman
        120
        ---
        ---
        ---
 Robert Buelt
        167
        ---
        ---
        ---
  The other directors whose term of office as a director continued after the annual meeting of the shareholders are the following individuals:  Daniel Nieland
        Dave Grabner
 Neil Kanne
        Charles Thatcher
  The only other matter voted upon by the shareholders at the annual meeting was the ratification of Kiesling Associates, LLP as Bredas auditors for the year 2006. The number of votes cast for, against or withheld, and the number of abstentions and broker non-votes, regarding this matter was as follows:  For
        Against or Withheld
        Abstentions
        Broker Non-Votes
  178
        21
        70
        --
  33


Breda entered into an Employment Agreement with Jane Morlok on November 13, 2006, pursuant to which Ms. Morlok is employed as the chief financial officer of Breda.  The term of the Employment Agreement is 24 months, beginning retroactively on July 1, 2006 and ending on June 30, 2008.  Ms. Morloks annual salary will be $92,000 during the first year of the Employment Agreement. Ms. Morloks annual salary for the years beginning July 1, 2007 and July 1, 2008 will be set by Bredas board of directors after receiving recommendations from Bredas chief executive officer, but will not be less than $92,000 per year. Ms. Morlok will also be entitled to a bonus for the calendar 2006, and Bredas board of directors and chief executive officer are to set up a procedure for the determination of the bonus. The final determination as to the amount of the bonus rests, however, solely with the board of directors. Ms. Morlok is also entitled to a bonus for the calendar years 2007 and 2008, and the structure for determining the bonus and the amount of the bonus is to be determined by Bredas board of directors and chief executive
officer. The final decision regarding bonuses for those calendar years rests, however, with the board of directors. Ms. Morlok will also be reimbursed for reasonable and appropriate expenses incurred in connection with Bredas business. Ms. Morlok will also be entitled to all employee benefits as are provided by Breda from time to time to all full time employees of Breda.  Breda may terminate the Employment Agreement at any time by giving 30 days written notice to Ms Morlok. In that circumstance, Ms. Morlok will be paid a severance allowance on the date of termination equal to the amount remaining to be paid under the Employment Agreement.  Ms. Morlok may also terminate the Employment Agreement by giving 60 days notice to Breda.  The Employment Agreement may also be terminated by Breda for cause upon five days written notice to Ms Morlok.  The Employment Agreement may also be terminated by Breda if Ms. Morlok is absent from her employment by reason of illness or other incapacity for more than 26 consecutive weeks. Breda will pay Ms. Morlok compensation during any period of illness or incapacity in accordance with Bredas sick pay policy as then in effect.  The Employment Agreement includes a noncompete covenant that applies during the term of the Employment Agreement and for a period of one year after the termination of the Employment Agreement, and provides that Ms. Morlok will not enter into or engage in any business competitive with that of Breda within a 50 mile area in which Breda is then doing business or solicit or attempt to solicit any of Bredas customers with the intent or purpose to provide them with competitive goods or services.  The Employment Agreement also includes a confidentiality covenant from Ms. Morlok.  There were no materialchanges during the period of July 1, 2006 through September 30, 2006 to the procedures by which the shareholders of Breda may recommend nominees to Bredas board of directors.   34


Item 6.    Exhibits  A list of the exhibits included as part of this quarterly report is set forth in the Exhibit Index which immediately precedes such exhibits and is incorporated herein by this reference.  [THE REST OF THIS PAGE IS INTENTIONALLY LEFT BLANK]         35


SIGNATURES  In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.  BREDA TELEPHONE CORP.
   Date:  November 14, 2006.
        By:/s/ Steve Frickenstein
 Steve Frickenstein, Chief Executive Officer  Date:  November 14, 2006.
        By:/s/ Jane Morlok
 Jane Morlok, Chief Financial Officer
   36


EXHIBIT INDEX
Exhibits to Form 10-QSB
Three Months Ended September 30, 2006
BREDA TELEPHONE CORP. Description of Exhibit
        Page
  3.
        Articles of Incorporation and Bylaws
  3.1
        Amended and Restated Articles of Incorporation of Breda Telephone Corp. (Filed as Exhibit 3.1 to Bredas Registration Statement on Form 10-SB, and incorporated herein by this reference.)3.2
        Amended and Restated Bylaws of Breda Telephone Corp. (Filed as Exhibit 3.2 to Bredas Form 10-QSB for the quarterly period ended March 31, 2006 and filed May 12, 2006, and incorporated herein by this reference.)
  10.
        Material Contracts
  *10.1
        Employment Agreement dated November 13, 2006 between Breda and Jane Morlok.
        E-110.2
        Employment Agreement dated June 14, 2006 between Breda and Steve Frickenstein. (Filed as Exhibit 10.2 to Bredas Form 10-QSB for the quarterly period ended June 30, 2006 and filed August 11, 2006, and incorporated herein by this reference.)10.3
        Employment Agreement dated June 14, 2006 between Breda and Charles Deisbeck. (Filed as Exhibit 10.3 to Bredas Form 10-QSB for the quarterly period ended June 30, 2006 and filed August 11, 2006, and incorporated herein by this reference.)
  *31.
        Rule 13a-14(a)/15d-14(a) Certifications
  31.1
        Rule 13a-14(a) Certification of Chief Executive Officer
        E-531.2
        Rule 13a-14(a) Certification of Chief Financial Officer
        E-6
  *32.
        Section 1350 Certifications
  32.1
        Section 1350 Certification of Chief Executive Officer
        E-7
 32.2
        Section 1350 Certification of Chief Financial Officer
        E-8
  *Included with this filing.