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UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington,
D.C. 20549



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FORM 10-K





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

For
the Fiscal Year Ended December 31, 2007

or

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

Commission
File Number: 0-3024



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|                                                      
|------------------------------------------------------
|NEW ULM TELECOM, INC.                                 
|(Exact name of registrant as specified in its charter)

| |                                   |                       | 
| | --------------------------------- | --------------------- | 
| | Minnesota                         | 41-0440990            | 
| | (State or other
  jurisdiction of | (I.R.S. Employer      | 
| | incorporation or
  organization)  | Identification
  No.) | 

27
North Minnesota Street
New Ulm, Minnesota 56073(Address of principal executive offices and zip code)

Registrants telephone number including area code: 507-354-4111

Securities registered pursuant to Section 12 (b) of
the Act: None

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

Common Stock, $1.66 par valueTitle of Class



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Indicate by check mark if the registrant is a
well-known seasoned issuer, as defined in Rule 405 of the Securities Act.Yes o   No x

Indicate by check mark if the registrant is not
required to file reports pursuant to Section 13 or 15(d) of the Act. Yes o   No x

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

Indicate by check mark if disclosure of delinquent
filers pursuant to Item 405 of Regulation S-K is not contained herein, and will
not be contained, to the best of registrants knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. x

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

o Large Accelerated Filer
   x Accelerated Filer
   o Non-Accelerated Filer
   o Smaller Reporting Company

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

As of June 30, 2007, the aggregate market value of the
common stock held by non-affiliates of the registrant was $63,359,419 based on
the last sale price of $13.13 on The OTC Bulletin Board.

The total number of shares of the registrants common
stock outstanding as of March 12, 2008: 5,115,435.

Documents Incorporated by Reference: Certain
information required by Part III, Items 10-14 of this document is incorporated
by reference to specified portions of the registrants definitive proxy
statement for the annual meeting of shareholders to be held May 29, 2008.





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TABLE OF CONTENTS

|         |  |                                                                                                                    |  |      | 
|-------- |  | ------------------------------------------------------------------------------------------------------------------ |  | ---- | 
|         |  |                                                                                                                    |  | Page
|         |  |                                                                                                                    |  |     
|         |  |                                                                                                                    |  |      | 
|Part I   |  |                                                                                                                    |  |      | 
|Item 1.  |  | Business                                                                                                           |  | 3    | 
|Item 1A. |  | Risk Factors                                                                                                       |  | 9    | 
|Item 1B. |  | Unresolved Staff Comments                                                                                          |  | 15   | 
|Item 2.  |  | Properties                                                                                                         |  | 15   | 
|Item 3.  |  | Legal Proceedings                                                                                                  |  | 17   | 
|Item 4.  |  | Submission of Matters to a Vote of
  Security Holders                                                              |  | 17   | 
|         |  |                                                                                                                    |  |      | 
|Part II  |  |                                                                                                                    |  |      | 
|Item 5.  |  | Market for the Registrants Common
  Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |  | 18   | 
|Item 6.  |  | Selected Financial Data                                                                                            |  | 19   | 
|Item 7.  |  | Managements Discussion and Analysis
  of Financial Condition and Results of Operations                            |  | 19   | 
|Item 7A. |  | Quantitative and Qualitative
  Disclosures About Market Risk                                                       |  | 33   | 
|Item 8.  |  | Financial Statements and
  Supplementary Data                                                                      |  | 34   | 
|Item 9.  |  | Changes in and Disagreements With
  Accountants on Accounting and Financial Disclosure                             |  | 53   | 
|Item 9A. |  | Controls and Procedures                                                                                            |  | 53   | 
|Item 9B. |  | Other Information                                                                                                  |  | 56   | 
|         |  |                                                                                                                    |  |      | 
|Part III |  |                                                                                                                    |  |      | 
|Item 10. |  | Directors, Executive Officers and
  Corporate Governance                                                           |  | 57   | 
|Item 11. |  | Executive Compensation                                                                                             |  | 57   | 
|Item 12. |  | Security Ownership of Certain
  Beneficial Owners and Management and Related Stockholder Matters                   |  | 57   | 
|Item 13. |  | Certain Relationships and Related
  Transactions, and Director Independence                                        |  | 57   | 
|Item 14. |  | Principal Accountant Fees and
  Services                                                                           |  | 57   | 
|         |  |                                                                                                                    |  |      | 
|Part IV  |  |                                                                                                                    |  |      | 
|Item 15. |  | Exhibits and Financial Statement
  Schedules                                                                       |  | 58   | 
|         |  |                                                                                                                    |  |      | 
|         |  | Signatures                                                                                                         |  | 80   | 

2

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Table of Contents

PART I

This Form 10-K contains
forward-looking statements, as defined in the Private Securities Litigation
Reform Act of 1995, that are based on managements current expectations,
estimates and projections about the industry in which the Company operates and
managements beliefs and assumptions. These forward-looking statements are subject
to important risks and uncertainties that could cause the Companys future
actual results to differ materially from these statements. These statements are
not guarantees of future performance and involve certain risks, uncertainties
and probabilities, that are difficult to predict. Therefore, our actual
outcomes and results may differ materially from what is expressed or forecasted
in these forward-looking statements, whether as a result of new information,
future events or the receipt of new information. See Risk Factors in Item 1A
of this Form 10-K. Readers are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date on which they were
made. Except as otherwise required by law, the Company undertakes no obligation
to update any of its forward-looking statements for any reason.

Item 1.  Business

General
Development of Business

New Ulm Telecom, Inc. was incorporated in 1905 under
the laws of the State of Minnesota, with headquarters in New Ulm, Minnesota.
The Companys principal line of business is the operation of three incumbent
local exchange carriers (ILECs). This business consists of connecting customers
to the telephone network, providing switched service and dedicated private
lines, connecting customers to long distance service providers and providing
many other services associated with ILECs. The Company also provides cable
television services (CATV), Internet access services, including both dial-up
access and high-speed digital subscriber line (DSL) access, and long distance
service. The Company installs and maintains telephone systems to the areas in
and around its ILEC service territory in southern Minnesota and northern Iowa.
The Company began offering service as a competitive local exchange carrier
(CLEC) in the city of Redwood Falls, Minnesota in 2002. The Company also has a
25.18% investment in FiberComm, LC, a CLEC in Sioux City, Iowa.

On November 3, 2006, the Company acquired a 33.33%
ownership interest in Hector Communications Corporation (HCC), which offers
ILEC, CATV, and Internet services to various communities in Minnesota and
Wisconsin.

On January 4, 2008, the Company completed its
acquisition of Hutchinson Telephone Company (HTC), which will operate as a
subsidiary of New Ulm. See note 14 on pages 49 - 50.

The acquisition of HTC has resulted in a combined
company that provides phone, video and internet services with over 50,000
connections in a number of Minnesota and Iowa communities.

For purposes of this report, all references to the Company
mean New Ulm Telecom, Inc. and its subsidiaries.

The Company maintains a website at www.nutelecom.net.
The Companys annual reports on Form 10-K, quarterly reports on Form 10-Q,
and current reports on Form 8-K are available free of charge at
www.nutelecom.net, as soon as reasonably practicable after the material is
filed with or furnished to the SEC.

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The Company and its subsidiaries are organized into
three business segments as follows:

Telecom
Segment

| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | This Segment contains the operations of the Companys
  incumbent local exchange carriers (ILECs): New Ulm Telecom, Inc. (New Ulm),
  the parent company; Western Telephone Company (Western), a wholly-owned
  subsidiary; Peoples Telephone Company (Peoples), a wholly-owned subsidiary;
  the Companys competitive local exchange carrier (CLEC) New Ulm Telecom,
  Inc.; the Companys investment in FiberComm, LC, a CLEC located in Sioux
  City, Iowa; the Companys 33.33% ownership in HCC; Hutchinson Telephone
  Company (HTC) which was acquired in January, 2008 and the Companys
  operations that provide Internet and video services.

Cellular
Segment

| |   |                                                                                                                                                                                                                                                                                                                                                                                       
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | This Segment contains the sales and service of
  cellular phones and accessories, and prior to October 2, 2006 the Companys
  investment in MWH in which New Ulm Cellular #9, Inc. (Cell #9), a
  wholly-owned subsidiary, owned 7.55% and Peoples owned 2.33%. The Companys
  total ownership of MWH was 9.88% as of December 31, 2005 and was sold to
  Alltel on October 2, 2006.

Phonery
Segment

| |   |                                                                                                                                                                                                                                                                                                                                                
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | This Segment contains the sales and service of
  customer premise equipment (CPE) and transport operations of New Ulm Phonery,
  Inc. (Phonery), a wholly-owned subsidiary; Western, and Peoples. This segment
  also contains the resale of long distance toll service operations of New Ulm
  Long Distance, Inc., a wholly-owned subsidiary.

Financial information about the Companys industry
segments is included commencing on Note 15 on page 51 of this Form 10-K.

Narrative Description of Business

Telecom
Segment

The Company generates the
majority of its revenue from its core business, the operation of three
independent telephone companies, its CLEC operations, its Internet and video
operations. The Company conducts this core business in the Telecom Segment.

The Telecom Segment operates
three ILECs (New Ulm, Western, and Peoples) and one CLEC in the City of
Redwood Falls, Minnesota. New Ulm and Western are independent telephone
companies that are regulated by the Minnesota Public Utilities Commission
(MPUC), and Peoples is an independent telephone company that is regulated by
the Iowa Utilities Board (IUB). The Telecom Segment has not experienced a major
change in the scope or direction of its operations during the past year. At
December 31, 2007, the Company served approximately 16,100 access lines.
The Company provides telephone service in Minnesota to the cities of New Ulm,
Courtland, Klossner, Searles, Redwood Falls (city only), Springfield, Sanborn
and the adjacent rural areas in Brown, Nicollet, Blue Earth and Redwood
counties in south central Minnesota, approximately 90 to 120 miles southwest of
Minneapolis, Minnesota. In addition, telephone services are also provided to
the community of Aurelia, IA. The segment also operates ten cable television
systems in Minnesota (including the cities of New Ulm, Courtland, Redwood
Falls, Springfield, Sanborn, Jeffers, Cologne, Mayer, New Market Township, and
New Germany), and one cable television system in Aurelia, Iowa. These systems
serve approximately 5,150 customers. Beginning in 2008, the Company is also
providing telephone and cable television services, through its wholly-owned
subsidiary HTC, primarily to the cities of Hutchinson and Litchfield,
Minnesota.

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The telecom segment derives
its principal revenues from local service charges to its residential and
business subscribers and access charges to inter-exchange carriers for
providing the carriers access to the Companys local phone networks. The
Company also receives revenue from long distance carriers for providing the
billing and collection of long distance toll calls to the Companys
subscribers.

Alternatives to the Companys
service include customers leasing private line switched voice and data
services in or adjacent to the territories served by the Company, which permit
the bypassing of local telephone facilities. In addition, microwave
transmission services, wireless communications, fiber optic and coaxial cable
deployment, Voice over Internet Protocol (VoIP), satellite and other services
permit bypass of the local exchange network. These alternatives to local
exchange service represent a potential threat to the Companys long-term
ability to provide local exchange services at economical rates.

In order to meet the
competition present in the industry, New Ulm, Western and Peoples have deployed
new technology for their local exchange networks to increase operating
efficiencies and to provide new services to their customers. These new
technologies include the latest release of digital switching technology on all
of the ILECs switches and installation of a SS7 out-of-band system for all of
its access lines. New Ulm, Western, and Peoples have also connected fiber rings
(redundant route designs which allow traffic to re-route if trouble appears in
the network) that protect their local networks and enable them to provide a
reliable level of service to their customers. The value of the local network is
also enhanced by the ability of these companies to offer access to high-speed
Internet with DSL to over 98% of their customers. DSL technology offers
customers access to high-speed Internet and traditional voice connectivity over
the same connection. In addition, New Ulm and Western have enhanced their
networks to offer video services over the same facilities that provide their
customers with voice and Internet access. This technology is available to
approximately 85% of their access lines.

New Ulm currently has
competition in the City of Redwood Falls, Minnesota in the provision of
traditional telephone service. Qwest is the incumbent provider. New Ulm entered
Redwood Falls as a CLEC in September 2002. Competition currently exists in the
other communities and areas served by New Ulm, Western or Peoples for
traditional telephone service from wireless communications, and the Company
expects competition to increase from service providers offering VoIP. The
Company is also facing competition in the Minnesota communities of New Ulm,
Redwood Falls, and Springfield in the provision of video services. Comcast is
the incumbent provider for video services in New Ulm and Mediacom is the
incumbent provider in Redwood Falls and Springfield. Several companies also
compete with the Company in providing Internet services. New Ulm, Western, and
Peoples respond to competitive pressure with active programs to market
products, to bundle services and to enhance their infrastructure for higher
customer satisfaction.

Competition also exists for some of the services
provided by inter-exchange carriers, such as customer billing services,
dedicated private lines, and network switching. This competition comes
primarily from the inter-exchange carriers themselves. The provision of these
services is of a contractual nature and is primarily directed by the
inter-exchange carriers. Other services, such as directory advertising,
operator services and cellular communications, are open to competition.
Competition is based primarily on service and customer experience.

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Cellular Segment

The Cellular
Segment derives its revenue from the sales and service of cellular phones and
accessories, and prior to October 2, 2006 from the Companys ownership in MWH
which was sold to Alltel on October 2, 2006. Cell #9 owned a 7.55% and Peoples
owned a 2.33% interest in MWH. MWH provided cellular phone service in southern
Minnesota, northwestern Iowa and southwestern Wisconsin. The Company recorded
equity earnings in MWH from Cell #9s and Peoples equity ownership in MWH.

Phonery Segment

The Phonery
Segment provides sales and service of CPE and transport operations of Phonery,
Western, and Peoples. This segments activities also include the resale of long
distance toll service operations of New Ulm Long Distance, Inc.

The Phonery
Segment is a non-regulated telecommunications business which sells and services
telephone apparatus, toll transport services and provides voice-mail services
on a retail level primarily in the areas served by New Ulm, Western and
Peoples. Phonery specializes in quality custom installation and maintenance of
local networking and transport solutions in telecommunications for end user
customers.

There are a
number of companies engaged in the sale of telephone equipment at the retail
level competing with the Phonery segment. Competition is based primarily on
price, service, and customer experience. No company is dominant in this field.

Regulatory Matters

The Companys
consolidated financial statements are prepared in accordance with accounting
principles generally accepted in the United States of America and, where
applicable, conform to the accounting principles as prescribed by federal and
state telephone utility regulatory authorities.

The
Telecommunications Act passed by the federal government in February 1996 is resulting
in significant changes to the telecommunications industry. The Federal
Communications Commission (FCC) is in the process of determining how
competition will be implemented by setting standards for wholesale pricing,
unbundling local network rates, and interconnection rates. State regulators are
also involved in implementing the transition to a competitive environment, but
the exact roles that the FCC and state regulators will play are yet to be fully
determined.

Interstate
access rates are established by a nationwide pooling of companies known as the
National Exchange Carriers Association (NECA). The FCC established NECA in 1983
to develop and administer interstate access service rates, terms and
conditions. Revenues are pooled and redistributed on the basis of each
companys actual or average costs. There has been a shift in the composition of
interstate access charges in recent years shifting more of the charges to the
end user and reducing the amount of access charges paid by inter-exchange carriers.
The Company believes this trend will continue.

The FCC
continues to examine inter-carrier compensation (payments from one
telecommunications company to another for use of their interconnecting
networks). This examination could lead to significant changes in the way the
Company is compensated for use of its local network in the future.

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The FCC has an
open docket on intercarrier compensation as well as several dockets on VoIP. In
February 2005, the FCC issued a Further Notice of Public Rule Making
and has received voluminous comments reflecting diverse opinions for
intercarrier compensation reform. On July 24, 2006, the National Association of
Regulatory Commissioners Task Force on Intercarrier Compensation filed an
intercarrier compensation reform plan (Missoula Plan) with the FCC. The FCC
sought comments on the Missoula Plan by September 25, 2006 with reply comments
due on or before November 9, 2006.

On November 6,
2006, the Supporters of the Missoula Plan filed a written ex parte proposing an interim process to
address phantom traffic issues (unidentified call traffic) and a related
proposal for the creation and exchange of call detail records. On November 8,
2006, the Wireline Competition Bureau released a Public Notice requesting
comment on the proposed phantom traffic interim process and call detail record
proposal. Thirty-nine (39) comments on this proposal were filed on December 7,
2006 and reply comments were due December 22, 2006.

On December
18, 2006, the Supporters of the Missoula Plan filed a request for additional
time to file reply comments on the phantom traffic proposal. Specifically, the
Supporters of the Missoula Plan requested that the Commission extend the time
for reply comments by two weeks, to January 5, 2007. The FCC agreed that given
the number and length of the comments filed, as well as the importance of the
phantom traffic issue to the industry, a brief amount of additional time to
prepare comprehensive replies to all of the issues raised would serve the
public interest.

On February
16, 2007, the FCC released a Public Notice seeking comment on amendments to
this Missoula Plan that incorporate a proposal addressing issues faced by
early adopter states, i.e. states that have already taken steps to
substantially reduce intrastate access rates. The proposed amendments, referred
to as the Federal Benchmark Mechanism (FBM), were described in an ex parte
letter filed January 30, 2007, and corrected by another filing on February 5,
2007. Comments were due March 19, 2007 and reply comments were due April 3,
2007. The Company cannot predict the outcome of these proceedings nor can it
estimate the impact, if any, on the Company.

On June 27, 2005, the United States Supreme Court reversed a prior
ruling that required cable operators to open up their high-speed Internet lines
to competition. The FCC has recently released regulations intended to spur the
development of broadband services. The Company cannot, at this time, estimate
the revenue impact, if any, related to these events.

The Companys
local exchange telephone companies are subject to the jurisdiction of Minnesota
and Iowa with respect to a variety of matters, including rates for intrastate
access services, the conditions and quality of service. Rates for local
telephone service are not established directly by regulatory authorities, but
their authority over other matters limits the Companys ability to implement rate increases. In addition, the
regulatory process inherently restricts the Companys ability to immediately
pass cost increases along to customers unless the cost increases are
anticipated and the rate increases are implemented prospectively.

State regulators are considering changes to intercarrier compensation.
In Minnesota, a docket had been opened to reduce the access charges paid to the
Company by inter-exchange carriers. The docket was suspended in December 2004,
subsequent to concerns expressed by state agencies regarding increases in local
rates that might result from mandated access reductions. The Company cannot estimate
the effect, if any, of any future potential state access charge changes.

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The Company and its subsidiaries anticipate no material effects on
their capital expenditures, earnings or competitive position because of laws
relating to the protection of the environment.

Competition

As a result of the Telecommunications Act of 1996, telephone companies
no longer have an exclusive franchise service area. Under the law, competitors
may offer telephone service to the Companys customers and request access to
the Companys local network facilities. The law also permits existing telephone
companies to offer telephone service outside their existing franchise service
area. The law includes universal service provisions, interconnection
requirements, and rules mandating how competition will be implemented. The FCC
and state regulatory agencies are responsible for establishing rule-making
procedures to implement the law. The rule-making procedures are not complete
and a number of court cases have already been filed challenging various aspects
of the rules and procedures. Until the rule-making procedures are complete and
the court issues settled, the Company cannot predict how this law will affect
its business.

Since the mid-1990s, the Companys business strategy has been to
position itself as a one-stop telecommunications provider. The Company
believes that its customers value the fact that it is the local company whose
goal is to meet the customers total communications needs. The Company believes
that it has several competitive advantages: its prices and costs are low; its
service quality and reputation are high; its commitment to the communities it
services is outstanding; its investment in technology is strong; and it has a
direct billing relationship with almost all of the customers in its service
territories.

The long-range effect of competition on the provision of
telecommunications services and equipment will depend on technological
advances, regulatory actions at the state and federal levels, court decisions,
and possible additional future state and federal legislation. The trend
resulting from past legislation has been to expand competition in the
telecommunications industry.

Employees

As of March 1,
2008, the Company had 75 full-time equivalent employees, excluding employees of
HTC, which the Company acquired in January 2008.

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Executive Officers of
the Registrant

Set forth below are the names, ages and
positions of the executive officers of the Company as of March 1, 2008.

|                   |  |                                                     
|------------------ |  | ----------------------------------------------------
|Name and Age       |  | Position                                            
|                   |  |                                                     
|                  
|Bill Otis          |  | President and Chief Executive Officer               
|(50)               |  | - New Ulm Telecom, Inc.                             
|                   |  |                                                     
|Barbara Bornhoft   |  | Vice-President and Chief Operating Officer/Secretary
|(51)               |  | - New Ulm Telecom, Inc.                             
|                   |  |                                                     
|Nancy Blankenhagen |  | Chief Financial Officer and Treasurer               
|(47)               |  | - New Ulm Telecom, Inc.                             

The executive officers of the Company are elected annually and serve at
the discretion of the Board of Directors. Mr. Otis, President and Chief
Executive Officer and Ms. Bornhoft, Vice-President and Secretary have written
employment contracts. The Companys other executive officer is not employed
pursuant to a written employment contract. There are no familial relationships
between any director or executive officer, except that the Chairman of the
Board, Mr. James P. Jensen is the brother-in-law of Director, Mr. Gary Nelson.

Background of Executive Officers

Bill Otis has been President and Chief Executive Officer of the Company
since 1985. Prior to being President and Chief Executive Officer of the
Company, he was the Office Manager/Controller for New Ulm Telecom, Inc. from
1979 to 1985. Mr. Otis is also a director of Hector Communications Corporation
and serves as its Chairman of the Board and President.

Barbara Bornhoft has been Vice President and Chief Operating
Officer/Secretary of the Company since 1998. Ms. Bornhoft has been employed
with New Ulm Telecom, Inc. since 1990. Ms. Bornhoft is also a director of
Hector Communications Corporation.

Nancy Blankenhagen has been Chief Financial Officer/Treasurer of the
Company since May 2004. She was the Interim Chief Financial Officer/Treasurer
of the Company from February 2004 to May 2004. Prior to that role, she had been
an accountant for the Company since 1989.

Item 1A.    Risk Factors.

The Companys business faces many risks, all of which may not be
described below. Additional risks of which the Company is currently unaware or
believes to be immaterial may also result in events that could impair its
business operations. If any of the events or circumstances described in the
following risks actually occur, the Companys business, financial condition or
results of operations may suffer, and the trading price of its stock could
decline.

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The Company is subject to
increased competition in core business segments that may adversely impact it.

As
an incumbent carrier, the Company historically has experienced limited
competition in its rural telephone company markets. Nevertheless, the market
for communications services is highly competitive. Regulation and technological
innovation change quickly in the communications industry, and changes in these
factors historically have had, and may in the future have, a significant impact
on competitive dynamics. In most of the Companys rural markets, it faces
competition from wireless technology, which may increase as wireless technology
improves. The Company also faces competition from wireline and cable television
operators. The Company may face additional competition from new market entrants
such as providers of wireless broadband, Voice over Internet Protocol,
satellite communications and electric utilities. The Internet services market
is also highly competitive, and the Company expects that competition will
intensify. Many of the Companys competitors have brand recognition, and have
financial, personnel, marketing and other resources that are significantly
greater than the Companys. In addition, consolidation and strategic alliances
within the communications industry or the development of new technologies could
affect the Companys competitive position. The Company cannot predict the
number of competitors that will emerge, especially as a result of existing or
new federal and state regulatory or legislative actions, but increased
competition from existing and new entities could have a material adverse effect
on the Companys business.

Competition
may lead to loss of revenues and profitability as a result of numerous factors,
including:

| |   |                                                                                                                                          
| | - | -----------------------------------------------------------------------------------------------------------------------------------------
| |  | loss
 of customers;                                                                                                                      
| |   |                                                                                                                                          
| |  | reduced
 usage of the Companys network by its existing customers who may use alternative
 providers for long distance and data services;
| |   |                                                                                                                                          
| |  | reductions
 in the prices for the Companys services which may be necessary to meet
 competition; and                                    
| |   |                                                                                                                                          
| |  | increases
 in marketing expenditures and discount and promotional campaigns.                                                             

In
addition, the Companys provision of long distance service is subject to a
highly competitive market served by large nation-wide carriers that enjoy brand
name recognition.

The Companys businesses may be
adversely affected if it is unable to hire and retain qualified employees.

The
Companys performance is largely dependent on the talents and efforts of highly
skilled individuals in the operations of its telecommunication businesses,
including telephone operations and telecommunications equipment sales and service.
Technological advances force the Companys employees to upgrade their knowledge
base continually in order to keep pace with these advances. The Companys
ability to compete effectively depends upon its ability to retain and motivate
its existing employees, and attract new qualified employees.

The Company may not be able to
successfully introduce new products and services.

The
Companys success depends upon its ability to successfully introduce new
products and services, such as the ability of its competitive local exchange
carrier (CLEC) business, which was initiated in 2002 in the City of Redwood
Falls, MN, to provide competitive local service in a new market, the Companys
ability to offer bundled service packages on terms attractive to its customers,
and the Companys ability to successfully expand its service offerings
geographically.

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The
Company may not accurately predict technological trends or the success of new
products in these markets. New product development often requires long-term forecasting
of market trends, development and implementation of new technologies and
processes and substantial capital investment. In addition, the Company does not
know whether its products and services will meet with market acceptance or be
profitable. Many of the Companys competitors have greater resources than the
Company does. If the Company fails to anticipate or respond in a cost-effective
and timely manner to technological developments, changes in industry standards
or customer requirements, experiences any significant delays in product
development or introduction, or if any of the Companys relationships with its
vendors are negatively impacted, the Companys business, operating results and
financial condition could be materially adversely affected.

Shifts in the Companys product
mix may result in declines in operating income.

Possible
changes in the demand for the Companys products and services including
lower-than-anticipated-demand for telephone services, reductions in access
lines per household or minutes of use volume associated with telephone service,
migration in technology from circuit switched to IP based technology for
services, and for network solutions for the Companys Telecom segment, may
result in lower gross margins and operating profitability. In addition,
operating income could decrease based on the amount of new products the Company
sells that have lower start-up gross margins than its existing products and
services. All of these factors could reduce the Companys operating income.

Technological advances in the
telecommunications industry create increased operating costs.

The
telecommunications industry has seen ever increasing technological advances
over the past several years. These technological advances increase costs to
maintain and improve networks and provide top-end communication products and
services that are demanded by the Companys customer base in order to stay
competitive with other companies that offer similar services. Wireless
communications, mobile/non-fixed point service and various Internet and
satellite communication innovations also create technological competition for
the Company.

Future regulation may result in
lower revenues.

The
outcome of future regulatory and judicial proceedings pertaining to
interconnection agreements and access charge reform may result in
greater-than-anticipated reductions in revenues received from federal and state
access charges related to long distance traffic. Regulatory rules and policies
also may adversely affect the Companys ability to change its prices for
telephone services in response to competitive pressures.

The Company may not generate
sufficient funds from operations to fund future liquidity needs.

The Company
may not retain a sufficient amount of cash to finance a material expansion of
its business, or to fund its operations consistent with past levels of funding
in the event of a significant business downturn. In addition, because
historically the Company has distributed a portion of available cash to its
shareholders in the form of dividends, the Companys ability to pursue any
material expansion of its business, including through acquisitions or increased
capital spending, may depend on its ability to obtain financing. There can be
no assurance that such financing will be available to the Company on acceptable
terms.

11

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The Companys
ability to consummate acquisitions and to make payments on its indebtedness
will depend on its ability to generate cash flow from operations in the future.
This ability, to a certain extent, is subject to general economic, financial,
competitive, legislative, regulatory and other factors that are beyond the
Companys control. There can be no assurance that the business will generate
sufficient cash flow from operations or that future borrowings will be
available to the Company in an amount sufficient to enable payment of
indebtedness or to fund other liquidity needs.

A significant
amount of cash flow from operations will be dedicated to capital expenditures
and debt service. In addition, the Company currently expects to distribute a
portion of its cash flow to its stockholders in the form of quarterly
dividends. As a result, the Company may not retain a sufficient amount of cash
to finance growth opportunities, including acquisitions, or unanticipated
capital expenditures or to fund its operations. In addition, if capital
expenditures are reduced, the regulatory settlement payments the company
receives may decline.

A failure in operational systems or
infrastructure could impair liquidity, disrupt business, damage the Companys
reputation and cause loss.

Shortcomings
or failures in the Companys internal processes, people or systems could impair
its liquidity, disrupt its business, result in liability to customers or
regulatory intervention, damage the Companys reputation or result in financial
loss. For example, telephone operations rely on a central switch to complete
local and long distance phone calls to various customers. An interruption in
the switch operations could lead to interrupted service for customers. In
addition, financial, accounting, data processing or other operating systems and
facilities may fail to operate properly or become disabled as a result of
events that are wholly or partially beyond the Companys control, thereby
adversely affecting its ability to process transactions. Despite the existence
of contingency plans, the Companys ability to conduct business may be
adversely impacted by a disruption in the infrastructure that supports its
businesses and the communities in which these businesses are located.

Unanticipated increases in capital spending,
operating or administrative costs, or the impact of new business opportunities
requiring significant up-front investments.

The Company
operates in cash-flow-dependent businesses. Its existing networks require large
capitalized up-front investments for growth and maintenance. Its operating
expenses in the form of payroll for a highly trained workforce and the
maintenance cost of telecommunications networks are also large uses of cash.
Its debt service obligation and dividends to shareholders also require
significant cash each year. New business development may require additional
up-front investment in assets and funding of early stage operating losses. The
risk is from any sudden unanticipated increases in cash outflow. This could
alter the Companys future business plans, which possibly could affect its
growth.

12

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Customer payment defaults could have an
adverse effect on the Companys financial condition and results of operations.

As a result of
adverse conditions in the communications market, some inter-exchange carriers
(IXCs) have experienced and may continue to experience serious financial
difficulties. In some cases these
difficulties have resulted or may result in bankruptcy filings or cessation of
operations. If IXCs experiencing financial problems default on paying amounts
owed, the Company may not be able to collect these amounts or recognize
expected revenue. It is possible those customers from whom the Company expects
to derive substantial revenue will default or that the level of defaults will
increase. Any material payment defaults by customers would have an adverse
effect on results of operations and financial condition. The Company currently
manages this exposure through an allowance for doubtful accounts. An unexpected
bankruptcy or default from an IXC may not be fully reserved in the allowance.

The Companys stock price is volatile.

Based on the
trading history of the Companys common stock and the nature of the market for
publicly traded securities of companies in the telecommunications industry, the
Company believes that some factors have caused and are likely to continue to
cause the market price of its common stock to fluctuate substantially. These
fluctuations could occur day-to-day or over a longer period of time. The
factors that may cause such fluctuations include, without limitation:

| |   |                                                                                                                                  
| | - | ---------------------------------------------------------------------------------------------------------------------------------
| |  | announcements of new products and services
  by the Company or its competitors;                                                  
| |   |                                                                                                                                  
| |  | quarterly fluctuations in the Companys
  financial results or the financial results of the Companys competitors or
  customers;
| |   |                                                                                                                                  
| |  | increased competition with the Companys
  competitors or among its customers;                                                   
| |   |                                                                                                                                  
| |  | consolidation among the Companys
  competitors or customers;                                                                    
| |   |                                                                                                                                  
| |  | disputes concerning intellectual property
  rights;                                                                              
| |   |                                                                                                                                  
| |  | the financial health of New Ulm Telecom,
  Inc., its competitors or its customers;                                               
| |   |                                                                                                                                  
| |  | developments in telecommunications
  regulations;                                                                                
| |   |                                                                                                                                  
| |  | general economic conditions in the U.S. or
  internationally;                                                                    
| |   |                                                                                                                                  
| |  | thinly traded stock; and                                                                                                         
| |   |                                                                                                                                  
| |  | rumors or speculation regarding New Ulm
  Telecom, Inc.s future business results and actions.                                   

In addition,
stocks of companies in the telecommunications industry in the past have
experienced significant price and volume fluctuations that are often unrelated
to the operating performance of such companies. Any such market volatility may
adversely affect the market price of the Companys common stock.

If the Company seeks to secure additional
financing, it may not be able to obtain it.

The Company
currently anticipates that its available cash resources, which include its
existing cash and cash equivalents, will be sufficient to meet its anticipated
needs for working capital and capital expenditures to execute its near-term
business plan, based on current business operations and economic conditions. If
the Company estimates are incorrect and it is unable to generate sufficient
cash flows from operations, the Company has the ability to use funds available
under the loans established in January 2008. The Company entered into an
agreement to purchase HTC for $78 million as of January 4, 2008. The Company
borrowed approximately $60 million from Co-Bank to finance the acquisition.

13

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The Companys future success will
depend in part on its ability to profitably manage Hector Communications
Corporation and Hutchinson Telephone Company

On November 3, 2006, New Ulm
Telecom, Inc. acquired a one-third interest in Hector Communications
Corporation. On January 4, 2008, New Ulm completed the acquisition of
Hutchinson Telephone Company as a wholly-owned subsidiary for approximately $78
million.

The acquisition of any new
business always carries with it certain risks. There can be no assurance that
the Company will be able to integrate and profitably operate Hutchinson
Telephone Company, or that the Company, together with its partners, will be
able to profitably manage Hector Communications Corporation. The Companys
failure to profitably operate either Hector Communications Corporation or
Hutchinson Telephone Company could have an adverse effect on the Company.

The Company incurred significant
debt in connection with its acquisition of Hutchinson Telephone Company,
pledged its assets to the lender and agreed to limitation on its dividends.

In connection with its
January 2008 acquisition of Hutchinson Telephone Company, the Company borrowed
approximately $60 million from CoBank, ACB. In connection with these
borrowings, New Ulm and HTC and their respective subsidiaries have
entered into security agreements under which substantially these entities
assets have been pledged to CoBank for performance under the loans. In
addition, New Ulm, HTC and their respective subsidiaries have all guaranteed
all the obligations under the credit facility. These loan agreements also put
restrictions on the ability of New Ulm to pay cash dividends to its shareholders, but New Ulm is allowed
to pay dividends (a) (i) in an amount up to $2,050,000 in any year and (ii) in
any amount if New Ulms Total Leverage Ratio that is, the ratio of its
Indebtedness to EDBITA (in each case as defined in the loan documents) is less
than 2:75 to 1:00, and (b) in either case if New Ulm is not in default or
potential default under the credit agreements. If New Ulm fails to comply with
these covenants, its ability to pay dividends would be limited.

New Ulm must comply with the Section 404 in
connection with its 2006 year end financial statements and subsequent years

As of June 30,
2006 (the last day of the second quarter of the Companys 2006 fiscal year),
the market capitalization for the Companys common stock held by non-affiliates
(persons other than directors and officers) was approximately $81 million. The
Company therefore became an accelerated filer in connection with its filing of
the financial statements for the year ended December 31, 2006.

As a result,
the Company became subject to the internal control assessment provisions of
Section 404 of the Sarbanes-Oxly Act of 2002. The Company, under the
supervision of its management, conducted an assessment of its internal
controls. The Company determined that there was a material weakness in its
internal control over reliance on an outside consultant as of December 31,
2006. The Company determined that it did not have adequate controls over an
outside consultant. The Company had hired an outside consultant to prepare its
Carrier Access Billings (CABs). At December 31, 2006, the Company did not have
in place an internal review process to ensure that the amounts being invoiced
to inter-exchange carriers contained the correct rates and number of access
minutes billed. As of December 31, 2007 the Company had contracted with Mid
America Computer Corp.
(MACC) to perform its carrier access billing. MACC has documented and certified
controls as evidenced by its SAS 70 certification.

14

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The Company
was able to remediate this material weakness from December 31, 2006. No
material weakness was noted in 2007; however, there can be no assurance that
the Company may not suffer additional material weaknesses in the future.

Item 1B.
   Unresolved Staff Comments.

None.

Item 2.   Properties

The three operating
telephone companies (New Ulm, Western and Peoples) own central office
equipment, which is used to record, switch and transmit telephone calls, as
described below.

New Ulms host central
office equipment was purchased in 1991 and consists of a Nortel Networks
DMS-100/200 digital switch. New Ulm also has remote switching sites in three
locations: two in New Ulm and one in the city of Courtland. The equipment at
these remote switching sites is housed within specially designed central office
equipment buildings. In 2005, the Company installed a Tekelec T7000 softswitch
that is located in the New Ulm central office.

Western installed Nortel
Networks remote central office equipment in 1996. This remote switching
equipment utilizes the host switch in New Ulm. Western also has a remote
switching site in the city of Sanborn. The equipment at Sanborn is housed
within a specially designed central office equipment building.

Peoples central office
equipment was installed in 1999 and consists of a Nortel Networks RSC digital
remote switch. Peoples leases host switching facilities from FiberComm, LC, in
which it owns a 25.18% equity interest.

The Company believes that
its property is suitable and adequate to provide the necessary services and
believes all properties are adequately insured. Note 5 to the financial
statements, found on page 44 of this document, describes the mortgages and
collateral relating to the above referenced properties, while Note 2 to the
financial statements, found on page 42 of this document, describes the
Companys depreciation policy.

The Company owns various
buildings and related land as follows:

| |     |                                                                                                                                                                                                                                                                                                                                                                                                  
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (1) | New Ulm owns a building
  that is located at 400 Second Street North, New Ulm, Minnesota. It was
  originally constructed in 1918, with various additions and remodeling through
  the years. This building contains business offices and central office
  equipment. The building also has warehouse and garage space. This building contains
  approximately 23,700 square feet of floor space.
| |     |                                                                                                                                                                                                                                                                                                                                                                                                  
| | (2) | New Ulm owns a warehouse
  that is located at 1201 North Front Street, New Ulm, Minnesota. The warehouse
  has 13,680 square feet of space and is used primarily as a storage facility
  for trucks, generators, trailers, plows and inventory used in outside plant
  construction.                                                                                                             
| |     |                                                                                                                                                                                                                                                                                                                                                                                                  
| | (3) | New Ulm owns three remote
  central office buildings that are located on the north side of New Ulm, the
  south side of New Ulm, and in Courtland. These buildings contain central
  office equipment that remote off New Ulms main central office equipment.                                                                                                                                   

15

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| |      |                                                                                                                                                                                                                                                                                                                                                                                                          
| | ---- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (4)  | New Ulm owns three towers
  and the land on which they are constructed. One is located north/northwest of
  the city of New Ulm along Highway 14 in Nicollet County, another is located
  north of St. George, Minnesota, and the third is located at the 400 Second
  North location.                                                                                                                   
| |      |                                                                                                                                                                                                                                                                                                                                                                                                          
| | (5)  | New Ulm owns land located
  at the corner of 7th Street South and Valley Street in New Ulm, Minnesota.
  This lot is utilized as storage for poles and cable inventory and contains
  approximately 5,000 square feet of fenced-in storage area.                                                                                                                                                         
| |      |                                                                                                                                                                                                                                                                                                                                                                                                          
| | (6)  | New Ulm leases a building
  located at 27 North Minnesota, New Ulm, Minnesota. The building contains
  approximately 14,000 square feet of space and is used primarily as a retail
  location housing customer support services and the corporate business office.                                                                                                                                       
| |      |                                                                                                                                                                                                                                                                                                                                                                                                          
| | (7)  | New Ulm owns a building
  located at 137 E. 2nd Street, Redwood Falls, Minnesota. This building
  contains business offices and central office equipment. This building
  contains approximately 1,540 square feet of floor space.                                                                                                                                                                       
| |      |                                                                                                                                                                                                                                                                                                                                                                                                          
| | (8)  | New Ulm owns three remote
  equipment office buildings in Redwood Falls, Minnesota that are located at
  1105 South Mill Street, 220 Veda Drive and 620 Walnut Street. These buildings
  contain central office equipment that remote off New Ulms main central
  office equipment.                                                                                                                     
| |      |                                                                                                                                                                                                                                                                                                                                                                                                          
| | (9)  | New Ulm owns two
  additional parcels within the city limits of New Ulm. The first is parcel,
  legally described as Lot 3, Block 1 and Lot 2 Block 3, Airport Industrial
  Park, on which a new remote and retail facility is being constructed. The
  second parcel is legally described as Lot 3, Block 1 Bridge Street Industrial
  Park First Addition which is vacant and available for future use.
| |      |                                                                                                                                                                                                                                                                                                                                                                                                          
| | (10) | Western owns a building at
  22 South Marshall, Springfield, Minnesota. This building contains the
  business office and central office equipment. This building contains
  approximately 2,100 square feet of floor space.                                                                                                                                                                              
| |      |                                                                                                                                                                                                                                                                                                                                                                                                          
| | (11) | Western owns a building in
  Sanborn, Minnesota, which contains central office equipment that remotes off
  Westerns central office equipment.                                                                                                                                                                                                                                                          
| |      |                                                                                                                                                                                                                                                                                                                                                                                                          
| | (12) | Western owns a warehouse
  located at 22 South Marshall, Springfield, Minnesota. This building is used
  as a storage facility for vehicles, other work equipment and inventory used
  in outside plant construction. This building contains approximately 3,750
  square feet of space.                                                                                                                 
| |      |                                                                                                                                                                                                                                                                                                                                                                                                          
| | (13) | Western owns a tower in
  the city of Sanborn. Western has a lease on the land on which the tower is
  located.                                                                                                                                                                                                                                                                                          
| |      |                                                                                                                                                                                                                                                                                                                                                                                                          
| | (14) | Peoples owns a building at
  221 Main Street, Aurelia, Iowa that houses the business office, central
  office equipment and cable television head-end equipment. The building
  contains approximately 1,875 square feet of floor space.                                                                                                                                                                 
| |      |                                                                                                                                                                                                                                                                                                                                                                                                          
| | (15) | Peoples owns a building
  that is adjacent to its main office building at 217 Main Street, Aurelia,
  Iowa. This building is available to expand the present main office building.
  The building contains approximately 1,875 square feet of floor space.                                                                                                                                               
| |      |                                                                                                                                                                                                                                                                                                                                                                                                          
| | (16) | Peoples owns a building at
  133 1⁄2 Main Street, Aurelia, Iowa, that contains approximately 1,100 square
  feet of warehouse space and 525 square feet of office space.                                                                                                                                                                                                                                   

16

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| |      |                                                                                                                                                                                                                                   
| | ---- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (17) | Peoples also owns a vacant
  lot at 121 Main Street, Aurelia, Iowa, that is 25 x 100.                                                                                                                                           
| |      |                                                                                                                                                                                                                                   
| | (18) | In connection with the
  Companys acquisition of HTC on January 4, 2008, the Company acquired
  buildings and facilities located at 235 Franklin Street SW, Hutchinson,
  Minnesota and 421 South CSAH 34, Litchfield, Minnesota.

In addition, New Ulm, Western
and Peoples own the lines, cables and associated outside physical plant
utilized in providing telephone and cable television service in their service
areas.

The Phonery owns equipment
leased to subscribers such as telephone sets and other similarly used
instruments.

In connection with the
Companys acquisition of HTC on January 4, 2008, the Company acquired buildings
and facilities. These include but are not limited to, the office building
located at 235 Franklin Street and a warehouse located at 345 Michigan Street,
both in Hutchinson, Minnesota and the office building located at 421 South CSAH
34 in Litchfield, Minnesota.

Item 3.
   Legal Proceedings

As of March 12, 2008, there
was no material litigation pending or threatened involving the Registrant or
any of its subsidiaries in any court, nor are there any proceedings known to be
contemplated by governmental authorities.

Item 4.   Submission of Matters to a Vote of Security Holders

No matters were submitted to a
vote of security holders during the fourth quarter of the fiscal year covered
by this Form 10-K.

17

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Table of Contents

PART II

Item
5.   Market for the
Registrants Common Equity, Related Stockholder Matters, and Issuer
Purchases of Equity Securities

The Companys
common stock is traded on the OTC Bulletin Board under the symbol NULM. The
table below sets forth the approximate high and low bid prices for the
Companys common stock for the periods indicated as reported by the OTC
Bulletin Board. Such over-the-counter market quotations reflect inter-dealer
prices, without retail mark-up, mark-down or commission and may not necessarily
reflect actual transactions.

|            |  |              |       |     |   |       | 
|----------- |  | ------------ | ----- | --- | - | ----- | 
|            |  | Common Stock |      
|            |  |              |      
|            |  | High         |       | Low |  
|            |  |              |       |     |  
|2007:       |  |              |       |     |   |       | 
|1st quarter |  | $            | 12.50 |     | $ | 10.70 | 
|2nd quarter |  | $            | 13.13 |     | $ | 11.00 | 
|3rd quarter |  | $            | 15.00 |     | $ | 11.90 | 
|4th quarter |  | $            | 13.25 |     | $ | 10.50 | 
|            |  |              |       |     |   |       | 
|2006:       |  |              |       |     |   |       | 
|1st quarter |  | $            | 17.00 |     | $ | 15.20 | 
|2nd quarter |  | $            | 17.25 |     | $ | 15.50 | 
|3rd quarter |  | $            | 17.00 |     | $ | 15.00 | 
|4th quarter |  | $            | 16.75 |     | $ | 10.40 | 

Record Holders

As of February
21, 2008, there were approximately 1,358 holders of record of the Companys
common stock.

Dividends

The Board of
Directors review quarterly dividend declarations based on anticipated earnings,
capital requirements and the operating and financial condition of the Company.
There were security and loan agreements underlying CoBank, ACB notes in 2005
and 2006, that contained certain restrictions on distributions to stockholders
and investment in, or loans to, others. Loan documents entered into by the
Company in 2008 contain certain restrictions on distributions to stockholders
and investments in, or loans to, others.

The following
table shows the per share dividend payments in 2007, 2006 and 2005.

|                       |  |      |        |      |   |        |  |   |        | 
|---------------------- |  | ---- | ------ | ---- | - | ------ |  | - | ------ | 
|                       |  | 2007 |        | 2006 |   | 2005   | 
|                       |  |      |        |      |   |        | 
|First
  Quarter        |  | $    | 0.1000 |      | $ | 0.0900 |  | $ | 0.0833 | 
|Second
  Quarter       |  | $    | 0.1000 |      | $ | 0.0900 |  | $ | 0.0833 | 
|Third Quarter          |  | $    | 0.1000 |      | $ | 0.0900 |  | $ | 0.0833 | 
|Fourth
  Quarter       |  | $    | 0.1000 |      | $ | 0.0900 |  | $ | 0.0900 | 
|Special
  Dividend     |  |      |       |      | $ | 2.7500 |  |   |       | 
|                       |  |      |        |      |   |        |  |   |        | 
|Total
  Dividends Paid |  | $    | 0.4000 |      | $ | 3.1100 |  | $ | 0.3399 | 
|                       |  |      |        |      |   |        |  |   |        | 

18

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Table of Contents

Item 6.   Selected Financial
Data

Selected
Income Statement Data for the Company (consolidated):

|                                       |  |                        |            |      |   |            |  |      |            |      |   |            |  |   |            | 
|-------------------------------------- |  | ---------------------- | ---------- | ---- | - | ---------- |  | ---- | ---------- | ---- | - | ---------- |  | - | ---------- | 
|                                       |  | Year Ended December 31 |           
|                                       |  |                        |           
|                                       |  | 2007                   |            | 2006 |   | 2005       |  | 2004 |            | 2003 |  
|                                       |  |                        |            |      |   |            |  |      |            |      |  
|Operating Revenues                     |  | $                      | 17,300,936 |      | $ | 16,882,234 |  | $    | 17,344,837 |      | $ | 15,100,567 |  | $ | 15,841,037 | 
|                                       |  |                        |            |      |   |            |  |      |            |      |   |            |  |   |            | 
|Operating Expenses                     |  |                        | 14,239,568 |      |   | 13,531,118 |  |      | 13,071,656 |      |   | 12,468,846 |  |   | 11,867,260 | 
|                                       |  |                        |            |      |   |            |  |      |            |      |   |            |  |   |            | 
|Operating Income                       |  |                        | 3,061,368  |      |   | 3,351,116  |  |      | 4,273,181  |      |   | 2,631,721  |  |   | 3,973,777  | 
|                                       |  |                        |            |      |   |            |  |      |            |      |   |            |  |   |            | 
|Other Income                           |  |                        | 4,583,457  |      |   | 56,065,372 |  |      | 5,112,117  |      |   | 2,964,020  |  |   | 2,393,527  | 
|                                       |  |                        |            |      |   |            |  |      |            |      |   |            |  |   |            | 
|Income Taxes                           |  |                        | 3,061,853  |      |   | 24,305,283 |  |      | 3,925,246  |      |   | 2,303,992  |  |   | 2,554,550  | 
|                                       |  |                        |            |      |   |            |  |      |            |      |   |            |  |   |            | 
|Net Income                             |  |                        | 4,582,972  |      |   | 35,111,205 |  |      | 5,460,052  |      |   | 3,291,749  |  |   | 3,812,754  | 
|                                       |  |                        |            |      |   |            |  |      |            |      |   |            |  |   |            | 
|Basic and Diluted Net Income Per Share |  |                        | .90        |      |   | 6.86       |  |      | 1.07       |      |   | .64        |  |   | .75        | 
|                                       |  |                        |            |      |   |            |  |      |            |      |   |            |  |   |            | 
|Dividends Per Share                    |  |                        | .40        |      |   | 3.11       |  |      | .34        |      |   | .33        |  |   | .33        | 
|                                       |  |                        |            |      |   |            |  |      |            |      |   |            |  |   |            | 

Selected Balance Sheet Data:

|                     |  |                        |            |      |   |            |  |      |            |      |   |            |  |   |            | 
|-------------------- |  | ---------------------- | ---------- | ---- | - | ---------- |  | ---- | ---------- | ---- | - | ---------- |  | - | ---------- | 
|                     |  | Year Ended December 31 |           
|                     |  |                        |           
|                     |  | 2007                   |            | 2006 |   | 2005       |  | 2004 |            | 2003 |  
|                     |  |                        |            |      |   |            |  |      |            |      |  
|Current Assets       |  | $                      | 11,649,394 |      | $ | 32,241,708 |  | $    | 4,273,791  |      | $ | 4,679,446  |  | $ | 5,459,456  | 
|                     |  |                        |            |      |   |            |  |      |            |      |   |            |  |   |            | 
|Current Liabilities  |  |                        | 2,359,781  |      |   | 23,505,397 |  |      | 4,917,710  |      |   | 4,452,826  |  |   | 4,214,536  | 
|                     |  |                        |            |      |   |            |  |      |            |      |   |            |  |   |            | 
|Working Capital      |  |                        | 9,289,613  |      |   | 8,736,311  |  |      | (643,919   | )    |   | 226,620    |  |   | 1,244,920  | 
|                     |  |                        |            |      |   |            |  |      |            |      |   |            |  |   |            | 
|Total Assets         |  |                        | 59,052,895 |      |   | 80,055,841 |  |      | 55,303,909 |      |   | 53,835,368 |  |   | 53,330,534 | 
|                     |  |                        |            |      |   |            |  |      |            |      |   |            |  |   |            | 
|Long-Term Debt       |  |                        | 88,915     |      |   | 106,132    |  |      | 15,114,426 |      |   | 17,630,413 |  |   | 20,145,630 | 
|                     |  |                        |            |      |   |            |  |      |            |      |   |            |  |   |            | 
|Stockholders Equity |  |                        | 53,284,651 |      |   | 50,747,853 |  |      | 31,545,651 |      |   | 27,824,338 |  |   | 26,238,457 | 
|                     |  |                        |            |      |   |            |  |      |            |      |   |            |  |   |            | 
|Book Value Per Share |  |                        | 10.42      |      |   | 9.92       |  |      | 6.17       |      |   | 5.44       |  |   | 5.13       | 

Item
7.   Managements
Discussion and Analysis of Financial Condition and Results of Operations

The Companys future results of operation and
other forward-looking statements are subject to risks and uncertainties,
including, but not limited to, the effects of deregulation in the
telecommunications industry as a result of the Telecommunications Act of 1996.
These forward-looking statements are subject to risks and uncertainties that
could cause the Companys actual results to differ materially from these
statements and the Company disclaims any obligation to update or revise any forward-looking
statements based on the occurrence of future events or the receipt of new
information. See Risk Factors in Item 1A of this Form 10-K.

19

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Table of Contents

Results of Operations for 2007, 2006 and 2005

The Company
operates three business segments: Telecom, Cellular and Phonery. The majority
of its operations consist of the Telecom Segment that provides telephone and
related ancillary services, Internet services, and cable television services to
several communities in Minnesota and Iowa. The Cellular Segment includes the
sale and service of cellular phones and accessories, and a 9.88% interest in
MWH (sold to Alltel on October 2, 2006), which it recorded on the equity method
of accounting due to the influence the Company had over the operations and
management of MWH. The Phonery Segment includes the sales and service of
customer premise equipment (CPE), transport operations, and the resale of long
distance toll service.

Consolidated Results of Operations

2007 Compared to 2006

|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 2007
  consolidated revenues were $17,301,000, compared with $16,882,000 in 2006, an
  increase of $419,000, or 2.5%.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|  | The Telecom
  segment showed decreased local network revenue of approximately $80,000. This
  decrease, a common industry trend, was due to declining access lines as
  customers increasingly utilized their wireless phones, dropped second phone
  lines in their homes when they moved their Internet service from a dial-up
  platform to a DSL platform, and utilized Voice over Internet Protocol (VoIP)
  or other services that bypass the local exchange network. With DSL, one
  access line allows customers to use their phone and be connected to the
  Internet at the same time.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|  | The Telecom
  segment experienced decreases in its operating revenues resulting from a
  decrease in access revenue. The decline in access revenue reflects industry
  trends of declining access usage and continued downward pricing pressures.
  The Telecom segments decrease in operating revenues is primarily due to
  these trends. Partially offsetting the decrease in access revenue, the
  Telecom segment experienced increases in unregulated revenues for video and
  Internet services due to an increase in customers. The Company anticipates
  that it will continue to be affected by the common industry trends of
  declining access minutes of use and reduced access rates.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|  | The Company
  believes, despite the negative industry trends, that the revenues in the
  Telecom Segment will experience future growth. The Company expects that the
  decreases in access revenue will be offset by growth from new and expanded
  service offerings: digital video and digital subscriber line (DSL), Internet
  service provision, and the complete array of the Companys services offered
  through its Competitive Local Exchange Carrier (CLEC) in the City of Redwood
  Falls, Minnesota. The Company also expects that the continued marketing of
  service bundles, which offer customers discounts for subscribing to multiple
  services, will help retain current customers and attract new customers. Also,
  the Company continually evaluates new and emerging technologies to keep the
  Companys service offerings innovative and competitive. The Telecom segment
  has made significant investments in its infrastructure, which has allowed it
  to enhance its local network so that it can offer a triple-play of services
  to its subscribers. In the telecommunications industry, a triple-play of
  services refers to offering telephone, Internet, and video services over the
  same infrastructure. The Company expects that continued investment in its infrastructure
  will allow it to continue to expand its offerings to customers including new
  technologies as they emerge, such as hi-definition television (HDTV)
  introduced in 2007, and that the geographic expansion of the Companys
  service offerings will provide this segment with continued future growth. The
  Telecom segment invested $4,005,000 in its
  infrastructure in 2007, which allowed it to enhance its local network, and
  offer new services to its subscribers.

20

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|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|  | The Cellular
  segment experienced a $160,000 increase in revenues due to an increase in its
  sales and service revenues of cellular phones and accessories. The Phonery
  segment had a $191,000 increase in revenues, primarily due to an increase in
  transport revenues.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | 2007
  consolidated operating expenses were $14,240,000, compared with $13,531,000
  in 2006, an increase of $709,000 or 5.2%. The Telecom segment had an increase
  of $379,000 due to expenses from an increase in the number of customers
  subscribing to Internet and video services, additional plant operating
  expenses associated with the maintenance of its infrastructure, and
  additional selling, general and administrative expenses associated with the
  commitment of the Company to compete in all aspects of communications
  services and to provide exceptional customer service for the Companys
  complete array of products and services in the communities that it serves.
  The Company incurred $81,000 and $137,000 in out-of-pocket expenses in 2007
  and 2006 respectively, to comply with Section 404 of the Sarbanes-Oxley Act
  of 2002. The Cellular segment had a $179,000 increase in cost of goods sold
  and sales expense due to the increase in cellular phone and accessory sales.
  The Phonery segment had an increase to cost of goods sold of $187,000 due to
  an increase in sales.
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | 2007
  consolidated net income was $4,583,000 compared with $35,111,000 in 2006. The
  decrease in consolidated net income of $30,528,000 was primarily due to the
  2006 gain booked on the sale of the Companys MWH investment ($50,153,000
  before income taxes), compared to the 2007 gain booked from the sale of the
  Companys MWH investment ($3,117,000 before income taxes). The revenues
  generated by the Companys non-regulated service offerings such as DSL and
  video services, cellular and CPE sales increased in 2007 as compared to 2006.
  In addition, the Company had an increase in interest income due to more funds
  available for investment in 2007.                                                                                                                                                                                                                                                                                                                                                                                                                                                

2006 Compared to 2005

|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 2006
  consolidated revenues were $16,882,000, compared with $17,345,000 in 2005, a
  decrease of $463,000 or 2.7%.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|  | The Telecom
  segment showed decreased local network revenue of approximately $89,000. This
  decrease was due to declining access lines as customers increasingly utilized
  their wireless phones, dropped second phone lines in their homes when they
  moved their Internet service from a dial-up platform to a DSL platform, and
  utilized Voice over Internet Protocol (VoIP), or other services that bypass
  the local exchange network. With DSL, one access line allows customers to use
  their phone and be connected to the Internet at the same time.                                                                                                                                 
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|  | The Telecom
  segment experienced decreases in its operating revenues resulting from a
  decrease in access revenue. The decline in access revenue reflects industry
  trends of declining access usage and continued downward pricing pressures.
  The Telecom segments decrease in operating revenues is primarily due to
  these trends. Partially offsetting the decrease in access revenue, the
  Telecom segment experienced increases in non-regulated revenues for video and
  Internet services due to an increase in customers. The Company anticipates
  that it will continue to be affected by the common industry trends of
  declining access minutes of use and reduced access rates.

21

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|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  | The Company
  believes, despite the negative industry trends, that the revenues in the
  Telecom Segment will experience future growth. The Company expects that the
  decreases in access revenue will be offset by growth from new and expanded
  service offerings: digital video and digital subscriber line (DSL), Internet
  service provision, and the complete array of the Companys services offered
  through its Competitive Local Exchange Carrier (CLEC) in the City of Redwood
  Falls, Minnesota. The Company also expects that the continued marketing of
  service bundles, which offer customers discounts for subscribing to multiple
  services, will help retain current customers and attract new customers. Also,
  the Company continually evaluates new and emerging technologies to keep the
  Companys service offerings innovative and competitive. The Telecom segment
  has made significant investments in its infrastructure, which has allowed it
  to enhance its local network so that it can offer a triple-play of services
  to its subscribers. In the telecommunications industry, a triple-play of
  services refers to offering telephone, Internet, and video services over the
  same infrastructure. The Company expects that continued investment in its
  infrastructure will allow it to continue to offer its customers new
  technologies as they emerge such as hi-definition television (HDTV), and that
  the geographic expansion of the Companys service offerings will provide this
  segment with continued future growth. The Telecom segment invested $1,950,000
  in its infrastructure in 2006, which allowed it to enhance its local network,
  and offer new services to its subscribers.
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|  | The Cellular
  segment experienced an $82,000 increase in revenues due to an increase in its
  sales and service revenues of cellular phones and accessories. The Phonery
  segment had a $29,000 increase in revenues, primarily due to an increase in
  transport revenues.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | 2006
  consolidated operating expenses were $13,531,000, compared with $13,072,000
  in 2005, an increase of $459,000 or 3.5%. The Telecom segment had a $363,000
  increase, which related to expenses from an increase in the number of
  customers subscribing to Internet and video services, additional plant
  operating expenses associated with the maintenance of its infrastructure, and
  additional selling, general and administrative expenses associated with the
  commitment of the Company to compete in all aspects of communications
  services and to provide exceptional customer service for the Companys
  complete array of products and services in the communities that it serves.
  Thus far, the Company incurred $137,000 in out-of-pocket expenses in 2006 to
  comply with Section 404 of the Sarbanes-Oxley Act of 2002. The Cellular
  segment had a $49,000 increase in cost of goods sold and sales expense due to
  the increase in cellular phone and accessory sales. The Phonery segment
  expenses had no significant change.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | 2006 consolidated
  net income was $35,111,000 compared with $5,460,000 in 2005. The increase in
  consolidated net income of $29,651,000 was primarily attributed to the gain
  on the sale of the Companys MWH investment. The increase in net income is
  also due to increases in revenue of its non-regulated offerings, such as DSL
  and video services, and an increase in cellular equity investment, an
  increase in interest income and other investment income, partially offset by
  an increase in operating expenses.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         

22

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Table of Contents

Results of Operations by Business Segment

Telecom Segment

Telecom
Segment revenues represented 84.9% of 2007 consolidated operating revenues
before intercompany eliminations. Revenues are primarily earned by providing
approximately 16,100 customers access to the local networks of its ILEC and
CLEC operations, and by providing inter-exchange access for long distance
network carriers. The Telecom segment also earns revenue through billing and
collecting for various long distance companies, directory advertising, providing
Internet services and video
services to its subscribers. The Telecom segment also began offering CLEC
services in the City of Redwood Falls, Minnesota in September 2002. Total
Telecom segment revenues have decreased 3.3% since 2005. All information contained
in this table is before intercompany eliminations.

|                                                              |  |      |            |      |   |            |  |   |            | 
|------------------------------------------------------------- |  | ---- | ---------- | ---- | - | ---------- |  | - | ---------- | 
|                                                              |  | 2007 |            | 2006 |   | 2005       | 
|                                                              |  |      |            |      |   |            | 
|Operating
  Revenues:                                         |  |      |            |      |   |            |  |   |            | 
|Local Network                                                 |  | $    | 3,958,892  |      | $ | 4,038,947  |  | $ | 4,127,704  | 
|Network Access                                                |  |      | 5,921,277  |      |   | 6,409,470  |  |   | 7,136,550  | 
|Other                                                         |  |      | 5,636,183  |      |   | 4,963,670  |  |   | 4,775,972  | 
|                                                              |  |      |            |      |   |            |  |   |            | 
|Total Operating Revenues                                      |  |      | 15,516,352 |      |   | 15,412,087 |  |   | 16,040,226 | 
|                                                              |  |      |            |      |   |            |  |   |            | 
|Operating
  Expenses, Excluding Depreciation and Amortization |  |      | 9,688,213  |      |   | 9,071,687  |  |   | 8,708,603  | 
|Depreciation
  and Amortization Expenses                      |  |      | 3,817,512  |      |   | 4,055,177  |  |   | 4,050,406  | 
|                                                              |  |      |            |      |   |            |  |   |            | 
|Total Operating Expenses                                      |  |      | 13,505,725 |      |   | 13,126,864 |  |   | 12,759,009 | 
|                                                              |  |      |            |      |   |            |  |   |            | 
|Operating
  Income                                            |  |      | 2,010,627  |      |   | 2,285,223  |  |   | 3,281,217  | 
|                                                              |  |      |            |      |   |            |  |   |            | 
|                                                              |  |      |            |      |   |            |  |   |            | 
|Net Income                                                    |  |      | 1,943,756  |      |   | 1,586,953  |  |   | 1,587,568  | 
|                                                              |  |      |            |      |   |            |  |   |            | 
|                                                              |  |      |            |      |   |            |  |   |            | 
|Capital
  Expenditures                                        |  | $    | 4,004,509  |      | $ | 1,950,205  |  | $ | 2,317,737  | 

Total Telecom
segment revenues increased $104,000 or 0.7% in 2007 over 2006 and decreased
$628,000 or 3.9% in 2006 over 2005.

Local network
revenue decreased in the Telecom segment by $80,000 or 2.0% in 2007 over 2006
and decreased $89,000 or 2.2% in 2006 over 2005. The number of access lines
served decreased by about 400 lines or 2.4% in 2007 over 2006, and decreased
1.2% in 2006 over 2005. The decrease in access lines in 2007 and 2006 were
primarily due to the decreased demand for access lines as the Companys
customers increasingly selected DSL Internet services at higher speeds than is
available through traditional dial-up service. DSL is used to provide both
traditional voice connectivity and access to high-speed Internet service over
the same facilities, which eliminates the need for customers to have second
lines dedicated solely to providing Internet service. The decrease is also
attributed to an increasing number of customers who only subscribe to wireless
service. In addition, charges for the regulated voice portion of DSL service
were responsible for an increase of $23,000 in 2007 revenue, and a decrease of
$45,000 for 2006. Overall, the decrease in revenue was minimized by the success
of the promotion and packaging of vertical services, most notably DSL, and
focused marketing to potential customers. The Telecom segment has also entered
into a number of interconnection agreements with wireless providers, which
allow these providers access to its customers at the local service level. The
interconnection agreements provided a steady source of local network revenues
for 2007 and 2006, contributing approximately $109,000 and $136,000,
respectively.

Network access
revenue decreased $488,000 or 7.6% in 2007 over 2006 and decreased $ 727,000 or
10.2% in 2006 over 2005. Access minutes in 2007 decreased by 7.2% over 2006 and
in 2006 decreased by 12.1% over 2005. The revenue decrease in 2007 as compared
to 2006 reflects the overall decrease in minutes of use and the negative
effects of downward pricing pressure on network access pricing. The revenue
decreases in 2006 and 2007 were indicative of the industry trend of decreasing
minutes of use experienced by the Company primarily due to the continued
utilization of the Internet (e-mail, voice-over-IP) and wireless services which
will likely erode any potential increases in the volume of switched access
minutes of use, likely contributing to future decreases in network access
revenues. The Telecom segment has invested $8,272,000 in capital expenditures
since 2005. These capital expenditures, which have enhanced this segments
infrastructure, allowed New Ulm, Western, and Peoples to receive additional
settlements from the NECA. The additional investment in the local loop (access
line cost) has made the Company eligible for high-cost loop funding and safety
net universal funding through the Universal Service Fund, minimizing the decrease
in network access revenues. In 2007, the Telecom segment saw a decrease of
$214,000 in the receipt of this funding compared to 2006. In 2006, the Telecom
segment saw a decrease of $83,000 in the receipt of this funding compared to
2005.

23

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Table of Contents



Other
operating revenues increased $673,000 or 13.5% in 2007 over 2006 and increased
$188,000 or 3.9% in 2006 over 2005. Due to the infrastructure enhancements that
have taken place since 2000, the Telecom Segment offers video and Internet
services over the existing infrastructure. The video product was responsible
for $238,000 of increased revenues in 2007 over 2006, as compared to $85,000 of
the increase for 2006 over 2005. The Telecom segment provided additional
Internet revenues of $182,000 in 2007 over 2006, and $116,000 in 2006 over
2005, primarily from the high-speed Internet portion of DSL service.

Operating
expenses, excluding depreciation and amortization, increased $617,000 or 6.8%
in 2007 over 2006 and $363,000 or 4.2% in 2006 over 2005. Increases in the cash
operating expenses for video services accounted for $205,000 of the 2007
increase, while the CLEC activity in Redwood Falls accounted for $9,000 of the
2006 increase. Cash operating expenses have increased due to the continued
growth of CLEC operations in Redwood Falls, Minnesota and the increasing array
of services offered, such as video and DSL, that allow the Company to offer the
triple-play of services to its customers. The Telecom segment recognized the
value of being able to compete in all aspects of communication services. This
realization motivated the segment to enhance its awareness of customer
satisfaction (including 24 hours a day, 7 days a week access to Internet
support due to customer desire for this service), offer additional services
(video and DSL), pursue aggressive marketing to develop brand recognition, and
provide solutions for customers evolving communications needs. The Company has
expanded its services and product offerings in an effort to meet its objective
of achieving 100% customer satisfaction by making the customer its top
priority, deserving its best service, attitude and consideration. The Telecom
segment also realizes the potential for growth by competitively offering its
range of services to an increasing number of communities. The Telecom segment
began offering its services in the City of Redwood Falls, Minnesota in
September 2002. In addition, the Company also incurred $81,000 and $137,000 in
expenses in 2007 and 2006 respectively to comply with Section 404 of the
Sarbanes-Oxley Act of 2002. The Company also a incurred significant increase,
$52,000, in audit fees charged in 2007 due to increased work in performing
required internal controls audits in addition to the audit of the Companys
consolidated financial statements. In order to enhance the Telecom segments
operating margins, the Company is always striving for cost efficiencies and
technological improvement.

Depreciation
and amortization expenses decreased $238,000 or 5.9% in 2007 over 2006 and
increased $5,000 or 0.1% in 2006 over 2005. While continuing to make
investments in the Telecom segments infrastructure in 2007, there were net
decreases due to the fact that certain long lived assets have become fully
depreciated for financial reporting purposes even though these assets are still
in service. The 2006 increase was due to increased investment in the Telecom
segments infrastructure.

The Telecom segment capital expenditures for 2007 and 2006 were
$4,005,000 and $1,950,000 respectively. Construction projects for 2007
consisted of circuit equipment improvements in excess of $1.1 million, in
addition to significant increases to buried and fiber optic cable. Construction
projects for 2006 consisted of continued build-out of facilities and the
installation of electronics to provide video and DSL in the rural areas surrounding New Ulm. The
segments capital budget for 2008 is approximately $4,000,000.

24

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Table of Contents

Cellular Segment

The Cellular
segment operations include the sales and service of cellular phones and
accessories, and the Companys 9.88% ownership interest in MWH through
September 30, 2006 (sold to Alltel on October 2, 2006). The operating income
from sales of cellular phones and accessories continues to generate revenue
through cellular sales and cellular activation commissions. The Cellular
segment currently receives commissions from Alltel for subscribing customers to
its service. These commissions allow the Cellular segment to give customers
discounts on cellular phones as incentives for customers to subscribe to Alltels
cellular phone service.

The operating
revenues from sales of cellular phones and accessories, and activation
commissions increased by $160,000 or 29.1 % in 2007 over 2006, and increased by
$82,000 or 17.5% in 2006 over 2005. The 2007 and 2006 increases were primarily
the result of increased cellular phone sales and cellular activation
commissions. The 2007 decrease in cellular investment income was due to the
sale of MWH in 2006, eliminating that income for 2007. In 2006, Cellular
investment income increased $182,000 or 3.2% in 2006 over 2005 as a result of
revenue and income growth as MWH continued to gain market share and offer
customers new phones, new features and new service plan options.

The Cellular segment
information for its investment in MWH is shown in the following table using the
proportionate consolidation method. The Company recorded its 9.88% investment
in MWH using the proportionate consolidation method so that it could be
compared to the cellular industry, as well as the Companys other business
segments, and because the Companys Chief Operating Decision Maker (CODM)
reviewed the performance of MWH using the proportionate method. A recap of the
Companys investment in MWH (prior to its October 2, 2006 sale to Alltel) using
the proportionate method is as follows:

|                                                              |  |      |            |      |   |            | 
|------------------------------------------------------------- |  | ---- | ---------- | ---- | - | ---------- | 
|                                                              |  | 2006 |            | 2005 |  
|                                                              |  |      |            |      |  
|Proportionate
  Method:                                       |  |      |            |      |   |            | 
|Operating Revenues                                            |  | $    | 20,940,667 |      | $ | 24,597,445 | 
|                                                              |  |      |            |      |   |            | 
|Operating Expenses, Excluding Depreciation
  and Amortization |  |      | 12,273,174 |      |   | 14,790,310 | 
|Depreciation and Amortization Expenses                        |  |      | 2,216,856  |      |   | 3,082,000  | 
|                                                              |  |      |            |      |   |            | 
|Total Operating Expenses                                      |  |      | 14,490,030 |      |   | 17,872,310 | 
|                                                              |  |      |            |      |   |            | 
|Operating
  Income                                            |  |      | 6,450,637  |      |   | 6,725,135  | 
|                                                              |  |      |            |      |   |            | 
|                                                              |  |      |            |      |   |            | 
|Net Income                                                    |  | $    | 5,925,389  |      | $ | 5,742,935  | 
|                                                              |  |      |            |      |   |            | 

25

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Table of Contents

A recap of income for the Cellular segment,
using the equity method to record earnings on its investment in MWH (prior to
its October 2, 2006 sale to Alltel), is contained in the following table.

|                                                              |  |      |            |      |   |             |   |   |            |  
|------------------------------------------------------------- |  | ---- | ---------- | ---- | - | ----------- | - | - | ---------- | -
|                                                              |  | 2007 |            | 2006 |   | 2005        |  
|                                                              |  |      |            |      |   |             |  
|Operating
  Revenues:                                         |  | $    | 708,807    |      | $ | 549,226     |   | $ | 467,438    |  
|                                                              |  |      |            |      |   |             |   |   |            |  
|                                                              |  |      |            |      |   |             |   |   |            |  
|Operating
  Expenses, Excluding Depreciation and Amortization |  |      | 564,561    |      |   | 386,003     |   |   | 337,278    |  
|Depreciation
  and Amortization Expenses                      |  |      |           |      |   |            |   |   |           |  
|                                                              |  |      |            |      |   |             |   |   |            |  
|                                                             
|Operating
  Income                                            |  |      | 144,246    |      |   | 163,223     |   |   | 130,160    |  
|                                                              |  |      |            |      |   |             |   |   |            |  
|Interest
  Expense                                            |  |      |           |      |   | (96,870     | ) |   | (118,661   | )
|Interest
  Income                                             |  |      | 212,290    |      |   |            |   |   |           |  
|Cellular
  Investment Income                                  |  |      |           |      |   | 5,925,389   |   |   | 5,742,935  |  
|Gain on Sale
  of Cellular Investment                         |  |      | 3,116,624  |      |   | 50,152,885  |   |   |           |  
|Income Taxes                                                  |  |      | (1,373,580 | )    |   | (23,155,539 | ) |   | (2,386,364 | )
|                                                              |  |      |            |      |   |             |   |   |            |  
|                                                              |  |      |            |      |   |             |   |   |            |  
|Net Income                                                    |  | $    | 2,099,580  |      | $ | 32,989,088  |   | $ | 3,368,070  |  
|                                                              |  |      |            |      |   |             |   |   |            |  

As previously
disclosed, on November 17, 2005, MWH and Alltel entered into a definitive
agreement under which Alltel agreed to purchase MWH. The total compensation to
be paid by Alltel was $1.075 billion, including payments to MWH shareholders,
payments to minority interest holders in certain MWH properties and assumption
of MWHs outstanding debt. The transaction was completed on October 2, 2006,
and New Ulm Telecom, Inc. received 90% of its proceeds or approximately $74
million on October 6, 2006. New Ulm received its prorata share of the amount
held in escrow in April 2007 and January 2008. These additional payments
received were approximately $3.1 million in April 2007 and approximately $5.1
million in January 2008.

Phonery Segment

The Phonery Segment represented
11.3% of 2007 and 10.4% of 2006 consolidated operating revenues. Revenues are
earned primarily by sales, installation and service of business telephone
systems and data communications equipment. In addition, the Phonery segment
leases network capacity to provide additional network access revenues and
re-sells long distance service. This segments expertise is the quality
installation and maintenance of CPE, provision of customer long distance needs
and transport solutions in communications to end-user customers. All
information contained in this table is before intercompany eliminations.

|                                                            |  |      |           |      |   |           |  |   |           | 
|----------------------------------------------------------- |  | ---- | --------- | ---- | - | --------- |  | - | --------- | 
|                                                            |  | 2007 |           | 2006 |   | 2005      | 
|                                                            |  |      |           |      |   |           | 
|Operating Revenues                                          |  | $    | 2,057,501 |      | $ | 1,866,787 |  | $ | 1,837,571 | 
|                                                            |  |      |           |      |   |           |  |   |           | 
|Operating Expenses, Excluding Depreciation and
Amortization |  |      | 1,074,741 |      |   | 898,621   |  |   | 914,404   | 
|Depreciation and Amortization Expenses                      |  |      | 76,265    |      |   | 65,496    |  |   | 61,363    | 
|                                                            |  |      |           |      |   |           |  |   |           | 
|Total Operating Expenses                                    |  |      | 1,151,006 |      |   | 964,117   |  |   | 975,767   | 
|                                                            |  |      |           |      |   |           |  |   |           | 
|Operating
  Income                                          |  |      | 906,495   |      |   | 902,670   |  |   | 861,804   | 
|                                                            |  |      |           |      |   |           |  |   |           | 
|                                                            |  |      |           |      |   |           |  |   |           | 
|Net Income                                                  |  |      | 539,636   |      |   | 535,164   |  |   | 504,414   | 
|                                                            |  |      |           |      |   |           |  |   |           | 

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Phonery
revenues increased $191,000 or 10.2% in 2007 over 2006 and increased $29,000 or
1.6% in 2006 over 2005. The 2007 increase is primarily due to the increased CPE
Sales and installation revenues of approximately $154,000 and an increase in
leased network revenue of approximately $48,000, offset by a decrease of
approximately $20,000 in the resale of long distance toll revenues. In 2006,
the increase in Phonery segment revenue was primarily due to an increase of
approximately $55,000 in leased network revenues offset by a decrease of
approximately $31,000 in the resale of long distance toll revenues.

Operating
expenses, excluding depreciation and amortization increased $176,000 or 19.6%
in 2007 over 2006, and decreased $16,000 or 1.7% in 2006 over 2005. The 2007
increase was primarily due to increased cost of goods sold. In 2006 the
decrease was related primarily to the changes in the expenses associated with
the reduction in the resale of long distance revenues. The Phonery segment
continues striving for cost efficiencies and continues to seek new technologies
to better serve customer needs and to operate efficiently.

Depreciation
and amortization expenses increased $11,000 or 16.4% in 2007 over 2006 and
increased $4,000 or 6.7% in 2006 over 2005. The 2007 and 2006 increases reflect
the continued investment in this segments infrastructure.

Other Income and
Interest Expense

Interest
expense decreased $775,000 in 2007 over 2006 and increased $8,000 in 2006 over
2005. The 2007 decrease was due to the receipt of the proceeds of the MWH sale,
a portion of which was applied to extinguish debt with CoBank ACB in 2006. The
2006 increase was limited due to the early extinguishment of its indebtedness
with CoBank, ACB during the fourth quarter of 2006.

Interest
income increased approximately $276,000 in 2007 over 2006 and increased
$545,000 in 2006 over 2005. The increases in 2007 and 2006 were the result of
increased funds available for investment, primarily because of the sale of MWH.

Other
investment income increased $27,000 in 2007 over 2006, as compared to a
decrease of $39,000 in 2006 over 2005. Included in other income was the
Companys 25.18% equity ownership in FiberComm, LC. The Company recorded a
$42,000 loss from FiberComm, LC in 2007 and a $98,000 loss in 2006. Also
included in other investment income was the patronage credit the Company earns
from CoBank, ACB as part of its debt agreements with CoBank, ACB. The patronage
earned in 2007 was $128,000 as compared to $164,000 in 2006.

The Company expects
interest expense to increase in 2008 as a result of its January 2008 borrowings
to finance its acquisition of Hutchinson Telephone Company.

Liquidity and Capital
Resources

Cash Flows from
Operations

Cash used in
operations for the year ended December 31, 2007 was $17,962,000 as compared to
cash generated by operations of $4,363,000 in 2006 and $6,487,000 in 2005.

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The 2007
decrease was primarily driven by the payment of income tax on the gain
associated with the 2006 sale of MWH. The 2006 decrease (after eliminating all
effects from the sale of the cellular investment, including taxes) was due to
an increase in receivables, a decrease in accounts payable and a
reduction in deferred income taxes. The 2005 decrease was driven primarily by
an increase in undistributed earnings in the Companys cellular investment, a
reduction in deferred income taxes, and reduction in receivables for 2005.

Cash generated
by operations continues to be the Companys primary source of funding for
existing operations, capital expenditures, debt service, and dividend payments
to shareholders. In 2006, the cash generated from the sale of the Companys
cellular investment was also a source of funding used to reduce debt and make a
special dividend payment to shareholders. At December 31, 2007, the Company had
working capital of $9,290,000 as compared to working capital of $8,736,000 at
December 31, 2006. Cash and cash equivalents at December 31, 2007 were
$9,510,000 as compared to $30,458,000 at December 31, 2006.

Cash Flows from
Investing Activities

The Company
operates in a capital intensive business. The Company is continuing to upgrade
its local networks for changes in technology to provide the most advanced
services to its customers. In 2006, the Company received proceeds of
$74,319,000 from the sale of its cellular investment and used $18,000,000 to
purchase a one-third interest in Hector Communications Corporation. Additions
to property, plant and equipment were $4,029,000 in 2007, $1,966,000 in 2006
and $2,318,000 in 2005. The 2007, 2006, and 2005 additions were financed
through cash flows from operations.

Cash Flows Used In
Financing Activities

In 2007 cash was used to repay $17,217 of long-term debt and distribute
$2,046,000 of dividends to shareholders. In 2006 cash was used to repay
$15,008,000 of long-term debt and to distribute $15,909,000 in dividends to
shareholders. In 2005 cash was used to repay $2,516,000 of long-term debt and
to distribute $1,739,000 in dividends to shareholders.

Dividends

The Company
paid dividends of $2,046,000 in 2007 and $15,909,000 in 2006, and $1,739,000 in
2005. This represented a dividend of $.40 per share for 2007, $3.11 per share
for 2006, and $.34 per share for 2005. The Company continues to reinvest in its
infrastructure while maintaining dividends to shareholders. The Board of
Directors reviews dividend declarations based on anticipated earnings, capital
requirements, the operating and financial condition of the Company, and any
loan requirements. Paying regular dividends at the existing level is not
expected to negatively impact the liquidity of the Company.

Share Repurchase

The Company
repurchased no shares in 2007, 2006 or 2005. At this time, the Company does not
anticipate any significant share repurchases in 2008 and the Board of Directors
has not authorized a share repurchase program.

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Long Term Obligations

The Companys long-term obligations consisted primarily of debt issued
from CoBank, ACB. In December, 2001, the Company refinanced its revolving
credit facilities with CoBank, ACB with a $15 million term loan and a reducing
revolving credit facility of $10 million. Interest on both CoBank, ACB loans was variable based on CoBank ACBs reference rate, and 30-day
fixed based on the Companys leverage ratio. The amounts of borrowings at
30-day fixed and variable rates fluctuated over time. The variable interest
rate on both CoBank, ACB loans was 6.11% at December 31, 2005. The 30-day fixed
interest rate on both CoBank, ACB loans was 5.31% at December 31, 2005. In
October 2005, the Company began 30-day fixing a portion of its long-term debt
in order to mitigate the effects of rising interest rates. As of December 31,
2007, the Company had an unsecured loan in the amount of $88,915, with the City
of Redwood Falls, Minnesota that bears interest at 5%.

On October 30, 2006, the Company paid the balance on its $10 million
CoBank, ACB reducing revolving credit facility. On December 22, 2006, the
Company paid off its remaining outstanding debt on its $15 million term loan.
It also terminated its reducing revolving credit facility.

The following details the Companys contractual obligations, along with
the cash principal payments due each period (excluding interest expense) on its
unsecured note payable and long-term debt, (excluding debt incurred in January
2008 to acquire HTC, see note 14 on pages 49 - 50) as of December 31, 2007:

|                  |  |   |        | 
|----------------- |  | - | ------ | 
|2008              |  | $ | 27,472 | 
|2009              |  | $ | 19,479 | 
|2010              |  | $ | 20,465 | 
|2011              |  | $ | 21,500 | 
|2012              |  | $ | 0      | 
|Years 6 through 7 |  | $ | 0      | 

Liquidity Outlook

The Companys short-term and long-term liquidity needs arise primarily
from: (i) capital expenditures; (ii) working capital requirements as
may be needed to support the growth of its business; (iii) dividend
payments on its common stock; and (iv) potential acquisitions.

The Companys primary sources of liquidity for the year ended
December 31, 2007 were proceeds from cash generated from operations, cash received
for the sale of MWH and cash reserves held at the beginning of the period. At
December 31, 2007, the Company had working capital of $9,290,000. The working
capital is primarily due to the funds received from the sale of MWH.

The Company has not conducted a public equity offering. It operates
with original equity capital, retained earnings and additions to indebtedness
in the form of senior debt and bank lines of credit.

Management believes adequate internal and external resources are
available to finance ongoing operating requirements, including capital
expenditures, business development, debt service and the payment of dividends,
for at least the next twelve months.

Effects of Inflation

It is the opinion of management that the effects of inflation on
operating revenues and expenses over the past three years have not been
significant. Management anticipates that this trend will continue in the near
term.

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Critical Accounting
Policies and Estimates

The preparation of consolidated financial statements and related
disclosures in conformity with accounting principles generally accepted in the
United States requires us to make judgments, assumptions, and estimates that
affect the amounts reported in the Companys financial statements and accompanying
notes. Note 1 to the consolidated financial statements describes the
significant accounting policies and methods used in preparing the financial
statements. The Company considers the accounting policies described below to be
the most critical accounting policies because these policies are impacted
significantly by estimates it makes. The Company bases its estimates on
historical experience or various assumptions that are believed to be reasonable
under the circumstances, and the results form the basis for making judgments
about the reported values of assets, liabilities, revenues and expenses. Actual
results may materially differ from these estimates.

Valuation of Long-Lived Assets:

The Company would record impairment losses on long-lived assets used in
operations when events and circumstances indicate the assets might be impaired
and the undiscounted cash flows estimated to be generated by those assets are
less than the carrying amounts of those assets. In assessing the recoverability
of long-lived assets, the Company compares the carrying value to the
undiscounted future cash flows the assets are expected to generate. If the
total of the undiscounted future cash flows is less than the carrying amount of
the assets, the Company would write down such assets based on the excess of the
carrying amount over the fair value of the assets. Fair value is generally
determined by calculating the discounted future cash flows expected from those
assets. Changes in these estimates could have a material adverse effect on the
assessment of its long-lived assets, thereby requiring a write-down of the
assets. Write-downs of long-lived assets are recorded as impairment charges and
are a component of operating expenses. The Company has reviewed its long-lived
assets and concluded that no impairment charge on its long-lived assets is
necessary.

Valuation of Goodwill:

The Company has goodwill on its books related to prior acquisition of
telephone properties. The Company is required to test goodwill for impairment
annually or at other times if events have occurred or circumstances exist that
indicate the carrying value of goodwill may no longer be recoverable. The
impairment test for goodwill involves a two-step process: step one consists of
a comparison of the fair value of a reporting unit with its carrying amount,
including the goodwill allocated to each reporting unit. If the carrying amount
is in excess of the fair value, step two requires the comparison of the implied
fair value of the reporting unit goodwill with the carrying amount of the
reporting unit goodwill. Any excess of the carrying value of the reporting unit
goodwill over the implied fair value of the reporting unit goodwill will be
recorded as an impairment loss, which is a component of operating expenses. The
Company tested goodwill for impairment and concluded that no impairment charge
on its existing goodwill was necessary as of December 31, 2007, nor has it
recorded impairment charges for goodwill in prior years.

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Depreciation of Property, Plant and Equipment

The Company uses the group life method to depreciate the assets of its
telephone companies. Telephone plant acquired in a given year is grouped into
similar categories and depreciated over the remaining estimated useful life of
the group. Due to rapid changes in technology and new competitors, selecting the estimated economic life of
telecommunications plant and equipment requires a significant amount of
judgment. The Company periodically reviews data on expected utilization of new
equipment, asset retirement activity and net salvage values to determine
adjustments to its depreciation rates. The Company has not made any changes to
the lives of assets resulting in a significant impact in the three year period
ended December 31, 2007.

Revenue Recognition:

The Company recognizes revenue when earned, regardless of the period in
which they are billed. The majority of the Companys revenues are earned from
providing services to its customers and providing access to its network to
inter-exchange carriers.

Revenues earned from the Companys customers come primarily from
connection to its local network, cable television services, and Internet
services (both dial-up and high-speed DSL). Revenues for these services
provided to the Companys customers are billed based on set rates for monthly
service or based on the amount of time the customer is utilizing the Companys
facilities. The revenue for these services is recognized when the service is
rendered.

Revenues earned from allowing inter-exchange carriers access to the
Companys network are based on utilization of the network by the carriers as
measured by minutes of use of the network by the individual carriers billed at
tariffed access rates for both interstate calls and intrastate calls. Revenues
for these services are recognized based on the period the access is provided.

Interstate access rates are established by a nationwide pooling of
companies known as the National Exchange Carriers Association (NECA). The FCC
established NECA in 1983 to develop and administer interstate access service
rates, terms and conditions. Revenues are pooled and redistributed on the basis
of each Companys actual or average costs. New Ulm settlements from the pools
are based on its actual costs to provide service, while Western and Peoples
settle based on nationwide average schedules. Access revenues for New Ulm
include an estimate of the final cost study for the year which is trued up
subsequent to December 31. Management believes the estimates included in the
preliminary cost study are reasonable. The Company cannot predict the future
impact that industry changes will have on interstate access revenues in 2008.

Intrastate access rates are filed with state regulatory commissions in
Minnesota and Iowa.

Revenues from system sales and services are derived from the sale,
installation, and servicing of communication systems. In accordance with EITF
00-21, these deliverables are separate units of accounting. Customer contracts
of sales and installations are recognized using the completed-contract method,
which recognizes income when the contract is substantially complete. Rental
revenues are recognized over the rental period.

Income Taxes:

The provision for income taxes consists of an amount for taxes
currently payable and a provision for tax consequences deferred to future
periods. Deferred income taxes are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax basis. Significant
components of the Companys deferred taxes arise from differences in the basis
of property, plant and equipment due to the use of accelerated depreciation
methods for tax purposes and partnerships due to the difference between book and tax income. The Companys effective income
tax rate is higher than the U.S. rate due to the effect of state income taxes.

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Effective January 1, 2007, the Company adopted the provisions of
Financial Accounting Standards board (FASB) Interpretation No. 48 (FIN 48),
Accounting for Uncertainty in Income Taxes 
and interpretation of FASB Statement No. 109. The implementation of
FIN 48 had no impact on the companys financial statements as the Company had
no unrecognized tax benefits at January 1, 2007.

A change in the estimated amount provided for the 2006 corporate income
taxes has been recorded in the estimated income taxes for the year ended
December 31, 2007 and is reflected in the current year tax rate. The change
occurred as a result of a reduced state tax liability (net of federal tax) of
approximately $632,000 as reported on the 2006 tax return as filed.

At December 31, 2007, the Company had approximately $155,600 of net
unrecognized tax benefits that, if recognized, would favorably affect the
income tax provision when recorded. The Company expects that there will be
additional unrecognized tax benefits to be recorded within the next year based
on the tax treatment of an installment sale. See note 6 on pages 45 - 46.

The Company is primarily subject to U.S., Minnesota, Iowa, Nebraska and
Wisconsin income tax. Tax years subsequent to 2003 remain open to examination
by U.S. federal and state tax authorities. The Companys policy is to recognize
interest and penalties related to income tax matters in income tax expense. As
of December 31, 2007, the Company had no accrual for interest or penalties
related to income tax matters.

Recently Issued
Accounting Pronouncements

In February 2007, the FASB issued Statement of Financial Accounting
Standards No. 159, The Fair Value Option for Financial Assets and
Financial Liabilities (SFAS 159). The Statement permits entities to choose
to measure many financial instruments and certain other items at fair value
that are not currently required to be measured at fair value. The objective is
to improve financial reporting by providing entities with the opportunity to
mitigate volatility in reported earnings caused by measuring related assets and
liabilities differently without having to apply complex hedge accounting provisions.
SFAS 159 will be effective for the first fiscal year that begins after
November 15, 2007. The Company will be assessing the impact of this
Statement on the Companys financial statements.

In May
2007, the FASB issued FASB Staff Position (FSP) No. FIN 48-1, Definition of Settlement in FASB Interpretation
No. 48, which provides guidance on how an enterprise should
determine whether a tax position is effectively settled for the purpose of
recognizing previously unrecognized tax benefits. The amendment had no impact
on the Companys financial position, results of operations or cash flows.

In
December 2007, the FASB issued SFAS No. 160, Non-controlling Interest in Consolidated Financial Statements
(SFAS 160), an amendment of ARB No. 51. SFAS 160 establishes new
accounting and reporting standards for the non-controlling interest in a
subsidiary and for the deconsolidation of a subsidiary. SFAS 160 clarifies that
changes in a parents ownership interest in a subsidiary that do not result in
deconsolidation are equity transactions if the parent retains its controlling
financial interest. In addition, this statement requires that a parent
recognize a gain or loss in net income when a subsidiary is deconsolidated.
Such gain or loss will be measured using the fair
value of the non-controlling equity investment on the deconsolidation date.
SFAS 160 also includes expanded disclosure requirements regarding their
interest of the parent and its non-controlling interest. SFAS 160 is effective
for fiscal years, and interim periods within those fiscal years, beginning on
or after December 15, 2008. Early adoption is prohibited. The Company will
evaluate the implementation of SFAS No. 160 and its potential impact on the
Company. The effective date of this pronouncement for the Company will be
January 1, 2009.

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In
December 2007, the FASB issued SFAS No. 141(R), Business Combinations (SFAS 141(R)). SFAS 141(R) requires an
acquiring entity to recognize all the assets acquired and liabilities assumed
in a transaction at the acquisition-date fair value, with limited exceptions
and also includes a substantial number of new disclosure requirements. SFAS
141(R) applies prospectively to business combinations for which the acquisition
date is on or after the beginning of the first annual reporting period
beginning on or after December 15, 2008. Early adoption is prohibited. The
Company will evaluate the impact of this pronouncement on its consolidated
financial statements as it considers any future acquisitions that would occur
for reporting periods after fiscal year 2008.

Item 7a. Quantitative and Qualitative
Disclosures About Market Risk

The Company does not have operations subject to risks of foreign
currency fluctuations, nor does the Company use derivative financial instruments
in its operations or investment portfolio. The Companys earnings are affected
by changes in interest rates, during periods when its long-term debt is based
on a national variable rate and a fixed rate based on the Companys leverage
ratio. During December 2006, all debts with a variable interest rates were
extinguished. For the 2007 year, variable interest rates did not impact the
Company.

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Item 8. Financial Statements and
Supplementary Data

REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Shareholders and Board of Directors
New Ulm Telecom, Inc.
New Ulm, Minnesota

We have audited the accompanying consolidated balance sheets of New Ulm
Telecom, Inc. (a Minnesota corporation) and subsidiaries as of December 31,
2007 and 2006, and the related consolidated statements of income, stockholders
equity and cash flows for each of the years in the three-year period ended
December 31, 2007. New Ulm Telecom, Inc.s management is responsible for these
consolidated financial statements. Our responsibility is to express an opinion
on these consolidated financial statements based on our audits. We did not
audit the financial statements of Hector Communications Corporation, the
investment in which, as discussed in Note 13, is accounted for by the equity
method of accounting. The investment in Hector Communications Corporation was
$18,699,104 and $20,295,933 at December 31, 2007 and 2006, respectively, and
the equity in its net income was $536,504 and $162,600 for each of the two
years in the period ended December 31, 2007. The financial statements of Hector
Communications Corporation were audited by other auditors whose report has been
furnished to us, and our opinion, insofar as it relates to the amounts included
for Hector Communications Corporation is based solely on the report of the
other auditors.

We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits and the
reports of the other auditors provide a reasonable basis for our opinion.

In our opinion, based on our audits and the reports of other auditors,
the consolidated financial statements referred to above, present fairly, in all
material respects, the financial position of New Ulm Telecom, Inc. and
subsidiaries as of December 31, 2007 and 2006, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 2007 in conformity with accounting principles generally
accepted in the United States of America.

As discussed in Note 12, in October 2006 the Company sold its interest
in Midwest Wireless Holdings, L.L.C.

We also have audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), New Ulm Telecom, Inc.s
internal control over financial reporting as of December 31, 2007 based on
criteria established in Internal Control  Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO), and our report dated March 14, 2008 expressed an unqualified opinion.

/s/ KIESLING ASSOCIATES LLPWest Des Moines,
IowaMarch 14, 2008

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NEW ULM TELECOM, INC. AND SUBSIDIARIES

CONSOLIDATED
BALANCE SHEETS
DECEMBER 31, 2007 AND 2006

|                                                                             |  |      |            |      |   |            | 
|---------------------------------------------------------------------------- |  | ---- | ---------- | ---- | - | ---------- | 
|                                                                             | 
|ASSETS                                                                       | 
|                                                                             |  |      |            |      |   |            | 
|                                                                             |  | 2007 |            | 2006 |  
|                                                                             |  |      |            |      |  
|CURRENT ASSETS:                                                              |  |      |            |      |   |            | 
|Cash and Cash Equivalents                                                    |  | $    | 9,510,309  |      | $ | 30,457,707 | 
|Receivables, Net of Allowance for
Doubtful Accounts of $384,477 and $322,500 |  |      | 1,036,911  |      |   | 1,337,367  | 
|Income Taxes Receivable                                                      |  |      | 458,442    |      |   |           | 
|Materials, Supplies, and Inventories                                         |  |      | 362,884    |      |   | 239,707    | 
|Prepaid Expenses                                                             |  |      | 280,848    |      |   | 206,927    | 
|                                                                             |  |      |            |      |   |            | 
|Total Current Assets                                                         |  |      | 11,649,394 |      |   | 32,241,708 | 
|                                                                             |  |      |            |      |   |            | 
|                                                                            
|INVESTMENTS AND OTHER ASSETS:                                                |  |      |            |      |   |            | 
|Goodwill (Note 4)                                                            |  |      | 3,218,906  |      |   | 3,218,906  | 
|Intangibles (Note 4)                                                         |  |      | 17,275     |      |   | 19,327     | 
|Hector Investment (Note 13)                                                  |  |      | 18,699,104 |      |   | 20,295,933 | 
|Other Investments                                                            |  |      | 2,668,483  |      |   | 1,572,902  | 
|                                                                             |  |      |            |      |   |            | 
|Total Investments and Other Assets                                           |  |      | 24,603,768 |      |   | 25,107,068 | 
|                                                                             |  |      |            |      |   |            | 
|                                                                            
|PROPERTY, PLANT AND EQUIPMENT (Note 2):                                      |  |      |            |      |   |            | 
|Telecommunications Plant                                                     |  |      | 63,309,122 |      |   | 59,903,762 | 
|Other Property                                                               |  |      | 3,173,127  |      |   | 2,976,784  | 
|Video Plant                                                                  |  |      | 2,656,683  |      |   | 2,489,752  | 
|                                                                             |  |      |            |      |   |            | 
|Total Property, Plant and Equipment                                          |  |      | 69,138,932 |      |   | 65,370,298 | 
|Less Accumulated Depreciation                                                |  |      | 46,339,199 |      |   | 42,663,233 | 
|                                                                             |  |      |            |      |   |            | 
|Net Property, Plant and Equipment                                            |  |      | 22,799,733 |      |   | 22,707,065 | 
|                                                                             |  |      |            |      |   |            | 
|                                                                             |  |      |            |      |   |            | 
|TOTAL ASSETS                                                                 |  | $    | 59,052,895 |      | $ | 80,055,841 | 
|                                                                             |  |      |            |      |   |            | 

The accompanying notes are an integral part
of these consolidated financial statements.

35

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NEW ULM TELECOM, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS (Continued)
 DECEMBER 31, 2007 AND 2006

|                                                                                                        |  |      |            |      |   |            | 
|------------------------------------------------------------------------------------------------------- |  | ---- | ---------- | ---- | - | ---------- | 
|                                                                                                        | 
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                    | 
|                                                                                                       
|                                                                                                        |  | 2007 |            | 2006 |  
|                                                                                                        |  |      |            |      |  
|CURRENT LIABILITIES:                                                                                    |  |      |            |      |   |            | 
|Current Portion of Long-Term Debt                                                                       |  | $    | 27,472     |      | $ | 26,149     | 
|Accounts Payable                                                                                        |  |      | 1,515,996  |      |   | 294,756    | 
|Accrued Income Taxes                                                                                    |  |      |           |      |   | 22,392,040 | 
|Other Accrued Taxes                                                                                     |  |      | 88,342     |      |   | 76,828     | 
|Other Accrued Liabilities                                                                               |  |      | 727,971    |      |   | 715,624    | 
|                                                                                                        |  |      |            |      |   |            | 
|Total Current Liabilities                                                                               |  |      | 2,359,781  |      |   | 23,505,397 | 
|                                                                                                        |  |      |            |      |   |            | 
|                                                                                                        |  |      |            |      |   |            | 
|LONG-TERM DEBT, Less Current Portion (Note 5)                                                           |  |      | 61,443     |      |   | 79,983     | 
|                                                                                                        |  |      |            |      |   |            | 
|                                                                                                        |  |      |            |      |   |            | 
|NONCURRENT LIABILITIES                                                                                  |  |      |            |      |   |            | 
|Loan Guarantee (Note 11)                                                                                |  |      | 328,336    |      |   | 2,478,474  | 
|Income Taxes (Note 6)                                                                                   |  |      | 3,018,684  |      |   | 3,244,134  | 
|                                                                                                        |  |      |            |      |   |            | 
|Total Noncurrent Liabilities                                                                            |  |      | 3,347,020  |      |   | 5,722,608  | 
|                                                                                                        |  |      |            |      |   |            | 
|                                                                                                        |  |      |            |      |   |            | 
|STOCKHOLDERS EQUITY:                                                                                   |  |      |            |      |   |            | 
|Preferred Stock - $1.66 Par Value; 10,000,000
Shares Authorized; 0
  Shares Issued and Outstanding      |  |      |           |      |   |           | 
|Common Stock - $1.66 Par Value; 90,000,000 Shares
Authorized;
  5,115,435 Shares Issued and Outstanding |  |      | 8,525,725  |      |   | 8,525,725  | 
|Retained Earnings                                                                                       |  |      | 44,758,926 |      |   | 42,222,128 | 
|                                                                                                        |  |      |            |      |   |            | 
|Total Stockholders Equity                                                                              |  |      | 53,284,651 |      |   | 50,747,853 | 
|                                                                                                        |  |      |            |      |   |            | 
|                                                                                                        |  |      |            |      |   |            | 
|TOTAL LIABILITIES AND STOCKHOLDERS EQUITY                                                              |  | $    | 59,052,895 |      | $ | 80,055,841 | 
|                                                                                                        |  |      |            |      |   |            | 

The accompanying notes are an integral part
of these consolidated financial statements.

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NEW ULM TELECOM, INC. AND SUBSIDIARIES

CONSOLIDATED
STATEMENTS OF INCOME
FOR THE THREE YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005

|
|

|                                                          |  |      |            |      |   |            |   |   |            |  
|--------------------------------------------------------- |  | ---- | ---------- | ---- | - | ---------- | - | - | ---------- | -
|                                                          |  | 2007 |            | 2006 |   | 2005       |  
|                                                          |  |      |            |      |   |            |  
|OPERATING REVENUES:                                       |  |      |            |      |   |            |   |   |            |  
|Local Network                                             |  | $    | 3,865,088  |      | $ | 3,945,143  |   | $ | 4,033,900  |  
|Network Access                                            |  |      | 5,891,920  |      |   | 6,380,661  |   |   | 7,107,497  |  
|Directory Advertising, Billing and Other
Services         |  |      | 752,815    |      |   | 485,060    |   |   | 488,656    |  
|Video Services                                            |  |      | 2,334,580  |      |   | 2,096,670  |   |   | 2,011,841  |  
|Internet Services                                         |  |      | 1,690,225  |      |   | 1,558,687  |   |   | 1,275,077  |  
|Other Nonregulated Services                               |  |      | 2,766,308  |      |   | 2,416,013  |   |   | 2,427,866  |  
|                                                          |  |      |            |      |   |            |   |   |            |  
|Total Operating Revenues                                  |  |      | 17,300,936 |      |   | 16,882,234 |   |   | 17,344,837 |  
|                                                          |  |      |            |      |   |            |   |   |            |  
|                                                         
|OPERATING EXPENSES:                                       |  |      |            |      |   |            |   |   |            |  
|Plant Operations, Excluding Depreciation and
Amortization |  |      | 2,511,302  |      |   | 2,457,050  |   |   | 2,285,473  |  
|Cost of Video Services                                    |  |      | 1,689,616  |      |   | 1,484,890  |   |   | 1,472,020  |  
|Cost of Internet Services                                 |  |      | 597,465    |      |   | 595,501    |   |   | 576,557    |  
|Cost of Other Nonregulated Services                       |  |      | 1,518,707  |      |   | 1,157,547  |   |   | 1,120,048  |  
|Depreciation and Amortization                             |  |      | 3,893,777  |      |   | 4,120,673  |   |   | 4,111,769  |  
|Selling, General and Administrative                       |  |      | 4,028,701  |      |   | 3,715,457  |   |   | 3,505,789  |  
|                                                          |  |      |            |      |   |            |   |   |            |  
|Total Operating Expenses                                  |  |      | 14,239,568 |      |   | 13,531,118 |   |   | 13,071,656 |  
|                                                          |  |      |            |      |   |            |   |   |            |  
|                                                          |  |      |            |      |   |            |   |   |            |  
|OPERATING INCOME                                          |  |      | 3,061,368  |      |   | 3,351,116  |   |   | 4,273,181  |  
|                                                          |  |      |            |      |   |            |   |   |            |  
|OTHER INCOME (EXPENSES):                                  |  |      |            |      |   |            |   |   |            |  
|Abandoned Acquisition Costs                               |  |      | (5,787     | )    |   | (30,697    | ) |   |           |  
|Loss on Disposal of Assets                                |  |      |           |      |   | (32,836    | ) |   |           |  
|Interest Expense                                          |  |      | (32,215    | )    |   | (807,655   | ) |   | (799,394   | )
|Interest and Dividend Income                              |  |      | 895,111    |      |   | 619,439    |   |   | 74,475     |  
|Interest During Construction                              |  |      |           |      |   | 29,858     |   |   | 8,259      |  
|Equity in Earnings of Cellular Investment                 |  |      |           |      |   | 5,925,389  |   |   | 5,742,935  |  
|Gain on Sale of Cellular Investment                       |  |      | 3,116,624  |      |   | 50,152,885 |   |   |           |  
|Equity in Earnings of Hector Investment                   |  |      | 536,504    |      |   | 162,600    |   |   |           |  
|Other Investment Income                                   |  |      | 73,220     |      |   | 46,389     |   |   | 85,842     |  
|                                                          |  |      |            |      |   |            |   |   |            |  
|Total Other Income (Expenses)                             |  |      | 4,583,457  |      |   | 56,065,372 |   |   | 5,112,117  |  
|                                                          |  |      |            |      |   |            |   |   |            |  
|                                                         
|INCOME BEFORE INCOME TAXES                                |  |      | 7,644,825  |      |   | 59,416,488 |   |   | 9,385,298  |  
|                                                         
|INCOME TAXES                                              |  |      | 3,061,853  |      |   | 24,305,283 |   |   | 3,925,246  |  
|                                                          |  |      |            |      |   |            |   |   |            |  
|                                                          |  |      |            |      |   |            |   |   |            |  
|NET INCOME                                                |  | $    | 4,582,972  |      | $ | 35,111,205 |   | $ | 5,460,052  |  
|                                                          |  |      |            |      |   |            |   |   |            |  
|                                                          |  |      |            |      |   |            |   |   |            |  
|BASIC AND DILUTED NET
 INCOME PER SHARE                   |  | $    | 0.90       |      | $ | 6.86       |   | $ | 1.07       |  
|                                                          |  |      |            |      |   |            |   |   |            |  
|                                                          |  |      |            |      |   |            |   |   |            |  
|DIVIDENDS PER SHARE                                       |  | $    | 0.40       |      | $ | 3.11       |   | $ | 0.34       |  
|                                                          |  |      |            |      |   |            |   |   |            |  

The accompanying notes are an integral part
of these consolidated financial statements.

37

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NEW ULM TELECOM, INC. AND SUBSIDIARIES

CONSOLIDATED
STATEMENTS OF STOCKHOLDERS EQUITY
FOR THE THREE YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005

|                              |  |              |           |                   |   |           |  |   |             |  
|----------------------------- |  | ------------ | --------- | ----------------- | - | --------- |  | - | ----------- | -
|                              |  |              |           |                   |   |           |  |   |             |  
|                              |  |              |           |                   |   |           |  |   |             |  
|                              |  | Common
Stock |           | Retained
Earnings |  
|                              |  |              |           |                  
|                              |  | Shares       |           | Amount            |   |          
|                              |  |              |           |                   |   |           | 
|                             
|BALANCE on December 31,
 2004 |  |              | 5,115,435 |                   |   | 8,525,725 |  |   | 19,298,613  |  
|                              |  |              |           |                   |   |           |  |   |             |  
|Net Income                    |  |              |           |                   |   |           |  |   | 5,460,052   |  
|Dividends                     |  |              |           |                   |   |           |  |   | (1,738,739  | )
|                              |  |              |           |                   |   |           |  |   |             |  
|                              |  |              |           |                   |   |           |  |   |             |  
|BALANCE on December 31,
 2005 |  |              | 5,115,435 |                   | $ | 8,525,725 |  | $ | 23,019,926  |  
|                              |  |              |           |                   |   |           |  |   |             |  
|                              |  |              |           |                   |   |           |  |   |             |  
|Net Income                    |  |              |           |                   |   |           |  |   | 35,111,205  |  
|Dividends                     |  |              |           |                   |   |           |  |   | (15,909,003 | )
|                              |  |              |           |                   |   |           |  |   |             |  
|                              |  |              |           |                   |   |           |  |   |             |  
|BALANCE on December 31,
 2006 |  |              | 5,115,435 |                   | $ | 8,525,725 |  | $ | 42,222,128  |  
|                              |  |              |           |                   |   |           |  |   |             |  
|                              |  |              |           |                   |   |           |  |   |             |  
|Net Income                    |  |              |           |                   |   |           |  |   | 4,582,972   |  
|Dividends                     |  |              |           |                   |   |           |  |   | (2,046,174  | )
|                              |  |              |           |                   |   |           |  |   |             |  
|                              |  |              |           |                   |   |           |  |   |             |  
|BALANCE on December 31,
 2007 |  |              | 5,115,435 |                   |   | 8,525,725 |  |   | 44,758,926  |  
|                              |  |              |           |                   |   |           |  |   |             |  

The accompanying notes are an integral part
of these consolidated financial statements.

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NEW ULM TELECOM, INC. AND SUBSIDIARIES

CONSOLIDATED
STATEMENTS OF CASH FLOWS
FOR THE THREE YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005

|
|
|

|                                                     |  |      |             |      |   |             |   |   |            |  
|---------------------------------------------------- |  | ---- | ----------- | ---- | - | ----------- | - | - | ---------- | -
|                                                     |  | 2007 |             | 2006 |   | 2005        |  
|                                                     |  |      |             |      |   |             |  
|CASH FLOWS FROM OPERATING
 ACTIVITIES:               |  |      |             |      |   |             |  
|Net Income                                           |  | $    | 4,582,972   |      | $ | 35,111,205  |   | $ | 5,460,052  |  
|Adjustments to Reconcile Net Income to Net
Cash      |  |      |             |      |   |             |   |   |            |  
|Provided By Operating Activities:                    |  |      |             |      |   |             |   |   |            |  
|Depreciation and Amortization                        |  |      | 3,893,777   |      |   | 4,120,673   |   |   | 4,111,769  |  
|Undistributed Earnings of Cellular
Investment        |  |      |            |      |   | (3,197,149  | ) |   | (3,283,180 | )
|Gain on Sale of Celluar Investment                   |  |      | (3,116,624  | )    |   | (50,152,885 | ) |   |           |  
|Undistributed Earnings of Hector
Investment          |  |      | (536,504    | )    |   | (162,600    | ) |   |           |  
|Loss on Disposal of Assets                           |  |      |            |      |   | 32,836      |   |   |           |  
|Deferred Income Taxes                                |  |      | (225,450    | )    |   | (2,623,784  | ) |   | (200,860   | )
|Changes in Assets and Liabilities:                   |  |      |             |      |   |             |   |   |            |  
|Receivables                                          |  |      | 300,456     |      |   | (280,193    | ) |   | 360,398    |  
|Inventories                                          |  |      | (123,177    | )    |   | 12,361      |   |   | 11,115     |  
|Prepaid Expenses                                     |  |      | (73,921     | )    |   | 50,858      |   |   | 1,517      |  
|Deferred Charges                                     |  |      | (1,103,024  | )    |   |            |   |   |           |  
|Accounts Payable                                     |  |      | 1,265,920   |      |   | (304,182    | ) |   | (794,041   | )
|Accrued Income Taxes                                 |  |      | (22,850,482 | )    |   | 21,718,046  |   |   | 673,994    |  
|Other Accrued Taxes                                  |  |      | 11,514      |      |   | (1,989      | ) |   | 1,479      |  
|Other Accrued Liabilities                            |  |      | 12,347      |      |   | 39,671      |   |   | 144,838    |  
|                                                     |  |      |             |      |   |             |   |   |            |  
|Net Cash Provided By (Used In) Operating
Activities  |  |      | (17,962,196 | )    |   | 4,362,868   |   |   | 6,487,081  |  
|                                                     |  |      |             |      |   |             |   |   |            |  
|                                                     |  |      |             |      |   |             |   |   |            |  
|CASH FLOWS FROM INVESTING
 ACTIVITIES:               |  |      |             |      |   |             |   |   |            |  
|Additions to Property, Plant and Equipment,
Net      |  |      | (4,029,073  | )    |   | (1,966,156  | ) |   | (2,317,737 | )
|Proceeds from Sale of Cellular Investment            |  |      | 3,116,624   |      |   | 74,318,762  |   |   |           |  
|Purchase of Hector Investment                        |  |      |            |      |   | (18,000,000 | ) |   |           |  
|Other, Net                                           |  |      | (9,362      | )    |   | (47,234     | ) |   | 52,757     |  
|                                                     |  |      |             |      |   |             |   |   |            |  
|Net Cash Provided By (Used In) Investing
Activities  |  |      | (921,811    | )    |   | 54,305,372  |   |   | (2,264,980 | )
|                                                     |  |      |             |      |   |             |   |   |            |  
|                                                     |  |      |             |      |   |             |   |   |            |  
|CASH FLOWS FROM FINANCING
 ACTIVITIES:               |  |      |             |      |   |             |   |   |            |  
|Principal Payments of Long-Term Debt                 |  |      | (17,217     | )    |   | (15,008,294 | ) |   | (2,515,987 | )
|Dividends Paid                                       |  |      | (2,046,174  | )    |   | (15,909,003 | ) |   | (1,738,739 | )
|                                                     |  |      |             |      |   |             |   |   |            |  
|Net Cash Used In Financing Activities                |  |      | (2,063,391  | )    |   | (30,917,297 | ) |   | (4,254,726 | )
|                                                     |  |      |             |      |   |             |   |   |            |  
|                                                     |  |      |             |      |   |             |   |   |            |  
|NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS |  |      | (20,947,398 | )    |   | 27,750,943  |   |   | (32,625    | )
|                                                     |  |      |             |      |   |             |   |   |            |  
|CASH AND CASH EQUIVALENTS
 at Beginning of Year      |  |      | 30,457,707  |      |   | 2,706,764   |   |   | 2,739,389  |  
|                                                     |  |      |             |      |   |             |   |   |            |  
|                                                    
|CASH AND CASH EQUIVALENTS
 at End of Year            |  | $    | 9,510,309   |      | $ | 30,457,707  |   | $ | 2,706,764  |  
|                                                     |  |      |             |      |   |             |   |   |            |  

The accompanying notes are an integral part
of these consolidated financial statements.

39

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|                                          
|------------------------------------------
|NEW ULM TELECOM, INC. AND SUBSIDIARIES    
|                                          
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|                                          
|                                          

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES

Basis of Presentation

New Ulm
Telecom, Inc.s (Company) principal line of business is providing local
telephone service, Internet, digital video, and access to long-distance
telephone service through local exchange networks. The Company owns and
operates three independent telephone companies serving seven communities in
southern Minnesota, one community in Iowa and the adjacent rural areas, a
competitive local exchange carrier (CLEC), and operates cable television
systems in ten communities. The Company has an investment in a CLEC (FiberComm,
LC) and an ILEC (Hector). The Company had investments in cellular entities
prior to their sale to Alltel on October 2, 2006.

Principles of Consolidation

The
consolidated financial statements include the accounts of the Company and its
five wholly-owned subsidiaries. All significant inter-company transactions have
been eliminated in consolidation.

Accounting Estimates

The
presentation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities as of the date
of the financial statements and the reported amount of revenues and expenses
during the operating period. Actual results could differ from those estimates.

Cash Equivalents

All highly
liquid investments (primarily US Government Bonds and Agency Bonds) with a
maturity of three months or less at the time of purchase are considered cash
equivalents.

Receivables

Receivables are stated at
the amounts the Company expects to collect from outstanding balances. The
Company provides for probable uncollectible amounts through charges to earnings
and credits to the valuation allowance based on its assessment of the current
status of individual accounts. Balances that are still outstanding after the
Company has used reasonable collection efforts are written off through charges
to the valuation allowance and credits to receivable accounts.

Materials, Supplies and Inventories

Materials,
supplies and inventories are recorded at the lower of average cost or market.

Property, Plant and Equipment

Property,
plant and equipment are recorded at original cost. Additions, improvements or
major renewals are capitalized. When telecommunications assets are sold,
retired or otherwise disposed of in the ordinary course of business, the cost,
less salvage, is charged to accumulated depreciation and the original cost is
credited to the asset accounts. Any gains or losses on non-telecommunications
property and equipment retirements are reflected in the current year
operations.

40

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|                                          
|------------------------------------------
|NEW ULM TELECOM, INC. AND SUBSIDIARIES    
|                                          
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|                                          
|                                          

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (Continued)

Recoverability of Long-Lived Assets

The Company
reviews its long-lived assets whenever events or changes in circumstances
indicate the carrying amount of the assets may not be recoverable. The Company
determines potential impairment by comparing the carrying value of its assets
with the sum of the undiscounted cash flows expected to be provided by
operating and eventually disposing of the asset. Should the sum of the expected
future net cash flows be less than carrying values, the Company would determine
whether an impairment loss should be recognized. No impairment losses have been
identified in the financial statements.

Investments and Other Assets

Investments in
Midwest Wireless Holdings, L.L.C. (MWH) (prior to its October 2, 2006 sale to
Alltel), FiberComm, LC, and Hector Communications Corporation are recorded using
the equity method of accounting, which reflects original cost and equity in
undistributed earnings and losses.

Long-term
investments in other companies that are not intended for resale or are not
readily marketable are valued at the lower of cost or net realizable value.

Goodwill and Intangible Assets

Goodwill
represents the excess of the purchase price of acquisitions and equity method
investments over the fair value of the net assets acquired. Goodwill is
reviewed annually for possible impairment. In its reviews, the Company has
determined that goodwill is not impaired. Intangible assets with definite lives
continue to be amortized.

Revenue Recognition

Revenues are
recognized when earned. Local network, video and Internet revenues are
recognized over the period a subscriber is connected to the network. Interstate
access revenues are based on settlements with the National Exchange Carrier
Association. Interstate access settlements are based on cost studies for New
Ulm Telecom, Inc. and by nationwide average cost schedules for two of its
subsidiaries, Western Telephone Company and Peoples Telephone Company. Access
revenues for New Ulm Telecom, Inc. include estimates which management believes
are reasonable, pending finalization of cost studies. Local network and
intrastate access revenues are based on tariffs filed with the state regulatory
commissions. Revenues from system sales and services are derived from the sale,
installation, and servicing of communication systems. In accordance with EITF
00-21, these deliverables are separate units of accounting. Customer contracts
of sales and installations are recognized using the completed-contract method,
which recognizes income when the contract is substantially complete. Rental
revenues are recognized over the rental period. The Company recognizes taxes charged to
customers on a net basis in the statement of income.

Interest During Construction

The Company
includes in its telecommunications plant account an average cost of debt used
for the construction of the plant.

41

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|                                          
|------------------------------------------
|NEW ULM TELECOM, INC. AND SUBSIDIARIES    
|                                          
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|                                          
|                                          

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (Continued)

Income Taxes and Investment Tax Credits

The provision
for income taxes consists of an amount for taxes currently payable and a
provision for tax consequences deferred to future periods. Deferred income
taxes are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax basis. Significant components of the
Companys deferred taxes arise from differences in the basis of property,
plant, and equipment due to the use of accelerated depreciation methods for tax
purposes and partnerships due to the difference between book and tax income.
For financial statement purposes, deferred investment tax credits are being
amortized as a reduction of the provision for income taxes over the estimated
useful lives of the related property, plant and equipment.

Credit Risk

Financial
instruments which potentially subject the Company to concentrations of credit
risk consist principally of cash and receivables. The Company places its cash
investments with high credit quality financial institutions in accounts which,
at times, may exceed the federally insured limits. The Company has not
experienced any losses in these accounts and does not believe it is exposed to
any significant credit risk. Concentrations of credit risk with respect to
trade receivables are limited due to the Companys large number of customers.

Basic and Diluted Net Income Per Common Share

Basic and
diluted net income per common share is based on the weighted average number of
shares outstanding of 5,115,435.

NOTE 2 - PROPERTY, PLANT AND EQUIPMENT

Property,
plant and equipment for December 31, 2007 and 2006 includes the following:

|                                    |  |      |            |      |   |            | 
|----------------------------------- |  | ---- | ---------- | ---- | - | ---------- | 
|                                    |  | 2007 |            | 2006 |  
|                                    |  |      |            |      |  
|Telecommunications
 Plant:          |  |      |            |      |   |            | 
|Land                                |  | $    | 176,783    |      | $ | 176,783    | 
|Buildings                           |  |      | 2,163,270  |      |   | 1,974,980  | 
|Other Support Assets                |  |      | 3,538,097  |      |   | 3,593,738  | 
|Central Office Equipment            |  |      | 29,071,543 |      |   | 27,697,851 | 
|Cable and Wire Facilities           |  |      | 25,989,689 |      |   | 25,610,690 | 
|Other Plant and Equipment           |  |      | 394,323    |      |   | 394,323    | 
|Plant Under Construction            |  |      | 1,975,417  |      |   | 455,397    | 
|                                    |  |      |            |      |   |            | 
|                                    |  |      | 63,309,122 |      |   | 59,903,762 | 
|                                    |  |      |            |      |   |            | 
|                                    |  |      |            |      |   |            | 
|Other
 Property                     |  |      | 3,173,127  |      |   | 2,976,784  | 
|Video Plant                         |  |      | 2,656,683  |      |   | 2,489,752  | 
|                                    |  |      |            |      |   |            | 
|                                    |  |      | 5,529,810  |      |   | 5,466,536  | 
|                                    |  |      |            |      |   |            | 
|                                    |  |      |            |      |   |            | 
|Total Property, Plant and Equipment |  | $    | 69,138,932 |      | $ | 65,370,298 | 
|                                    |  |      |            |      |   |            | 

Depreciation
is computed using the straight-line method based on estimated service or
remaining useful lives of the various classes of depreciable assets. The
composite depreciation rates on telecommunications plant and equipment for the
three years ended December 31, 2007, 2006 and 2005 were 5.9%, 6.5%, and 7.0%.
Other property is depreciated over estimated useful lives of three to fifteen
years.

42

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|NEW ULM TELECOM, INC. AND SUBSIDIARIES    
|                                          
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|                                          
|                                          

NOTE 3 - CELLULAR INVESTMENT

Cellular investment included
a 9.88% ownership interest in units of MWH at December 31, 2005 (the Companys
ownership interest in MWH was sold to Alltel on October 2, 2006). This entity
provided cellular phone service to southern Minnesota, northwestern Iowa and
southwestern Wisconsin. The difference between the carrying amount of the MWH
investment and the underlying equity in the net assets of MWH at the time of
purchase of ownership interests was $4,890,389 as of December 31, 2005,
net of accumulated amortization of $156,391.

Income and cash
distributions from MWH were as follows for the years ended December 31, 2006,
and 2005:

|                    |  |      |           |      |   |           | 
|------------------- |  | ---- | --------- | ---- | - | --------- | 
|                    |  | 2006 |           | 2005 |  
|                    |  |      |           |      |  
|                    |  |      |           |      |  
|Income
 Recorded    |  | $    | 5,925,389 |      | $ | 5,742,935 | 
|Cash
 Distributions |  |      | 2,728,240 |      |   | 2,457,755 | 

The following is summarized
financial information from MWH as of and for the period ended October 2, 2006,
and as of and for the year ended December 31, 2005:

|                        |  |      |             |      |   |             | 
|----------------------- |  | ---- | ----------- | ---- | - | ----------- | 
|                        |  | 2006 |             | 2005 |  
|                        |  |      |             |      |  
|                        |  |      |             |      |  
|Current
 Assets         |  | $    | 36,130,833  |      | $ | 33,104,932  | 
|Noncurrent
 Assets      |  |      | 356,934,252 |      |   | 362,172,494 | 
|Current
 Liabilities    |  |      | 118,687,337 |      |   | 40,753,598  | 
|Noncurrent
 Liabilities |  |      | 3,518,305   |      |   | 139,497,300 | 
|Members
 Equity        |  |      | 270,859,443 |      |   | 215,026,528 | 
|Revenues                |  |      | 219,577,883 |      |   | 264,013,168 | 
|Operating
 Income       |  |      | 72,917,668  |      |   | 73,851,914  | 
|Net Income              |  |      | 60,174,958  |      |   | 58,232,113  | 

In November
2005, Alltel Corporation (Alltel) entered into a definitive agreement to
purchase MWH licenses, customers and network assets for $1.075 billion in cash
(See Note 12).

NOTE 4 - GOODWILL AND INTANGIBLES

At December 31, 2007, the
Company had goodwill for wireline acquisitions of $3,218,906. The Company
annually tests the goodwill of $3,218,906, associated with wireline
acquisitions under SFAS 142 and had determined the goodwill associated with
this investment is not impaired.

Goodwill and other
non-amortizable intangibles consist of the following:

|                                         |  |      |           |      |   |           | 
|---------------------------------------- |  | ---- | --------- | ---- | - | --------- | 
|                                         |  | 2007 |           | 2006 |  
|                                         |  |      |           |      |  
|                                         |  |      |           |      |   |           | 
|Included
 Under the Caption at Year End: |  |      |           |      |   |           | 
|Goodwill                                 |  | $    | 3,218,906 |      | $ | 3,218,906 | 
|                                         |  |      |           |      |   |           | 

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|NEW ULM TELECOM, INC. AND SUBSIDIARIES    
|                                          
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|                                          
|                                          

NOTE 4 - GOODWILL AND INTANGIBLES (Continued)

Amortizable intangibles
consist of the following:

|                           |  |      |        |      |   |        |  
|-------------------------- |  | ---- | ------ | ---- | - | ------ | -
|                           |  | 2007 |        | 2006 |  
|                           |  |      |        |      |  
|                           |  |      |        |      |  
|Balance
 Beginning of Year |  | $    | 19,327 |      | $ | 21,379 |  
|Intangible amortization    |  |      | (2,052 | )    |   | (2,052 | )
|                           |  |      |        |      |   |        |  
|                           |  |      |        |      |   |        |  
|Balance End of Year        |  | $    | 17,275 |      | $ | 19,327 |  
|                           |  |      |        |      |   |        |  

Estimated
annual amortization expense for definite-lived-intangible assets for each of
the next five years is $2,052.

NOTE 5 - LONG-TERM DEBT

Long-term debt
is as follows:

|                                                                                                                                                                |  |      |        |      |   |         | 
|--------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | ------ | ---- | - | ------- | 
|                                                                                                                                                                |  | 2007 |        | 2006 |  
|                                                                                                                                                                |  |      |        |      |  
|                                                                                                                                                                |  |      |        |      |  
|Unsecured
 ten-year note with the City of Redwood Falls, payable semi-annually
 (beginning in 2002), at a fixed 5% interest rate, maturing on January 1,
 2013. |  | $    | 88,915 |      | $ | 106,132 | 
|                                                                                                                                                                |  |      |        |      |   |         | 
|                                                                                                                                                                |  |      | 88,915 |      |   | 106,132 | 
|Less amount
 due within one year                                                                                                                                |  |      | 27,472 |      |   | 26,149  | 
|                                                                                                                                                                |  |      |        |      |   |         | 
|                                                                                                                                                                |  |      |        |      |   |         | 
|Long-term debt                                                                                                                                                  |  | $    | 61,443 |      | $ | 79,983  | 
|                                                                                                                                                                |  |      |        |      |   |         | 

Substantially all assets of
the Company were pledged as security for the long-term debt under certain loan
agreements with CoBank, ACB. These mortgage notes were to be repaid in equal
quarterly and monthly installments, respectively, covering principal and
interest beginning in the year after issue and expiring by December 20, 2011.
In October 2006 and December 2006, the Company made long-term debt repayments
that extinguished its debt with CoBank, ACB.

The security
and loan agreements underlying the CoBank, ACB notes contained certain
restrictions on distributions to stockholders, investment in, or loans to,
others. In addition, the Company was required to maintain certain financial
ratios for current assets to current liabilities, net worth to total assets,
long-term debt to operating cash flow and debt service coverage. During 2006,
the specified financial ratios outlined in the loan agreements were achieved.

Principal payments required
during the next five years are as follows: 2008 - $27,472;
2009 - $19,478; 2010 - $20,465; 2011 - $21,500;
and 2012 - $0.

Cash payments
for interest, net of amounts capitalized, were $46,045, $832,314, and $779,905
in 2007, 2006, and 2005.

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|NEW ULM TELECOM, INC. AND SUBSIDIARIES    
|                                          
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|                                          
|                                          

NOTE 6 - INCOME TAXES AND INVESTMENT TAX CREDITS

Income taxes reflected in
the Consolidated Statements of Income consist of the following:

|                          |  |      |           |      |   |            |   |   |           |  
|------------------------- |  | ---- | --------- | ---- | - | ---------- | - | - | --------- | -
|                          |  | 2007 |           | 2006 |   | 2005       |  
|                          |  |      |           |      |   |            |  
|Taxes
 Currently Payable: |  |      |           |      |   |            |   |   |           |  
|Federal                   |  | $    | 2,655,807 |      | $ | 20,718,269 |   | $ | 3,071,148 |  
|State                     |  |      | 631,496   |      |   | 6,210,798  |   |   | 1,054,958 |  
|Deferred
 Income Taxes    |  |      | (225,450  | )    |   | (2,623,784 | ) |   | (200,860  | )
|                          |  |      |           |      |   |            |   |   |           |  
|                          |  |      |           |      |   |            |   |   |           |  
|Total Income Tax Expense  |  | $    | 3,061,853 |      | $ | 24,305,283 |   | $ | 3,925,246 |  
|                          |  |      |           |      |   |            |   |   |           |  

A change in
the estimated amount provided for the 2006 corporate income taxes has been
recorded in the estimated income taxes for the year ended December 31, 2007 and
is reflected in the current year tax rate. The change occurred as a result of a
reduced state tax liability (net of federal tax) of approximately $632,000 or
$0.12 per share, as reported on the 2006 tax return as filed.

Effective
January 1, 2007, New Ulm Telecom, Inc. adopted FASB Interpretation No. 48 (FIN
48), Accounting for Uncertainty in Income Taxes - an Interpretation of FASB
Statement 109. As required by FIN 48, we recognize the financial statement
benefit of a tax position only after determining that the relevant tax
authority would more likely than not sustain the position following an audit.
For tax positions meeting the more-likely-than-not threshold, the amount
recognized in the financial statements is the largest benefit that has a
greater than 50 percent likelihood of being realized upon ultimate settlement
with the relevant tax authority.

At
the adoption date of January 1, 2007, the Company had no unrecognized tax
benefits which needed to be adjusted for. The Company recognizes interest and
penalties accrued on unrecognized tax benefits as well as interest received
from favorable tax settlements within income tax expense. At the adoption date
of January 1, 2007, the Company recognized no interest or penalties related to
uncertain tax positions. A reconciliation of the beginning and ending
amount of unrecognized tax benefits is as follows:

|                                |  |      |         | 
|------------------------------- |  | ---- | ------- | 
|                                |  | 2007 |        
|                                |  |      |        
|Balance
 Beginning of Year      |  | $    |        | 
|Gross Increases                 |  |      |         | 
|Prior Period Tax Positions      |  |      |        | 
|Current Period Tax Positions    |  |      | 155,616 | 
|Gross Decreases                 |  |      |         | 
|Prior Period Tax Positions      |  |      |        | 
|Current Period Tax Positions    |  |      |        | 
|Settlements                     |  |      |        | 
|Lapse of statute of Limitations |  |      |        | 
|                                |  |      |        
|Balance End
 of Year            |  | $    | 155,616 | 
|                                |  |      |        

Included in
the balance at December 31, 2007, the Company recognized a reduction in income
tax expense for a tax position related to an allowance on certain accounts
receivable and amounts based on the tax treatment of an installment sale.

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|NEW ULM TELECOM, INC. AND SUBSIDIARIES    
|                                          
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|                                          
|                                          

At the adoption date of January 1, 2007, the Company had no unrecognized tax benefits that, if
recognized, would affect the effective tax rate. As of December 31, 2007 the Company had approximately $155,600 of unrecognized
tax benefits that, if recognized, would affect the effective tax rate.

The Company is
primarily subject to U.S., Minnesota, Iowa, Nebraska and Wisconsin income tax.
Tax years subsequent to 2003 remain open to examination by U.S. federal and
state tax authorities. The Companys policy is to recognize interest and
penalties related to income tax matters in income tax expense. As of December
31, 2007, the Company had no accrual for interest or penalties related to
income tax matters.

The differences between the
statutory federal tax rate and the effective tax rate were as follows:

|                                                |  |      |      |      |  |      |   |  |      |  
|----------------------------------------------- |  | ---- | ---- | ---- |  | ---- | - |  | ---- | -
|                                                |  | 2007 |      | 2006 |  | 2005 |  
|                                                |  |      |      |      |  |      |  
|Statutory
 Tax Rate                             |  |      | 35.0 | %    |  | 35.0 | % |  | 35.0 | %
|Effect of:                                      |  |      |      |      |  |      |   |  |      |  
|Surtax exemption                                |  |      | (1.0 | )    |  |     |   |  | (1.0 | )
|State income taxes, net of federal tax
 benefit |  |      | 6.4  |      |  | 5.6  |   |  | 8.3  |  
|Other, net                                      |  |      | (0.4 | )    |  | 0.3  |   |  | (0.5 | )
|                                                |  |      |      |      |  |      |   |  |      |  
|                                                |  |      |      |      |  |      |   |  |      |  
|Effective tax rate                              |  |      | 40.0 | %    |  | 40.9 | % |  | 41.8 | %
|                                                |  |      |      |      |  |      |   |  |      |  

Deferred income taxes and
unrecognized tax benefits reflected in the Consolidated Balance Sheets are summarized as follows:

|                                    |  |      |           |      |   |           |  
|----------------------------------- |  | ---- | --------- | ---- | - | --------- | -
|                                    |  | 2007 |           | 2006 |  
|                                    |  |      |           |      |  
|Deferred Tax
 (Assets)/Liabilities: |  |      |           |      |   |           |  
|Depreciation                        |  | $    | 3,485,432 |      | $ | 3,406,934 |  
|Partnership basis                   |  |      | (259,776  | )    |   | 82,300    |  
|Other                               |  |      | (362,589  | )    |   | (245,100  | )
|                                    |  |      |           |      |   |           |  
|                                    |  |      |           |      |   |           |  
|Subtotal                            |  |      | 2,863,067 |      |   | 3,244,134 |  
|                                    |  |      |           |      |   |           |  
|Unrecognized Tax Benefit            |  |      | 155,616   |      |   |          |  
|                                    |  |      |           |      |   |           |  
|                                    |  |      |           |      |   |           |  
|Total                               |  | $    | 3,018,683 |      | $ | 3,244,134 |  
|                                    |  |      |           |      |   |           |  

Cash payments for income
taxes, net of refunds, were $26,137,785, $5,221,021, and $3,029,933 in 2007,
2006, and 2005, respectively.

NOTE 7 - RETIREMENT PLAN

The Company
has a 401(k) employee savings plan in effect for its employees who meet certain
age and service requirements. The Companys contribution to its 401(k) employee
savings plan was $226,201, $215,231, and $194,036 in 2007, 2006 and 2005,
respectively.

NOTE 8 - FAIR VALUE OF FINANCIAL INSTRUMENTS

It was not practicable to
estimate a fair value for investments in companies carried on the cost basis
due to a lack of quoted market prices. The Company believes the book value is
not impaired at December 31, 2007.

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|NEW ULM TELECOM, INC. AND SUBSIDIARIES    
|                                          
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|                                          
|                                          

The fair value of the
Companys long-term debt is estimated based on the discounted value of the
future cash flows expected to be paid using current rates of borrowing for
similar types of debt. Fair value of the debt approximates carrying value.

New Ulm
Telecom, Inc.s financial instruments also include cash equivalents, trade
accounts receivable, and accounts payable for which current carrying amounts
approximate fair market value.

NOTE 9 - COMMITMENTS

The Companys
capital budget for 2008 is approximately $4,000,000, which will be financed
through internally generated funds. As of December 31, 2007, the Company has no
significant purchase commitments.

NOTE 10 - NONCASH INVESTING ACTIVITIES

Noncash investing activities
included $107,780, $152,460, and $525,672 during the years ended December 31,
2007, 2006 and 2005, relating to plant and equipment additions placed in
service during 2007, 2006 and 2005, which are reflected in accounts payable at
year end.

NOTE 11 - GUARANTEES

On January 30, 2004, the
Company guaranteed the indebtedness of FiberComm, LC (a 25.18% owned
partnership, which is being accounted for by the equity method) in connection
with the refinancing of a 15-year loan made by American State Bank to
FiberComm, LC. The Companys liability for the guarantee is not to exceed 12.5%
of the indebtedness of FiberComm, LC upon default, including accrued interest,
and the expenses of collection or protection of lenders rights and remedies
under the guarantee. The Company had recorded a liability of $375,000 in
connection with this guarantee, which was the maximum potential liability under
the terms of the guarantee. As of December 31, 2007, the Company has recorded a
liability of $328,336 in connection with this guarantee. This is the maximum
potential liability under the terms of the guarantee at December 31, 2007.

In addition,
on November 3, 2006, the Company guaranteed a portion of the indebtedness of
Hector Communications Corporation (HCC), in connection with a $6.4 million
bridge loan by CoBank, ACB to HCC. The bridge financing by CoBank, ACB was issued
in anticipation of HCCs receipt of escrow funds in connection with the sale of
its cellular interests in MWH to Alltel. Due to the contingencies for the
release of the escrow funds, the three HCC owners (New Ulm Telecom, Inc., Blue
Earth Valley Communications, Inc. and Arvig Enterprises, Inc.) have each agreed
to guarantee $2.133 million of the bridge loan. As of December 31, 2007 this
loan had been paid in full.

NOTE 12  SALE OF MIDWEST WIRELESS HOLDINGS
LLC

Prior to the
sale of MWH, the Company owned approximately 9.88% of MWH. In November 2005,
MWH and Alltel entered into an agreement for Alltel to purchase MWH. The
transaction was closed October 2, 2006 after the satisfaction of conditions and
the receipt of regulatory approvals. Under the terms of the agreement, all of
the members of MWH sold their membership interests to Alltel.

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|NEW ULM TELECOM, INC. AND SUBSIDIARIES    
|                                          
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|                                          
|                                          

Upon closing,
New Ulm Telecom, Inc. received approximately 90% of the sale proceeds or
approximately $74 million on October 6, 2006. Alltel delivered the other 10% to
the escrow agent. The escrow account will be used for any true-up adjustments,
indemnifications, and other specified costs. Funds not used for such purposes
will be released to the members. New Ulm received its prorata share of the
amount in escrow during April 2007, of approximately $3.1 million, and January
2008, of approximately $5.1 million.

The Companys
prorated share of the indemnification account of the escrow was $8,170,263 plus
accrued interest, which has all been received by the Company as of January,
2008. Due to the contingencies for release of the escrow funds, no receivable
had been recorded for the escrow funds.

NOTE 13  INVESTMENT
IN HECTOR COMMUNICATION CORPORATION (HCC)

On November 3,
2006, New Ulm Telecom, Inc. acquired a one-third interest in HCC. HCC is
equally owned by New Ulm telecom, Inc., Blue Earth Valley Communications, Inc.
and Arvig Enterprises, Inc. Each of the owners provides management and other
operational services to HCC and its subsidiaries.

New Ulm
Telecom, Inc.s President and CEO, Mr. Bill Otis, has been named Chairman of
the Board and President of HCC

Hector investment consists
of the following:

|                         |  |      |            |      |   |            |  
|------------------------ |  | ---- | ---------- | ---- | - | ---------- | -
|                         |  | 2007 |            | 2006 |  
|                         |  |      |            |      |  
|Equity
 Investment       |  | $    | 18,000,000 |      | $ | 18,000,000 |  
|Loan Guarantee           |  |      | 0          |      |   | 2,133,333  |  
|Cumulative Income        |  |      | 699,104    |      |   | 162,600    |  
|Cumulative Distributions |  |      | (0         | )    |   | (0         | )
|                         |  |      |            |      |  
|                        
|Total                    |  | $    | 18,699,104 |      | $ | 20,295,933 |  
|                         |  |      |            |      |  

Income and cash
distributions from HCC were as follows as of the year ended December 31, 2007
and for the period from acquisition (November 3, 2006) to December 31, 2006:

|                                  |  |      |         |      |   |         |  
|--------------------------------- |  | ---- | ------- | ---- | - | ------- | -
|                                  |  | 2007 |         | 2006 |  
|                                  |  |      |         |      |  
|Balance Beginning of Year         |  | $    | 162,600 |      | $ | 0       |  
|Current Income                    |  |      | 536,504 |      |   | 162,600 |  
|Current Distributions             |  |      | (0      | )    |   | (0      | )
|                                  |  |      |         |      |  
|                                  |  |      |         |      |   |         |  
|Cumulative Undistributed Earnings |  | $    | 699,104 |      | $ | 162,600 |  
|                                  |  |      |         |      |  

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|NEW ULM TELECOM, INC. AND SUBSIDIARIES    
|                                          
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|                                          
|                                          

The following is summarized financial information from HCC as of the year ended December 31, 2007
and for the period from acquisition (November 3, 2006) to December 31, 2006:

|                        |  |      |             |      |   |             | 
|----------------------- |  | ---- | ----------- | ---- | - | ----------- | 
|                        |  | 2007 |             | 2006 |  
|Current Assets          |  | $    | 12,195,812  |      | $ | 34,920,241  | 
|Noncurrent
 Assets      |  |      | 143,096,395 |      |   | 142,206,163 | 
|Current
 Liabilities    |  |      | 8,704,597   |      |   | 33,123,755  | 
|Noncurrent
 Liabilities |  |      | 91,023,926  |      |   | 89,638,886  | 
|Stockholders
 Equity   |  |      | 55,563,684  |      |   | 54,363,763  | 
|Revenues                |  |      | 30,484,910  |      |   | 5,295,962   | 
|Operating
 Income       |  |      | 7,186,478   |      |   | 1,571,100   | 
|Net Income              |  |      | 1,609,214   |      |   | 488,133     | 
|                        |  |      |             |      |   |             | 

A complete 2007 10-K includes HCC audited financial statements.

NOTE 14 - ACQUISITION OF HUTCHINSON TELEPHONE COMPANY (HTC)

On January 4, 2008, New Ulm
completed the acquisition of HTC for approximately $78 million pursuant to the
terms of the Agreement and Plan of Merger dated as of August 3, 2007, as
amended. The transaction was structured as a reverse triangular merger under
which a newly formed subsidiary of New Ulm merged into HTC at closing, with HTC
continuing as a subsidiary of New Ulm. The acquisition has resulted in a
combined company that provides phone, video and internet services with over
50,000 connections in a number of Minnesota and Iowa communities.

Under the
Merger Agreement, approximately $72 million of the $78 million was distributed
to former shareholders of HTC immediately. An additional $5.7 million was
placed in an escrow account covering (i) indemnification of New Ulm in the
amount of $5.2 million covering the representations and warranties of HTC for a
period of 15 months from closing and (ii) a True-Up Reserve and Shareholder
Fund Amount in the aggregate amount of $500,000.

In connection with its
acquisition of Hutchinson Telephone Company (HTC), New Ulm Telecom, Inc.
(New Ulm) and HTC as New Ulms new subsidiary entered into a credit facility
with CoBank, ACB. Under the credit facility, each of New Ulm and HTC entered
into a separate Master Loan Agreement (MLA) and a series of supplements to
the respective MLAs.

Under the terms of the two
MLA and supplements, New Ulm and HTC have borrowed approximately $59.7 million
and entered into promissory notes on the following terms:

New Ulm

MLA: $15,000,000 term note with interest payable monthly. Twelve quarterly
principal payments of $125,000 are due commencing March 31, 2008 through
December 31, 2010. Sixteen quarterly principal payments of $250,000 are due
commencing March 31, 2011 through December 31, 2014. Final maturity of the note
is December 31, 2014.

Supplement:
$10,000,000 revolving note with interest payable monthly. Final maturity of the
note is December 31, 2014.

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|NEW ULM TELECOM, INC. AND SUBSIDIARIES    
|                                          
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|                                          
|                                          

Hutchinson Telephone Company

MLA: $29,700,000 term note with interest payable monthly. Sixteen quarterly
principal payments of $609,500 are due commencing March 31, 2010 through
December 31, 2014. Final maturity of the note is December 31, 2014.

Supplement:
$2,000,000 revolving note with interest payable monthly. Final maturity of the
note is December 31, 2014.

Supplement:
$3,000,000 term note with interest payable monthly. Final maturity of the note
is April 3, 2008.

New Ulm and
HTC and their respective subsidiaries also have entered into security
agreements under which substantially all the assets of New Ulm, HTC and their
respective subsidiaries have been pledged to CoBank for performance under the
loans. In addition, New Ulm, HTC and their respective subsidiaries have
guaranteed all the obligations under the credit facility.

The loan agreements also put
restrictions on the ability of New Ulm to pay cash dividends to its shareholders, but New Ulm is allowed
to pay dividends (a) (i) in an amount up to $2,050,000 in any year and (ii) in
any amount if New Ulms Total Leverage Ratio, that is, the ratio of its
Indebtedness to EBITDA (in each case as defined in the loan documents) is
equal to or less than 3:50 to 1:00, and (b) in either case if New Ulm is not in
default or potential default under the loan agreements.

50

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|                                          
|------------------------------------------
|NEW ULM TELECOM, INC. AND SUBSIDIARIES    
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|                                          

NOTE
15 - SEGMENT INFORMATION

The Company is organized into
three business segments: the Telecom Segment, the Cellular Segment and the Phonery
Segment. The Telecom Segment consists of the operations of its incumbent local
carriers (ILECs), its competitive local exchange carrier (CLEC), and its
operations that provide internet and video services. In addition, this Segment
also has a 25.18% investment in FiberComm, LC, a competitive local exchange
carrier (CLEC), in Sioux City, Iowa and acquired a 33.33% ownership interest in
Hector Communications Corporation (HCC) on November 3, 2006. HCC offers ILEC,
CATV, and Internet services to various communities in Minnesota and Wisconsin.
The Cellular Segment includes the sale and service of cellular phones and
accessories, and had a 9.88% cellular investment in MWH that was sold to Alltel
on October 2, 2006. The cellular investment in the Cellular Segment was
recorded on the equity method on the financial statements and is presented in
this note using the proportionate consolidated method. The Company recorded its
9.88% investment in MWH using the proportionate consolidation method so that it
can be compared to the cellular industry, as well as the Companys other
business segments, and because the Companys chief operation decision maker
reviewed the performance of MWH using the proportionate method. The Phonery
segment includes the sales and service of customer premise equipment (CPE),
transport operations, and the resale of long distance toll service. No single
customer accounted for a material portion of the Companys revenues in any of
the last three years.

Segment information is as
follows:

|                                                            |  |                  |             |                   |   |                  |   |              |           |              |   |              |   |   |             |  
|----------------------------------------------------------- |  | ---------------- | ----------- | ----------------- | - | ---------------- | - | ------------ | --------- | ------------ | - | ------------ | - | - | ----------- | -
|                                                            |  | Telecom
 Segment |             | Cellular
 Segment |   | Phonery
 Segment |   | Eliminations |           | Consolidated |  
|                                                            |  |                  |             |                   |   |                  |   |              |           |              |  
|Year Ended December 31, 2007:                               |  |                  |             |                   |   |                  |   |              |           |              |   |              |   |   |             |  
|Operating Revenues                                          |  | $                | 15,516,352  |                   | $ | 708,807          |   | $            | 2,057,501 |              | $ | (981,724     | ) | $ | 17,300,936  |  
|Depreciation and Amortization                               |  |                  | 3,817,512   |                   |   |                 |   |              | 76,265    |              |   |             |   |   | 3,893,777   |  
|Operating Expenses, Excluding Depreciation and
Amortization |  |                  | 9,688,213   |                   |   | 564,561          |   |              | 1,074,741 |              |   | (981,724     | ) |   | 10,345,791  |  
|                                                            |  |                  |             |                   |   |                  |   |              |           |              |   |              |   |   |             |  
|Operating Income                                            |  |                  | 2,010,627   |                   |   | 144,246          |   |              | 906,495   |              |   |             |   |   | 3,061,368   |  
|Interest Expense                                            |  |                  | (32,215     | )                 |   |                 |   |              |          |              |   |             |   |   | (32,215     | )
|Gain on Sale of Cellular Investment                         |  |                  |            |                   |   | 3,116,624        |   |              |          |              |   |             |   |   | 3,116,624   |  
|Hector Investment Income                                    |  |                  | 536,504     |                   |   |                 |   |              |          |              |   |             |   |   | 536,504     |  
|Other Investment Income                                     |  |                  | 750,254     |                   |   | 212,290          |   |              |          |              |   |             |   |   | 962,544     |  
|Income Taxes                                                |  |                  | (1,321,414  | )                 |   | (1,373,580       | ) |              | (366,859  | )            |   |             |   |   | (3,061,853  | )
|                                                            |  |                  |             |                   |   |                  |   |              |           |              |   |              |   |   |             |  
|Net Income                                                  |  | $                | 1,943,756   |                   | $ | 2,099,580        |   | $            | 539,636   |              | $ |             |   | $ | 4,582,972   |  
|                                                            |  |                  |             |                   |   |                  |   |              |           |              |   |              |   |   |             |  
|Total Assets                                                |  | $                | 123,102,134 |                   | $ | 76,071           |   | $            | 7,226,294 |              | $ | (71,351,604  | ) | $ | 59,052,895  |  
|                                                            |  |                  |             |                   |   |                  |   |              |           |              |   |              |   |   |             |  
|Capital Expenditures                                        |  | $                | 4,004,509   |                   | $ |                 |   | $            | 24,564    |              | $ |             |   | $ | 4,029,073   |  
|                                                            |  |                  |             |                   |   |                  |   |              |           |              |   |              |   |   |             |  
|Year Ended December 31, 2006:                               |  |                  |             |                   |   |                  |   |              |           |              |   |              |   |   |             |  
|Operating Revenues                                          |  | $                | 15,412,087  |                   | $ | 21,489,893       |   | $            | 1,866,787 |              | $ | (21,886,533  | ) | $ | 16,882,234  |  
|Depreciation and Amortization                               |  |                  | 4,055,177   |                   |   | 2,216,856        |   |              | 65,496    |              |   | (2,216,856   | ) |   | 4,120,673   |  
|Operating Expenses, Excluding Depreciation and
Amortization |  |                  | 9,071,687   |                   |   | 12,659,177       |   |              | 898,621   |              |   | (13,219,040  | ) |   | 9,410,445   |  
|                                                            |  |                  |             |                   |   |                  |   |              |           |              |   |              |   |   |             |  
|Operating Income                                            |  |                  | 2,285,223   |                   |   | 6,613,860        |   |              | 902,670   |              |   | (6,450,637   | ) |   | 3,351,116   |  
|Interest Expense                                            |  |                  | (710,785    | )                 |   | (608,925         | ) |              |          |              |   | 512,055      |   |   | (807,655    | )
|Cellular Investment Income                                  |  |                  |            |                   |   |                 |   |              |          |              |   | 5,925,389    |   |   | 5,925,389   |  
|Gain on Sale of Cellular Investment                         |  |                  |            |                   |   | 50,152,885       |   |              |          |              |   |             |   |   | 50,152,885  |  
|Hector Investment Income                                    |  |                  | 162,600     |                   |   |                 |   |              |          |              |   |             |   |   | 162,600     |  
|Other Investment Income                                     |  |                  | 632,153     |                   |   | (13,193          | ) |              |          |              |   | 13,193       |   |   | 632,153     |  
|Income Taxes                                                |  |                  | (782,238    | )                 |   | (23,155,539      | ) |              | (367,506  | )            |   |             |   |   | (24,305,283 | )
|                                                            |  |                  |             |                   |   |                  |   |              |           |              |   |              |   |   |             |  
|Net Income                                                  |  | $                | 1,586,953   |                   | $ | 32,989,088       |   | $            | 535,164   |              | $ |             |   | $ | 35,111,205  |  
|                                                            |  |                  |             |                   |   |                  |   |              |           |              |   |              |   |   |             |  
|Total Assets                                                |  | $                | 137,535,472 |                   | $ | 39,070,144       |   | $            | 6,537,664 |              | $ | (103,087,439 | ) | $ | 80,055,841  |  
|                                                            |  |                  |             |                   |   |                  |   |              |           |              |   |              |   |   |             |  
|Capital Expenditures                                        |  | $                | 1,950,205   |                   | $ | 2,294,359        |   | $            | 15,951    |              | $ | (2,294,359   | ) | $ | 1,966,156   |  
|                                                            |  |                  |             |                   |   |                  |   |              |           |              |   |              |   |   |             |  
|Year Ended December 31, 2005:                               |  |                  |             |                   |   |                  |   |              |           |              |   |              |   |   |             |  
|Operating Revenues                                          |  | $                | 16,040,226  |                   | $ | 25,064,883       |   | $            | 1,837,571 |              | $ | (25,597,843  | ) | $ | 17,344,837  |  
|Depreciation and Amortization                               |  |                  | 4,050,406   |                   |   | 3,082,000        |   |              | 61,363    |              |   | (3,082,000   | ) |   | 4,111,769   |  
|Operating Expenses, Excluding Depreciation and
Amortization |  |                  | 8,708,603   |                   |   | 15,127,588       |   |              | 914,404   |              |   | (15,790,708  | ) |   | 8,959,887   |  
|                                                            |  |                  |             |                   |   |                  |   |              |           |              |   |              |   |   |             |  
|Operating Income                                            |  |                  | 3,281,217   |                   |   | 6,855,295        |   |              | 861,804   |              |   | (6,725,135   | ) |   | 4,273,181   |  
|Interest Expense                                            |  |                  | (680,733    | )                 |   | (1,029,802       | ) |              |          |              |   | 911,141      |   |   | (799,394    | )
|Cellular Investment Income                                  |  |                  |            |                   |   |                 |   |              |          |              |   | 5,742,935    |   |   | 5,742,935   |  
|Other Investment Income                                     |  |                  | 168,576     |                   |   | (71,059          | ) |              |          |              |   | 71,059       |   |   | 168,576     |  
|Income Taxes                                                |  |                  | (1,181,492  | )                 |   | (2,386,364       | ) |              | (357,390  | )            |   |             |   |   | (3,925,246  | )
|                                                            |  |                  |             |                   |   |                  |   |              |           |              |   |              |   |   |             |  
|Net Income                                                  |  | $                | 1,587,568   |                   | $ | 3,368,070        |   | $            | 504,414   |              | $ |             |   | $ | 5,460,052   |  
|                                                            |  |                  |             |                   |   |                  |   |              |           |              |   |              |   |   |             |  
|Total Assets                                                |  | $                | 90,943,813  |                   | $ | 52,068,198       |   | $            | 6,066,738 |              | $ | (93,774,840  | ) | $ | 55,303,909  |  
|                                                            |  |                  |             |                   |   |                  |   |              |           |              |   |              |   |   |             |  
|Capital Expenditures                                        |  | $                | 2,317,737   |                   | $ | 2,844,349        |   | $            |          |              | $ | (2,844,349   | ) | $ | 2,317,737   |  
|                                                            |  |                  |             |                   |   |                  |   |              |           |              |   |              |   |   |             |  

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|                                          
|------------------------------------------
|NEW ULM TELECOM, INC. AND SUBSIDIARIES    
|                                          
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|                                          

NOTE 16  UNAUDITED QUARTERLY OPERATING RESULTS

UNAUDITED QUARTERLY OPERATING RESULTS

|                                       |  |               |           |         |   |              |  |             |           |       |   |            |   |   |            | 
|-------------------------------------- |  | ------------- | --------- | ------- | - | ------------ |  | ----------- | --------- | ----- | - | ---------- | - | - | ---------- | 
|                                       |  | Quarter Ended |          
|                                       |  |               |           |         |   |             
|                                       |  | March 31      |           | June 30 |   | September 30 |  | December 31 |           | Total |  
|                                       |  |               |           |         |   |              |  |             |           |       |  
|                                      
|2007:                                  |  |               |           |         |   |              |  |             |           |       |   |            |   |   |            | 
|Revenues                               |  | $             | 4,077,107 |         | $ | 4,176,631    |  | $           | 4,412,028 |       | $ | 4,635,170  |   | $ | 17,300,936 | 
|Operating Income                       |  |               | 612,271   |         |   | 503,988      |  |             | 931,933   |       |   | 1,013,176  |   |   | 3,061,368  | 
|Net Income                             |  |               | 737,606   |         |   | 2,477,940    |  |             | 1,486,484 |       |   | (119,058   | ) |   | 4,582,972  | 
|Basic and Diluted Net Income per Share |  |               | 0.14      |         |   | 0.48         |  |             | 0.29      |       |   | (0.01      | ) |   | 0.90       | 
|                                       |  |               |           |         |   |              |  |             |           |       |   |            |   |   |            | 
|2006:                                  |  |               |           |         |   |              |  |             |           |       |   |            |   |   |            | 
|Revenues                               |  | $             | 4,044,296 |         | $ | 3,979,613    |  | $           | 4,309,989 |       | $ | 4,548,336  |   | $ | 16,882,234 | 
|Operating Income                       |  |               | 661,414   |         |   | 474,662      |  |             | 1,021,880 |       |   | 1,193,160  |   |   | 3,351,116  | 
|Net Income                             |  |               | 1,508,559 |         |   | 1,234,982    |  |             | 1,766,489 |       |   | 30,601,175 |   |   | 35,111,205 | 
|Basic and Diluted Net Income per Share |  |               | 0.29      |         |   | 0.24         |  |             | 0.35      |       |   | 5.98       |   |   | 6.86       | 

The Companys net income for
the quarter ended June 30, 2007 increased due to the gain on the installment
portion of the sale of its cellular investment (MWH) to Alltel, less income
taxes.

The Companys net income for
the quarter ended December 31, 2006 increased due to the gain on the sale of
its cellular investment (MWH) to Alltel on October 2, 2006, less income taxes.

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Item 9.     Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure

None.

Item 9A.  Controls and Procedures

Controls and Procedures

As of the end
of the period covered by this report, the Company carried out an evaluation,
under the supervision and with the participation of our management, including
our Chief Executive Officer, Chief Financial Officer and Chief Operating
Officer, of the effectiveness of the design and operation of our disclosure
controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under
the Securities Exchange Act of 1934). Based on this evaluation, and except as
described below in Managements Report on Internal Control over Financial
Reporting, the Chief Executive Officer, Chief Financial Officer and Chief
Operating Officer have concluded that, as of December 31, 2007, the
Companys disclosure controls and procedures were effective to ensure that
information required to be disclosed by the Company in reports that it files or
submits under the Securities Exchange Act is authorized, recorded, processed,
summarized and reported within the time periods specified in SEC rules and
forms.

Managements Report
on Internal Control over Financial Reporting

The management
of the Company is responsible for establishing and maintaining adequate
internal control over financial reporting as defined in Exchange Act Rule
13a-15(f). The Companys internal controls are designed to provide reasonable
assurance to the Companys management, Board of Directors and Audit Committee
regarding the reliability of financial reporting and the preparation of
published financial statements in accordance with generally accepted accounting
principles.

All internal
controls, no matter how well designed, have inherent limitations. Therefore,
even those systems determined to be effective can provide only reasonable
assurance with respect to financial statement preparation and presentation.

A material
weakness is a significant deficiency, or combination of significant
deficiencies, that result in more than a remote likelihood that a material
misstatement of the annual or interim financial statements will not be
prevented or detected. A significant deficiency is a control deficiency, or
combination of control deficiencies, that adversely affects the Companys
ability to initiate, authorize, record, process, or report external financial
data reliably in accordance with generally accepted accounting principles so
that there is more than a remote likelihood that a misstatement of the
Companys annual or interim financial statements that is more than
inconsequential will not be prevented or detected.

Under the
supervision, and with the participation of management, including the Companys
Chief Executive Officer, Chief Financial Officer and Chief Operating Officer,
the Company assessed the effectiveness of its internal control over financial
reporting as of December 31, 2007. In making this assessment, management used
the framework in Internal Control-Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission. Based on this assessment, management concluded that its
internal control over financial reporting was effective as of December 31,
2007.

Attestation Report of
the Registered Public Accounting Firm

Managements
assessment of the effectiveness of the Companys internal control over
financial reporting as of December 31, 2007 has been audited by Kiesling
Associates LLP, an independent registered public accounting firm, as stated in
their report that follows:

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REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the
Shareholders and Board of Directors
New Ulm Telecom, Inc.

We have
audited New Ulm Telecom, Inc.s internal control over financial reporting as of
December 31, 2007, based on criteria established in Internal Control  Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO). New Ulm Telecom, Inc.s management is responsible for
maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting
included in the accompanying report entitled Managements Report on Internal
Control over Financial Reporting. Our responsibility is to express an opinion
on the companys internal control over financial reporting based on our audit.

We conducted
our audit in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit of internal control over financial reporting included
obtaining an understanding of internal control over financial reporting,
assessing the risk that a material weakness exists, and testing and evaluating
the design and operating effectiveness of internal control based on the
assessed risk. Our audit also included performing such other procedures as we
considered necessary in the circumstances. We believe that our audit provides a
reasonable basis for our opinion.

A companys
internal control over financial reporting is a process designed to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. A companys internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the Company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally
accepted accounting principles, and that receipts and expenditures of the
Company are being made only in accordance with authorizations of management and
directors of the Company, and (3) provide reasonable assurance regarding prevention
or timely detection of unauthorized acquisition, use, or disposition of the
Companys assets that could have a material effect on the financial statements.

Because of its
inherent limitations, internal control over financial reporting may not prevent
or detect misstatements. Also, projections of any evaluation of effectiveness
to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.

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In our
opinion, New Ulm Telecom, Inc. maintained, in all material respects, effective
internal control over financial reporting as of December 31, 2007, based on
criteria established in Internal Control  Integrated Frameworkissued
by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

We have also
audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the balance sheets and the related statements
of income, stockholders equity and cash flows of New Ulm Telecom, Inc., and
our report dated March 14, 2008 expressed an unqualified opinion.

West Des
Moines, Iowa
March 14, 2008

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Changes in Internal
Controls over Financial Reporting During 2007 Fourth Quarter

During the
fourth quarter of 2007, the Company implemented various improvements to
internal controls, which included: (i) contracting with MACC to provide carrier
access billing, (ii) separation of human resources and the accounting function
of payroll. Except for the items discussed above, there have been no changes in
the Companys internal control over financial reporting during the fourth
quarter of 2007 that have materially affected, or is reasonably likely to
materially affect, the Companys control over financial reporting.

Item
9B.    Other Information

None.

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PART III

Item 10.   Directors, Executive Officers
and Corporate Governance

The Company
incorporates by reference the information contained under the captions
Proposal No. 1: Election of Directors, The Board of Directors and
Committees and Section 16(a) Beneficial Ownership Reporting Compliance in
its definitive proxy statement for the annual meeting of shareholders to be
held May 29, 2008.

Pursuant to
General Instruction G(3) to Form 10-K and Instruction 3 to Item 401(b) of
Regulation S-K, information regarding executive officers of the Company is
provided in Part I of this Form 10-K under separate caption.

The Company
has adopted a code of conduct that applies to all officers, directors, and
employees. This code of conduct is available on the Companys website at
www.nutelecom.net and in print upon written request to New Ulm Telecom, Inc.,
27 North Minnesota Street, New Ulm, Minnesota 56073, Attention: Chief Financial
Officer. Any amendment to, or waiver from, a provision of the Companys code of
conduct will be posted to the above-referenced website.

Item 11.   Executive Compensation

The Company
incorporates by reference the information contained under the captions
Executive Compensation and Non-Employee Director Compensation in its
definitive proxy statement for the annual meeting of shareholders to be held
May 29, 2008.

Item 12.   Security Ownership of Certain Beneficial Owners and Management

The Company
incorporates by reference the information contained under the caption Security
Ownership of Certain Beneficial Owners and Management in its definitive proxy
statement for the annual meeting of shareholders to be held May 29, 2008.

The Company
does not maintain any equity compensation plans.

Item 13.   Certain Relationships and Related Transactions,
and Director Independence

The Company
incorporates by reference the information contained under the caption Certain
Relationships and Related Transactions in its definitive proxy statement for
the annual meeting of shareholders to be held May 29, 2008.

Item 14.   Principal
Accounting Fees and Services

The Company
incorporates by reference the information contained under the caption
Independent Registered Public Accounting Firm in its definitive proxy
statement for the annual meeting of shareholders to be held May 29, 2008.

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PART IV

Item 15. Exhibits and Financial
Statement Schedules

|       |  |                                                                                                                                                                                                                                                                                            |        
|------ |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | -------
|(a) 1. |  | Consolidated Financial Statements
  Included in Part II, Item 8, of this report:                                                                                                                                                                                                           |        
|       |  |                                                                                                                                                                                                                                                                                            |        
|       |  |                                                                                                                                                                                                                                                                                            | Pages  
|      
|       |  | Report of Independent Registered Public
  Accounting Firm                                                                                                                                                                                                                                  | 34     
|       |  |                                                                                                                                                                                                                                                                                            |        
|       |  | Consolidated Balance Sheets at December 31,
  2007 and 2006                                                                                                                                                                                                                                | 35 - 36
|       |  |                                                                                                                                                                                                                                                                                            |        
|       |  | Consolidated Statements of Income for the
  Three Years Ended December 31, 2007, 2006 and 2005                                                                                                                                                                                             | 37     
|       |  |                                                                                                                                                                                                                                                                                            |        
|       |  | Consolidated Statements of Stockholders
  Equity for the Three Years Ended December 31, 2007, 2006 and 2005                                                                                                                                                                               | 38     
|       |  |                                                                                                                                                                                                                                                                                            |        
|       |  | Consolidated Statements of Cash Flows for
  the Three Years Ended December 31, 2007, 2006 and 2005                                                                                                                                                                                         | 39     
|       |  |                                                                                                                                                                                                                                                                                            |        
|       |  | Notes to Consolidated Financial
Statements                                                                                                                                                                                                                                                 | 40 - 52
|       |  |                                                                                                                                                                                                                                                                                            |        
|(a) 2. |  | Consolidated Financial Statement schedules:                                                                                                                                                                                                                                                |        
|       |  |                                                                                                                                                                                                                                                                                            |        
|       |  | Schedule II  Valuation and Qualifying
  Accounts                                                                                                                                                                                                                                          | 60     
|       |  |                                                                                                                                                                                                                                                                                            |        
|       |  | Other schedules are omitted because they
  are not required or are not applicable, or the required information is shown
  in the financial statements or notes thereto.                                                                                                                    |        
|       |  |                                                                                                                                                                                                                                                                                            |        
|(a) 3. |  | See Index to Exhibits                                                                                                                                                                                                                                                                    |        
|       |  |                                                                                                                                                                                                                                                                                            |        
|(b)    |  | Exhibits Required                                                                                                                                                                                                                                                                          |        
|       |  |                                                                                                                                                                                                                                                                                            |        
|       |  | See Index to Exhibits                                                                                                                                                                                                                                                                    | 81 - 82
|       |  |                                                                                                                                                                                                                                                                                            |        
|(c)    |  | Separate financial statements of Hector
  Communications Corporation a 50 percent or less owned equity method
  investment, are included as part of this report because this entity
  constitutes a significant subsidiary pursuant to the provisions of Regulation
  S-X, Article 3-09. | 61  79

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REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON 
FINANCIAL STATEMENT SCHEDULE

To the
Shareholders and Board of Directors of
New Ulm Telecom, Inc.

Our audits of
the consolidated financial statements referred to in our report dated March 14,
2008 also included an audit of the financial statement schedules listed in Item
15(a)2 of this Form 10-K. In our opinion, this financial statement schedule
presents fairly, in all material respects, the information set forth therein
when read in conjunction with the related consolidated financial statements.

/s/ KIESLING
ASSOCIATES LLP
West Des Moines, Iowa
March 14, 2008

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Schedule II 
Valuation and Qualifying Accounts

Allowance for
Uncollectible Accounts

|                         |  |                          |         |                |   |                 |   |                  |        |                          |   |         |   |   |         | 
|------------------------ |  | ------------------------ | ------- | -------------- | - | --------------- | - | ---------------- | ------ | ------------------------ | - | ------- | - | - | ------- | 
|Customer                 |  | 1/1/07
Beginning
Balance |         | 2007
Additions |   | 2007
Recoveries |   | 2007
Write-
Offs |        | 12/31/07
Ending 
Balance |  
|                         |  |                          |         |                |   |                 |   |                  |        |                          |   |         |   |   |         | 
|                         |  |                          |         |                |   |                 |   |                  |        |                          |   |         |   |   |         | 
|New Ulm                  |  | $                        | 127,565 |                | $ | 39,018          |   | $                | 28,277 |                          | $ | (83,383 | ) | $ | 111,477 | 
|Western                  |  |                          | 9,000   |                |   | 12,871          |   |                  | 2,750  |                          |   | (15,621 | ) |   | 9,000   | 
|Peoples                  |  |                          | 6,000   |                |   | (637            | ) |                  | 781    |                          |   | (144    | ) |   | 6,000   | 
|                         |  |                          |         |                |   |                 |   |                  |        |                          |   |         |   |   |         | 
|                         |  |                          | 142,565 |                |   | 51,252          |   |                  | 31,808 |                          |   | (99,148 | ) |   | 126,477 | 
|                         |  |                          |         |                |   |                 |   |                  |        |                          |   |         |   |   |         | 
|                         |  |                          |         |                |   |                 |   |                  |        |                          |   |         |   |   |         | 
|Interexchange
  Carriers |  |                          |         |                |   |                 |   |                  |        |                          |   |         |   |   |         | 
|                         |  |                          |         |                |   |                 |   |                  |        |                          |   |         |   |   |         | 
|                         |  |                          |         |                |   |                 |   |                  |        |                          |   |         |   |   |         | 
|New Ulm                  |  |                          | 81,935  |                |   | 68,065          |   |                  |       |                          |   |        |   |   | 150,000 | 
|Western                  |  |                          | 98,000  |                |   | 10,000          |   |                  |       |                          |   |        |   |   | 108,000 | 
|                         |  |                          |         |                |   |                 |   |                  |        |                          |   |         |   |   |         | 
|Total                    |  |                          | 179,935 |                |   | 78,065          |   |                  |       |                          |   |        |   |   | 258,000 | 
|                         |  |                          |         |                |   |                 |   |                  |        |                          |   |         |   |   |         | 
|                         |  |                          |         |                |   |                 |   |                  |        |                          |   |         |   |   |         | 
|                         |  | $                        | 322,500 |                | $ | 129,317         |   | $                | 31,808 |                          | $ | (99,148 | ) | $ | 384,477 | 
|                         |  |                          |         |                |   |                 |   |                  |        |                          |   |         |   |   |         | 

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HECTOR COMMUNICATIONS
CORPORATION

Consolidated Financial Statements

December 31, 2007

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Table of Contents

REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM

Board of
Directors
Hector Communications Corporation
New Ulm, Minnesota

We have
audited the accompanying consolidated balance sheets of Hector Communications
Corporation and subsidiaries as of December 31, 2007 and 2006, and the related
consolidated statements of income, comprehensive income, stockholders equity
and cash flows for the year ended December 31, 2007 and for the period from
acquisition (November 3, 2006) to December 31, 2006. These financial statements
are the responsibility of the Companys management. Our responsibility is to
express an opinion on these financial statements based on our audits.

We conducted
our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. The Company is not required to have, nor were we
engaged to perform, an audit of its internal control over financial reporting.
Our audit included consideration of internal control over financial reporting
as a basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the Companys internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.

In our opinion,
the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Hector Communications Corporation
and subsidiaries as of December 31, 2007 and 2006, and the results of their
operations and their cash flows for the year ended December 31, 2007 and for
the period from acquisition (November 3, 2006) to December 31, 2006 in
conformity with accounting principles generally accepted in the United States
of America.

|                               | 
|------------------------------ | 
|/s/ Olsen
 Thielen & Co., Ltd. | 
|                               | 
|St. Paul,
 Minnesota           | 
|March 13,
 2008                | 

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HECTOR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 2007 AND 2006

|                                                                                                             |  |      |             |      |   |             |  
|------------------------------------------------------------------------------------------------------------ |  | ---- | ----------- | ---- | - | ----------- | -
|                                                                                                             |  | 2007 |             | 2006 |  
|                                                                                                             |  |      |             |      |  
|ASSETS                                                                                                       | 
|CURRENT ASSETS:                                                                                              |  |      |             |      |   |             |  
|Cash and cash equivalents                                                                                    |  | $    | 7,551,276   |      | $ | 30,793,116  |  
|Accounts receivable (net of allowance of $72,548 and
$15,360)                                                |  |      | 2,454,914   |      |   | 2,601,027   |  
|Other receivables                                                                                            |  |      | 904,845     |      |   | 212,334     |  
|Materials, supplies and inventories (Note 1)                                                                 |  |      | 854,608     |      |   | 737,235     |  
|Deferred income taxes                                                                                        |  |      | 308,900     |      |   | 398,900     |  
|Other current assets                                                                                         |  |      | 121,269     |      |   | 177,629     |  
|                                                                                                             |  |      |             |      |   |             |  
|Total current assets                                                                                         |  |      | 12,195,812  |      |   | 34,920,241  |  
|                                                                                                             |  |      |             |      |   |             |  
|PROPERTY, PLANT AND EQUIPMENT: (Notes 1 and 3)                                                               |  |      | 40,479,567  |      |   | 37,987,592  |  
|less accumulated depreciation                                                                                |  |      | (7,089,124  | )    |   | (1,003,069  | )
|                                                                                                             |  |      |             |      |   |             |  
|Net property, plant and equipment                                                                            |  |      | 33,390,443  |      |   | 36,984,523  |  
|                                                                                                             |  |      |             |      |   |             |  
|OTHER ASSETS:                                                                                                |  |      |             |      |   |             |  
|Excess of cost over net assets acquired (Note 4)                                                             |  |      | 61,867,411  |      |   | 86,347,040  |  
|Intangibles (Note 4)                                                                                         |  |      | 38,724,400  |      |   | 8,900,000   |  
|Investment in unconsolidated affiliates (Note 6)                                                             |  |      | 3,758,993   |      |   | 3,512,447   |  
|Other investments (Notes 1, 7 and 9)                                                                         |  |      | 4,566,464   |      |   | 5,525,449   |  
|Other assets (Note 1)                                                                                        |  |      | 788,684     |      |   | 936,704     |  
|                                                                                                             |  |      |             |      |   |             |  
|Total other assets                                                                                           |  |      | 109,705,952 |      |   | 105,221,640 |  
|                                                                                                             |  |      |             |      |   |             |  
|TOTAL ASSETS                                                                                                 |  | $    | 155,292,207 |      | $ | 177,126,404 |  
|                                                                                                             |  |      |             |      |   |             |  
|                                                                                                             |  |      |             |      |   |             |  
|LIABILITIES
 AND STOCKHOLDERS EQUITY                                                                        | 
|                                                                                                             |  |      |             |      |   |             |  
|CURRENT LIABILITIES:                                                                                         |  |      |             |      |   |             |  
|Notes payable and current portion of long-term debt (Note
9)                                                 |  | $    | 4,100,000   |      | $ | 7,400,000   |  
|Accounts payable                                                                                             |  |      | 887,625     |      |   | 848,209     |  
|Payable to affiliates                                                                                        |  |      | 128,730     |      |   | 545,576     |  
|Midwest Wireless proceeds payable to USCC (Note 5)                                                           |  |      | 832,701     |      |   | 4,028,513   |  
|Accrued expenses                                                                                             |  |      | 2,755,541   |      |   | 2,848,648   |  
|Income taxes payable                                                                                         |  |      |            |      |   | 17,452,809  |  
|                                                                                                             |  |      |             |      |   |             |  
|Total current liabilities                                                                                    |  |      | 8,704,597   |      |   | 33,123,755  |  
|                                                                                                             |  |      |             |      |   |             |  
|LONG TERM DEBT, less current portion (Note 9)                                                                |  |      | 71,386,565  |      |   | 79,024,351  |  
|DEFERRED INCOME TAXES (Note 8)                                                                               |  |      | 18,748,728  |      |   | 9,765,798   |  
|DEFERRED COMPENSATIONS (Note 11)                                                                             |  |      | 888,633     |      |   | 848,737     |  
|                                                                                                             |  |      |             |      |   |             |  
|STOCKHOLDERS EQUITY:                                                                                        |  |      |             |      |   |             |  
|Common Stock, par value $0.01 per share; 1,000,000 shares authorized;
 900,000 shares issued and outstanding |  |      | 9,000       |      |   | 9,000       |  
|Paid in Capital                                                                                              |  |      | 53,991,000  |      |   | 53,991,000  |  
|Retained Earnings                                                                                            |  |      | 2,097,527   |      |   | 488,313     |  
|Accumulated other comprehensive losses                                                                       |  |      | (533,843    | )    |   | (124,550    | )
|                                                                                                             |  |      |             |      |   |             |  
|Total Stockholders Equity                                                                                   |  |      | 55,563,684  |      |   | 54,363,763  |  
|                                                                                                             |  |      |             |      |   |             |  
|TOTAL LIABILITIES AND STOCKHOLDERS EQUITY                                                                   |  | $    | 155,292,207 |      | $ | 177,126,404 |  
|                                                                                                             |  |      |             |      |   |             |  

See the notes to the consolidated financial statements.

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HECTOR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 2007 AND THE PERIOD FROM ACQUISITION
(NOVEMBER 3, 2006) TO DECEMBER 31, 2006

|                                                              |  |      |            |      |   |            |  
|------------------------------------------------------------- |  | ---- | ---------- | ---- | - | ---------- | -
|                                                              |  | 2007 |            | 2006 |  
|                                                              |  |      |            |      |  
|REVENUES:                                                     |  |      |            |      |   |            |  
|Local network                                                 |  | $    | 6,515,294  |      | $ | 1,027,565  |  
|Network access                                                |  |      | 13,831,890 |      |   | 2,400,106  |  
|Video services                                                |  |      | 2,530,562  |      |   | 501,888    |  
|Internet services                                             |  |      | 4,885,670  |      |   | 759,355    |  
|Other nonregulated services                                   |  |      | 2,721,494  |      |   | 607,048    |  
|                                                              |  |      |            |      |   |            |  
|Total revenues                                                |  |      | 30,484,910 |      |   | 5,295,962  |  
|                                                              |  |      |            |      |   |            |  
|COSTS AND EXPENSES:                                           |  |      |            |      |   |            |  
|Plant operations, excluding depreciation                      |  |      | 5,914,863  |      |   | 673,973    |  
|Customer operations                                           |  |      | 1,384,184  |      |   | 239,988    |  
|General and administrative                                    |  |      | 3,413,556  |      |   | 415,275    |  
|Depreciation and amortization                                 |  |      | 9,936,713  |      |   | 1,302,627  |  
|Other operating expenses                                      |  |      | 2,649,116  |      |   | 1,092,999  |  
|                                                              |  |      |            |      |   |            |  
|Total costs and expenses                                      |  |      | 23,298,432 |      |   | 3,724,862  |  
|                                                              |  |      |            |      |   |            |  
|OPERATING INCOME                                              |  |      | 7,186,478  |      |   | 1,571,100  |  
|                                                              |  |      |            |      |   |            |  
|OTHER INCOME (EXPENSE):                                       |  |      |            |      |   |            |  
|Interest expense                                              |  |      | (6,186,228 | )    |   | (1,089,495 | )
|Interest and dividend income                                  |  |      | 662,751    |      |   | 322,854    |  
|Income from investments in unconsolidated affiliates (Note
6) |  |      | 245,245    |      |   | 28,354     |  
|Gain on sale of assets                                        |  |      | 829,968    |      |   |           |  
|                                                              |  |      |            |      |   |            |  
|Other income (expense), net                                   |  |      | (4,448,264 | )    |   | (738,287   | )
|                                                              |  |      |            |      |   |            |  
|INCOME BEFORE INCOME TAXES                                    |  |      | 2,738,214  |      |   | 832,813    |  
|                                                              |  |      |            |      |   |            |  
|INCOME TAX EXPENSE (Note 8)                                   |  |      | 1,129,000  |      |   | 344,500    |  
|                                                              |  |      |            |      |   |            |  
|                                                              |  |      |            |      |   |            |  
|NET INCOME                                                    |  | $    | 1,609,214  |      | $ | 488,313    |  
|                                                              |  |      |            |      |   |            |  
|                                                              |  |      |            |      |   |            |  
|BASIC AND DILUTED NET INCOME PER SHARE                        |  | $    | 1.79       |      | $ | 0.54       |  
|                                                              |  |      |            |      |   |            |  

See the notes to the consolidated financial statements.

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HECTOR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
FOR THE YEAR ENDED DECEMBER 31, 2007 AND FOR THE PERIOD FROM ACQUISITION
(NOVEMBER 3, 2006) TO DECEMBER 31, 2006

|                                                                                                 |  |      |           |      |   |          |  
|------------------------------------------------------------------------------------------------ |  | ---- | --------- | ---- | - | -------- | -
|                                                                                                 |  | 2007 |           | 2006 |  
|                                                                                                 |  |      |           |      |  
|                                                                                                 |  |      |           |      |  
|Net income                                                                                       |  | $    | 1,609,214 |      | $ | 488,313  |  
|                                                                                                 |  |      |           |      |   |          |  
|Other comprehensive loss:                                                                        |  |      |           |      |   |          |  
|Unrealized holding gain (loss) on marketable securities                                          |  |      | 443,062   |      |   | (108,384 | )
|Income tax benefit (expense) related to unrealized holding gain
 (loss) on marketable securities |  |      | (177,202  | )    |   | 43,354   |  
|Reclassification adjustment for gains on marketable securities
 included in net income           |  |      | (323,654  | )    |   |         |  
|Income tax expense related to reclassification adjustments for gains
 included in net income     |  |      | 129,460   |      |   |         |  
|Unrealized loss on interest rate swap agreement                                                  |  |      | (807,919  | )    |   | (99,980  | )
|Income tax benefit related to unrealized loss on interest rate swap
 agreement                   |  |      | 326,960   |      |   | 40,460   |  
|                                                                                                 |  |      |           |      |   |          |  
|Other comprehensive loss                                                                         |  |      | (409,293  | )    |   | (124,550 | )
|                                                                                                 |  |      |           |      |   |          |  
|                                                                                                 |  |      |           |      |   |          |  
|Comprehensive income                                                                             |  | $    | 1,199,921 |      | $ | 363,763  |  
|                                                                                                 |  |      |           |      |   |          |  

See notes to consolidated financial statements.

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HECTOR COMMUNICATIONS CORPORATION AND
SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY
FOR THE YEAR ENDED DECEMBER 31, 2007 AND FOR THE PERIOD FROM ACQUISITION
(NOVEMBER 3, 2006) TO DECEMBER 31, 2006

|                                                                                    |  |              |       |                            |   |                   |  |                                      |           |       |   |          |   |   |            |  
|----------------------------------------------------------------------------------- |  | ------------ | ----- | -------------------------- | - | ----------------- |  | ------------------------------------ | --------- | ----- | - | -------- | - | - | ---------- | -
|                                                                                    |  | Common
Stock |       | Additional Paid
in Capital |   | Retained
Earnings |  | Accumulated
Other
Comprehensive
Loss |           | Total |  
|                                                                                    |  |              |       |                            |   |                   |  |                                      |           |       |  
|                                                                                    |  |              |       |                            |   |                   |  |                                      |           |       |   |          |   |   |            |  
|BALANCE at Beginning of Period                                                      |  | $            |      |                            | $ |                  |  | $                                    |          |       | $ |         |   | $ |           |  
|                                                                                    |  |              |       |                            |   |                   |  |                                      |           |       |   |          |   |   |            |  
|Common Stock Issued                                                                 |  |              | 9,000 |                            |   | 53,991,000        |  |                                      |           |       |   |          |   |   | 54,000,000 |  
|Net income                                                                          |  |              |       |                            |   |                   |  |                                      | 488,313   |       |   |          |   |   | 488,313    |  
|Change in unrealized losses on marketable
 securities, net of deferred taxes        |  |              |       |                            |   |                   |  |                                      |           |       |   | (65,030  | ) |   | (65,030    | )
|Change in unrealized losses on interest
 rate swap agreement, net of deferred taxes |  |              |       |                            |   |                   |  |                                      |           |       |   | (59,520  | ) |   | (59,520    | )
|                                                                                    |  |              |       |                            |   |                   |  |                                      |           |       |   |          |   |   |            |  
|                                                                                    |  |              |       |                            |   |                   |  |                                      |           |       |   |          |   |   |            |  
|BALANCE at December 31, 2006                                                        |  |              | 9,000 |                            |   | 53,991,000        |  |                                      | 488,313   |       |   | (124,550 | ) |   | 54,363,763 |  
|                                                                                    |  |              |       |                            |   |                   |  |                                      |           |       |   |          |   |   |            |  
|Net income                                                                          |  |              |       |                            |   |                   |  |                                      | 1,609,214 |       |   |          |   |   | 1,609,214  |  
|Change in unrealized gains on marketable
 securities, net of deferred taxes         |  |              |       |                            |   |                   |  |                                      |           |       |   | 71,666   |   |   | 71,666     |  
|Change in unrealized losses on interest
 rate swap agreement, net of deferred taxes |  |              |       |                            |   |                   |  |                                      |           |       |   | (480,959 | ) |   | (480,959   | )
|                                                                                    |  |              |       |                            |   |                   |  |                                      |           |       |   |          |   |   |            |  
|                                                                                    |  |              |       |                            |   |                   |  |                                      |           |       |   |          |   |   |            |  
|BALANCE at December 31, 2007                                                        |  | $            | 9,000 |                            | $ | 53,991,000        |  | $                                    | 2,097,527 |       | $ | (533,843 | ) | $ | 55,563,684 |  
|                                                                                    |  |              |       |                            |   |                   |  |                                      |           |       |   |          |   |   |            |  

See notes to consolidated financial
statements

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HECTOR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 2007 AND FOR THE PERIOD FROM ACQUISITION
(NOVEMBER 3, 2006) TO DECEMBER 31, 2006

|                                                                                            |  |      |             |      |   |              |  
|------------------------------------------------------------------------------------------- |  | ---- | ----------- | ---- | - | ------------ | -
|                                                                                            |  | 2007 |             | 2006 |  
|                                                                                            |  |      |             |      |  
|Cash Flows from Operating Activities:                                                       |  |      |             |      |   |              |  
|Net income                                                                                  |  | $    | 1,609,214   |      | $ | 488,313      |  
|Adjustments to reconcile net income to net cash provided by (used in) operating
activities: |  |      |             |      |   |              |  
|Depreciation and amortization                                                               |  |      | 10,071,317  |      |   | 1,305,563    |  
|Income from unconsolidated affiliates                                                       |  |      | (245,245    | )    |   | (28,354      | )
|Cash distributions from unconsolidated
affiliates                                           |  |      | 156,432     |      |   | 39,131       |  
|Gain on sale of assets                                                                      |  |      | (829,968    | )    |   |             |  
|Noncash patronage refund                                                                    |  |      | (42,838     | )    |   |             |  
|Noncash interest income from notes                                                          |  |      | (1,019      | )    |   | (4,443       | )
|Changes in assets and liabilities:                                                          |  |      |             |      |   |              |  
|Accounts receivable                                                                         |  |      | 146,113     |      |   | (345,168     | )
|Materials and supplies                                                                      |  |      | (117,373    | )    |   | 253,067      |  
|Other current assets                                                                        |  |      | 83,810      |      |   | 38,913       |  
|Accounts payable                                                                            |  |      | (377,430    | )    |   | (11,055      | )
|Accrued expenses                                                                            |  |      | (901,026    | )    |   | 902,982      |  
|Income taxes payable                                                                        |  |      | (17,452,809 | )    |   | (1,814,376   | )
|Deferred taxes                                                                              |  |      | (1,830,625  | )    |   | (126,406     | )
|Deferred compensation                                                                       |  |      | 39,896      |      |   | (25,862      | )
|                                                                                            |  |      |             |      |   |              |  
|Net cash provided by (used in) operating
activities                                         |  |      | (9,691,551  | )    |   | 672,305      |  
|                                                                                            |  |      |             |      |   |              |  
|                                                                                           
|Cash Flows from Investing Activities:                                                       |  |      |             |      |   |              |  
|Purchases of property, plant and equipment                                                  |  |      | (3,133,579  | )    |   | (562,012     | )
|Purchases of investments                                                                    |  |      | (176,704    | )    |   | (1,745       | )
|Increase in intangibles                                                                     |  |      | (34,105     | )    |   |             |  
|Acquisition, net of cash acquired                                                           |  |      |            |      |   | (101,837,666 | )
|Payable to USCC                                                                             |  |      | (3,195,812  | )    |   | (6,590,091   | )
|Proceeds from sales of investments                                                          |  |      | 3,927,697   |      |   | 140,726      |  
|                                                                                            |  |      |             |      |   |              |  
|Net cash used in investing activities                                                       |  |      | (2,612,503  | )    |   | (108,850,788 | )
|                                                                                            |  |      |             |      |   |              |  
|                                                                                           
|Cash Flows from Financing Activities:                                                       |  |      |             |      |   |              |  
|Repayment of notes payable and long-term
debt                                               |  |      | (10,937,786 | )    |   | (5,741       | )
|Proceeds from issuance of long-term debt                                                    |  |      |            |      |   | 85,900,000   |  
|Loan issuance costs                                                                         |  |      |            |      |   | (922,660     | )
|Proceeds from issuance of stock                                                             |  |      |            |      |   | 54,000,000   |  
|                                                                                            |  |      |             |      |   |              |  
|Net cash provided by (used in) financing
activities                                         |  |      | (10,937,786 | )    |   | 138,971,599  |  
|                                                                                            |  |      |             |      |   |              |  
|                                                                                           
|Net Increase (Decrease) in Cash and Cash Equivalents                                        |  |      | (23,241,840 | )    |   | 30,793,116   |  
|                                                                                           
|Cash and Cash Equivalents at Beginning of Period                                            |  |      | 30,793,116  |      |   |             |  
|                                                                                            |  |      |             |      |   |              |  
|                                                                                            |  |      |             |      |   |              |  
|Cash and Cash Equivalents at End of Period                                                  |  | $    | 7,551,276   |      | $ | 30,793,116   |  
|                                                                                            |  |      |             |      |   |              |  
|                                                                                            |  |      |             |      |   |              |  
|Supplemental disclosures of cash flow information:                                          |  |      |             |      |   |              |  
|Interest paid during the period                                                             |  | $    | 6,715,991   |      | $ | 192          |  
|Income taxes paid during the period                                                         |  |      | 20,597,318  |      |   | 2,285,282    |  

See the notes to the consolidated financial statements.

67

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Table of Contents

HECTOR COMMUNICATIONS CORPORATION AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1  SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES

Description of business:
On November 3, 2006, Hector Acquisition Corporation (HAC) acquired all of the
Companys outstanding common stock. Simultaneous with the acquisition, HAC was
merged into the Company and the new legal entity was renamed Hector
Communication Corporation. In connection with this acquisition, the accounts of
the Company have been adjusted using the push down basis of accounting to
recognize the allocation of the consideration paid for the common stock to the
respective net assets acquired.

Hector
Communications Corporation owns a 100% interest in five local exchange
telephone subsidiaries. The Company also owns a 100% interest in Alliance
Telecommunications Corporation, which owns and operates four local exchange
telephone companies. At December 31, 2007, the Companys subsidiaries provided
telephone service to 27,880 access lines in 28 rural communities in Minnesota,
Wisconsin and North Dakota and cable television services to 4,810 subscribers
in Minnesota. The Company is also an investor in partnerships and corporations
providing other telecommunications related services.

Principles of consolidation:
The consolidated financial statements include the accounts of Hector
Communications Corporation and its subsidiaries (Hector or the Company).
All material intercompany transactions and accounts have been eliminated.

Regulatory accounting:
Accounting practices prescribed by regulatory authorities have been considered
in the preparation of the financial statements and formulation of accounting
policies for telephone subsidiaries. These policies conform to accounting
principles generally accepted in the United States of America as applied to
regulated public utilities in accordance with Statement of Financial Accounting
Standards No. 71, Accounting for the Effects of Certain Types of Regulation
(SFAS 71).

Estimates: The
presentation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets,
liabilities, and disclosure of contingent assets and liabilities at the balance
sheet date, and the reported amounts of revenues and expenses during the
reporting period. The estimates and assumptions used in the accompanying
consolidated financial statements are based upon managements evaluation of the
relevant facts and circumstances as of the time of the financial statements.
Actual results could differ from those estimates. The Companys financial
statements are also affected by depreciation rates prescribed by regulators,
which may result in different depreciation rates than for an unregulated
enterprise.

Revenue recognition:
Revenues are recognized when earned, regardless of the period in which they are
billed. Network access revenues are furnished in conjunction with interexchange
carriers and are determined by cost separation studies and nationwide average
schedules. Revenues include estimates pending finalization of cost studies.
Network access revenues are based upon interstate tariffs filed with the
Federal Communications Commission by the National Exchange Carriers Association
and state tariffs filed with state regulatory agencies. Management believes
recorded revenues are reasonable based on estimates of final cost separation
studies, which are typically settled within two years.

Presentation of Taxes Collected From
Customers: Sales, excise, and other taxes are imposed
on most of the Companys sales to nonexempt customers. The Company collects the
taxes from customers and remits the entire amounts to the governmental
authorities. The Companys accounting policy is to exclude the taxes collected
and remitted from revenues and expenses.

68

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Table of Contents

HECTOR COMMUNICATIONS CORPORATION AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1  SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (Continued)

Income taxes: The
provision for income taxes consists of an amount for taxes currently payable
and a provision for tax consequences deferred to future periods. Deferred
income taxes are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax basis. Significant components of the
Companys deferred taxes arise from differences in the basis of property, plant
and equipment due to the use of accelerated deprecation methods for tax
purposes, partnerships due to the differences between book and tax income, and
intangible assets which are amortized for book purposes but not deductible for
tax purposes.

Net income per share:
Basic and diluted net income per common share is based on the weighted average
number of common shares outstanding during the period presented.

Cash and cash equivalents:
The Company considers temporary cash investments with an original maturity of
three months or less to be cash equivalents. The Company places its cash
investments with high credit quality financial institutions. The Company
maintains its cash in bank deposit accounts. The account balances at times
exceed the federally insured limits. The Company has not experienced losses in
these accounts and does not believe they are exposed to any significant credit
risk.

Accounts receivable:
Receivables are stated at the amount the Company expects to collect from
outstanding balances. The Company provides for probable uncollectible amounts
through a charge to earnings and a credit to a valuation allowance based on its
assessment of the current status of individual accounts. Balances that are
still outstanding after the Company has used reasonable collection efforts are written
off through a charge to the valuation allowance and a credit to the receivable
accounts.

A significant
portion of the Companys revenues is received from long distance carriers in
the telephone industry. Consequently, the Company is directly affected by the
financial well-being of that industry. The credit risk associated with these
accounts is minimized due to the large number of long distance carriers.

Materials, supplies and inventories:
Materials, supplies and inventories are valued at the lower of average cost or
market.

Property, plant and equipment:
Property, plant and equipment is recorded at cost. Depreciation is computed
using principally the straight-line method based on estimated service or
remaining useful lives of the various classes of depreciable assets.
Maintenance and repairs are charged to operations and additions or improvements
are capitalized. Items of telecommunications property sold, retired or
otherwise disposed of in the ordinary course of business are removed from
assets and any gains or losses are included in accumulated depreciation. Any
gains or losses on non-telecommunications property and equipment retirements
are reflected in the current year operations.

Investments in unconsolidated affiliates:
The Company is an investor in several partnerships and limited liability
corporations (Note 6). The Companys percentage of ownership in these joint
ventures ranges from 5% to 20%. The Company uses the equity method of
accounting for these investments, which reflects original cost and recognition
of the Companys share of operating income or losses from the respective
operations.

Other investments:
The Company owns CoBank stock and investments in the stock of other
telecommunications service providers. Long-term investments in corporations
that are not intended for resale or are not readily marketable and in which the
Company does not exercise significant influence are valued using the cost
method. The cost method requires the Company to periodically evaluate these
investments for impairment and if impairment is found, reduce the investments
valuation to its net realizable value. No impairment charges have been taken
against these investments.

69

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Table of Contents

HECTOR COMMUNICATIONS CORPORATION AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1  SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (Continued)

Intangibles and other assets:
Intangible assets owned by the Company include customer relationships, trade
names, and regulatory rights acquired and customer lists purchased. Other
assets owned by the Company include deferred debt issuance costs, and other
deferred charges. In accordance with SFAS 142, intangible assets determined to
have an indefinite useful life are not amortized. Intangible assets with a
determinable life are amortized over the useful life.

Financial instruments:
The fair value of the Companys financial instruments approximate carrying
value except for long-term investments in other companies. Other long-term
investments are not intended for resale and are not readily marketable, thus a
reasonable estimate of fair value is not practicable. The fair value of
long-term debt is estimated based on current rates offered to the Company for
debt with similar terms and maturities. The fair value of the Companys debt approximates
carrying value.

Recently issued accounting principles:
In June 2006, the Financial Accounting Standards Board issued FASB
Interpretation No. 48, Accounting for
Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109,or
FIN 48. FIN 48 clarifies the accounting for uncertainty in income taxes
recognized in an enterprises financial statements in accordance with FASB
Statement No. 109, Accounting for Income
Taxes.FIN 48 prescribes a recognition threshold and measurement
attributable for the financial statement recognition and measurement of a tax
position taken or expected to be taken in a tax return. This pronouncement also
provides guidance on derecognition, classification, interest and penalties,
accounting in interim periods, disclosure, and transition. FIN 48 was to be
effective for fiscal years beginning after December 15, 2006, but in February
2008, was deferred for one year for non-public entities. We do not expect the
adoption of this pronouncement in fiscal 2008 to have a material impact on our
financial position or results of operations.

In September
2006, the FASB issued SFAS No. 157, Fair
Value Measurements (SFAS No. 157), which is effective for interim
and annual reporting periods beginning after November 15, 2007. This statement
provides a definition of fair value, establishes a framework for measuring fair
value, and expands disclosures about fair value measurements for future
transactions. We do not expect the adoption of this pronouncement to have a
material impact on our financial position or results of operations.

In February
2007, the FASB issued Statement of Financial Accounting Standards No. 159, The
Fair Value Option for Financial Assets and Financial Liabilities (SFAS 159).
The Statement permits entities to choose to measure many financial instruments
and certain other items at fair value that are not currently required to be
measured at fair value. The objective is to improve financial reporting by
providing entities with the opportunity to mitigate volatility in reported
earnings caused by measuring related assets and liabilities differently without
having to apply complex hedge accounting provisions. SFAS 159 will be effective
for the first fiscal year that begins after November 15, 2007. We do not expect
the adoption of this pronouncement to have a material impact on our financial
position or results of operations.

70

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Table of Contents

HECTOR COMMUNICATIONS CORPORATION AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 2  ACQUISITION OF HECTOR COMMUNICATIONS
CORPORATION

On November 3, 2006, the Company was acquired by
Hector Acquisition Corp (HAC). The purchase price was approximately $157
million (or $102 million net of cash acquired). HAC was a temporary entity
incorporated on January 13, 2006 for the purpose of acquiring Hector
Communications Corp and was dissolved simultaneously with the transaction
closing. There was no activity in HAC prior to the acquisition of Hector
Communications Corporation. The three shareholders of the Company are New Ulm
Telecom, Inc., Blue Earth Valley Communications, Inc. and Arvig Enterprises,
Inc, each owning 1/3 of the outstanding stock. All three shareholders are
experienced in the telecommunications industry and have properties contiguous
or near the Companys service territories. Operations for the Company reflect
the business activity from the date of acquisition November 3, 2006. In the
acquisition, the following assets were acquired and liabilities were assumed.

The total
allocation of the net purchase price of Hector Communications Corporation as
adjusted for the 2007 independent valuation of intangible assets acquired is
shown in the table below:

|                                         |  |   |             |  
|---------------------------------------- |  | - | ----------- | -
|Current
 assets                          |  | $ | 59,150,606  |  
|Property,
 plant and equipment           |  |   | 37,621,304  |  
|Investments                              |  |   | 9,291,595   |  
|Customer
 relationship intangible        |  |   | 31,125,000  |  
|Trade name
 intangible                   |  |   | 5,611,000   |  
|Regulatory
 rights intangible            |  |   | 5,193,000   |  
|Excess costs
 over net assets acquired   |  |   | 63,973,140  |  
|Other assets                             |  |   | 20,819      |  
|Current
 liabilities                     |  |   | (33,136,314 | )
|Long term
 debt                          |  |   | (530,092    | )
|Deferred
 liabilities                    |  |   | (21,469,422 | )
|                                         |  |   |             |  
|Total
 purchase price                    |  |   | 156,850,636 |  
|Less cash
 and cash equivalents acquired |  |   | (55,012,970 | )
|                                         |  |   |             |  
|Cash paid
 for acquisition               |  | $ | 101,837,666 |  
|                                         |  |   |             |  

The
acquisition was accounted for using the purchase method of accounting for
business combinations and, accordingly, the acquired assets and liabilities
were recorded at their estimated fair values as of the date of acquisition.
Based upon the Companys final purchase price allocation during 2007, the
excess of the purchase price and acquisition costs over the fair value of the
net identifiable assets acquired was approximately $64 million. The Company
recorded an intangible asset related to the acquired companys customer
relationships of $31,125,000, trade name intangible of $5,611,000, regulatory
rights intangible of $5,193,000. The estimated useful life of the customer
relationship intangible asset is 11.5 years and regulatory rights intangible is
13.5 years. The trade name intangible has an indefinite life and is not subject
to amortization. Goodwill on this transaction will not be deductible for income
tax purposes.

NOTE 3  PROPERTY, PLANT AND EQUIPMENT

The cost of
property, plant and equipment and the estimated useful lives are as follows:

|                               |  |                        |  |               |            |               |   |            |  
|------------------------------ |  | ---------------------- |  | ------------- | ---------- | ------------- | - | ---------- | -
|                               |  | Estimated
 useful life |  | Dec 31,
 2007 |            | Dec 31,
 2006 |  
|                               |  |                        |  |               |            |               |  
|Land                           |  |                        |  | $             | 414,052    |               | $ | 424,502    |  
|Buildings                      |  | 5-40 years             |  |               | 3,489,723  |               |   | 3,469,080  |  
|Machinery
 and equipment       |  | 3-15 years             |  |               | 567,123    |               |   | 426,846    |  
|Furniture
 and fixtures        |  | 5-10 years             |  |               | 17,163     |               |   | 17,163     |  
|Telephone
 plant               |  | 5-33 years             |  |               | 34,444,145 |               |   | 33,067,051 |  
|Cable
 television plant        |  | 10-15 years            |  |               | 776,962    |               |   | 486,658    |  
|Construction
 in progress      |  |                        |  |               | 770,399    |               |   | 96,292     |  
|                               |  |                        |  |               |            |               |   |            |  
|                               |  |                        |  |               | 40,479,567 |               |   | 37,987,592 |  
|Less
 accumulated depreciation |  |                        |  |               | (7,089,124 | )             |   | (1,003,069 | )
|                               |  |                        |  |               |            |               |   |            |  
|                               |  |                        |  | $             | 33,390,443 |               | $ | 36,984,523 |  
|                               |  |                        |  |               |            |               |   |            |  

71

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Table of Contents

HECTOR COMMUNICATIONS CORPORATION AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 3  PROPERTY, PLANT AND EQUIPMENT
(Continued)

Depreciation
expense included in costs and expenses from operations was $6,818,700 for the
year ended December 31, 2007 and $1,198,800 for the period from acquisition
(November 3, 2006) to December 31, 2006.

NOTE 4  GOODWILL AND INTANGIBLE ASSETS

The Company
accounts for goodwill and other intangible assets under SFAS No. 142, Goodwill
and Other Intangible Assets. Under the provisions of this accounting standard,
goodwill and intangible assets with indefinite useful lives are no longer
amortized but are instead tested for impairment on at least an annual basis and
when changes in circumstances indicate that the value of goodwill may be below
its carrying value. In 2007, the Company engaged an independent valuation firm
to complete its first annual impairment test for goodwill acquired. Such
testing resulted in no impairment charge to goodwill, as the determined fair
value was sufficient to pass the first step of the impairment test.

On November 3,
2006, the Company was acquired by HAC. A preliminary purchase price allocation
resulted in goodwill of $86,347,040. During 2007, the Company obtained an
independent appraisal of the identifiable intangible assets acquired as a
result of the business combination and has revised the purchase price
allocation in accordance with the independent appraisal. Along with the
valuation of identifiable intangible assets acquired, the appraisal also
determined the estimated useful lives of those amortizable assets based on
historical customer churn statistics for the customer relationship intangible
asset, and the estimated useful life of the Companys regulated investment base
for the identified regulatory rights intangible asset.

In addition,
in 2007, the Company received $2,699,833 of funds released from an escrow
account related to the pre-acquisition sale of Midwest Wireless Holdings as
discussed in Note 5. These funds were not recorded in the allocation of the
purchase price of the Company as they were contingent on future events. In
2007, when the contingency was resolved and the funds were released, they were
recorded against goodwill net of the related income taxes.

A summary of changes to the
Companys goodwill is as follows:

|                                                                                                       |  |   |             |  
|------------------------------------------------------------------------------------------------------ |  | - | ----------- | -
|Balance at December 31, 2006                                                                           |  | $ | 86,347,040  |  
|                                                                                                       |  |   |             |  
|Reclassification of identified intangible assets
acquired net of
 deferred income taxes of $10,555,100 |  |   | (22,373,900 | )
|Midwest Wireless Holdings escrow funds received net
of income taxes of
 $1,026,200                     |  |   | (1,673,683  | )
|Other adjustments                                                                                      |  |   | (432,046    | )
|                                                                                                       |  |   |             |  
|Balance at December 31, 2007                                                                           |  | $ | 61,867,411  |  
|                                                                                                       |  |   |             |  

The components of the
Companys identified intangible assets are as follows:

|                                       |  |                        |            |                           |   |                        |   |                           |           |  |   |           |  
|-------------------------------------- |  | ---------------------- | ---------- | ------------------------- | - | ---------------------- | - | ------------------------- | --------- |  | - | --------- | -
|                                       |  | December 31, 2007      |            | December 31, 2006         |  
|                                       |  |                        |            |                           |  
|                                       |  | Gross Carrying
 Amount |            | Accumulated
 Amortization |   | Gross Carrying
 Amount |   | Accumulated
 Amortization |          
|                                       |  |                        |            |                           |   |                        |   |                           |          
|Definitely Lived Intangibles:          |  |                        |            |                           |   |                        |   |                           |           |  |   |           |  
|Customer Relationships - 11.58 Yr Life |  | $                      | 31,125,000 |                           | $ | (2,818,312             | ) | $                         | 9,000,000 |  | $ | (100,000  | )
|Regulatory Rights - 13.61 Yr Life      |  |                        | 5,193,000  |                           |   | (386,288               | ) |                           |          |  |   |          |  
|Indefinitely Lived Intangibles         |  |                        |            |                           |   |                        |   |                           |           |  |   |           |  
|Trade name                             |  |                        | 5,611,000  |                           |   |                       |   |                           |          |  |   |          |  
|                                       |  |                        |            |                           |   |                        |   |                           |           |  |   |           |  
|Totals                                 |  | $                      | 41,929,000 |                           | $ | (3,204,600             | ) | $                         | 9,000,000 |  | $ | (100,000  | )
|                                       |  |                        |            |                           |   |                        |   |                           |           |  |   |           |  
|Net Identified Intangible Assets       |  |                        |            |                           | $ | 38,724,400             |   |                           |           |  | $ | 8,900,000 |  
|                                       |  |                        |            |                           |   |                        |   |                           |           |  |   |           |  

72

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Table of Contents

HECTOR COMMUNICATIONS CORPORATION AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 4  GOODWILL AND INTANGIBLE ASSETS
(Continued)

Amortization
expense of definitely lived intangible assets was $3,104,600 for the year ended
December 31, 2007 and $100,000 for the period from the date of acquisition
(November 3, 2006) through December 31, 2006. Amortization expense for the next
five years is estimated at $3,104,600 annually.

NOTE 5  MIDWEST WIRELESS HOLDINGS LLC

Hector
Communications Corporation owned approximately 8% of Midwest Wireless Holdings
L.L.C (MWH). In November of 2005, Midwest Wireless Holdings L.L.C. (MWH) and
Alltel Corporation (Alltel) entered into an agreement for Alltel to purchase
MWH. The transaction was closed October 2, 2006 after the satisfaction of
conditions and the receipt of regulatory approvals, which was prior to Hector
Acquisition Corporations purchase of the Company. Under the terms of the
agreement, all of the members of MWH sold their membership interests to Alltel.
Upon closing, the members received approximately 90% of the sale proceeds.
Alltel delivered the other 10% to the escrow agent. The escrow account was to
be used for any true-up adjustments, indemnifications, and other specified
costs.

In 2007, the Company
received $2,699,883 of the escrowed funds. These funds net of related income
taxes were recorded against goodwill as they related to a pre-acquisition
contingency which was resolved in 2007. Subsequent to December 31, 2007, the
Company received the remaining escrowed funds totaling $4,323,450 which net of
income taxes will be recorded as a reduction of goodwill in 2008 when the
contingency has been resolved.

A portion of
the Companys investment in MWH was held in a subsidiary which was 49% owned by
United States Cellular Corporation (USCC). This subsidiary will be liquidated
in 2008 after the final receipt of the indemnification escrow payments. At
December 31, 2006 and 2007, the Company has a balance payable to USCC which
represents the amount of proceeds from the MHW sale due to USCC from the
Company.

NOTE 6  INVESTMENTS IN UNCONSOLIDATED
AFFILIATES

The Company is
a co-investor with other rural telephone companies in several partnerships and
limited liability corporations. These joint ventures make it possible to offer
certain services to customers, including directory services, centralized
switching or fiber optic transport of messaging, that the Company could not
afford to offer on its own. These joint ventures also make it possible to
invest in new technologies with a lower level of financial risk. The Company
recognizes income and losses from these investments on the equity method of
accounting. The following table summarizes the Companys ownership percentage,
investment at December 31, 2007 and 2006 and income or loss from these
investments for the year ended December 31, 2007 and the period from
acquisition (November 3, 2006) to December 31, 2006.

73

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Table of Contents

HECTOR COMMUNICATIONS CORPORATION AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 6  INVESTMENTS IN UNCONSOLIDATED
AFFILIATES (Continued)

|                               |  |                      |      |                                    |   |                                    |  |                        |           |                        |   |         |   |   |        |  
|------------------------------ |  | -------------------- | ---- | ---------------------------------- | - | ---------------------------------- |  | ---------------------- | --------- | ---------------------- | - | ------- | - | - | ------ | -
|                               |  | Ownership
  Interest |      | Book Value at
  December 31
  2007 |   | Book Value at
  December 31
  2006 |  | Income
  (Loss)
  2007 |           | Income
  (Loss)
  2006 |  
|                               |  |                      |      |                                    |   |                                    |  |                        |           |                        |  
|Broadband Visions              |  |                      | 16.7 | %                                  | $ | 875,202                            |  | $                      | 889,784   |                        | $ | (14,582 | ) | $ | (5,599 | )
|Communications Mgmt Grp        |  |                      | 6.5  | %                                  |   | 328,183                            |  |                        | 252,366   |                        |   | 75,817  |   |   | 153    |  
|Independent Pinnacle           |  |                      | 7.9  | %                                  |   | 661,898                            |  |                        | 578,665   |                        |   | 83,233  |   |   | 12,406 |  
|Northern Transport Group       |  |                      | 20.0 | %                                  |   | 43,294                             |  |                        | 85,234    |                        |   | (41,940 | ) |   | (8,282 | )
|NW Minnesota Spec Access       |  |                      | 5.3  | %                                  |   | 9,465                              |  |                        | 27,167    |                        |   | 17,298  |   |   | 2,927  |  
|702 Communications             |  |                      | 18.1 | %                                  |   | 1,492,625                          |  |                        | 1,488,581 |                        |   | 75,476  |   |   | 20,288 |  
|West Central Transport         |  |                      | 5.0  | %                                  |   | 190,593                            |  |                        | 190,650   |                        |   | 49,943  |   |   | 6,461  |  
|Midwest AWS Limited
  Partners |  |                      | 14.3 | %                                  |   | 131,000                            |  |                        |          |                        |   |        |   |   |       |  
|SkyCom 700 mhz LLC             |  |                      | 8.42 | %                                  |   | 26,733                             |  |                        |          |                        |   |        |   |   |       |  
|                               |  |                      |      |                                    |   |                                    |  |                        |           |                        |   |         |   |   |        |  
|                               |  |                      |      |                                    | $ | 3,758,993                          |  | $                      | 3,512,447 |                        | $ | 245,245 |   | $ | 28,354 |  
|                               |  |                      |      |                                    |   |                                    |  |                        |           |                        |   |         |   |   |        |  

NOTE 7 - MARKETABLE SECURITIES

Marketable
securities consist principally of equity securities of other telecommunications
companies. The Companys marketable securities portfolio was classified as
available-for-sale at December 31, 2007 and 2006. The cost and fair value of
available-for-sale investment securities were as follows:

|                    |  |      |           |                            |   |                             |  |              |         |  |   |           | 
|------------------- |  | ---- | --------- | -------------------------- | - | --------------------------- |  | ------------ | ------- |  | - | --------- | 
|                    |  | Cost |           | Gross
  Unrealized
  Gains |   | Gross
  Unrealized
  Losses |  | Fair
  Value |        
|                    |  |      |           |                            |   |                             |  |              |        
|                    |  |      |           |                            |   |                             |  |              |         |  |   |           | 
|December 31,
  2007 |  | $    | 1,263,806 |                            | $ | 55,676                      |  | $            | 44,616  |  | $ | 1,274,866 | 
|December 31,
  2006 |  | $    | 1,455,817 |                            | $ | 31,535                      |  | $            | 139,919 |  | $ | 1,347,433 | 

Realized gains
on the sales of securities are based on the book value of the securities sold
using the specific identification method. In 2007, the Company sold marketable
securities for a gain of $323,654. Net proceeds from the sales were $515,665.

Net unrealized
gains (losses) on marketable securities, net of related deferred taxes, are
included in stockholders equity as accumulated other comprehensive loss at
December 31, 2007 and 2006 as follows:

|                    |  |                                   |          |                           |   |                                               |   |   |         |  
|------------------- |  | --------------------------------- | -------- | ------------------------- | - | --------------------------------------------- | - | - | ------- | -
|                    |  | Net Unrealized
  Gains
  (Losses) |          | Deferred
  Income
  Taxes |   | Accumulated
  Comprehensive
  Income (Losses) |  
|                    |  |                                   |          |                           |   |                                               |  
|                    |  |                                   |          |                           |   |                                               |   |   |         |  
|December 31,
  2007 |  | $                                 | 119,408  |                           | $ | (47,742                                       | ) | $ | 71,666  |  
|December 31,
  2006 |  | $                                 | (108,384 | )                         | $ | 43,354                                        |   | $ | (65,030 | )

These amounts have no cash
effect and are not included in the statement of cash flows.

NOTE
8 - INCOME TAXES

Hector Communications
Corporation and its subsidiaries file a consolidated tax return. Income tax
expenses (benefits) were as follows:

|                           |  |      |            |                                                                     |   |          |  
|-------------------------- |  | ---- | ---------- | ------------------------------------------------------------------- | - | -------- | -
|                           |  | 2007 |            | Period from Acquisition
  (November 3, 2006) to
  December 31, 2006 |  
|                           |  |      |            |                                                                     |  
|Currently
  payable taxes: |  |      |            |                                                                     |   |          |  
|Federal                    |  | $    | 1,948,612  |                                                                     | $ | 357,900  |  
|State                      |  |      | 533,156    |                                                                     |   | 113,000  |  
|                           |  |      |            |                                                                     |   |          |  
|Deferred
  income tax      |  |      | (1,352,768 | )                                                                   |   | (126,400 | )
|                           |  |      |            |                                                                     |   |          |  
|                           |  | $    | 1,129,000  |                                                                     | $ | 344,500  |  
|                           |  |      |            |                                                                     |   |          |  

74

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Table of Contents

HECTOR COMMUNICATIONS CORPORATION AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 8 - INCOME TAXES (Continued)

Deferred tax
liabilities and assets as of December 31 related to the following:

|                                   |  |      |            |      |   |            |  
|---------------------------------- |  | ---- | ---------- | ---- | - | ---------- | -
|                                   |  | 2007 |            | 2006 |  
|                                   |  |      |            |      |  
|Deferred tax liabilities:          |  |      |            |      |   |            |  
|Accelerated depreciation           |  | $    | 3,794,276  |      | $ | 4,775,539  |  
|Intangibles                        |  |      | 13,121,123 |      |   | 3,642,642  |  
|Partnership and LLC investments    |  |      | 2,200,064  |      |   | 1,839,358  |  
|Other                              |  |      | 267,928    |      |   | 164,282    |  
|                                   |  |      |            |      |   |            |  
|                                   |  |      | 19,383,391 |      |   | 10,421,821 |  
|                                   |  |      |            |      |   |            |  
|Deferred tax assets:               |  |      |            |      |   |            |  
|Deferred compensation              |  |      | 276,457    |      |   | 273,790    |  
|Accrued expenses                   |  |      | 308,901    |      |   | 541,671    |  
|Marketable securities              |  |      |           |      |   | 39,724     |  
|Interest rate swap                 |  |      | 358,205    |      |   | 40,460     |  
|Other                              |  |      |           |      |   | 159,278    |  
|                                   |  |      |            |      |   |            |  
|                                   |  |      | 943,563    |      |   | 1,054,923  |  
|                                   |  |      |            |      |   |            |  
|                                   |  | $    | 18,439,828 |      | $ | 9,366,898  |  
|                                   |  |      |            |      |   |            |  
|                                   |  |      |            |      |   |            |  
|Presented on the balance sheet as: |  |      |            |      |   |            |  
|                                   |  |      |            |      |   |            |  
|Current deferred tax asset         |  | $    | (308,900   | )    | $ | (398,900   | )
|Non current deferred tax liability |  |      | 18,748,728 |      |   | 9,765,798  |  
|                                   |  |      |            |      |   |            |  
|Net deferred tax                   |  | $    | 18,439,828 |      | $ | 9,366,898  |  
|                                   |  |      |            |      |   |            |  

The provision for income taxes
varied from the federal statutory tax rate as follows:

|                                             |  |      |      |                                                                         |  |      |  
|-------------------------------------------- |  | ---- | ---- | ----------------------------------------------------------------------- |  | ---- | -
|                                             |  | 2007 |      | Period from
  Acquisition
  (November 3, 2006)
  to December 31,
  2006 | 
|                                             |  |      |      |                                                                         | 
|                                             |  |      |      |                                                                         |  |      |  
|Tax at U.S.
  statutory rate                 |  |      | 35.0 | %                                                                       |  | 35.0 | %
|Surtax
  exemption                           |  |      | (1.0 | )                                                                       |  |     |  
|State income
  taxes, net of federal benefit |  |      | 7.9  |                                                                         |  | 6.2  |  
|Other                                        |  |      | (.7  | )                                                                       |  | (0.1 | )
|                                             |  |      |      |                                                                         |  |      |  
|Effective tax rate                           |  |      | 41.2 | %                                                                       |  | 41.1 | %
|                                             |  |      |      |                                                                         |  |      |  
|                                             |  |      |      |                                                                         |  |      |  

NOTE
9 - NOTES PAYABLE AND LONG-TERM DEBT

The Companys notes payable and
long term debt is as follows:

|                                 |  |                     |            |                     |   |            | 
|-------------------------------- |  | ------------------- | ---------- | ------------------- | - | ---------- | 
|                                 |  | December 31,
  2007 |            | December 31,
  2006 |  
|                                 |  |                     |            |                     |  
|                                 |  |                     |            |                     |   |            | 
|CoBank                           |  |                     |            |                     |   |            | 
|Bridge note payable              |  | $                   |           |                     | $ | 6,400,000  | 
|Revolving credit facility        |  |                     |           |                     |   | 3,500,000  | 
|Term loan facility               |  |                     | 75,000,000 |                     |   | 76,000,000 | 
|RDUP                             |  |                     |            |                     |   |            | 
|Rural economic development grant |  |                     | 291,922    |                     |   | 284,791    | 
|Rural economic development loan  |  |                     | 194,643    |                     |   | 239,560    | 
|                                 |  |                     |            |                     |   |            | 
|Total                            |  |                     | 75,486,565 |                     |   | 86,424,351 | 
|Less current portion             |  |                     | 4,100,000  |                     |   | 7,400,000  | 
|                                 |  |                     |            |                     |   |            | 
|                                 |  | $                   | 71,386,565 |                     | $ | 79,024,351 | 
|                                 |  |                     |            |                     |   |            | 

75

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Table of Contents

HECTOR COMMUNICATIONS CORPORATION AND
SUBSIDIARIES 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 9 - NOTES PAYABLE AND LONG-TERM DEBT
(Continued)

The Bridge
Note Payable to CoBank by the Company was payable in full on December 31, 2007.
The Company paid the full balance by July 31, 2007. Interest was payable
quarterly at a variable rate (8.44% at December 31, 2006).

The Revolving
Credit Facility payable to CoBank by the Company is payable in full on November
3, 2013. This revolving credit facility allows the Company to borrow up to
$10,000,000 of which $10,000,000 is available as of December 31, 2007. Interest
is payable quarterly at a variable rate (7.44% at December 31, 2007).

The Term Loan
Facility payable to CoBank by the Company was the main vehicle to finance the
acquisition by HAC. Principal payments on this facility were deferred for one
year and began in December 2007. Principal payments will be due quarterly until
September 30, 2013 when the remaining balance of $47,500,000 is due. Interest is
payable quarterly at a variable rate (8.44% at December 31, 2006 and 7.44% at
December 31, 2007). CoBank syndicated $25,000,000 of the term loan facility to
other financial institutions, but remains the administrative agent for the
loan.

The Rural
Development Utilities Program of the United States Department of Agriculture
(RDUP) Economic Development Grant is a revolving loan fund to finance approved
rural economic projects. The grant was made to one of the Companys
subsidiaries. The grant funds and a required $64,600 contribution from the
Company are to be used to create a revolving loan fund to encourage rural
development in the subsidiaries service area.

The RDUP
economic development loan consists of a non-interest bearing note payable to
the RDUP in equal monthly payments of $3,743. The loan was made to one of the
Companys subsidiaries. This loan matures in 2012. Proceeds from the loan were
lent to a city in the subsidiaries service territory under identical repayment
terms.

As a condition
of maintaining the Companys loan with CoBank, the Company owns stock in the
bank. The Companys investment in CoBank stock was $2,379,100 and $2,509,066 as
of December 31, 2007 and 2006.

CoBank is a
cooperative, owned and controlled by its customers. Each customer borrowing
from the bank on a patronage basis shares in the banks net income through
payment of patronage refunds. Patronage refunds receivable included in accounts
receivable were $556,162 and $208,398 at December 31, 2007 and 2006.
Approximately 50% of patronage refunds are received in cash, with the balance
in stock in the bank. The accrued patronage refund is reflected in the
Companys operating statement as a reduction of interest expense. The Company
recorded $87,558 in patronage refunds for the period from acquisition (November
3, 2006) to December 31, 2006 and $561,948 for the year ending December 31,
2007. The Company cannot predict what patronage refunds might be in future
years.

Pledges of the
parent company assets and the stock of the Companys subsidiaries secure the
CoBank loans. Interest rates on long-term portions of the loan are variable and
consist of a base rate plus an applicable margin of .5% to 3.0% based on the
Companys leverage ratio as defined in the loan agreement.

The security
and loan agreements underlying the CoBank notes contain certain restrictions on
distributions to stockholders, capital additions and investments in or loans to
others. In addition, the Company is required to maintain certain financial
ratios relating to leverage, debt service and interest coverage, and equity to
total assets. The Company was in compliance with these covenants at December
31, 2007 and 2006.

76

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Table of Contents

HECTOR COMMUNICATIONS CORPORATION AND
SUBSIDIARIES 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 9  NOTES PAYABLE AND LONG-TERM DEBT
(Continued)

The annual
requirements for principal payments on notes payable and long-term debt are as
follows:

|                  |  |   |            | 
|----------------- |  | - | ---------- | 
|2008              |  | $ | 4,100,000  | 
|2009              |  |   | 4,500,000  | 
|2010              |  |   | 4,900,000  | 
|2011              |  |   | 5,300,000  | 
|2012              |  |   | 5,700,000  | 
|Years 6 through 7 |  |   | 50,500,000 | 

NOTE 10  INTEREST RATE SWAP

The Company
assesses interest rate cash flow risk by continually identifying and monitoring
changes in interest rate exposures that may adversely impact expected future
cash flows and by evaluating hedging opportunities.

The Company
uses variable-rate debt to finance its operations, capital expenditures, and
acquisitions. The variable-rate debt obligations expose the Company to
variability in interest payments due to changes in interest rates. The Company
and its primary lender, CoBank, believe it is prudent to limit the variability
of a portion of its interest payments. To meet this objective, the Company
entered into an interest rate swap agreement to manage fluctuations in cash
flows resulting from interest rate risk. The swap changes the variable-rate
cash flow exposure on the debt obligations to fixed cash flows. Under the terms
of the interest rate swap, the Company pays a fixed contractual interest rate
(5.1%) plus an additional payment if the variable rate (LIBOR) payment is below
a contractual rate, or it receives a payment if the variable rate payment is
above the contractual rate. As of December 31, 2006 and 2007 the Company had
one interest rate swap agreement for a notional amount of $38,000,000 that
expires November 8, 2009.

The interest
rate swap qualifies as a cash flow hedge for accounting purposes under SFAS No.
133. The effect of hedging ineffectiveness on net earnings was insignificant
for the period ending December 31, 2007 and 2006. The fair value of the
Companys interest rate swap agreement is determined from a valuation received
from the financial institution. The fair value indicates an estimated amount
the Company would pay if the contract was canceled or transferred to other
parties. At December 31, 2007 and 2006, the fair value loss of the swap was
$907,899 and $99,980 which has been recorded, net of deferred tax of $367,420
and $40,460, as a decrease in comprehensive income. The fair value loss of the
swap has been included as a current liability in accrued expenses.

NOTE 11 - EMPLOYEE BENEFIT PLANS

The Company
has 401(k) savings plans for its employees. Employees who meet certain age and
service requirements may contribute up to 15% of their salaries to the plan on
a pretax basis. The Company matches a portion of employee contributions.
Contributions to the plan by the Company for the period from acquisition
(November 3, 2006) to December 31, 2006 were approximately $28,000 and $101,365
for the year ending December 31, 2007.

77

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Table of Contents

HECTOR COMMUNICATIONS CORPORATION AND
SUBSIDIARIES 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 11 - EMPLOYEE BENEFIT PLANS (Continued)

The Company
has a deferred compensation agreement with two former officers of one of its
subsidiaries. Under the agreement, the salaries of these officers were
continued after their retirement based on a formula stated in the agreement.
The Company is responsible for 68% of the remaining deferred compensation, with
former partners responsible for the remaining 32%. Deferred compensation
expense included in operations was $14,300 for the period from acquisition
(November 3, 2006) to December 31, 2006. Payments made under the agreement by
the Company were $17,000 for the same period. Deferred compensation expense
included in operations in 2007 was $70,268 and payments made were $103,336.

With the
acquisition of the Company by HAC on November 3, 2006, the Company entered into
severance agreements with former officers and key employees. A liability was
accrued at November 3, 2006 for $1,156,000 for payments due under these
agreements. As of December 31, 2006 and 2007, $1,029,000 and $187,930 remained
payable under these agreements.

NOTE 12 - TRANSACTIONS WITH AFFILIATES

The Company
receives and provides services to various partnerships and limited liability
corporations in which it is a minority investor. Services received include
transport, directory services, centralized equal access and digital television
signals. Services provided include commissioned sales and transport. Revenues
from transactions with these affiliates were $204,785, for the period from
acquisition (November 3, 2006) to December 31, 2006. Expenses from transactions
with the affiliates were $195,075 for the period from acquisition (November 3,
2006) to December 31, 2006. Revenue from transactions with these affiliates
were $472,489 for the year ended December 31, 2007. Expenses from transactions
with these affiliates were $610,369 for the year ended December 31, 2007.

Costs of
services the Company receives from affiliated parties may not be indicative of
the costs of such services had they been obtained from different parties.

The Company
has entered into Management agreements with each of its three shareholders as
of November 3, 2006. The terms of the management agreements are one year and
will be automatically renewed unless either the Company or the shareholder
elects to terminate the service with 120 days written notice. Either party can
terminate the agreement at any time with 120 days written notice. The annual
management fee began January 1, 2007 and was $300,000 for the year ended
December 31, 2007.

The Company
has also contracted with certain shareholders for corporate overhead functions
such as accounting, billing and human resources, maintenance of plant, and
internet help desk services. Each contract was effective November 3, 2006 and
has duration of one year. Each contract will automatically renew unless either
party elects to terminate the service with 120 days written notice. The fees
for these services are billed at cost plus 20%. Costs include all direct costs
and related employee overhead costs. There were no costs billed under these
agreements in the period from acquisition (November 3, 2006) to December 31,
2006. Fees for these services were $1,498,134 for the year ending December 31,
2007.

In addition,
the Companys shareholders provided labor and materials related to construction
of the Companys property, plant and equipment. The total of these services
provided by the Companys shareholder was $850,650 for the year ended December
31, 2007. There were no construction related services provided in 2006.

Balances
payable to affiliates at December 31, 2006 represented acquisition costs to be
reimbursed by the Company to its shareholders, which was done in 2007. The
total balance due from the Company to its shareholders for routine services
provided at December 31, 2007 was $128,730.

78

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Table of Contents

HECTOR COMMUNICATIONS CORPORATION AND
SUBSIDIARIES 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 13  SEGMENT INFORMATION

The Company
operates in the communication segment and has no other significant business
segments. The communication segment consists of voice, data and video
communication services delivered to the customer over the Companys local
communications network.

No single
customer accounted for a material portion of the Companys revenues from the
year ended December 31, 2007 or the period from acquisition (November 3, 2006)
to December 31, 2006. The Company has no foreign operations.

NOTE 14  SHAREHOLDER AGREEMENT

The
shareholders of the Company have entered into a Shareholder Agreement that
requires any shareholder who is selling or otherwise transferring their shares
of stock in the Company to first offer to sell those shares to the Company. In
the event the Company elects to not purchase such shares, the other
shareholders may elect to purchase the shares. Upon occurrence of certain other
events specified in the Shareholder Agreement, the Company and the remaining
shareholders may purchase the shares owned by a shareholder. The selling price
is determined based upon provisions set forth in the agreement.

79

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Table of Contents

SIGNATURES

Pursuant to
the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.

|      |                 |    |                                                  
|----- | --------------- | -- | -------------------------------------------------
|      |                 |    | NEW
 ULM TELECOM, INC.                           
|      |                 |    | (Registrant)                                     
|      |                 |    |                                                  
|Date: | March 14,
 2008 | By | /s/ Bill Otis                                    
|      |                 |    |                                                  
|      |                 |    | Bill Otis,
 President and Chief Executive Officer
|      |                 |    | (Principal
 Executive Officer)                   

Pursuant to
the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the Registrant and in the
capacities and on the date indicated.

KNOW ALL BY
THESE PRESENT, that each person whose signature appears below constitutes and
appoints Bill Otis as his or her true and lawful attorney-in-fact and
agent, with full powers of substitution and resubstitution, for him or her and
in his or her name, place and stead, in any and all capacities, to sign any or
all amendments to this report, and to file the same, with all exhibits thereto,
and other documents in connection therewith, with the SEC, granting unto said
attorney-in-fact and agent, full power and authority to do and perform each and
every act and thing requisite or necessary to be done in and about the
premises, as fully to all intents and purposes as he or she might or could do
in person, hereby ratifying and confirming all that said attorney-in-fact and
agent, or his or her substitute or substitutes, may lawfully do or cause to be
done by virtue hereof.

|      |                 |    |                                                  
|----- | --------------- | -- | -------------------------------------------------
|Date: | March 14,
 2008 | By | /s/ Bill Otis                                    
|      |                 |    |                                                  
|      |                 |    | Bill Otis,
 President and Chief Executive Officer
|      |                 |    | (Principal
 Executive Officer)                   
|      |                 |    |                                                  
|     
|      |                 |    | /s/ Nancy Blankenhagen                           
|      |                 |    |                                                  
|      |                 |    | Nancy Blankenhagen, Chief Financial Officer      
|      |                 |    | and Treasurer (Principal Financial and           
|      |                 |    | Accounting Officer)                              
|      |                 |    |                                                  
|     
|      |                 |    | /s/ James Jensen                                 
|      |                 |    |                                                  
|      |                 |    | James Jensen, Chairman of
 the Board             
|     
|      |                 |    |                                                  
|      |                 |    | /s/ Duane Lambrecht                              
|      |                 |    |                                                  
|      |                 |    | Duane Lambrecht, Director                        
|      |                 |    |                                                  
|     
|      |                 |    | /s/ Gary Nelson                                  
|      |                 |    |                                                  
|      |                 |    | Gary Nelson, Director                            
|      |                 |    |                                                  
|     
|      |                 |    | /s/ Rosemary Dittrich                            
|      |                 |    |                                                  
|      |                 |    | Rosemary Dittrich,
 Director                     
|      |                 |    |                                                  
|     
|      |                 |    | /s/ Mary Ellen Domeier                           
|      |                 |    |                                                  
|      |                 |    | Mary Ellen Domeier, Director                     
|      |                 |    |                                                  
|     
|      |                 |    | /s/ Perry Meyer                                  
|      |                 |    |                                                  
|      |                 |    | Perry Meyer, Director                            
|      |                 |    |                                                  
|     
|      |                 |    | /s/ Paul Erick                                   
|      |                 |    |                                                  
|      |                 |    | Paul Erick,  Director                            

80

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Table of Contents

INDEX TO EXHIBITS

Exhibits
required to be filed by Item 601 of Regulation S-K are included as Exhibits to
this report as follows:

| |        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | ------ |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 3.1    |  | Restated
  Articles of Incorporation, as amended (incorporated by reference to the New
  Ulm Telecom, Inc. quarterly report on Form 10-Q (file No. 000-03024) filed on
  August 5, 2004).                                                                                                                                                                                                                                                                                                  
| |        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | 3.2    |  | Restated
  By-Laws (incorporated by reference to the New Ulm Telecom, Inc. annual report
  on Form 10-K (file No. 000-03024) for the fiscal year ended December 31,
  1986).                                                                                                                                                                                                                                                                                                               
| |        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | 4.1    |  | Registrant, by
  signing this Report, agrees to furnish the Securities and Exchange
  Commission, upon its request, a copy of any instrument which defines the
  rights of holders of long-term debt of the registrant and all of its
  subsidiaries for which consolidated financial statements are required to be
  filed, and which authorizes a total amount of securities not in excess of 10%
  of the total assets of the registrant and its subsidiaries on a consolidated
  basis.
| |        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | 10.1+  |  | Employment
  Agreement dated as of July 1, 2006, by and between New Ulm Telecom, Inc. and
  Mr. Bill Otis (incorporated by reference to Exhibit 10.1 contained in the
  Companys Form 8-K filed on July 18, 2006 (File No. 000-03024)).                                                                                                                                                                                                                                                   
| |        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | 10.2+  |  | Employment
  Agreement dated as of July 1, 2006, by and between New Ulm Telecom, Inc. and
  Ms. Barbara Bornhoft (incorporated by reference to Exhibit 10.1 contained in
  the Companys Form 8-K filed on July 18, 2006 (File No. 000-03024)).                                                                                                                                                                                                                                            
| |        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | 10.3   |  | Shareholder
  Agreement dated as of November 1, 2006, by and among New Ulm Telecom, Inc.,
  Arvig Enterprises, Inc., and Blue Earth Valley Communications, Inc. and each
  individually (incorporated by reference to Exhibit 10.1 contained in the
  Companys Form 10-Q for the quarterly period ended September 30, 2006 (File No.
  000-03024)).                                                                                                                                       
| |        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | 10.4+* |  | New Ulm
  Telecom, Inc. Management Incentive Plan                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | 10.5   |  | Master Loan
  Agreement RX0583, dated as of January 4, 2008 between CoBank, ACB and New Ulm
  Telecom, Inc.                                                                                                                                                                                                                                                                                                                                                                                
| |        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | 10.6   |  | First
  Supplement dated January 4, 2008 to the Master Loan Agreement between CoBank,
  ACB and New Ulm Telecom, Inc.                                                                                                                                                                                                                                                                                                                                                                      
| |        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | 10.7   |  | New Ulm
  Telecom, Inc. $15,000,000 Term Promissory Note.                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | 10.8   |  | Second
  Supplement dated January 4, 2008, to the Master Loan Agreement between
  CoBank, ACB and New Ulm Telecom, Inc.                                                                                                                                                                                                                                                                                                                                                                    
| |        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | 10.9   |  | New Ulm
  Telecom, Inc. $10,000,000 Revolving Promissory Note.                                                                                                                                                                                                                                                                                                                                                                                                                             
| |        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | 10.10  |  | Master Loan
  Agreement RX0584, dated January 4, 2008 between CoBank, ACB and Hutchinson
  Telephone Company (as successor to Hutchinson Acquisition Corp).                                                                                                                                                                                                                                                                                                                                
| |        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | 10.11  |  | First
  Supplement dated January 4, 2008 to the Master Loan Agreement between CoBank,
  ACB and Hutchinson Telephone Company.                                                                                                                                                                                                                                                                                                                                                              
| |        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | 10.12  |  | Hutchinson
  Telephone Company $29,700,000 Promissory Note.                                                                                                                                                                                                                                                                                                                                                                                                                                
| |        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | 10.13  |  | Second
  Supplement dated January 4, 2008 to the Master Loan Agreement between CoBank,
  ABC and Hutchinson Telephone Company.                                                                                                                                                                                                                                                                                                                                                             

81

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Table of Contents

| |       |  |                                                                                                                                                         
| | ----- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------
| | 10.14 |  | Hutchinson
  Telephone Company $2,000,000 Revolving Promissory Note.                                                                                    
| |       |  |                                                                                                                                                         
| | 10.15 |  | Third
  Supplement dated January 4, 2008 to the Master Loan Agreement between CoBank,
  ACB and Hutchinson Telephone Company.                           
| |       |  |                                                                                                                                                         
| | 10.16 |  | Hutchinson
  Telephone Company $3,000,000 Term Promissory Note.                                                                                         
| |       |  |                                                                                                                                                         
| | 10.17 |  | Form of
  Security Agreement.                                                                                                                           
| |       |  |                                                                                                                                                         
| | 10.18 |  | Form of
  Guarantee.                                                                                                                                    
| |       |  |                                                                                                                                                         
| | 21*   |  | Subsidiaries
  of the Registrant.                                                                                                                       
| |       |  |                                                                                                                                                         
| | 24*   |  | Power of
  Attorney (Included on Signature Page).                                                                                                       
| |       |  |                                                                                                                                                         
| | 31.1* |  | Chief
  Executive Officer Certification pursuant to Exchange Act Rule 13a-14(a), as
  adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
| |       |  |                                                                                                                                                         
| | 31.2* |  | Chief
  Financial Officer Certification pursuant to Exchange Act Rule 13a-14(a), as
  adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
| |       |  |                                                                                                                                                         
| | 32.1* |  | Chief
  Executive Officer Certification pursuant to 18 U.S.C. Section 1350, as
  adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.     
| |       |  |                                                                                                                                                         
| | 32.2* |  | Chief
  Financial Officer Certification pursuant to 18 U.S.C. Section 1350, as
  adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.     
| |       |  |                                                                                                                                                         
| | *     |  | Filed
  herewith                                                                                                                                        
| |       |  |                                                                                                                                                         
| | +     |  | Indicates
  Compensatory Plan                                                                                                                           

82

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