**UNITED STATESSECURITIES AND EXCHANGE COMMISSION****WASHINGTON, DC 20549**

**FORM 10-Q**
| **(Mark One)** |
|----------------|
| **x**          | ** ** | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)  OF THE SECURITIES EXCHANGE ACT OF 1934** |
|           |   |   |
| ** **     | ** ** | **For the quarterly period ended June 30, 2006** |
|           |   |   |
| **OR**         |
|           |   |   |
| **o**          | ** ** | **TRANSITION REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|           |   |   |
|           |   | **For the transition  period from                  to                .** |

 

**Commission file number   0-13721**

###### **HICKORYTECH CORPORATION**(Exact name of registrant as specified in its charter)

| **Minnesota**                    |   | **41-1524393**       |
|----------------------------------|--------|----------------------|
| (State or other  jurisdiction of |   | (I.R.S. Employer     |
| incorporation or  organization)  |   | Identification  No.) |

 

**221 EastHickory StreetMankato, Minnesota 56002-3248**(Address of principal executive offices and zip code)

**(800) 326-5789**(Registrant’s telephone number, including area code)

(Former name, former address and former fiscal year,if changed since last report)

Indicate by check mark whetherthe Registrant (1) has filed all reports required to be filed by Section 13 or15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (orfor 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 whether the registrant is alarge accelerated filer, an accelerated filer, or a non-accelerated filer. Seedefinition of “accelerated filer and large accelerated filer” in Rule 12b-2 ofthe Exchange Act.

(Check one): Large accelerated filer o Accelerated filer x Non-accelerated filer o

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

The total number of shares of the registrant’s common stock outstandingas of July 28, 2006: 13,156,490.

 

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**TABLE OF CONTENTS**
| Description | ** ** | ** **                                                                                                           | ** ** |
|-------------|------------|----------------------------------------------------------------------------------------------------------------------|------------|
| ** **  | ** ** | ** **                                                                                                           | ** ** |
|        |       | **PART I. Financial Information**                                                                                    |       |
|        |       |                                                                                                                 |       |
| Item 1.     |       | Financial  Statements:                                                                                               |       |
|        |       |                                                                                                                 |       |
|        |       | Consolidated  Statements of Operations (unaudited) for the Three Months and Six Months  Ended June 30, 2006 and 2005 |       |
|        |       |                                                                                                                 |       |
|        |       | Consolidated  Balance Sheets (unaudited) as of June 30, 2006 and December 31, 2005                                   |       |
|        |       |                                                                                                                 |       |
|        |       | Consolidated  Statements of Cash Flows (unaudited) for the Six Months Ended June 30, 2006  and 2005                  |       |
|        |       |                                                                                                                 |       |
|        |       | Condensed  Notes to Consolidated Financial Statements (unaudited)                                                    |       |
|        |       |                                                                                                                 |       |
| Item 2.     |       | Management’s  Discussion and Analysis of Results of Operations and Financial Condition                          |       |
|        |       |                                                                                                                 |       |
| Item 3.     |       | Quantitative  and Qualitative Disclosures About Market Risk                                                          |       |
|        |       |                                                                                                                 |       |
| Item 4.     |       | Controls and  Procedures                                                                                             |       |
|        |       |                                                                                                                 |       |
| ** **  |       | **PART II. Other Information**                                                                                       |       |
|        |       |                                                                                                                 |       |
| Item 1.     |       | Legal Proceedings                                                                                                    |       |
|        |       |                                                                                                                 |       |
| Item  1A.   |       | Risk  Factors                                                                                                        |       |
|        |       |                                                                                                                 |       |
| Item 2.     |       | Unregistered  Sales of Equity Securities and Use of Proceeds                                                         |       |
|        |       |                                                                                                                 |       |
| Item 3.     |       | Defaults  Upon Senior Securities                                                                                     |       |
|        |       |                                                                                                                 |       |
| Item 4.     |       | Submission  of Matters to a Vote of Security Holders                                                                 |       |
|        |       |                                                                                                                 |       |
| Item 5.     |       | Other Information                                                                                                    |       |
|        |       |                                                                                                                 |       |
| Item  6.    |       | Exhibit  Listing                                                                                                     |       |
|        |       |                                                                                                                 |       |
|        |       | Signatures                                                                                                           |       |
|        |       |                                                                                                                 |       |
|        |       | Exhibits                                                                                                             |       |

 

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**HICKORYTECH CORPORATION**

Consolidated Statementsof Operations

(Unaudited)
| ** **                                                                               | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|------------------------------------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                                                               | ** ** | **June 30,**                | ** ** | **June 30,**              | ** ** |
| **(In Thousands Except Share and Per Share Amounts)** | ** ** | **2006**                         | ** ** | **2005**                       | ** ** | **2006** | ** ** | **2005** | ** ** |
| Operating revenues:                                                                      |       |                             |       |                           |       |   |   |   |   |
| Telecom Sector                                                                           | ** ** | **$**                            | **18,378** |                           | $          | 19,286 | ** ** | **$** | **36,346** |   | $ | 38,631 |   |
| Information  Solutions Sector                                                            | ** ** | **534**                          |       | 914                            | ** ** | **1,222** |   | 1,402 |   |
| Enterprise  Solutions Sector                                                             | ** ** | **2,545**                        |       | 5,068                          | ** ** | **5,282** |   | 8,343 |   |
| Enventis Sector                                                                          | ** ** | **15,178**                       |       | —                         | ** ** | **29,262** |   | — |   |
| Total operating  revenues                                                                | ** ** | **36,635**                       |       | 25,268                         | ** ** | **72,112** |   | 48,376 |   |
| Costs and expenses:                                                                      |       |                             |       |                           |       |   |   |   |   |
| Cost of sales,  Enterprise Solutions and Enventis                                        | ** ** | **11,828**                       |       | 3,772                          | ** ** | **22,855** |   | 6,040 |   |
| Cost of services  (excluding depreciation and amortization)                              | ** ** | **9,373**                        |       | 8,289                          | ** ** | **18,334** |   | 16,342 |   |
| Selling, general  and administrative expenses (excluding depreciation and amortization)  |       | **6,818**                        |       | 4,087                          |       | **14,001** |   | 8,114 |   |
| Depreciation                                                                             | ** ** | **4,236**                        |       | 4,043                          | ** ** | **8,310** |   | 8,044 |   |
| Amortization of  intangibles                                                             | ** ** | **293**                          |       | 204                            | ** ** | **586** |   | 441 |   |
| Total costs and  expenses                                                                | ** ** | **32,548**                       |       | 20,395                         | ** ** | **64,086** |   | 38,981 |   |
| Operating income                                                                         | ** ** | **4,087**                        |       | 4,873                          | ** ** | **8,026** |   | 9,395 |   |
| Other income/(expense):                                                                  |       |                             |       |                           |       |   |   |   |   |
| Interest and  other income                                                               | ** ** | **37**                           |       | 32                             | ** ** | **67** |   | 40 |   |
| Interest expense                                                                         | ** ** | **(1,830**                       | **)**      | (1,027                         | )          | **(3,479** | **)** | (2,004 | ) |
| Total other  income/(expense)                                                            | ** ** | **(1,793**                       | **)**      | (995                           | )          | **(3,412** | **)** | (1,964 | ) |
|                                                                                     |       |                             |       |                           |       |   |   |   |   |
| Income before income  taxes                                                              | ** ** | **2,294**                        |       | 3,878                          | ** ** | **4,614** |   | 7,431 |   |
| Income tax provision                                                                     | ** ** | **920**                          |       | 1,569                          | ** ** | **1,851** |   | 3,006 |   |
| Income from continuing  operations                                                       | ** ** | **1,374**                        |       | 2,309                          | ** ** | **2,763** |   | 4,425 |   |
| Discontinued  operations:                                                                |       |                             |       |                           |       |   |   |   |   |
| Income/(loss)  from operations of discontinued component                                 | ** ** | **—**                       |       | 170                            | ** ** | **—** |   | 170 |   |
| Income tax provision/(benefit)                                                           | ** ** | **—**                       |       | 69                             | ** ** | **—** |   | 69 |   |
| Income/(loss) from  discontinued operations                                              | ** ** | **—**                       |       | 101                            | ** ** | **—** |   | 101 |   |
| Net income                                                                               | ** ** | **$**                            | **1,374**  |                           | $          | 2,410 | ** ** | **$** | **2,763** |   | $ | 4,526 |   |
|                                                                                     |       |                             |       |                           |       |   |   |   |   |
| Basic earnings per  share - continuing operations                                        | ** ** | **$**                            | **0.10**   |                           | $          | 0.18 | ** ** | **$** | **0.21** |   | $ | 0.34 |   |
| Basic earnings per share  - discontinued operations                                      | ** ** | **—**                       |       | 0.01                           | ** ** | **—** |   | 0.01 |   |
| ** **                                                                               |       | **$**                            | **0.10**   | ** **                     | $          | 0.19 |   | **$** | **0.21** |   | $ | 0.35 |   |
| Dividends per share                                                                      | ** ** | **$**                            | **0.12**   |                           | $          | 0.12 | ** ** | **$** | **0.24** |   | $ | 0.24 |   |
| Basic weighted average  common shares outstanding                                        | ** ** | **13,152**                       |       | 13,072                         | ** ** | **13,143** |   | 13,066 |   |
|                                                                                     |       |                             |       |                           |       |   |   |   |   |
| Diluted earnings per share  - continuing operations                                      | ** ** | **$**                            | **0.10**   |                           | $          | 0.18 | ** ** | **$** | **0.21** |   | $ | 0.34 |   |
| Diluted earnings per  share - discontinued operations                                    | ** ** | **—**                       |       | 0.01                           | ** ** | **—** |   | 0.01 |   |
| ** **                                                                               |       | **$**                            | **0.10**   | ** **                     | $          | 0.19 |   | **$** | **0.21** |   | $ | 0.35 |   |
| Diluted weighted average common and potential common shares  outstanding                 | ** ** | **13,155**                       |       | 13,102                         | ** ** | **13,146** |   | 13,102 |   |

 

The accompanying notesare an integral part of the consolidated financial statements.

3

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**HICKORY TECH CORPORATION**Consolidated Balance Sheets(Unaudited)
| ** **                                                                                                                                         | ** ** | **June 30,** | ** **  | **December 31,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|-------------|-----------------------|------------|
| **(In Thousands Except Share and Per Share Amounts)**                                                           | ** ** | **2006**          | ** **  | **2005**              | ** ** |
| ASSETS                                                                                                                                             |       |              |        |                  |       |
| Current assets:                                                                                                                                    |       |              |        |                  |       |
| Cash and cash equivalents                                                                                                                          | ** ** | **$**             | **140**     |                  | $          | 601 |   |
| Receivables, net of allowance for doubtful accounts  of $356 and $334                                                                              | ** ** | **21,620**        |        | 19,867                |       |
| Costs in excess of billings on contracts                                                                                                           | ** ** | **239**           |        | 462                   |       |
| Inventories                                                                                                                                        | ** ** | **7,303**         |        | 4,577                 |       |
| Deferred income taxes                                                                                                                              | ** ** | **300**           |        | 300                   |       |
| Prepaid expenses                                                                                                                                   | ** ** | **1,739**         |        | 5,066                 |       |
| Other                                                                                                                                              | ** ** | **1,289**         |        | 1,155                 |       |
| Total current assets                                                                                                                               | ** ** | **32,630**        |        | 32,028                |       |
|                                                                                                                                               |       |              |        |                  |       |
| Investments                                                                                                                                        | ** ** | **3,554**         |        | 3,407                 |       |
|                                                                                                                                               |       |              |        |                  |       |
| Property, plant  and equipment                                                                                                                     | ** ** | **300,953**       |        | 290,499               |       |
| Less accumulated depreciation                                                                                                                      | ** ** | **149,471**       |        | 141,157               |       |
| Property, plant and equipment, net                                                                                                                 | ** ** | **151,482**       |        | 149,342               |       |
|                                                                                                                                               |       |              |        |                  |       |
| Other assets:                                                                                                                                      |       |              |        |                  |       |
| Goodwill                                                                                                                                           | ** ** | **26,943**        |        | 27,109                |       |
| Intangible assets, net                                                                                                                             | ** ** | **3,726**         |        | 4,312                 |       |
| Financial derivative instruments                                                                                                                   | ** ** | **3,777**         |        | 3,429                 |       |
| Deferred costs and other                                                                                                                           | ** ** | **2,921**         |        | 3,640                 |       |
| Total other assets                                                                                                                                 | ** ** | **37,367**        |        | 38,490                |       |
|                                                                                                                                               |       |              |        |                  |       |
| Total assets                                                                                                                                       | ** ** | **$**             | **225,033** |                  | $          | 223,267 |   |
|                                                                                                                                               |       |              |        |                  |       |
| LIABILITIES AND SHAREHOLDERS EQUITY                                                                                                                |       |              |        |                  |       |
| Current  liabilities:                                                                                                                              |       |              |        |                  |       |
| Cash overdraft                                                                                                                                     | ** ** | **$**             | **—**  |                  | $          | 514 |   |
| Short-term financing (Note 12)                                                                                                                     | ** ** | **4,546**         |        | —                |       |
| Accounts payable                                                                                                                                   | ** ** | **3,740**         |        | 5,224                 |       |
| Accrued expenses                                                                                                                                   | ** ** | **5,260**         |        | 6,809                 |       |
| Accrued interest                                                                                                                                   | ** ** | **388**           |        | —                |       |
| Accrued income taxes                                                                                                                               | ** ** | **5,803**         |        | 4,765                 |       |
| Billings in excess of costs on contracts                                                                                                           | ** ** | **300**           |        | 283                   |       |
| Advanced billings and deposits                                                                                                                     | ** ** | **3,814**         |        | 4,577                 |       |
| Current maturities of long-term obligations                                                                                                        | ** ** | **1,693**         |        | 1,778                 |       |
| Total current liabilities                                                                                                                          | ** ** | **25,544**        |        | 23,950                |       |
|                                                                                                                                               |       |              |        |                  |       |
| Long-term  obligations, net of current maturities                                                                                                  | ** ** | **138,762**       |        | 140,980               |       |
|                                                                                                                                               |       |              |        |                  |       |
| Deferred income  taxes                                                                                                                             | ** ** | **15,592**        |        | 15,346                |       |
|                                                                                                                                               |       |              |        |                  |       |
| Deferred revenue  and employee benefits                                                                                                            | ** ** | **9,850**         |        | 7,982                 |       |
|                                                                                                                                               |       |              |        |                  |       |
| Total liabilities                                                                                                                                  | ** ** | **189,748**       |        | 188,258               |       |
|                                                                                                                                               |       |              |        |                  |       |
| Commitments and  contingencies (Note 8)                                                                                                            | ** ** | **—**        |        | —                |       |
|                                                                                                                                               |       |              |        |                  |       |
| Shareholders’  equity:                                                                                                                        |       |              |        |                  |       |
| Common stock, no par value, $.10 stated value shares  authorized: 100,000,000  shares  outstanding: 13,156,290 in 2006 and 13,124,928 in 2005 |       | **1,315**         |        | 1,312                 |       |
| Additional paid-in capital                                                                                                                         | ** ** | **9,717**         |        | 9,262                 |       |
| Retained earnings                                                                                                                                  | ** ** | **21,980**        |        | 22,371                |       |
| Accumulated other comprehensive income                                                                                                             | ** ** | **2,273**         |        | 2,064                 |       |
| Total shareholders’ equity                                                                                                                    | ** ** | **35,285**        |        | 35,009                |       |
|                                                                                                                                               |       |              |        |                  |       |
| Total liabilities and  shareholders’ equity                                                                                                   | ** ** | **$**             | **225,033** |                  | $          | 223,267 |   |

 

The accompanying notesare an integral part of the consolidated financial statements.

4

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**HICKORY TECH CORPORATION**

Consolidated Statementsof Cash Flows

(Unaudited)
| ** **                                                                         | ** ** | **Six Months Ended** | ** ** |
|------------------------------------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                                                         | ** ** | **June 30,**              | ** ** |
| **(Dollars In Thousands)**                                               | ** ** | **2006**                       | ** ** | **2005** | ** ** |
| Cash flows from  operating activities:                                             |       |                           |       |   |   |
| Net income                                                                         | ** ** | **$**                          | **2,763**  |   | $ | 4,526 |   |
| Adjustments to reconcile net income to net Cash  provided by operating activities: |       |                           |       |   |   |
| Depreciation and amortization                                                      | ** ** | **8,896**                      |       | 8,485 |   |
| (Gain)/Loss on sale of assets                                                      | ** ** | **—**                     |       | (4 | ) |
| Stock-based compensation                                                           | ** ** | **177**                        |       | 45 |   |
| Employee retirement benefits and deferred  compensation                            | ** ** | **353**                        |       | 273 |   |
| Accrued patronage refunds                                                          | ** ** | **(543**                       | **)**      | (211 | ) |
| Provision for losses on accounts receivable                                        | ** ** | **296**                        |       | 477 |   |
| Deferred income taxes                                                              | ** ** | **108**                        |       | — |   |
| Changes in operating assets and liabilities:                                       |       |                           |       |   |   |
| Receivables                                                                        | ** ** | **(1,010**                     | **)**      | 2,553 |   |
| Inventories                                                                        | ** ** | **(2,726**                     | **)**      | (396 | ) |
| Billings and costs on contracts                                                    | ** ** | **241**                        |       | (834 | ) |
| Accounts payable and accrued expenses                                              | ** ** | **(2,691**                     | **)**      | (857 | ) |
| Advance billings and deposits                                                      | ** ** | **(764**                       | **)**      | (326 | ) |
| Deferred revenue and employee benefits                                             | ** ** | **1,514**                      |       | (58 | ) |
| Prepaid assets                                                                     | ** ** | **3,327**                      |       | 252 |   |
| Other                                                                              | ** ** | **960**                        |       | 114 |   |
| Net cash provided by operating activities                                          | ** ** | **10,901**                     |       | 14,039 |   |
|                                                                               |       |                           |       |   |   |
| Cash flows from  investing activities:                                             |       |                           |       |   |   |
| Additions to property, plant and equipment                                         | ** ** | **(10,297**                    | **)**      | (4,628 | ) |
| Acquisitions, adjustments to purchase price and  allocation                        | ** ** | **166**                        |       | — |   |
| Redemption of investments                                                          | ** ** | **21**                         |       | 2,100 |   |
| Proceeds from sale of assets                                                       | ** ** | **5**                          |       | 25 |   |
| Net cash provided by/(used in) investing activities                                | ** ** | **(10,105**                    | **)**      | (2,503 | ) |
|                                                                               |       |                           |       |   |   |
| Cash flows from  financing activities:                                             |       |                           |       |   |   |
| Short-term financing                                                               | ** ** | **4,546**                      |       | — |   |
| Change in cash overdraft                                                           | ** ** | **(514**                       | **)**      | (1,680 | ) |
| New capital leases                                                                 | ** ** | **(32**                        | **)**      | — |   |
| Payments of capital lease obligations                                              | ** ** | **(244**                       | **)**      | (303 | ) |
| Repayments on credit facility                                                      | ** ** | **(12,685**                    | **)**      | (9,500 | ) |
| Borrowings on credit facility                                                      | ** ** | **10,500**                     |       | 3,500 |   |
| Proceeds from issuance of common stock                                             | ** ** | **200**                        |       | 328 |   |
| Dividends paid                                                                     | ** ** | **(3,028**                     | **)**      | (3,135 | ) |
| Net cash used in financing activities                                              | ** ** | **(1,257**                     | **)**      | (10,790 | ) |
|                                                                               |       |                           |       |   |   |
| Net increase  (decrease) in cash and cash equivalents                              | ** ** | **(461**                       | **)**      | 746 |   |
|                                                                               |       |                           |       |   |   |
| Cash and cash  equivalents at beginning of period                                  | ** ** | **601**                        |       | 257 |   |
|                                                                               |       |                           |       |   |   |
| Cash and cash  equivalents at end of period                                        | ** ** | **$**                          | **140**    |   | $ | 1,003 |   |
|                                                                               |       |                           |       |   |   |
| Supplemental  disclosure of cash flow information:                                 |       |                           |       |   |   |
| Cash paid for interest                                                             | ** ** | **$**                          | **3,592**  |   | $ | 2,119 |   |
| Net cash paid for income taxes                                                     | ** ** | **$**                          | **690**    |   | $ | 310 |   |
| Non-cash  investing activities:                                                    |       |                           |       |   |   |
| Property, plant  and equipment acquired with capital leases                        | ** ** | **$**                          | **158**    |   | $ | 547 |   |

 

The accompanying notesare an integral part of the consolidated financial statements.

5

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**HICKORYTECH CORPORATIONJUNE 30, 2006PART 1. FINANCIAL INFORMATION**

**ITEM 1.   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

NOTE 1. BASIS OFPRESENTATION

The accompanyingunaudited condensed consolidated financial statements have been prepared inaccordance with generally accepted accounting principles for interim financialinformation and with the instructions to Form 10-Q and Article 10 of RegulationS-X. Accordingly, they do not include all of the information necessary for afair statement of results of operations, financial position, and cash flows inconformity with accounting principles generally accepted in the United Statesof America. In the opinion of management, the unaudited condensed consolidatedfinancial statements reflect all adjustments (consisting only of normalrecurring adjustments) considered necessary for a fair statement of HickoryTech Corporation’s (HickoryTech or the Company) results for the periodspresented. Operating results for interim periods are not necessarily indicativeof results that may be expected for the fiscal year as a whole. The preparationof financial statements in conformity with accounting principles generallyaccepted in the United States of America requires management to make estimatesand assumptions that affect the reported amounts of assets, liabilities,revenues, expenses, and related disclosures at the date of the financialstatements and during the reporting period. Actual results could differ fromthese estimates. These unaudited interim condensed consolidated financialstatements should be read in conjunction with HickoryTech’s Annual Report onForm 10-K for the year ended December 31, 2005.

*Recently Issued AccountingPronouncements*

InJuly 2006, the FASB issued FASB Interpretation (FIN) No. 48, “Accountingfor Uncertainty in Income Taxes-an interpretation of FASB StatementNo. 109.” This Interpretation provides guidance for recognizing andmeasuring uncertain tax positions, as defined in SFAS No. 109, “Accountingfor Income Taxes.” FIN No. 48 prescribes a threshold condition that a taxposition must meet for any of the benefit of the uncertain tax position to berecognized in the financial statements. Guidance is also provided regardingderecognition, classification and disclosure of these uncertain tax positions.FIN 48 is effective for fiscal years beginning after December 15, 2006.The Company does not expect that this Interpretation will have a materialimpact on its financial position, results of operations, or cash flows.

The condensed consolidatedfinancial statements of HickoryTech include Hickory Tech Corporation and itssubsidiaries in the following four business segments: (i) Telecom Sector, (ii)Information Solutions Sector, (iii) Enterprise Solutions Sector and (iv)Enventis Sector. All inter-company transactions have been eliminated from theconsolidated financial statements.

Cost of services includes allcosts related to delivery of HickoryTech’s communications services andproducts. These costs include all costs of performing services and providingrelated products. It does not include costs associated with selling, generaland administrative, depreciation and amortization of property, plant andequipment and intangible assets, and cost of sales for the Enterprise Solutionsand Enventis Sectors.

On December 30, 2005,HickoryTech purchased Enventis Telecom, Inc. (Enventis) from ALLETE, Inc.Enventis is a transport and enterprise Internet Protocol telephony equipmentsales business which specializes in providing telecommunications and networksolutions. In addition to its statewide SONET-based network, Enventis providesinnovative Internet Protocol services that combine voice and data onto a singleplatform. Since 1997, Enventis has provided network solutions for a broadspectrum of large corporate, non-profit, government, and small businessclients. Enventis has offices located in Duluth, Plymouth and Rochester,Minnesota and Sioux Falls, South Dakota.

6

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NOTE 2. EARNINGS AND CASHDIVIDENDS PER COMMON SHARE

Basic earnings pershare are computed by dividing net income by the weighted average number ofshares of common stock outstanding during the applicable period. Shares used inthe earnings per share assuming dilution calculation are based on the weightedaverage number of shares of common stock outstanding during the periodincreased by potentially dilutive common shares. Potentially dilutive commonshares include stock options and stock subscribed under the HickoryTechCorporation Amended and Restated Employee Stock Purchase Plan (ESPP).
| ** **                           | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|--------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                           | ** ** | **June 30,**                | ** ** | **June 30,**              | ** ** |
| ** **                           | ** ** | **2006**                         | ** ** | **2005**                       | ** ** | **2006** | ** ** | **2005** | ** ** |
| Weighted average  shares outstanding |       | 13,151,626                       |       | 13,072,273                     |       | 13,142,770 |   | 13,065,685 |   |
| Stock options  (dilutive only)       |       | —                           |       | 5,166                          |       | — |   | 11,009 |   |
| Stock subscribed  (ESPP)             |       | 3,084                            |       | 24,877                         |       | 3,371 |   | 24,877 |   |
| Total dilutive shares  outstanding   |       | 13,154,710                       |       | 13,102,316                     |       | 13,146,141 |   | 13,101,571 |   |

 

Options to purchase 551,451 shares and 524,850 shares for the threemonths ended June 30, 2006 and 2005, respectively, and 502,161 shares and517,950 shares for the six months ended June 30, 2006 and 2005, respectively,were not included in the computation of earnings per share assuming dilutionbecause their effect on earnings per share would have been anti-dilutive.

Cash dividends are based on thenumber of common shares outstanding at the respective record dates. Listedbelow is the number of shares outstanding as of the record date for the firstand second quarters of 2006 and 2005, respectively.  

| Shares outstanding on record date | ** ** | **2006**   | ** ** | **2005**   | ** ** |
|-------------------------------------------------------|------------|------------|------------|------------|------------|
| First quarter  (Feb. 15)                              |       | 13,133,928 |       | 13,057,106 |       |
| Second quarter (May 15)                               |       | 13,153,067 |       | 13,073,602 |       |

 

Dividends per share are based on the quarterly dividend per share asdeclared by the HickoryTech Board of Directors. HickoryTech paid dividends of $0.12 per share for the second quarter of2006 and 2005.

During the first six months of 2006 and 2005, shareholders have electedto reinvest $125,000 and $132,000, respectively, of dividends into HickoryTechcommon stock pursuant to the HickoryTech Dividend Reinvestment Plan.

NOTE 3. COMPREHENSIVE INCOME

HickoryTech follows the provisions of Statement of Financial AccountingStandards (SFAS) No. 130, “Reporting Comprehensive Income.” This statementestablished rules for the reporting of comprehensive income and its components.In addition to net income, HickoryTech’s comprehensive income includes changesin unrealized gains and losses on derivative instruments qualifying anddesignated as cash flow hedges. Comprehensive income for the three months endedJune 30, 2006 and 2005 was $1,409,000 and $1,845,000, respectively.Comprehensive income for the six months ended June 30, 2006 and 2005 was$2,972,000 and $4,576,000, respectively.

7

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NOTE 4. ACQUISITION OF ENVENTIS

On December 30, 2005, HickoryTech purchased Enventis from ALLETE, Inc.Enventis was formerly a wholly owned subsidiary of ALLETE, Inc. Enventis is anetwork transport and an enterprise Internet Protocol telephony equipment salesbusiness. The acquisition of Enventis was made to expand the geographicalregion which HickoryTech could serve with its business broadband servicecapabilities. Both Enventis and HickoryTech have similarly bundled servicebusiness plans.

The purchase price was cash of $35,500,000 in exchange for the commonstock of Enventis, with further purchase price adjustments and transactioncosts making the estimated total purchase consideration $38,602,000 as ofDecember 31, 2005. Enventis had no debt at the time of acquisition. Thepurchase agreement outlined certain purchase price adjustments which wereestimated as of December 31, 2005 and resulted in cash payments between ALLETEand HickoryTech in the first quarter of 2006. These adjustments were forworking capital, capital expenditures and employee benefits. These adjustmentschanged the estimated purchase price by $125,000, which reduced the amountsoriginally estimated for total purchase consideration and goodwill.

The financing for the adjusted $38,602,000 total purchase considerationfor Enventis, plus an additional $8,500,000 for Enventis working capital as ofDecember 31, 2005, was entirely from HickoryTech’s credit agreement, asestablished on December 30, 2005. The credit facility is comprised of a$30,000,000 revolving credit component, which expires on December 30, 2011, anda $130,000,000 term loan component, which has partial maturities during itsterm, with final maturity on June 30, 2013. In the first quarter of 2006, anadditional $10,000,000 credit facility with a vendor finance organization wasestablished for short-term inventory floor-plan financing of accounts payablefor Enventis.

The Enventis acquisition was accounted for using the purchase method ofaccounting. Accordingly, the purchase price was allocated to the estimated fairvalue of assets acquired and liabilities assumed. The preliminary purchaseprice allocation resulted in goodwill of $2,023,000, which has been adjusted to$1,857,000 as of June 30, 2006, as noted in the table below. For income taxpurposes ALLETE and HickoryTech have agreed to treat the transaction as apurchase of assets. Accordingly, the tax basis of the acquired assets andassumed liabilities will be the same for financial reporting.

A summary of the changes in the Enventis goodwill is as follows:

|                                                                                  | ** ** | **Enventis** | ** ** |
|----------------------------------------------------------------------------------|------------|--------------|------------|
| **(Dollars in Thousands)**                                             | ** ** | **Goodwill** | ** ** |
| ** **                                                                       | ** ** | ** **   | ** ** |
| Balance at  December 31, 2005                                                    |       | $            | 2,023      |   |
| Purchase Price  Adjustments                                                      |       | (125         | )          |
| Balance at March  31, 2006                                                       |       | $            | 1,898      |   |
| Adjustments to  estimated fair values of assets acquired and liabilities assumed |       | (41          | )          |
| Balance at June 30,  2006                                                        |       | $            | 1,857      |   |

 

The purchase price allocation isstill considered preliminary. Specific reasons causing the purchase price tostill be preliminary are: 1) the liquidation of acquired accounts receivable,and 2) resolution of one litigation matter. On the litigation matter,HickoryTech has received an indemnification from ALLETE which managementbelieves to be more than adequate to cover any loss. The first item is expectedto be resolved by October 2006 and the last item by December 2006.

8

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NOTE 5. INVENTORIES

Inventories, which consist of equipment for resale, materials andsupplies, are stated at the lower of average cost or market. Cost is determinedon a first-in, first-out (FIFO) basis. Reserves offset the cost of inventory toarrive at the net realizable value of the inventory. Telecommunicationsequipment supply markets have changed in recent years and have caused theCompany to apply additional valuation methods, which estimate the lower of costor market principle in the Enterprise Solutions Sector. The Company has aregular process of evaluating its inventory and modifying its value to itsestimate of market prices and making the adjustments to lower of cost or marketon a consistent basis. The Company cannot predict the impact or timing, if any,of future inventory valuation changes.

NOTE 6. INTANGIBLE ASSETS

Goodwill assets are subject to an impairment test annually as well asupon certain events that indicate that impairment may be present. The goodwillimpairment test includes two steps, the first of which requires management todetermine the fair value of certain of the Company’s reporting units (asdefined by SFAS No. 142, “Goodwill and Other Intangible Assets”). The Companydetermines the fair value of its reporting units by application of a discountedcash flow analysis. Management makes estimates that are included in itsdiscounted cash flow analysis based upon the best available information at thetime that the determinations of fair value are made. If circumstances change,HickoryTech’s estimates of fair value will also change and could result in adetermination of additional impairment charges to reduce the carrying value ofgoodwill.

The carrying value ofHickoryTech’s goodwill decreased from $27,109,000 as of December 31, 2005 to$26,943,000 as of June 30, 2006 due to the working capital adjustment andpurchase price allocation adjustment (see Note 4).

The components of HickoryTech’s other intangible assets are as follows:
| ** **                           | ** ** | ** **            | ** ** | **June 30, 2006** | ** ** | **December 31, 2005** | ** ** |
|--------------------------------------|------------|-----------------------|------------|-----------------------------|------------|---------------------------------|------------|
| ** **                           | ** ** | ** **            | ** ** | **Gross Carrying**     | ** ** | **Accumulated**                 | ** ** | **Gross Carrying** | ** ** | **Accumulated** | ** ** |
| **(Dollars in Thousands)** | ** ** | **Useful Lives** | ** ** | **Amount**                  | ** ** | **Amortization**                | ** ** | **Amount** | ** ** | **Amortization** | ** ** |
| ** **                           | ** ** | ** **            | ** ** | ** **                  | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| Definite-lived  intangible assets    |       |                  |       |                        |       |                            |       |   |   |   |   |
| Customers                            |       | 1 - 8 years           |       | $                           | 4,229      |                            | $          | 1,024 |   | $ | 4,229 |   | $ | 544 |   |
| Other intangibles                    |       | 1 - 5 years           |       | 730                         |       | 209                             |       | 730 |   | 103 |   |
| Total                                |       |                  |       | $                           | 4,959      |                            | $          | 1,233 |   | $ | 4,959 |   | $ | 647 |   |

 

As required by SFAS No. 142, we periodically reassess the carryingvalue, useful lives and classification of identifiable intangible assets.Amortization expense related to the definite-lived intangible assets for thethree months ended June 30, 2006 and 2005 was $293,000 and $26,000,respectively. Amortization expense related to the definite-lived intangibleassets for the six months ended June 30, 2006 and 2005 was $586,000 and$52,000, respectively. Total estimated amortization expense for the remainingsix months of 2006 and the five years subsequent to 2006 is as follows: 2006(July 1 through December 31) - $586,000; 2007 - $1,157,000; 2008 - $1,127,000;2009 - $853,000; 2010 - $3,000 and 2011 - $0.

9

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NOTE 7. QUARTERLY SECTOR FINANCIAL SUMMARY
| ** **                                     | ** ** | ** **  | ** ** | **Information** | ** ** | **Enterprise** | ** ** | ** **   | ** ** | **Corporate and** | ** ** | **HickoryTech**  | ** ** |
|------------------------------------------------|------------|-------------|------------|-----------------|------------|----------------|------------|--------------|------------|------------------------|------------|------------------|------------|
| **(Dollars In Thousands)**           | ** ** | **Telecom** | ** ** | **Solutions**   | ** ** | **Solutions**  | ** ** | **Enventis** | ** ** | **Eliminations**       | ** ** | **Consolidated** | ** ** |
| Three Months  Ended June 30, 2006              |       |        |       |            |       |           |       |         |       |                   |       |             |       |
| Operating revenue  from unaffiliated customers |       | $           | 18,378     |            | $          | 534            |       | $            | 2,545      |                   | $          | 15,178           |       | $ | — |   | $ | 36,635 |   |
| Intersegment  revenues                         |       | 51          |       | 1,189           |       | —         |       | —       |       | (1,240                 | )          | —           |       |
| Total                                          |       | 18,429      |       | 1,723           |       | 2,545          |       | 15,178       |       | (1,240                 | )          | 36,635           |       |
|                                           |       |        |       |            |       |           |       |         |       |                   |       |             |       |
| Depreciation and  amortization                 |       | 3,293       |       | 420             |       | 28             |       | 768          |       | 20                     |       | 4,529            |       |
| Operating  income/(loss)                       |       | 4,420       |       | (420            | )          | (395           | )          | 731          |       | (249                   | )          | 4,087            |       |
| Interest and  other income                     |       | 1           |       | 6               |       | —         |       | 4            |       | 26                     |       | 37               |       |
| Interest expense                               |       | 3           |       | 15              |       | 1              |       | —       |       | 1,811                  |       | 1,830            |       |
| Income  taxes/(benefit)                        |       | 1,766       |       | (172            | )          | (158           | )          | 298          |       | (814                   | )          | 920              |       |
| Net  income/(loss)                             |       | 2,652       |       | (257            | )          | (238           | )          | 437          |       | (1,220                 | )          | 1,374            |       |
|                                           |       |        |       |            |       |           |       |         |       |                   |       |             |       |
| Identifiable  assets                           |       | 149,562     |       | 6,270           |       | 5,479          |       | 53,926       |       | 9,796                  |       | 225,033          |       |
| Property, plant  and equip., net               |       | 113,836     |       | 5,577           |       | 198            |       | 31,709       |       | 162                    |       | 151,482          |       |
| Capital expenditures                           |       | 3,609       |       | 239             |       | 24             |       | 2,593        |       | —                 |       | 6,465            |       |
|                                                |            |             |            |                 |            |                |            |              |            |                        |            |                  |            |  |  |  |  |  |  |

 
| ** **                                                         | ** ** | ** **  | ** ** | **Information** | ** ** | **Enterprise** | ** ** | ** **            | ** ** | **Corporate and** | ** ** | **HickoryTech**  | ** ** |
|--------------------------------------------------------------------|------------|-------------|------------|-----------------|------------|----------------|------------|-----------------------|------------|------------------------|------------|------------------|------------|
| **(Dollars In Thousands)**                               | ** ** | **Telecom** | ** ** | **Solutions**   | ** ** | **Solutions**  | ** ** | **Enventis (1)** | ** ** | **Eliminations**       | ** ** | **Consolidated** | ** ** |
| Three Months  Ended June 30, 2005                                  |       |        |       |            |       |           |       |                  |       |                   |       |             |       |
| Operating  revenue from unaffiliated customers                     |       | $           | 19,286     |            | $          | 914            |       | $                     | 5,068      |                   | $          | —           |       | $ | — |   | $ | 25,268 |   |
| Intersegment  revenues                                             |       | 52          |       | 1,087           |       | —         |       | —                |       | (1,139                 | )          | —           |       |
| Total                                                              |       | 19,338      |       | 2,001           |       | 5,068          |       | —                |       | (1,139                 | )          | 25,268           |       |
|                                                               |       |        |       |            |       |           |       |                  |       |                   |       |             |       |
| Depreciation and  amortization                                     |       | 3,564       |       | 639             |       | 31             |       | —                |       | 13                     |       | 4,247            |       |
| Operating  income/(loss)                                           |       | 5,464       |       | (617            | )          | 44             |       | —                |       | (18                    | )          | 4,873            |       |
| Interest expense                                                   |       | 2           |       | 15              |       | —         |       | —                |       | 1,010                  |       | 1,027            |       |
| Income  taxes/(benefit)                                            |       | 2,211       |       | (255            | )          | 18             |       | —                |       | (405                   | )          | 1,569            |       |
| Income  (loss)/from Continuing operations                          |       | 3,252       |       | (374            | )          | 26             |       | —                |       | (595                   | )          | 2,309            |       |
| Loss from  discontinued operations Including intersegment revenues |       | 101         |       | —          |       | —         |       | —                |       | —                 |       | 101              |       |
| Net  income/(loss)                                                 |       | 3,353       |       | (374            | )          | 26             |       | —                |       | (595                   | )          | 2,410            |       |
|                                                               |       |        |       |            |       |           |       |                  |       |                   |       |             |       |
| Identifiable  assets                                               |       | 143,347     |       | 4,377           |       | 8,965          |       | —                |       | 7,846                  |       | 164,535          |       |
| Property, plant  and equip., net                                   |       | 107,085     |       | 4,356           |       | 271            |       | —                |       | 88                     |       | 111,800          |       |
| Capital expenditures                                               |       | 2,678       |       | 474             |       | 20             |       | —                |       | —                 |       | 3,172            |       |
|                                                                    |            |             |            |                 |            |                |            |                       |            |                        |            |                  |            |  |  |  |  |  |  |

 

10

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| ** **                                     | ** ** | ** **  | ** ** | **Information** | ** ** | **Enterprise** | ** ** | ** **   | ** ** | **Corporate and** | ** ** | **HickoryTech**  | ** ** |
|------------------------------------------------|------------|-------------|------------|-----------------|------------|----------------|------------|--------------|------------|------------------------|------------|------------------|------------|
| **(Dollars In Thousands)**           | ** ** | **Telecom** | ** ** | **Solutions**   | ** ** | **Solutions**  | ** ** | **Enventis** | ** ** | **Eliminations**       | ** ** | **Consolidated** | ** ** |
| Six Months Ended  June 30, 2006                |       |        |       |            |       |           |       |         |       |                   |       |             |       |
| Operating  revenue from unaffiliated customers |       | $           | 36,346     |            | $          | 1,222          |       | $            | 5,282      |                   | $          | 29,262           |       | $ | — |   | $ | 72,112 |   |
| Intersegment  revenues                         |       | 102         |       | 2,277           |       | —         |       | —       |       | (2,379                 | )          | —           |       |
| Total                                          |       | 36,448      |       | 3,499           |       | 5,282          |       | 29,262       |       | (2,379                 | )          | 72,112           |       |
|                                           |       |        |       |            |       |           |       |         |       |                   |       |             |       |
| Depreciation and  amortization                 |       | 6,499       |       | 791             |       | 56             |       | 1,506        |       | 44                     |       | 8,896            |       |
| Operating  income/(loss)                       |       | 9,084       |       | (823            | )          | (673           | )          | 1,296        |       | (858                   | )          | 8,026            |       |
| Interest and  other income                     |       | 4           |       | 6               |       | —         |       | 4            |       | 53                     |       | 67               |       |
| Interest expense                               |       | (130        | )          | 26              |       | 1              |       | —       |       | 3,582                  |       | 3,479            |       |
| Income taxes/(benefit)                         |       | 3,688       |       | (337            | )          | (270           | )          | 525          |       | (1,755                 | )          | 1,851            |       |
| Net  income/(loss)                             |       | 5,530       |       | (505            | )          | (405           | )          | 773          |       | (2,630                 | )          | 2,763            |       |
|                                           |       |        |       |            |       |           |       |         |       |                   |       |             |       |
| Identifiable  assets                           |       | 149,562     |       | 6,270           |       | 5,479          |       | 53,926       |       | 9,796                  |       | 225,033          |       |
| Property, plant  and equip., net               |       | 113,836     |       | 5,577           |       | 198            |       | 31,709       |       | 162                    |       | 151,482          |       |
| Capital expenditures                           |       | 6,571       |       | 504             |       | 29             |       | 3,100        |       | 93                     |       | 10,297           |       |
|                                                |            |             |            |                 |            |                |            |              |            |                        |            |                  |            |  |  |  |  |  |  |

 
| ** **                                                           | ** ** | ** **  | ** ** | **Information** | ** ** | **Enterprise** | ** ** | ** **            | ** ** | **Corporate and** | ** ** | **HickoryTech**  | ** ** |
|----------------------------------------------------------------------|------------|-------------|------------|-----------------|------------|----------------|------------|-----------------------|------------|------------------------|------------|------------------|------------|
| **(Dollars In Thousands)**                                 | ** ** | **Telecom** | ** ** | **Solutions**   | ** ** | **Solutions**  | ** ** | **Enventis (1)** | ** ** | **Eliminations**       | ** ** | **Consolidated** | ** ** |
| Six Months Ended  June 30, 2005                                      |       |        |       |            |       |           |       |                  |       |                   |       |             |       |
| Operating  revenue from unaffiliated customers                       |       | $           | 38,631     |            | $          | 1,402          |       | $                     | 8,343      |                   | $          | —           |       | $ | — |   | $ | 48,376 |   |
| Intersegment  revenues                                               |       | 103         |       | 2,183           |       | —         |       | —                |       | (2,286                 | )          | —           |       |
| Total                                                                |       | 38,734      |       | 3,585           |       | 8,343          |       | —                |       | (2,286                 | )          | 48,376           |       |
|                                                                 |       |        |       |            |       |           |       |                  |       |                   |       |             |       |
| Depreciation and  amortization                                       |       | 7,100       |       | 1,295           |       | 63             |       | —                |       | 27                     |       | 8,485            |       |
| Operating  income/(loss)                                             |       | 11,228      |       | (1,369          | )          | (154           | )          | —                |       | (310                   | )          | 9,395            |       |
| Interest expense                                                     |       | 3           |       | 28              |       | —         |       | —                |       | 1,973                  |       | 2,004            |       |
| Income  taxes/(benefit)                                              |       | 4,544       |       | (565            | )          | (62            | )          | —                |       | (911                   | )          | 3,006            |       |
| Income/(loss) from  continuing operations                            |       | 6,684       |       | (829            | )          | (92            | )          | —                |       | (1,338                 | )          | 4,425            |       |
| Income from  discontinued operations including intersegment revenues |       | 101         |       | —          |       | —         |       | —                |       | —                 |       | 101              |       |
| Net  income/(loss)                                                   |       | 6,785       |       | (829            | )          | (92            | )          | —                |       | (1,338                 | )          | 4,526            |       |
|                                                                 |       |        |       |            |       |           |       |                  |       |                   |       |             |       |
| Identifiable  assets                                                 |       | 143,347     |       | 4,377           |       | 8,965          |       | —                |       | 7,846                  |       | 164,535          |       |
| Property, plant  and equip., net                                     |       | 107,085     |       | 4,356           |       | 271            |       | —                |       | 88                     |       | 111,800          |       |
| Capital expenditures                                                 |       | 4,050       |       | 558             |       | 20             |       | —                |       | —                 |       | 4,628            |       |
|                                                                      |            |             |            |                 |            |                |            |                       |            |                        |            |                  |            |  |  |  |  |  |  |

 

----

(1) No information provided due to the fact thatEnventis was purchased on December 30, 2005.

NOTE 8. CONTINGENCIES

HickoryTech is involved incertain contractual disputes in the ordinary course of business. HickoryTechdoes not believe the ultimate resolution of any of these existing matters willhave a material adverse effect on its financial position, results of operationsor cash flows.

11

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NOTE 9. STOCK COMPENSATION

On January 1, 2006, the Company adopted Statement of FinancialAccounting Standards No. 123(R) (revised 2004), “Share-Based Payment,” (“SFAS123(R)”) which requires the measurement and recognition of compensation expensefor all share-based payment awards made to employees and directors, includingemployee stock options and employee stock purchases related to the EmployeeStock Purchase Plan, based on estimated fair values. SFAS 123(R) supersedes theCompany’s previous accounting under Accounting Principles Board OpinionNo. 25, “Accounting for Stock Issued to Employees” (“APB 25”) for periodsbeginning in fiscal 2006. In March 2005, the Securities and ExchangeCommission issued Staff Accounting Bulletin No. 107 (“SAB 107”) relatingto SFAS 123(R). The Company has applied the provisions of SAB 107 in itsadoption of SFAS 123(R).

The Company adopted SFAS 123(R) using the modified prospectivetransition method, which requires the application of the accounting standard asof January 1, 2006. The Company’s Consolidated Financial Statements as ofand for the six months ended June 30, 2006 reflect the impact of SFAS 123(R).In accordance with the modified prospective transition method, the Company’sConsolidated Financial Statements for prior periods have not been restated toreflect, and do not include, the impact of SFAS 123(R) or any modifications tooutstanding stock options prior to the adoption of SFAS 123(R). Share-basedcompensation expense recognized under SFAS 123(R) for the three-months endedJune 30, 2006 was $41,000 pre-tax and $25,000 after tax. In addition,Share-based compensation expense recognized under SFAS 123(R) for thesix-months ended June 30, 2006 was $86,000 pre-tax and $52,000 after tax. Themajority of this expense relates to the expensing of stock options, and a smallamount relates to the Employee Stock Purchase Plan. The adoption of FAS123R hadminimal impact on earnings per share for the Company’s three month periodending June 30, 2006 and a $0.01 reduction for basic and diluted earnings pershare through June 30, 2006. Also, adopting FAS 123(R) had minimal impact oncash flow from financing and operations.

Share-based compensation expense recognized during the period is basedon the value of the portion of share-based payment awards that are ultimatelyexpected to vest during the period. Share-based compensation expense recognizedin the Company’s Consolidated Statements of Operations for the first six monthsof 2006 included compensation expense for share-based payment awards grantedprior to, but not yet vested as of December 31, 2005, based on the grant datefair value estimated in accordance with the fair value provisions of SFAS 123.Because share-based compensation expense recognized in the ConsolidatedStatements of Operations for the six months ended June 30, 2006 is based onawards ultimately expected to vest, it has been reduced for estimatedforfeitures. SFAS 123(R) requires forfeitures to be estimated at the time ofgrant and revised, if necessary, in subsequent periods if actual forfeituresdiffer from those estimates. The Company accounted for forfeitures as theyoccurred for the periods prior to 2006. The cumulative adjustment for thechange in accounting principle was immaterial.

The fair value of each option award is estimated on the date of grantusing a Black-Scholes option valuation model. The Company uses a seven-yearperiod to calculate the historical volatility of its stock price for use in thevaluation model. The Company uses historical data to estimate option exerciseand employee termination within the valuation model. The expected term ofoptions granted is derived from historical experience and represents the periodof time that options granted are expected to be outstanding. The forfeiturerate is based upon a statistical computation of remaining lives and exerciseprice in relationship to current stock price. The risk-free rate for options isbased on a U.S. Treasury rate commensurate with the expected terms.

There have been no changes in the quantity or type of instruments usedin stock-based compensation programs. There have been no changes in the termsof stock-based compensation arrangements.

Refer to the Company’s Annual Report on Form 10-K for the year endedDecember 31, 2005 for a complete description of its stock-based compensationplans.

Options were last granted under the Company’s Stock Award Plan inFebruary of 2005. The Stock Award Plan does provide for the issuance of stockoptions, but no current compensation programs have options as a component.

As of June 30, 2006, there was $152,000 of total unrecognizedcompensation costs related to non-vested stock options granted under theCompany’s Stock Award Plan. This expense is expected to be recognized over aweighted average period of two years.

12

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A summary of stock option activity of the StockAward Plan is as follows:
|                                 | ** ** | ** ** | ** ** | **Weighted Average** | ** ** | **Aggregate**            | ** ** |
|---------------------------------|------------|------------|------------|---------------------------|------------|--------------------------|------------|
| ** **                      | ** ** | **Shares** | ** ** | **Exercise Price**   | ** ** | **Intrinsic Value** | ** ** |
| Outstanding at  January 1, 2006 |       | 578,850    |       | $                         | 12.63      |                     | —     |   |
| Granted                         |       | —     |       | —                    |       | —                   |       |
| Exercised                       |       | —     |       | —                    |       | —                   |       |
| Forfeited                       |       | 24,999     |       | 11.13                     |       | —                   |       |
| Expired                         |       | 2,400      |       | 9.38                      |       | —                   |       |
| Outstanding at  June 30, 2006   |       | 551,451    |       | $                         | 12.71      |                     | $          | — |   |
| Exercisable at June 30,  2006   |       | 502,161    |       | $                         | 12.86      |                     | $          | — |   |

 

The following table provides certain informationwith respect to stock options outstanding at June 30, 2006:
|                          | ** ** | ** **      | ** ** | **Weighted** | ** ** | **Weighted**              | ** ** |
|--------------------------|------------|-----------------|------------|--------------|------------|---------------------------|------------|
| ** **               | ** ** | **Stock**       | ** ** | **Average**  | ** ** | **Average**               | ** ** |
| **Range of**        | ** ** | **Options**     | ** ** | **Exercise** | ** ** | **Remaining**             | ** ** |
| **Exercise Prices** | ** ** | **Outstanding** | ** ** | **Price**    | ** ** | **Contractual Life** | ** ** |
| $8.00 - $12.00           |       | 245,401         |       | $            | 10.24      |                      | 6.88 years |   |
| $12.00 - $16.00          |       | 245,550         |       | 13.83        |       | 4.60 years                |       |
| $16.00 - $21.00          |       | 60,500          |       | 18.17        |       | 4.76 years                |       |
|                     |       | 551,451         |       | $            | 12.71      |                      | 5.63 years |   |

 

The following table provides certain informationwith respect to stock options exercisable at June 30, 2006:
|                          | ** ** | ** **      | ** ** | **Weighted** | ** ** | ** **                | ** ** |
|--------------------------|------------|-----------------|------------|--------------|------------|---------------------------|------------|
| ** **               | ** ** | **Stock**       | ** ** | **Average**  | ** ** | **Average**               | ** ** |
| **Range of**        | ** ** | **Options**     | ** ** | **Exercise** | ** ** | **Remaining**             | ** ** |
| **Exercise Prices** | ** ** | **Exercisable** | ** ** | **Price**    | ** ** | **Contractual Life** | ** ** |
| $8.00 - $12.00           |       | 196,111         |       | $            | 10.02      |                      | 6.55 years |   |
| $12.00 - $16.00          |       | 245,550         |       | 13.83        |       | 4.60 years                |       |
| $16.00 - $21.00          |       | 60,500          |       | 18.17        |       | 4.76 years                |       |
|                     |       | 502,161         |       | $            | 12.86      |                      | 5.38 years |   |

 

The following table provides the range ofassumptions used for valuing stock options:

|                           | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|---------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                | ** ** | **2006**                                            | ** ** | **2005**                                          | ** ** | **2006** | ** ** | **2005** | ** ** |
| Expected  volatility      |       | 39.36                                               | %          | 37.15                                             | %          | 39.36 | % | 37.15 | % |
| Expected  dividends       |       | 5.80                                                | %          | 4.60                                              | %          | 5.80 | % | 4.60 | % |
| Expected term  (in years) |       | 7                                                   |       | 7                                                 |       | 7 |   | 7 |   |
| Risk-free interest rate   |       | 5.11                                                | %          | 4.07                                              | %          | 5.11 | % | 4.07 | % |

 

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If HickoryTech had elected to recognize compensationcost based on the fair value of the options as prescribed by SFAS No. 123(R)for the three and six month periods ended June 30, 2005, the followingoperating results would have resulted using the Black-Scholes option-pricingmodel to determine the fair value of the options:  
| ** **                                                                                                                                    | ** ** | **Three Months Ended**     | ** ** | **Six Months Ended**       | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------|------------|--------------------------------------|------------|
| ** **                                                                                                                                    | ** ** | **June 30, 2005 (1)** | ** ** | **June 30, 2005 (1)** | ** ** |
| Net income:                                                                                                                                   |       |                                 |       |                                 |       |
| As reported                                                                                                                                   |       | $                                    | 2,410      |                                 | $          | 4,526 |   |
| Add: Stock-based employee compensation expense included  in reported net income, net of related tax effects                                   |       | 14                                   |       | 27                                   |       |
| Deduct: Total stock-based employee compensation  expense determined under fair value based method for all awards, net of  related tax effects |       | (62                                  | )          | (126                                 | )          |
| Pro forma net income                                                                                                                          |       | $                                    | 2,362      |                                 | $          | 4,427 |   |
|                                                                                                                                          |       |                                 |       |                                 |       |
| Earnings per  share:                                                                                                                          |       |                                 |       |                                 |       |
| As reported:                                                                                                                                  |       |                                 |       |                                 |       |
| Basic                                                                                                                                         |       | $                                    | 0.19       |                                 | $          | 0.35 |   |
| Diluted                                                                                                                                       |       | $                                    | 0.18       |                                 | $          | 0.34 |   |
| Pro forma:                                                                                                                                    |       |                                 |       |                                 |       |
| Basic                                                                                                                                         |       | $                                    | 0.19       |                                 | $          | 0.35 |   |
| Diluted                                                                                                                                       |       | $                                    | 0.18       |                                 | $          | 0.34 |   |

 

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(1)          2005 Net income and net income per share do not include share-basedcompensation expense in accordance with SFAS 123(R).

As of June 30, 2006, the number of shares that areavailable for  future and/or existinggrants of the following stock-based compensation plans:
| Plan                                         | ** ** | **Shares Available** | ** ** |
|----------------------------------------------|------------|---------------------------|------------|
| Employee Stock  Purchase Plan                |       | 566,190                   |       |
| Retainer Stock  Plans for Directors          |       | 242,642                   |       |
| Non-Employee  Directors’ Incentive Plan |       | 190,000                   |       |
| Stock Award Plan                             |       | 962,058                   |       |

Sharesissued under other stock-based compensation plans are as follows:
|                                              | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|----------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                   | ** ** | **June 30, 2006**      | ** ** | **June 30, 2006**    | ** ** |
| Retainer Stock  Plans for Directors          |       | 2,382 shares                     |       | 4,379 shares                   |       |
| market price/fair value at time of grant     |       | $                                | 6.83/share |                           | $          | 6.83/share |   |
|                                         |       |                             |       |                           |       |
| Non-Employee  Director’s Incentive Plan |       | 1,000 shares                     |       | 10,000 shares                  |       |
| market price/fair value at time of grant     |       | $                                | 8.03/share |                           | $          | 8.03/share |   |
|                                         |       |                             |       |                           |       |
| Stock Award Plan                             |       | 841 shares                       |       | 1,620 shares                   |       |
| market  price/fair value at time of grant    |       | $                                | 7.79/share |                           | $          | 7.79/share |   |

 

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NOTE 10. FINANCIAL DERIVATIVE INSTRUMENTS

HickoryTech accounts forderivative instruments in accordance with SFAS No. 133, “Accounting forDerivative Instruments and Hedging Activities,” as amended by SFAS No. 149, “Amendmentof Statement 133 Accounting for Derivative Instruments and Hedging Activities,”which requires derivative instruments to be recorded on the balance sheet atfair value. Changes in fair value of derivative instruments must be recognizedin earnings unless specific hedge accounting criteria are met, in which casethe gains and losses are included in other comprehensive income rather than inearnings.
|                                                                                    | ** ** | **Interest Rate**  | ** ** |
|------------------------------------------------------------------------------------|------------|-------------------------|------------|
| **(Dollars in Thousands)**                                               | ** ** | **Swap Agreement** | ** ** |
| ** **                                                                         | ** ** | ** **              | ** ** |
| Accumulated  other comprehensive income balance at December 31, 2005               |       | $                       | 2,064      |   |
| Market value  increase on interest rate swap agreement, net of related tax effects |       | 209                     |       |
| Accumulated other  comprehensive income balance at June 30, 2006                   |       | $                       | 2,273      |   |

 

HickoryTech has variable ratedebt instruments, which subject the Company to interest rate risk. Beginning inthe second quarter of 2003, HickoryTech entered into interest rate swapagreements, with remaining maturities of twenty-four months, to manage itsexposure to interest rate movements on a portion of its variable rate debtobligations. The market value of the cumulative gain or loss on thesederivative instruments is reported as a component of accumulated othercomprehensive income/loss in shareholders’ equity and will be recognized inearnings when the term of the swap agreement is concluded.

The fair value of HickoryTech’sderivatives at June 30, 2006 and December 31, 2005 is a net asset of $3,777,000and $3,429,000, respectively, which is included in other assets in theaccompanying consolidated balance sheet.

NOTE 11. EMPLOYEE POST-RETIREMENTBENEFITS

HickoryTech providespost-retirement health care and life insurance benefits for certain employees.HickoryTech is not currently funding these post-retirement benefits, but hasaccrued these liabilities as of June 30, 2006 and 2005.
| ** **                                | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|-------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                | ** ** | **June 30,**                | ** ** | **June 30,**              | ** ** |
| **(Dollars in Thousands)**      | ** ** | **2006**                         | ** ** | **2005**                       | ** ** | **2006** | ** ** | **2005** | ** ** |
| Components of  net periodic benefit cost: |       |                             |       |                           |       |   |   |   |   |
| Service cost                              |       | $                                | 81         |                           | $          | 92 |   | $ | 162 |   | $ | 184 |   |
| Interest cost                             |       | 107                              |       | 115                            |       | 214 |   | 230 |   |
| Expected return on plan assets            |       | —                           |       | —                         |       | — |   | — |   |
| Amortization of transition obligation     |       | 15                               |       | 15                             |       | 30 |   | 30 |   |
| Amortization of prior service cost        |       | (3                               | )          | (3                             | )          | (6 | ) | (6 | ) |
| Recognized net actuarial loss             |       | 31                               |       | 44                             |       | 62 |   | 88 |   |
| Net periodic benefit cost                 |       | $                                | 231        |                           | $          | 263 |   | $ | 462 |   | $ | 526 |   |

 
|                                                              | ** ** | **June 30, 2006** | ** ** |
|--------------------------------------------------------------|------------|-----------------------------|------------|
| Employer’s  contributions for current premiums:         |       |                        |       |
| Contributions made for the six months ended June 30,  2006   |       | $                           | 100        |   |
| Expected contributions for remainder of 2006                 |       | 100                         |       |
| Total estimated  employer contributions for fiscal year 2006 |       | $                           | 200        |   |

 

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NOTE 12. SHORT-TERM FINANCINGARRANGEMENT

Enventis has a $10 million credit facility with a financing company to purchaseinventories from certain approved vendors. Advances under the financingarrangement are collateralized by the accounts receivable and inventory ofEnventis and a guaranty of the principal indebtedness by HickoryTech. Thecredit facility provides sixty-day payment terms for working capital and can beterminated at any time by either party. Borrowings outstanding under the creditfacility at June 30, 2006 totaled $4,546,000.

ITEM2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION.

#### **FORWARD-LOOKING STATEMENTS**

*This Quarterly Report on Form 10-Q contains certainforward-looking statements within the meaning of Section 27A of the SecuritiesAct of 1933, as amended, and Section 21E of the Securities Exchange Act of1934, as amended, which are subject to the “safe harbor” created by thosesections. Statements in this Quarterly Report that are not historical fact areforward-looking statements that are based on management’s current expectations,estimates and projections about the industry in which Hickory Tech Corporation(HickoryTech, we the Company) operates and management’s beliefs and assumptions.Forward-looking statements may be identified by the use of terminology such as “may,”“will,” “believes,” “does not believe,” “no reason to believe,” “expects,” “plans,”“intends,” “estimates,” “anticipated” or “anticipates,” and similarexpressions, as they relate to HickoryTech or its management. Suchforward-looking statements are subject to important risks and uncertaintiesthat could cause HickoryTech’s future actual results to differ materially fromsuch statements. These statements are not guarantees of future performance andinvolve certain risks, uncertainties and probabilities, which are difficult topredict. Therefore, actual outcomes and results may differ materially from whatis expressed or forecasted in such forward-looking statements, whether as aresult of new information, future events or otherwise. Factors that might causesuch a difference include, but are not limited to, those contained in this “Management’sDiscussion and Analysis” (Item 2) and Item 1A, “Risk Factors,” of HickoryTech’sAnnual Report on Form 10-K for the year ended December 31, 2005, which isincorporated herein by reference. You are cautioned not to place undue relianceon these forward-looking statements, which speak only as of the date on whichthey were made. Except as otherwise required by federal securities law,HickoryTech undertakes no obligation to update any of its forward-lookingstatements for any reason.*

**BUSINESS**

*HickoryTech operates in four business segments: the Telecom,Information Solutions, Enterprise Solutions and Enventis Sectors. Its largestand oldest business (since 1898) has been the operation of incumbent localexchange carriers (ILECs) or traditional wireline telephone service. The ILECbusiness is included in HickoryTech’s Telecom Sector. In 1998, HickoryTechbegan its competitive local exchange carrier (CLEC) line of business, competingfor telephone dial tone, dial-up and broadband Internet access, data, digitalTV and long distance calling business in ILEC territories owned by others. The CLECbusiness is included in HickoryTech’s Telecom Sector. Since 1964, HickoryTech’sInformation Solutions Sector has provided computer data processing andsoftware, predominantly for HickoryTech’s Telecom Sector operations and also toother telecommunications companies. HickoryTech acquired its EnterpriseSolutions Sector in 1990 and it operates as a telecommunications, data andInternet Protocol equipment distributor from a base in Minneapolis/St. Paul,Minnesota. On December 30, 2005, HickoryTech purchased Enventis Telecom, Inc.(Enventis). Enventis is a Minnesota-based regional provider of integrated fibernetwork, Internet Protocol telephony, and data services, with 1,500 route milesof fiber network serving more than 300 business customers in over 40 communitiesin the Upper Midwest.*

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*The eight current subsidiaries of HickoryTech and thebusiness segments in which they operate are:*
| **TELECOM SECTOR**               |
|----------------------------------|
|                             | Mankato Citizens  Telephone Company (MCTC) |
|                             | Mid-Communications,  Inc. (Mid-Comm) |
|                             | Heartland  Telecommunications Company of Iowa, Inc. (Heartland) |
|                             | Cable Network,  Inc. (CNI) |
|                             | Crystal  Communications, Inc. (Crystal) |
| **INFORMATION SOLUTIONS SECTOR** |
|                             | National  Independent Billing, Inc. (NIBI) |
| **ENTERPRISE SOLUTIONS SECTOR**  |
|                             | Collins  Communications Systems Co. (Collins) |
| **ENVENTIS SECTOR**              |
|                             | Enventis  Telecom, Inc. (Enventis) |
|                                  |  |  |

 

*HickoryTech and its subsidiaries are engaged in businessesthat provide services to their customers for a fee. Many of these services arerecurring, and, as a result, backlog orders and seasonality are not significantfactors. Working capital requirements for the Telecom Sector involve financingthe construction of networks involving switches and cable, maintaining a highamount of fixed assets, paying payroll costs of highly skilled labor,maintaining inventory to service its capital projects and its network andtelephone equipment customers, and providing for the carrying value of tradeaccounts receivable, which may take several months to collect in the normalcourse of business. Working capital requirements for the Information SolutionsSector involve capital for software development, operating losses, payrollcosts of highly skilled labor, and the carrying value of trade accountsreceivable. Working capital requirements for the Enterprise Solutions Sectorinvolve capital for payroll costs, inventory to service its customers, thecarrying value of trade accounts receivable, work-in-process, and operatinglosses. Working capital requirements for the Enventis Sector involve capitalfor payroll costs, the carrying value of accounts receivable, andwork-in-process.*

*The materials and supplies that are necessary for theoperation of the businesses of HickoryTech and its subsidiaries are availablefrom a variety of sources. All of HickoryTech’s central office switches andfiber optic equipment, as well as a majority of HickoryTech’s equipment sold inits Enterprise Solutions and Enventis Sectors, are supplied by Nortel, Motorolaand Cisco. These vendors are leading suppliers of communications and dataequipment, and HickoryTech’s dependence on these brands is not viewed as asignificant risk.*

**INDUSTRY SEGMENTS**

*HickoryTech reports the business operations of Telephone andCommunications Services as a single segment referred to as the Telecom Sector.The other three business segments are the Information Solutions, EnterpriseSolutions and Enventis Sectors.*

#### *TELECOMSECTOR*

HickoryTech’s Telecom Sector provides local exchangewireline telephone service, long distance, dial-up and broadband Internetaccess, and owns and operates fiber optic cable facilities. This sectorincludes three ILECs: MCTC, Mid-Comm and Heartland. MCTC and Mid-Comm providetelephone service in south central Minnesota, specifically Mankato (a regionalhub) and eleven rural communities surrounding Mankato. The third ILEC,Heartland, provides telephone service for eleven rural communities in northwestIowa. In total, there are twenty-three ILEC exchanges within the TelecomSector.

The Telecom Sector also includes Crystal, a CLEC.Crystal provides local telephone service, long distance, dial-up and broadbandInternet access and digital TV on a competitive basis. Crystal also connectscommunication networks of interexchange and wireless carriers with theequipment and facilities of end users. Crystal has customers in ten ruralcommunities, encompassing eight exchanges, in Minnesota and three communities,encompassing two exchanges, in Iowa that are not in HickoryTech’s ILEC serviceareas. Crystal also provides digital TV service in eight Minnesota communitiesin addition to its telephone services described above.

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HickoryTech also owns and operates fiber optic cablefacilities in Minnesota in its Telecom Sector, in addition to its EnventisSector. These facilities are used to transport interexchange communications asa service to telephone industry customers. HickoryTech’s Minnesota ILECs andCLEC are the primary users of the fiber optic cable facilities in the TelecomSector. None of the companies in the Telecom Sector experienced major changesin operations during the first and second quarters of 2005 or 2006.

MCTC derives its principal revenues and income fromlocal services charged to subscribers in its service area, access servicescharged to interexchange carriers, and the operation of a toll tandem-switchingcenter in Mankato, Minnesota. Revenues and income for Mid-Comm are also derivedfrom local service charges in its area of operation and by providing access tolong distance services for its subscribers through the toll center in Mankato.Local and interexchange telephone access for the two companies is provided onan integrated basis. The local and interexchange telephone access for bothtelephone companies utilize the same facilities and equipment and are managedand maintained by a common workforce. Heartland derives its principal revenuesand income from local services charged to subscribers in its service area inIowa, as well as from providing interexchange access for its subscribers.Interexchange telephone access is provided by all three of HickoryTech’s ILECsubsidiaries by connecting the communications networks of interexchange andwireless carriers with the equipment and facilities of end users through itsswitched networks or private lines.

MCTC and Mid-Comm are Minnesota public utilitiesoperating pursuant to indeterminate permits issued by the Minnesota PublicUtilities Commission (MPUC). Heartland is also a public utility, which operatespursuant to a certificate of public convenience and necessity issued by the IowaUtilities Board (IUB). These state agencies regulate the services provided byMCTC, Mid-Comm and Heartland. CNI’s operations are not subject to regulation bythe state regulatory authority. Neither the MPUC nor the IUB regulate the rateof return or profits of each of HickoryTech’s ILEC operations due to the sizeof these companies relative to state regulation. In Minnesota, regulatorsmonitor MCTC and Mid-Comm’s price and service levels. MCTC’s and Mid-Comm’slocal service rates are below those of most Minnesota ILECs. HickoryTech andits subsidiaries will change rates determined by various factors, includingeconomic and competitive circumstances.

As local exchange telephone companies, MCTC, Mid-Command Heartland provide end office switching and dedicated circuits to longdistance interexchange carriers. These relationships allow HickoryTech’stelephone subscribers to place long distance telephone calls across to thetelephone network. HickoryTech provides interexchange access to its network forinterexchange carriers to conduct long distance business with individualcustomers who select a long distance carrier and for termination of calls toall customers. This interexchange access business is separate and distinct fromHickoryTech’s own long distance retail business, which is operated in itsCrystal subsidiary. The long distance interexchange carriers are significantcustomers of HickoryTech, but no carrier represents more than ten percent ofHickoryTech’s consolidated revenues.

Alternatives to HickoryTech service include customersleasing private lines in lieu of switched voice services and data services inor adjacent to the territories served by HickoryTech, which permits thebypassing of local telephone switching facilities. Additionally, services providedby other companies utilizing various internet, wireline or wirelesstechnologies permit bypass of the local exchange network. These alternatives tolocal exchange service represent a potential threat to HickoryTech’s long-termability to provide local exchange service at economical rates.

Competition exists in several of HickoryTech’s ILECservice areas. A municipality has overbuilt Heartland’s network in onecommunity in Iowa and now serves over half of that market. Additionally, cableTV providers are poised to offer voice services in several Heartlandcommunities, two Mid-Comm communities, and also in Mankato.

Competition also exists for some of the HickoryTechservices provided to interexchange carriers, such as customer billing services,dedicated private lines, network switching, and network routing. Thiscompetition comes primarily from the interexchange carriers themselves, in thatcarriers may decide that the services provided by HickoryTech may be redirectedor handled on their own network or on other networks. The provision of theseservices is primarily month-to-month service ordered from a general tariff,which is a schedule of terms, rates and conditions that is approved by theappropriate state or federal agency. The interexchange carriers primarilycontrol the procurement of these services. As interexchange carriers make theseservice decisions, they have the potential to reduce the Company’s revenue inthe Telecom Sector. Other services, such as the provision of broadband, longdistance service, directory advertising and end user equipment, are open tocompetition.

 

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HickoryTechcompanies are sometimes engaged in negotiations or renegotiations ofarrangements for network interconnections with other wireline carriers andcontracts with various wireless service providers. In 2005 and the first sixmonths of 2006, negotiations regarding interconnection of networks wereconcluded with a potential competitor for all markets served by HickoryTech inMinnesota and one market in Iowa. HickoryTech is presently involvedin interconnection negotiations with the service providers notedabove, and they may compete with HickoryTech companies in several additionalcommunities in Iowa and in Mankato. Although competition from all thesevarious sources may result in reduced revenue, HickoryTech cannot, at thistime, estimate the potential impact related to these events ornegotiations.

Crystal began operations in January 1998 as a new CLEC.Crystal offers local service, long distance, dial-up and broadband Internetaccess services, and digital TV on a competitive basis to customers in southernMinnesota and Iowa, which were not previously served by HickoryTech’s TelecomSector service area. These service offerings provide customers alternatives tothe incumbent communication providers in various communities and are offeredunder the brand name HickoryTech. These services are currently being offered tocustomers in ten rural communities, encompassing eight exchanges, in Minnesota,as well as three communities, encompassing two exchanges, in Iowa. Crystal hasalso been granted the necessary authority to provide service in another ILECcommunity in Northwest Iowa. Crystal also provides the long distance service,dial-up and broadband Internet access services to HickoryTech’s ILECsubscribers and is providing digital TV in two communities served by Mid-Comm.

CLEC activities require Crystal to file for authority tooperate with the appropriate public utilities commission in each state itserves. Crystal competes directly against existing ILECs in the areas in whichit operates. Crystal competes directly with incumbent cable TV providers andsatellite for its digital TV services. Crystal is presently providing theseservices under franchise agreements with the local communities. Crystal is notdependent upon any single customer or small group of customers. No singlecustomer in Crystal accounts for ten percent or more of HickoryTech’sconsolidated revenues.

REGULATED INDUSTRY

ILEC Minnesota - HickoryTech’s two Minnesota ILECsubsidiaries continue to operate under an alternative form of regulation as definedin Minnesota Statutes, Chapter 237, whereby companies with less than 50,000customers are regulated on price and service level rather than profit. In 2005,the Minnesota legislature enacted a statute deregulating multi-line businessesin certain metropolitan markets.

The MPUC has been considering intrastate access reformand universal service for several years. In June 2004, the MPUC issued an order to refer the carrier common linecomponent of the access reform issue to a contested case hearing.  In September 2004, the MPUC also referred thelocal switching and transport component of the access reform issue for aseparate contested case hearing.  Theprocess on both of these dockets was suspended in December 2004 subsequent toconcerns expressed by state agencies regarding increases in local rates and thepotential that federal activity may also address this issue.  In January 2006, these dockets wereclosed.  However, the MPUC has openedanother rulemaking docket on this issue. HickoryTech cannot estimate theimpact, if any, of future potential state access revenue changes.  This statute has had little significantchange on the HickoryTech operations.

The Federal Court of Appeals, 8th Circuit, has upheld aruling by the United States District Court, District of Minnesota, in issuingan injunction providing relief from regulation of any service provider of Voiceover Internet Protocol (VoIP) based services in Minnesota. In July 2006, theFederal Communications Commission (FCC) ruled that VoIP services are subject toUniversal Service Fund contributions; however, any further regulation of VoIPunder consideration at the FCC is uncertain. Future decisions regarding theregulation of VoIP may result in a change in the business relationship betweenHickoryTech companies and the interexchange carriers, as interconnections withcertain VoIP providers may not be governed by tariffed access charges.HickoryTech cannot, at this time, estimate the revenue impact, if any, relatedto these events.

On June 27, 2005, the United States Supreme Courtreversed a prior ruling that required cable operators to open up theirhigh-speed Internet lines to competition. In October 2005, the FCC alsoreleased new regulations intended to spur the development of broadband services.HickoryTech cannot, at this time, estimate the revenue impact, if any, relatedto these events.

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ILEC Iowa – In 2005, rate deregulation was granted toall Iowa companies, for all services other than single line services.Previously, only companies with fewer than 15,000 access lines wereunregulated.  HickoryTech’s Iowa ILECsubsidiary has maintained less than 15,000 access lines.  As a result, it has been and will remainunregulated.

Wireline Interstate – The HickoryTech ILEC companies donot participate in the National Exchange Carrier Association (NECA) trafficsensitive pool and instead set their own access rates according to either anationwide average cost of providing access, or in the case of Heartland,according to its own interstate costs. This bi-annual rate process wascompleted in June 2005, and established traffic sensitive interstate rates forthe period from July 1, 2005 through June 30, 2007. HickoryTech ILEC companiesparticipate in the NECA common line pool. End User Common Line (EUCL) fundscollected, are pooled and some of HickoryTech’s revenues are based onsettlements distributed from the pool. Pool settlements are adjustedperiodically.

CLEC – HickoryTech’s CLEC businesses provide services inMinnesota, Iowa and Wisconsin with less regulatory oversight than theHickoryTech ILEC companies. HickoryTech’s Crystal subsidiary provides localexchange services in Minnesota and Iowa and its Enventis subsidiary providesprivate line services in Minnesota and Wisconsin. Both Crystal and Enventis alsooffer long distance services. In-state services in Minnesota are regulated bythe MPUC with respect to uniform pricing statewide. In-state long distanceservice in Iowa is unregulated. Long distance services are also deregulated atthe federal level (for interstate services), but are subject to annualcertification of geographical rate averaging and rate integration. Dial-up andbroadband Internet access are unregulated at both the state and federal levels.

In addition to the deregulation granted by new Iowa law,the IUB has opened another docket investigating effective competition forseveral additional communities and may authorize additional deregulation forthose communities. This docket includes one community served by Crystal.  This additional Iowa deregulation may provideCrystal some additional competition from the incumbent telephone provider inthe communities Crystal operates in Iowa.

Crystal offers digital TV service in St. Peter, Waseca,Ellendale, New Richland, St. Clair, Faribault, Eagle Lake and Lake Crystal,Minnesota markets under franchises negotiated with these local municipalities.

Other – HickoryTech’s CLEC interstate access rates areestablished in accordance with an April 2001 FCC order. Under the final phaseof this order, interstate switched access rates for HickoryTech’s CLEC werereduced to levels comparable to those of the ILECs in June 2004.

The FCC has an open docket on intercarrier compensationas well as several dockets on VoIP. In February 2005, the FCC issued a FurtherNotice of Public Rule Making and has received voluminous comments reflectingdiverse opinions for intercarrier compensation reform. This process continuesas an industry group has filed another plan (the Missoula Plan) on July 24,2006 with the FCC for its consideration. HickoryTech cannot predict the outcomeof such proceedings nor can it estimate the impact, if any, on HickoryTech.

There is currently a multi-state Local Exchange Carrierindustry dispute with a large RBOC (Regional Bell Operating Company) regardingcertain access charges. A formal complaint process with the MPUC has beenplaced in a “continuance” while the industry conducts a trial of proposedresolution. Because HickoryTech has already recognized the potential impact ofthe dispute, future resolution of this dispute should not have a materialimpact.

MCTC, Mid-Comm, Heartland, and Crystal have also enteredinto a civil complaint against a large interexchange carrier related to anaccess avoidance scheme for prepaid calling card traffic. HickoryTech cannotpredict the outcome of such proceedings nor can it estimate the impact, if any,on HickoryTech.

Local Number Portability (LNP) – In 2003, the FCCreleased a decision providing guidance on porting between wireline and wirelessnetworks (intermodal porting). Most of the Company’s wireline operations weresubject to a May 24, 2004 implementation date for intermodal porting, however,Heartland implemented LNP on January 25, 2005. The effects of intermodalporting on the Company’s wireline operations have been minimal as of June 30,2006. The Company cannot fully quantify the long-term effects of implementingintermodal porting on its wireline operations. It is possible that theserequirements could adversely affect the Company’s wireline operating costs andcustomer growth rates. HickoryTech is also unable to quantify the revenueimpact of wireline customers that may switch to wireless or other wirelinealternatives.

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*INFORMATIONSOLUTIONS SECTOR*

Through NIBI,HickoryTech’s Information Solutions Sector provides data processing and relatedservices, principally for HickoryTech, other local exchange telephonecompanies, CLECs, interexchange network carriers and wireless companies. TheInformation Solutions Sector’s principal activity is the provision of monthlybatch processing of computerized data for HickoryTech as well as non-affiliatedcompanies. Services for telephone company customers include the processing oflong distance telephone calls from data sources and telephone switches, thepreparation of the subscriber telephone bills, customer record keeping andcarrier access bills. There are a number of companies engaged in supplying dataprocessing services comparable to those furnished by the Information SolutionsSector. Competition is based primarily on price and service. HickoryTech’sInformation Solutions Sector has developed an integrated billing and managementsystem called SuiteSolution®. can provide wireline and wireless carriers theindividual benefits of a billing platform or a total system solution.SuiteSolution® is comparable in the majority of functional elements to similarproducts/companies providing end-user billing services for small tomedium-sized independent wireline and wireless service providers in NorthAmerica. Certain features and functionality of SuiteSolution® are, based onRequest For Proposal (RFP) responses, more highly rated than competingproducts, while other features and functionality may not be as highly rated ascompeting products. HickoryTech Information Solutions counts 18 to 20 companiesas its primary competitors in marketing to small-to-medium-sized independentwireline and wireless service providers in North America. SuiteSolutions® doesnot utilize uniquely patentable inventions or technological innovations in theconstruction of the product. Commercially available programming languages areutilized in the development of code that may, based on needs of a prospectiveuser, deliver solutions that are preferred over those of competing products.

*ENTERPRISESOLUTIONS SECTOR*

Through Collins,HickoryTech’s Enterprise Solutions Sector provides telephone, data and VoIPbusiness systems equipment sales and services to companies primarily based inmetropolitan Minneapolis/St. Paul, Minnesota. This sector also supports thebusiness telephone system service for HickoryTech ILEC and CLEC operations insouthern Minnesota and in Iowa. The customers in the Enterprise SolutionsSector’s market are the individual business end users of telecommunicationsservice with ongoing service requirement offerings. Enterprise Solutionsspecializes in complex design, installation and maintenance of voice, data orInternet Protocol products. Enterprise Solutions continues its commitment toservice and support its core products, Nortel and Cisco, while identifying newopportunities such as call centers, computer telephone integration voice mailand interactive voice response systems.

Revenues in theEnterprise Solutions Sector are primarily earned by the sales, installation andservice of business telephone and Internet Protocol data systems. HickoryTech’sEnterprise Solutions Sector is not dependent upon any single customer or smallgroup of customers. No single customer in the Enterprise Solutions Sectoraccounts for ten percent or more of HickoryTech’s consolidated revenues.

EnterpriseSolutions does business in a competitive market where a large number ofcompanies compete for the sale, installation and servicing oftelecommunications equipment and VoIP communications products. Competition is basedprimarily on price and service. No single company is dominant in this market.

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*ENVENTISSECTOR*

On December 30, 2005, HickoryTech acquired Enventis.Through Enventis, HickoryTech provides integrated data services, offering fiberoptic-based communication and advanced data services to business communities inthe Upper Midwest. Enventis owns or has long-term leases to approximately 1,500route miles of fiber optic cable. Enventis also has extensive local fiber opticrings that directly connect the Enventis network with its larger clients (e.g.,health care, government, and education). Other local fiber rings connect theEnventis network to the local telephone company’s central offices. This allowsEnventis to utilize the telephone company’s connections to access its smallerclients. Enventis serves customers through facilities that are primarily leasedfrom third parties. Enventis has business relationships with Cisco Systems,Inc. and is recognized as a Gold Partner. Enventis is a regional leader in deployingleading edge technologies such as Internet Protocol call centers. Enventis hasoffices located in Plymouth, Duluth and Rochester, Minnesota and Sioux Falls,South Dakota. Enventis provides converged Internet Protocol services that allowall communications (voice, video and data) to use the same fiber optic-baseddelivery technology. Enventis’ product portfolio includes Encompass UnifiedCommunications, which serves small to medium-sized businesses. Encompass is ahosted or managed Internet Protocol communications service including local andlong distance voice; business Internet Protocol telephony via hosted InternetProtocol private branch exchange; unified messaging (a single inbox forvoicemail, e-mail, and fax), and dedicated Internet access. Encompass leveragesVoIP or Internet Protocol telephony over a private connection, minimizingupfront capital investment and information technology (IT) management overhead.VoIP enables advanced functionality, voice interoperability with PCs, andscalability. Enventis has been granted authority to operate from the publicutility commissions in Minnesota and Wisconsin for private line services thatare subject to minimal regulation. Enventis does not provide regulated localtelephone (voice) services, but it has applied to expand its authority toprovide through resale, certain local services which may augment its VoIPservice. Services provided by Enventis compete directly with those from ILECsand other providers in the area in which it operates. Enventis is not dependentupon any single customer or small group of customers.

**RESULTS OF OPERATIONS**

CONSOLIDATED OPERATING RESULTS:

Thefollowing is a summarized discussion of consolidated results of operations. Amore detailed discussion of operating results by segment follows thisdiscussion. The operating results of the Enventis Sector include a comparisonto first quarter 2006 due to the acquisition date of December 30, 2005.

OPERATING REVENUES:

Consolidatedoperating revenues were $36,635,000, which is $11,367,000 or 45.0% higher inthe three months ended June 30, 2006 compared to the three months ended June 30, 2005. Without thenew Enventis Sector revenues, total consolidated operating revenues would havebeen $21,457,000, which is $3,811,000 or 15.1% lower in the second quarter of2006 compared to the second quarter of 2005. This decrease was primarily due todecreases in installation revenue in the Enterprise Solutions Sector of$2,396,000, decreased network access revenues of $1,443,000 in the TelecomSector and decreased revenue from unaffiliated customers in the InformationSolutions Sector of $380,000. The Enventis Sector contributed $15,178,000 ofrevenue to total HickoryTech consolidated operating revenues in the secondquarter of 2006, which is a $1,094,000 or 7.8% increase compared to firstquarter revenues of $14,084,000.

Consolidatedoperating revenues were $72,112,000, which is $23,736,000 or 49.1% higher inthe six months ended June 30, 2006 compared to the six months ended June 30,2005. Without the new Enventis Sector revenues, total consolidated operatingrevenues would have been $42,850,000, which is $5,526,000 or 11.4% lower in thefirst six months of 2006 compared to the first six months of 2005. Thisdecrease was primarily due to decreases in installation revenue in theEnterprise Solutions Sector of $3,245,000, decreased network access revenues of$3,114,000 in the Telecom Sector and decreased revenue from unaffiliatedcustomers of $180,000 in the Information Solutions Sector. The Enventis Sector contributed$29,262,000 of revenue to total HickoryTech consolidated operating revenues inthe first six months of 2006.

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COST OF SALES,ENTERPRISE SOLUTIONS AND ENVENTIS:

Costof sales, which is related to the Enterprise Solutions and Enventis Sectors, was$11,828,000, which is $8,056,000 or 213.6% higher in the three months endedJune 30, 2006 compared to the three months ended June 30, 2005. Without the newEnventis Sector costs of sales, cost of sales from the Enterprise SolutionsSector would have been $1,795,000, which is $1,977,000 or 52.4 % lower in thesecond quarter of 2006 compared to the second quarter of 2005. This decrease was largely the result of thedecrease in installation work in the Enterprise Solutions Sector. The portionof the Cost of Sales line item which is attributable to the Enventis Sector was$10,033,000, which is a $764,000 or 8.2% increase in the second quarter of2006, compared to first quarter cost of sales of $9,269,000.

Costof sales was $22,855,000, which is $16,815,000 or 278.4% higher in the sixmonths ended June 30, 2006 compared to the six months ended June 30, 2005.Without the new Enventis Sector costs of sales, cost of sales from theEnterprise Solutions Sector would have been $3,552,000, which is $2,488,000 or41.2% lower in the first six months of 2006 compared to the first six months of2005. This decrease was largely the resultof the decrease in installation work in the Enterprise Solutions Sector. Theportion of the Cost of Sales line item which is attributable to the EnventisSector was $19,302,000 in the first six months of 2006.

COSTOF SERVICES (excluding Depreciation and Amortization):

Cost of services (excluding depreciation andamortization) was $9,373,000, which is $1,084,000 or 13.1% higher in the secondquarter of 2006 compared to the second quarter of 2005. Without the newEnventis cost of services, total cost of services would have been $8,451,000,which is $162,000 or 2.0% higher in the second quarter of 2006 compared to thesecond quarter of 2005. This increase is primarily due to increased cost ofservices in the Telecom Sector of $431,000, which was the result of normal inflationary increases in labor andservices such as transport costs. In the Telecom Sector, even when revenues aredeclining, particularly when the revenue decrease is for network access serviceto interexchange carrier customers, there is not a direct association betweenrevenue trends and expense levels. Consequently, the level of cost of servicecan still have inflationary increases even when the volume of revenue has gonedown. Also contributing to the increase in cost of services was a $22,000increase in the inventory valuation reserve in the Enterprise Solutions Sector,partially offset by a $105,000 decrease in wages and benefits in theInformation Solutions Sector and decreases of $45,000 in technician wages andbenefits and $15,000 in miscellaneous expense in the Enterprise SolutionsSector. Cost of services (excluding depreciation and amortization),which were attributable to the Enventis Sector, was $922,000 in the secondquarter of 2006, which is $85,000 or 10.2% higher than the $837,000 of cost ofservices in the first quarter of 2006.

Cost of services (excluding depreciation andamortization) was $18,334,000, which is $1,992,000 or 12.2% higher in the firstsix months of 2006 compared to the first six months of 2005. Without the newEnventis cost of services, total cost of services would have been $16,575,000,which is $233,000 or 1.4% higher in the first six months of 2006 compared tothe first six months of 2005. This increase was primarily due to increased costof services in the Telecom Sector of $478,000, which was the result of normal inflationary increases in labor andservices such as transport costs. Also contributing to the increase in cost ofservices was an increase in costs recognized from outsourced contractor work of$61,000 and increased maintenance contract expense of $51,000 in theInformation Solutions Sector, partially offset by decreases in wages and benefitsof $151,000, software expense of $105,000 and bad debt expense of $60,000, allof which were also in the Information Solutions Sector. Cost of services(excluding depreciation and amortization) which was attributable to theEnventis Sector was $1,759,000 in the first six months of 2006.

SELLING, GENERAL ANDADMINISTRATIVE EXPENSES (excluding Depreciation and Amortization):

Selling,general and administrative expenses (excluding depreciation and amortization)were $6,818,000, which is $2,731,000 or 66.8% higher in the second quarter of2006 compared to the second quarter of 2005. Without the new Enventis Sector,total selling, general and administrative expenses would have been $4,094,000,which is $7,000 or 0.2% higher in the second quarter of 2006 compared to thesecond quarter of 2005. This increase was primarily due to $254,000 ofnon-recurring separation costs due to the departure of the Company’s formerChief Executive Officer and a $180,000 increase in wages and benefits in theInformation Solutions Sector, offset by $329,000 of one-time fees associatedwith the termination of leases in the second quarter of 2005 in the InformationSolutions Sector and a $68,000 decrease in staff technician wages in theEnterprise Solutions Sector. Selling, general and administrative expenses(excluding depreciation and amortization) attributable to the Enventis Sectorwere $2,724,000, which is $49,000 or 1.8% higher in the second quarter of 2006,compared to first quarter selling, general and administrative expenses of$2,675,000.

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Selling,general and administrative expenses (excluding depreciation and amortization)were $14,001,000, which is $5,887,000 or 72.6% higher in the first six monthsof 2006 compared to the first six months of 2005. Without the new EnventisSector, total selling, general and administrative expenses would have been$8,602,000, which is $488,000 or 6.0% higher in the first six months of 2006compared to the first six months of 2005. This increase was primarily due to$254,000 of non-recurring separation costs due to the departure of the Company’sformer Chief Executive Officer, a $209,000 increase in wages and benefits inthe Information Solutions Sector and a $41,000 increase in sales staff wages inthe Enterprise Solutions Sector, offset by $329,000 of one-time fees associatedwith the termination of leases in the second quarter of 2005 in the InformationSolutions Sector, a $62,000 decrease in staff technician wages and a $11,000decrease in insurance expense, both in the Enterprise Solutions Sector.Selling, general and administrative expenses (excluding depreciation andamortization) attributable to the Enventis Sector were $5,399,000 in the firstsix months of 2006. Enventis selling, general and administrative expenses of$550,000 and $1,100,000 in the three and six months ended June 30, 2006,respectively, were due to acquisition integration costs which are unique to thefirst year after the acquisition.

DEPRECIATION ANDAMORTIZATION:

Depreciationexpense was $4,236,000, which is $193,000 or 4.8% higher in the three monthsended June 30, 2006 compared to the three months ended June 30, 2005. Withoutthe new Enventis Sector, total depreciation expense would have been $3,731,000,which is $312,000 or 7.7% lower in the second quarter of 2006 compared to thesecond quarter 2005. Depreciation expense was $8,310,000, which is $266,000 or3.3% higher in the six months ended June 30, 2006 compared to the six monthsended June 30, 2005. Without the new Enventis Sector, total depreciationexpense would have been $7,328,000, which is $716,000 or 8.9% lower in thefirst six months of 2006 compared to the first six months of 2005. Thedecreases in the non-Enventis Sectors were primarily due to central officeequipment becoming fully depreciated in the third quarter of 2005 in theTelecom Sector. Depreciation expense attributable to the Enventis Sector was$505,000, which is $29,000 or 6.1% higher in the second quarter of 2006,compared to $476,000 of depreciation expense in the first quarter of 2006. Depreciationexpense attributable to the Enventis Sector was $982,000 in the first sixmonths of 2006.

Amortizationexpense was $293,000, which is $89,000 or 43.6% higher in the three monthsended June 30, 2006 compared to the three months ended June 30, 2005. Withoutthe new Enventis Sector, total amortization expense would have been $30,000,which is $174,000 or 85.3% lower in the second quarter of 2006 compared to thesecond quarter 2005. Amortization expense was $586,000, which is $145,000 or32.9% higher in the six months ended June 30, 2006 compared to the six monthsended June 30, 2005. Without the new Enventis Sector, total amortizationexpense would have been $60,000, which is $381,000 or 86.4% lower in the firstsix months of 2006 compared to the first six months of 2005. The decreases inthe non-Enventis Sectors were primarily due to internally developed billingsoftware in the Information Solutions Sector becoming fully amortized in thesecond quarter of 2005. Amortization expense attributable to the EnventisSector was $263,000 in the first and second quarters of 2006,respectively.  Amortization expenseattributable to the Enventis Sector was $526,000 in the first six months of2006.

OPERATING INCOME:

Operating income was $4,087,000, which is $786,000 or16.1% lower in the three months ended June 30, 2006 compared to the threemonths ended June 30, 2005. Without the new Enventis Sector, operating incomewould have been $3,356,000, which is $1,517,000 or 31.1% lower in the secondquarter of 2006 compared to the second quarter of 2005. The decrease in totaloperating income was due to the $8,056,000 increase in cost of sales, the$2,731,000 increase in selling, general and administrative expenses, (excludingdepreciation and amortization), the $1,084,000 increase in cost of services(excluding depreciation and amortization), the $193,000 increase indepreciation and the $89,000 increase in amortization, described above. Theseexpense increases were partially offset by the $11,367,000 increase inoperating revenues, described above. The Enventis Sector contributed $731,000of operating income in the second quarter of 2006, which is $167,000 or 29.6%higher compared to operating income of $564,000 in the first quarter of 2006.

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Operating income was $8,026,000, which is $1,369,000or 14.6% lower in the six months ended June 30, 2006 compared to the six monthsended June 30, 2005. Without the new Enventis Sector, operating income wouldhave been $6,731,000, which is $2,664,000 or 28.4% lower in the six months endedJune 30, 2006 compared to the six months ended June 30, 2005. The decrease intotal operating income was due to the $16,815,000 increase in cost of sales,the $5,887,000 increase in selling, general and administrative expenses(excluding depreciation and amortization), the $1,992,000 increase in cost ofservices (excluding depreciation and amortization), the $266,000 increase indepreciation and the $145,000 increase in amortization, all of which weredescribed above. These expense increases were partially offset by the$23,736,000 increase in operating revenues, described above. The EnventisSector contributed $1,295,000 of operating income in the first six months of2006.

INTEREST EXPENSE:

Interest expense was $1,830,000,which is $803,000 or 78.2% higher in the three months ended June 30,2006 compared to the three months ended June 30, 2005. Interest expense increased $1,475,000 or 73.6% to $3,479,000 inthe six months ended June 30, 2006 compared to the six months ended June 30,2005. The increase in interest expense forboth the three and six-month periods ended June 30, 2006 compared to thecorresponding periods ending June 30, 2005, was primarily due to an increase intotal debt outstanding and to an increase in the average effective interestrate on outstanding debt of 0.17 percent to 5.76 percent. The proceeds from theincrease in total debt outstanding were used to repay the outstandingobligations under the previous credit facility, pay fees and expensesassociated with the new credit facility, and pay costs associated with theacquisition of Enventis. The outstanding balance of the revolving creditfacility was $139,850,000 at June 30, 2006 and $96,500,000 at June 30, 2005.

INCOME TAXES:

The effective income tax rate ofapproximately 40.1% for the second quarter of 2006 and 40.4% for the secondquarter of 2005 exceeds the federal statutory rate primarily due to stateincome taxes.

INCOME FROMCONTINUING OPERATIONS:

Consolidated income fromcontinuing operations was $1,374,000, which is $935,000 or 40.5% lower inthe three months ended June 30, 2006 compared to the three months ended June30, 2005. Without the new Enventis Sector, income from continuing operationswould have been $937,000, which is $1,372,000 or 59.4% lower in the secondquarter of 2006 compared to the second quarter of 2005. The decrease in totalincome from continuing operations was primarily due to the $8,056,000 increasein cost of sales, the $2,731,000 increase in selling, general andadministrative expenses (excluding depreciation and amortization), the$1,084,000 increase in cost of services (excluding depreciation andamortization), the $803,000 increase in interest expense, the $193,000 increasein depreciation and the $89,000 increase in amortization, described above. Theseexpense increases were partially offset by the $11,367,000 increase inoperating revenues, described above. The Enventis Sector contributed $437,000of net income in the second quarter of 2006, which is $101,000 or 30.1% highercompared to first quarter net income of $336,000.

Consolidated income fromcontinuing operations was $2,763,000, which is $1,662,000 or 37.6% lower inthe six months ended June 30, 2006 compared to the six months ended June 30,2005. Without the new Enventis Sector, income from continuing operations wouldhave been $1,990,000, which is $2,435,000 or 55.0% lower in the six monthsended June 30, 2006 compared to the six months ended June 30, 2005. Thedecrease in total income from continuing operation was due to the $16,815,000increase in cost of sales, the $5,887,000 increase in selling, general andadministrative expenses (excluding depreciation and amortization), the$1,992,000 increase in cost of services (excluding depreciation andamortization), the $1,475,000 increase in interest expense, the $266,000increase in depreciation and the $145,000 increase in amortization, describedabove. These expense increases were partially offset by the $23,736,000increase in operating revenues, described above. The Enventis Sectorcontributed $773,000 of net income in the first six months of 2006.

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SECTORRESULTS OF OPERATIONS FROM CONTINUING OPERATIONS

TELECOM – The following table provides a breakdown of the Telecom Sectoroperating results.

**TELECOM SECTOR**
| ** **                                                                                | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|-------------------------------------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                                                                | ** ** | **June 30,**                | ** ** | **June 30,**              | ** ** |
| **(Dollars in Thousands)**                                                      | ** ** | **2006**                         | ** ** | **2005**                       | ** ** | **2006** | ** ** | **2005** | ** ** |
|                                                                                      |       |                             |       |                           |       |   |   |   |   |
| Revenues before  intersegment eliminations:                                               |       |                             |       |                           |       |   |   |   |   |
| ILEC:                                                                                     |       |                             |       |                           |       |   |   |   |   |
| Local service                                                                             | ** ** | **$**                            | **3,692**  |                           | $          | 3,742 | ** ** | **$** | **7,400** |   | $ | 7,478 |   |
| Network access                                                                            | ** ** | **6,908**                        |       | 8,364                          | ** ** | **13,765** |   | 16,858 |   |
| Data                                                                                      | ** ** | **699**                          |       | 590                            | ** ** | **1,344** |   | 1,160 |   |
| Intersegment                                                                              | ** ** | **51**                           |       | 52                             | ** ** | **102** |   | 103 |   |
| Other                                                                                     | ** ** | **1,571**                        |       | 1,558                          | ** ** | **3,083** |   | 3,224 |   |
| Total ILEC                                                                                | ** ** | **12,921**                       |       | 14,306                         | ** ** | **25,694** |   | 28,823 |   |
|                                                                                      |       |                             |       |                           |       |   |   |   |   |
| CLEC:                                                                                     |       |                             |       |                           |       |   |   |   |   |
| Local service                                                                             | ** ** | **884**                          |       | 883                            | ** ** | **1,771** |   | 1,772 |   |
| Network access                                                                            | ** ** | **507**                          |       | 494                            | ** ** | **991** |   | 1,012 |   |
| Data                                                                                      | ** ** | **787**                          |       | 630                            | ** ** | **1,533** |   | 1,248 |   |
| Other                                                                                     | ** ** | **627**                          |       | 462                            | ** ** | **1,170** |   | 895 |   |
| Total CLEC                                                                                | ** ** | **2,805**                        |       | 2,469                          | ** ** | **5,465** |   | 4,927 |   |
|                                                                                      |       |                             |       |                           |       |   |   |   |   |
| Long distance                                                                             | ** ** | **1,254**                        |       | 1,219                          | ** ** | **2,402** |   | 2,361 |   |
|                                                                                      |       |                             |       |                           |       |   |   |   |   |
| Internet                                                                                  | ** ** | **1,131**                        |       | 1,100                          | ** ** | **2,284** |   | 2,171 |   |
|                                                                                      |       |                             |       |                           |       |   |   |   |   |
| Digital TV                                                                                | ** ** | **318**                          |       | 244                            | ** ** | **603** |   | 452 |   |
|                                                                                      |       |                             |       |                           |       |   |   |   |   |
| Total Telecom  revenues                                                                   | ** ** | **$**                            | **18,429** |                           | $          | 19,338 | ** ** | **$** | **36,448** |   | $ | 38,734 |   |
|                                                                                      |       |                             |       |                           |       |   |   |   |   |
| Total Telecom  revenues before intersegment eliminations:                                 |       |                             |       |                           |       |   |   |   |   |
| Unaffiliated customers                                                                    | ** ** | **$**                            | **18,378** |                           | $          | 19,286 | ** ** | **$** | **36,346** |   | $ | 38,631 |   |
| Intersegment                                                                              | ** ** | **51**                           |       | 52                             | ** ** | **102** |   | 103 |   |
|                                                                                      | ** ** | **18,429**                       |       | 19,338                         | ** ** | **36,448** |   | 38,734 |   |
|                                                                                      |       |                             |       |                           |       |   |   |   |   |
| Cost of services  (excluding depreciation and amortization)                               | ** ** | **7,977**                        |       | 7,546                          | ** ** | **15,436** |   | 14,958 |   |
| Selling,  general, and administrative expenses (excluding depreciation and  amortization) |       | **2,739**                        |       | 2,764                          | ** ** | **5,429** |   | 5,448 |   |
| Depreciation and  amortization                                                            | ** ** | **3,293**                        |       | 3,564                          | ** ** | **6,499** |   | 7,100 |   |
| Operating income                                                                          | ** ** | **$**                            | **4,420**  |                           | $          | 5,464 | ** ** | **$** | **9,084** |   | $ | 11,228 |   |
|                                                                                      |       |                             |       |                           |       |   |   |   |   |
| Income from  continuing operations, net of tax                                            | ** ** | **$**                            | **2,652**  |                           | $          | 3,252 | ** ** | **$** | **5,530** |   | $ | 6,684 |   |
| Income/(loss)  from discontinued operations                                               | ** ** | **—**                       |       | 101                            | ** ** | **—** |   | 101 |   |
| Net income                                                                                | ** ** | **$**                            | **2,652**  |                           | $          | 3,353 | ** ** | **$** | **5,530** |   | $ | 6,785 |   |
|                                                                                      |       |                             |       |                           |       |   |   |   |   |
| Capital expenditures                                                                      | ** ** | **$**                            | **3,609**  |                           | $          | 2,678 | ** ** | **$** | **6,571** |   | $ | 4,050 |   |

 

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|                                      | ** ** | **Six Months Ended** | ** ** |
|--------------------------------------|------------|--------------------------------|------------|
| ** **                           | ** ** | **June 30,**              | ** ** |
| **(Dollars in Thousands)** | ** ** | **2006**                       | ** ** | **2005** | ** ** |
|                                 |       |                           |       |   |   |
| ILEC access  lines                   | ** ** | **54,854**                     |       | 57,995 |   |
|                                 |       |                           |       |   |   |
| CLEC access  lines                   |       |                           |       |   |   |
| Overbuild                            | ** ** | **11,482**                     |       | 10,550 |   |
| Unbundled network element (UNE)      | ** ** | **1,564**                      |       | 1,746 |   |
| Total service resale (TSR)           | ** ** | **1,407**                      |       | 1,757 |   |
| Total                                | ** ** | **14,453**                     |       | 14,053 |   |
|                                 |       |                           |       |   |   |
| Long distance  customers             | ** ** | **40,788**                     |       | 42,061 |   |
|                                 |       |                           |       |   |   |
| Internet  customers                  | ** ** | **19,205**                     |       | 17,761 |   |
|                                 |       |                           |       |   |   |
| Total Telecom  customers             | ** ** | **129,300**                    |       | 131,870 |   |
|                                 |       |                           |       |   |   |
| DSL customers                        | ** ** | **14,282**                     |       | 11,693 |   |
|                                 |       |                           |       |   |   |
| Digital TV customers                 | ** ** | **3,389**                      |       | 2,141 |   |

 

Telecom Sector operating revenues before intersegmenteliminations were $18,429,000, which is $909,000 or 4.7% lower in the threemonths ended June 30, 2006 compared to the three months ended June 30, 2005.The decrease was primarily due to the $1,443,000 decrease in network access,offset by increases in revenue from data of $266,000, other revenue of $178,000and digital TV of $74,000.

Telecom Sector operating revenues before intersegmenteliminations were $36,448,000, which is $2,286,000 or 5.9% lower in the sixmonths ended June 30, 2006 compared to the six months ended June 30, 2005. Thedecrease was primarily due to the $3,114,000 decrease in network accessrevenue, offset by increases in revenue from data of $469,000, digital TV of$151,000, other revenue of $134,000 and Internet of $113,000.

ILEC local service revenue was $3,692,000, which is$50,000 or 1.3% lower in the three months ended June 30, 2006 compared to thethree months ended June 30, 2005 and $7,400,000, which is $78,000 or 1.0% lowerin the six months ended June 30, 2006 compared to the six months ended June 30,2005. The decrease was the result of 3,141 fewer customer access lines at June30, 2006 than at June 30, 2005.

ILEC network access revenue was $6,908,000, which is$1,456,000 or 17.4% lower in the three months ended June 30, 2006 compared tothe three months ended June 30, 2005. ILEC network access revenue was$13,765,000, which is $3,093,000 or 18.3% lower in the six months ended June30, 2006 compared to the six months ended June 30, 2005. The decrease wasprimarily due to interstate rate decreases on July 1, 2005, lower overall minutesof use and the recognition of the impact of the different treatment of trafficdelivered via Qwest Communications, all of which are expected to be lasting innature. A combination of changing minutes of use, carriers optimizing theirnetwork costs and lower demand for dedicated lines may negatively impact futureaccess revenues. In addition, future federal or state access reform may providefurther negative influences.

ILEC data revenue was $699,000, which is $109,000 or18.5% higher in the three months ended June 30, 2006 compared to the threemonths ended June 30, 2005 and $1,344,000, which is $184,000 or 15.9% higher inthe six months ended June 30, 2006 compared to the six months ended June 30,2005. The increase was primarily due to increased broadband services tobusiness customers, 2,589 more residential Digital Subscriber Line (DSL)customers at June 30, 2006 than at June 30, 2005 and DSL customers migratingfrom lower speed DSL products to higher speed DSL products, which have theeffect of increasing revenue per customer.

27

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ILEC other revenue was $1,571,000 which is $13,000 or0.8% higher in the three months ended June 30, 2006 compared to the threemonths ended June 30, 2005.

ILEC other revenue was $3,083,000, which was $141,000or 4.4% lower in the six months ended June 30, 2006 compared to the six monthsended June 30, 2005. The decrease was primarily due to a contract terminationand other contract expirations of $116,000, lower billing and collectionrevenue of $76,000, lower miscellaneous revenue of $24,000 and lower customerpremise equipment (CPE) sales revenue of $15,000, offset by a $95,000 increasein directory revenue.

CLEC network access revenuewas $507,000, which is $13,000 or 2.6% higher in the three months ended June30, 2006 compared to the three months ended June 30, 2005. The increase wasprimarily due to higher billings in June 2006 for intrastate access.

CLEC network access revenuewas $991,000, which was $21,000 or 2.1% lower in the six months ended June 30,2006 compared to the six months ended June 30, 2005. The decrease was primarilydue to lower overall minutes of use, offset by the higher billings in June 2006for intrastate access. A combination of changing minutes of use,carriers optimizing their network costs, and lower demand for dedicated linesmay negatively impact future access revenues. In addition, future federal orstate access reform may provide further negative influences.

CLECdata revenue was $787,000, which is $157,000 or 24.9% higher in the threemonths ended June 30, 2006 compared to the three months ended June 30, 2005.CLEC data revenue was $1,533,000, which was $285,000 or 22.8% higher in the sixmonths ended June 30, 2006 compared to the six months ended June 30, 2005. Theincrease was primarily due to increased residential and business DSLpenetration in CLEC communities, as well as the rollout of Ethernet broadbandservices to large business customers in 2005. Ethernet service revenues willcontinue to provide growth opportunities for HickoryTech. Expanded networkingopportunities among medium and large enterprise customers are key drivers forthis growth.

CLECother revenue was $627,000, which is $165,000 or 35.7% higher in the threemonths ended June 30, 2006 compared to the three months ended June 30, 2005.The increase was primarily due to a $168,000 increase in CPE sales.

CLECother revenue was $1,170,000, which was $275,000 or 30.7% higher in the sixmonths ended June 30, 2006 compared to the six months ended June 30, 2005. Theincrease was primarily due to a $235,000 increase in CPE sales, a $55,000increase in maintenance fees and a $32,000 increase in late fees, offset by a$58,000 decrease in SOCRATES revenue (see below).

InJanuary 2006, HickoryTech was informed that its bid to renew its multi-yearcontract with Project SOCRATES (South Central Regional Area TelecommunicationsSystem) was not accepted. HickoryTech had been providing Internet access andvideo conferencing for Project SOCRATES, which is a distance-learning networkconnecting schools and libraries in a 12-county region in south centralMinnesota. HickoryTech’s contract with Project SOCRATES ended on June 30, 2006.During the transition period to a new carrier in July and August 2006,HickoryTech will continue to provide services to Project SOCRATES and expectsCLEC other revenues of approximately $165,000 to be recognized in the thirdquarter of 2006. Due to these additional services, CLEC’s other revenues willnow decrease by approximately $185,000 in the third quarter of 2006 and approximately$350,000 in the fourth quarter of 2006 associated with the loss of revenuesfrom this contract. There will be a corresponding level of decrease in Cost ofServices associated with these revenue declines in the third and fourth quarterof 2006.

Longdistance revenue was $1,254,000, which is $35,000 or 2.9% higher in the threemonths ended June 30, 2006 compared to the three months ended June 30, 2005.Long distance revenue was $2,402,000, which was $41,000 or 1.7% higher in thesix months ended June 30, 2006 compared to the six months ended June 30, 2005.The long distance customer base decreased 1,273 or 3.0% between June 30, 2005and June 30, 2006. Despite the loss of customers, long distance revenueincreased primarily due to higher long distance usage offsetting the smallerlong distance customer based described above.

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Internet revenuewas $1,131,000, which is $31,000 or 2.8% higher in the three months ended June30, 2006 compared to the three months ended June 30, 2005. Internet revenue was$2,284,000, which is $113,000 or 5.2% higher in the six months ended June 30, 2006compared to the six months ended June 30, 2005. The increase was primarily dueto an increase in Internet customers of 1,444 or 8.1% between June 30, 2005 andJune 30, 2006.

Digital TV revenuewas $318,000, which is $74,000 or 30.3% higher in the three months ended June30, 2006 compared to the three months ended June 30, 2005. Digital TV revenuewas $603,000, which is $151,000 or 33.4% higher in the six months ended June30, 2006 compared to the six months ended June 30, 2005. The increase wasprimarily the result of the offering of digital TV in three additionalcommunities in the latter half of 2005 and two additional communities in thesecond quarter of 2006, which resulted in a 1,248 or 58.3% increase in digitalTV customers at June 30, 2006 compared to June 30, 2005.

Cost of Services (excluding Depreciation andAmortization):

Cost of services(excluding depreciation and amortization) was $7,977,000, which is $431,000 or5.7% higher in the three months ended June 30, 2006 compared to the threemonths ended June 30, 2005. Cost of services (excluding depreciation andamortization) was $15,436,000, which was $478,000 or 3.2% higher in the sixmonths ended June 30, 2006 compared to the six months ended June 30, 2005. Theincrease was primarily due to normal inflationary increases in labor andservices such as transport costs. In the Telecom Sector, even when revenues aredeclining, particularly when the revenue decrease is for network access serviceto interexchange carrier customers, there is not a direct association betweenrevenue trends and expense levels. Consequently, the level of cost of servicecan still have inflationary increases even when the volume of revenue has gonedown. (Also see prior discussion of an anticipated decrease in Cost of Servicesassociated with decreases in SOCRATES project revenues in the third and fourthquarters of 2006)

Selling, General and Administrative Expenses (excludingDepreciation and Amortization):

Selling, Generaland Administrative expenses (excluding depreciation and amortization) were$2,739,000, which is $25,000 or 0.9% lower in the three months ended June 30,2006 compared to the three months ended June 30, 2005. Selling, General andAdministrative expenses (excluding depreciation and amortization) were $5,429,000,which was $19,000 or 0.3% lower in the six months ended June 30, 2006 comparedto the six months ended June 30, 2005.

Depreciation and Amortization:

Depreciation andamortization was $3,293,000, which is $271,000 or 7.6% lower in the threemonths ended June 30, 2006 compared to the three months ended June 30, 2005.Depreciation and amortization were $6,499,000, which is $601,000 or 8.5% lowerin the six months ended June 30, 2006 compared to the six months ended June 30,2005. The decrease in depreciation expense was primarily due to central officeswitching equipment becoming fully depreciated in the third quarter of 2005.

Operating and NetIncome from Continuing Operations:

Operating income from continuing operations was$4,420,000, which is $1,044,000 or 19.1% lower in the three months ended June30, 2006 compared to the three months ended June 30, 2005. Net income fromcontinuing operations was $2,652,000, which is $600,000 or 18.5% lower in thethree months ended June 30, 2006 compared to the three months ended June 30,2005. The decreases in operating income from continuing operations and netincome from continuing operations were driven by the $909,000 decrease inrevenue and the $431,000 increase in cost of services (excluding depreciationand amortization), described above, offset by the $271,000 decrease indepreciation and amortization and the $25,000 decrease in selling, general andadministrative expenses (excluding depreciation and amortization), describedabove.

Operating income from continuing operations was$9,084,000, which is $2,144,000 or 19.1% lower in the six months ended June 30,2006 compared to the six months ended June 30, 2005. Net income from continuingoperations was $5,530,000, which is $1,154,000 or 17.3% lower in the six monthsended June 30, 2006 compared to the six months ended June 30, 2005. Thedecreases in operating income from continuing operations and net income fromcontinuing operations were driven by the $2,286,000 decrease in revenue and the$478,000 increase in cost of services (excluding depreciation andamortization), described above, offset by the $601,000 decrease in depreciationand amortization and the $19,000 decrease in selling, general andadministrative expenses (excluding depreciation and amortization), describedabove.

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INFORMATION SOLUTIONS – The following table provides a breakdown ofthe Information Solutions Sector operating results.

**INFORMATIONSOLUTIONS SECTOR**
| ** **                                                                              | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|-----------------------------------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                                                              | ** ** | **June 30,**                | ** ** | **June 30,**              | ** ** |
| **(In Thousands)**                                                                 | ** ** | **2006**                         | ** ** | **2005**                       | ** ** | **2006** | ** ** | **2005** | ** ** |
| Revenues before  eliminations:                                                          |       |                             |       |                           |       |   |   |   |   |
| Unaffiliated customers                                                                  |       | **$**                            | **534**    |                           | $          | 914 | ** ** | **$** | **1,222** |   | $ | 1,402 |   |
| Intersegment                                                                            |       | **1,189**                        |       | 1,087                          | ** ** | **2,277** |   | 2,183 |   |
|                                                                                    | ** ** | **1,723**                        |       | 2,001                          | ** ** | **3,499** |   | 3,585 |   |
| Cost of services  (excluding depr. and amort.)                                          | ** ** | **1,280**                        |       | 1,396                          | ** ** | **2,617** |   | 2,777 |   |
| Selling, general  and administrative expenses (excluding depreciation and amortization) |       | **443**                          |       | 583                            |       | **914** |   | 882 |   |
| Depreciation and  amortization                                                          | ** ** | **420**                          |       | 639                            | ** ** | **791** |   | 1,295 |   |
|                                                                                    |       |                             |       |                           |       |   |   |   |   |
| Operating  income/(loss)                                                                | ** ** | **$**                            | **(420**   | **)**                          | $          | (617 | ) | **$** | **(823** | **)** | $ | (1,369 | ) |
| Net income/(loss)                                                                       | ** ** | **$**                            | **(257**   | **)**                          | $          | (374 | ) | **$** | **(505** | **)** | $ | (829 | ) |
|                                                                                    |       |                             |       |                           |       |   |   |   |   |
| Capital expenditures                                                                    | ** ** | **$**                            | **239**    |                           | $          | 474 | ** ** | **$** | **504** |   | $ | 558 |   |

 

Revenues:

Operating revenues fromunaffiliated customers were $534,000, which is $380,000 or 41.6% lower in thethree months ended June 30, 2006 compared to the three months ended June 30,2005. This is primarily due to the fact that in June 2005, the Companyrecognized $369,000 in non-recurring license fees from the sale ofSuiteSolutions® to a customer.

Operating revenues fromunaffiliated customers were $1,222,000 which is $180,000 or 12.8% lower in thesix months ended June 30, 2006 compared to the six months ended June 30, 2005.The addition of several customers and increased volumes for several existingcustomers, helped offset the loss of several customers in the six months endedJune 30, 2006 compared to the six months ended June 30, 2005.

Cost of Services (excluding Depreciation and Amortization):

Cost of services (excludingdepreciation and amortization) was $1,280,000, which is $116,000 or 8.3% lowerin the three months ended June 30, 2006 compared to the three months ended June30, 2005. The decrease was primarily due to a $105,000 decrease in wages andbenefits associated with fewer employees in support roles.

Cost of services (excludingdepreciation and amortization) was $2,617,000, which is $160,000 or 5.8% lowerin the six months ended June 30, 2006 compared to the six months ended June 30,2005. The decrease was primarily due to decreases in wages and benefitsassociated with fewer employees in support roles of $151,000, decreasedsoftware expense of $105,000 and decreased bad debt expense of $60,000, whichwas offset by an increase in costs, recognized from outsourced contractor workof $61,000 and increased maintenance contract expense of $51,000.

Selling, Generaland Administrative Expenses (excluding Depreciation and Amortization):

Selling, general andadministrative expenses (excluding depreciation and amortization) were$443,000, which is $140,000 or 24.0% lower in the three months ended June 30,2006 compared to the three months ended June 30, 2005. The decrease was largelydue to $329,000 of one-time fees associated with the termination of leases inthe second quarter of 2005, which was offset by an $180,000 increase in wagesand benefits.

Selling, general andadministrative expenses (excluding depreciation and amortization) were$914,000, which is $32,000 or 3.6% higher in the six months ended June 30, 2006compared to the six months ended June 30, 2005. The increase was primarily dueto a $209,000 increase in wages and benefits and a smaller percentage ofexpenses billed out through inter-company charges of $169,000, which was offsetby the $329,000 of one-time fees associatedwith the termination of leases in the second quarter of 2005.

30

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Depreciation and Amortization:

Depreciation and amortizationwas $420,000, which is $219,000 or 34.3% lower in the three months ended June30, 2006 compared to the three months ended June 30, 2005. Depreciation andamortization was $791,000, which was $504,000 or 38.9% lower in the six monthsended June 30, 2006 compared to the six months ended June 30, 2005. Thedecrease was primarily due to billing software that became fully amortized inthe second quarter of 2005.

Operating and Net Loss:

Operating loss was $420,000,which is $197,000 or 31.9% lower in the three months ended June 30, 2006compared to the three months ended June 30, 2005. Net loss was $257,000, whichis $117,000 or 31.3% lower in the three months ended June 30, 2006 compared tothe three months ended June 30, 2005. The decreases in operating loss and netloss were driven by the $219,000 decrease in depreciation and amortization, the$140,000 decrease in selling, general and administrative expenses (excludingdepreciation and amortization) and the $116,000 decrease in cost of services(excluding depreciation and amortization), described above, offset by the$380,000 decrease in revenues from unaffiliated customers, described above.

Operating loss was $823,000,which was $546,000 or 39.9% lower in the six months ended June 30, 2006compared to the six months ended June 30, 2005. Net loss was $505,000, which is$324,000 or 39.1% lower in the six months ended June 30, 2006 compared to thesix months ended June 30, 2005. The decreases in operating loss and net losswere primarily due to the $504,000 decrease in depreciation and amortizationand the $160,000 decrease in cost of services (excluding depreciation andamortization), described above, offset by the $180,000 decrease in revenuesfrom unaffiliated customers and the $32,000 increase in selling, general andadministrative expenses (excluding depreciation and amortization), describedabove.

ENTERPRISE SOLUTIONS – The following table provides a breakdown ofthe Enterprise Solutions Sector operating results.

**ENTERPRISE SOLUTIONS SECTOR**
| ** **                                                                              | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|-----------------------------------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                                                              | ** ** | **June 30,**                | ** ** | **June 30,**              | ** ** |
| **(In Thousands)**                                                                 | ** ** | **2006**                         | ** ** | **2005**                       | ** ** | **2006** | ** ** | **2005** | ** ** |
| Revenues before  eliminations:                                                          |       |                             |       |                           |       |   |   |   |   |
| Installation                                                                            | ** ** | **$**                            | **617**    |                           | $          | 3,013 | ** ** | **$** | **1,155** |   | $ | 4,400 |   |
| Service                                                                                 | ** ** | **1,928**                        |       | 2,055                          | ** ** | **4,127** |   | 3,943 |   |
| ** **                                                                              | ** ** | **2,545**                        |       | 5,068                          | ** ** | **5,282** |   | 8,343 |   |
| Cost of sales                                                                           | ** ** | **1,795**                        |       | 3,772                          | ** ** | **3,552** |   | 6,040 |   |
| Cost of services  (excluding depr. and amort.)                                          | ** ** | **402**                          |       | 453                            | ** ** | **837** |   | 828 |   |
| Selling, general  and administrative expenses (excluding depreciation and amortization) |       | **715**                          |       | 768                            |       | **1,510** |   | 1,566 |   |
| Depreciation and  amortization                                                          | ** ** | **28**                           |       | 31                             | ** ** | **56** |   | 63 |   |
|                                                                                    |       |                             |       |                           |       |   |   |   |   |
| Operating  income/(loss)                                                                | ** ** | **$**                            | **(395**   | **)**                          | $          | 44 | ** ** | **$** | **(673** | **)** | $ | (154 | ) |
| Net  income/(loss)                                                                      | ** ** | **$**                            | **(238**   | **)**                          | $          | 26 | ** ** | **$** | **(405** | **)** | $ | (92 | ) |
|                                                                                    |       |                             |       |                           |       |   |   |   |   |
| Capital expenditures                                                                    | ** ** | **$**                            | **24**     |                           | $          | 20 | ** ** | **$** | **29** |   | $ | 20 |   |

 

Revenues:

EnterpriseSolutions Sector operating revenues were $2,545,000, which is $2,523,000 or49.8% lower in the three months ended June 30, 2006 compared to the threemonths ended June 30, 2005. Installation revenue was $617,000, which is$2,396,000 or 79.5% lower in the three months ended June 30, 2006 compared tothe three months ended June 30, 2005. The decrease in installation revenue wasprimarily due to decreased sales and installations in the data product line of$1,900,000 and private branch exchange of $491,000. In June 2005, theEnterprise Solutions Sector recognized a substantial installation contract withMinnesota State University — Mankato, Minnesota and South Central College inMankato, Minnesota which is the primary reason for the large decrease in 2006.Service revenue was $1,928,000, which was $127,000 or 6.2% lower in the threemonths ended June 30, 2006 compared to the three months ended June 30, 2005.The decrease in service revenue was primarily due to decreases in activity inthe Move/Add/Change product lines of $177,000, which was offset by an increaseof $50,000 in the Maintenance product lines.

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EnterpriseSolutions Sector operating revenues were $5,282,000, which is $3,061,000 or36.7% lower in the six months ended June 30, 2006 compared to the six monthsended June 30, 2005. Installation revenue was $1,155,000, which is $3,245,000or 73.8% lower in the six months ended June 30, 2006 compared to the six monthsended June 30, 2005. The decrease in installation revenue was primarily due to decreasedsales and installations in the data product line of $2,565,000 and privatebranch exchange of $561,000. Service revenue was $4,127,000, which is $184,000or 4.7% higher in the six months ended June 30, 2006 compared to the six monthsended June 30, 2005. The increase in service revenue was primarily due to anincrease in activity in the Move/Add/Change product lines of $90,000 andMaintenance product lines of $94,000.

Cost of Sales:

Costof sales was $1,795,000, which is $1,977,000 or 52.4% lower in the three monthsended June 30, 2006 compared to the three months ended June 30, 2005. Cost ofsales was $3,552,000, which is $2,488,000 or 41.2% lower in the six monthsended June 30, 2006 compared to the six months ended June 30, 2005. Thedecrease in cost of sales was largely the result of the decrease ininstallation work.

Cost of Services (excluding Depreciation and Amortization):

Costof services (excluding depreciation and amortization) was $402,000, which is$51,000 or 11.3% lower in the three months ended June 30, 2006 compared to thethree months ended June 30, 2005. The decrease was primarily the result of a$45,000 decrease in technician wages and benefits and a $15,000 decrease inmiscellaneous expense, offset by a $22,000 increase in the inventory valuationreserve in the second quarter of 2006. Telecommunications equipment supplymarkets have changed in recent years and have caused the Company to applyadditional valuation methods, which estimate the lower of cost or marketprinciple. The Company cannot predict the impact or timing, if any, of futureinventory valuation changes.

Costof services (excluding depreciation and amortization) was $837,000, which is$9,000 or 1.1% higher in the six months ended June 30, 2006 compared to the sixmonths ended June 30, 2005.

Selling, Generaland Administrative Expenses (excluding Depreciation and Amortization):

Selling,general and administrative expenses (excluding depreciation and amortization)were $715,000, which is $53,000 or 6.9% lower in the three months ended June30, 2006 compared to the three months ended June 30, 2005. The decrease wasprimarily due to a decrease in staff technician wages of $68,000.

Selling,general and administrative expenses (excluding depreciation and amortization)were $1,510,000, which is $56,000 or 3.6% lower in the six months ended June30, 2006 compared to the six months ended June 30, 2005. The decrease wasprimarily due to a decrease in staff technician wages of $62,000 and reducedinsurance expense of $11,000, offset by a $41,000 increase in sales staffwages.

Operating and Net Loss:

Anoperating loss of $395,000 was recognized in the three months ended June 30,2006 compared to operating income of $44,000 in the three months ended June 30,2005. A net loss of $238,000 was recognized in the three months ended June 30,2006 compared to net income of $26,000 in the three months ended June 30, 2005.The decreases in the operating income and net income resulted primarily fromthe $2,523,000 decrease in operating revenues, described above, partiallyoffset by the $1,977,000 decrease in cost of sales, the $53,000 decrease inselling, general and administrative expenses (excluding depreciation andamortization) and the $51,000 decrease in cost of services (excluding depreciationand amortization), described above.

Operatingloss was $673,000, which is $519,000 higher in the six months ended 2006compared to the six months ended June 30, 2005. Net loss was $405,000, which is$313,000 higher in the six months ended June 30, 2006 compared to the sixmonths ended June 30, 2005. The increases in the operating losses and netlosses resulted primarily from the $3,061,000 decrease in operating revenuesand $9,000 increase in cost of services (excluding depreciation andamortization), described above, partially offset by the $2,488,000 decrease incost of sales and the $56,000 decrease in selling, general and administrativeexpenses (excluding depreciation and amortization), described above.

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ENVENTIS – The following table provides a breakdown ofthe Enventis operating results.

**ENVENTISSECTOR**
| ** **                                                                              | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|-----------------------------------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| **(In Thousands)**                                                                 | ** ** | **June 30, 2006**      | ** ** | **March 31, 2006**   | ** ** | **June 30, 2006** | ** ** |
| Revenues before  eliminations:                                                          |       |                             |       |                           |       |   |   |
| Enterprise Network Systems                                                              | ** ** | **$**                            | **11,144** |                           | $          | 10,031 | ** ** | **$** | **21,175** | ** ** |
| Enterprise Transport Systems*                                                           | ** ** | **4,034**                        |       | 4,053                          | ** ** | **8,087** | ** ** |
| ** **                                                                              | ** ** | **15,178**                       |       | 14,084                         | ** ** | **29,262** | ** ** |
| Cost of sales                                                                           | ** ** | **10,033**                       |       | 9,269                          | ** ** | **19,302** | ** ** |
| Cost of services  (excluding depr. and amort.)                                          | ** ** | **922**                          |       | 837                            | ** ** | **1,759** | ** ** |
| Selling, general  and administrative expenses,(excluding depreciation and amortization) | ** ** | **2,724**                        | ** ** | 2,675                          | ** ** | **5,399** | ** ** |
| Depreciation and  amortization                                                          | ** ** | **768**                          |       | 739                            | ** ** | **1,507** | ** ** |
| ** **                                                                              | ** ** | ** **                       | ** ** | ** **                     | ** ** | ** ** | ** ** |
| Operating  income/(loss)                                                                | ** ** | **$**                            | **731**    |                           | $          | 564 | ** ** | **$** | **1,295** | ** ** |
| Net  income/(loss)                                                                      | ** ** | **$**                            | **437**    |                           | $          | 336 | ** ** | **$** | **773** | ** ** |
| ** **                                                                              | ** ** | ** **                       | ** ** | ** **                     | ** ** | ** ** | ** ** |
| Capital expenditures                                                                    | ** ** | **$**                            | **2,593**  |                           | $          | 507 | ** ** | **$** | **3,100** | ** ** |

 

----

*includesEncompass

Revenues:

Enventis Sector operating revenues in the second quarter of 2006 were$15,178,000, which is $1,094,000 or 7.8% higher than the first quarter of 2006.This was attributable to higher sales of Cisco equipment from the previousquarter.

Cost of Sales:

Cost of Sales increased in the second quarter of 2006 over the firstquarter of 2006 as it directly relates to the increased sales of Ciscoequipment mentioned above.  The increasewas to $10,033,000 in the second quarter of 2006 from $9,269,000 in the firstquarter of 2006, a $764,000 increase or 8.2%.

Cost of Services (excluding Depreciation and Amortization):

Cost of Services increased to $922,000 in the second quarter of 2006from $837,000, an increase of $85,000 or 10.2%.

Selling, Generaland Administrative Expenses (excluding Depreciation and Amortization):

Selling, General and Administrative Expenses (excluding Depreciationand Amortization) in the second quarter of 2006 increased minimally to$2,724,000 from $2,675,000 in the first quarter of 2006, an increase of $49,000or 1.8%.  Enventisselling, general and administrative expenses of $550,000 and $1,100,000 in thethree and six months ended June 30, 2006, respectively, were due to acquisitionintegration costs which are unique to the first year after the acquisition.

Operating and Net Income:

Operating Income increased $167,000 or 29.6% to $731,000 for the secondquarter of 2006 because of the increased sales. Net Income increased to $437,000 in the second quarter from $336,000 or$101,000, a 30.1% increase.  This isattributable to the increase in sales mentioned above.

**LIQUIDITY AND CAPITAL RESOURCES**

CASH FLOWS – Cashprovided by operations was $10,901,000 in the first six months of 2006 comparedto $14,039,000 in the first six months of 2005. Cash flows from operations inthe first six months of 2006 were primarily attributable to net income plusnon-cash expenses for depreciation and amortization as well as a decrease inprepaid inventory acquired in the Enventis acquisition.

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Cash flows used by investing activities were $10,105,000 in the firstsix months of 2006 compared to cash flows provided of $2,503,000 for the sameperiod in 2005. Capital expenditures were $10,297,000 during the first sixmonths of 2006 as compared to $4,628,000 for the same period in 2005. Secondquarter 2006 capital expenditures were incurred primarily to provide additionalnetwork facilities in the Telecom Sector and for installation of fiber networksto transport customers of the Enventis Sector. Management expects capitalexpenditures in the remainder of 2006 to be approximately $9,703,000.

Cash flows used in financing activities were $1,257,000 for the firstsix months of 2006 compared to $10,790,000 for the first six months of 2005.Included in cash flows used in financing activities are debt repayments anddividend payments. HickoryTech made payments on its revolving credit facilityof $12,685,000 during the first six months of 2006, and $9,500,000 during thefirst six months of 2005. HickoryTech borrowed $10,500,000 on its revolvingcredit facility during the first six months of 2006 and $3,500,000 during thefirst six months of 2005.  Dividendpayments for the first six months of 2006 were $3,028,000 compared to$3,135,000 for the same period in 2005.

WORKING CAPITAL –Working capital (i.e. current assets minus current liabilities) was $7,086,000as of June 30, 2006, compared to working capital of $8,078,000 as of December31, 2005. The ratio of current assets to current liabilities was 1.3 to 1.0 as ofJune 30, 2006 and 1.3 to 1.0 as of December 31, 2005.

SHORT-TERM FINANCING ARRANGEMENT – Enventishas a $10 million credit facility with a financing company to purchaseinventories from certain approved vendors. Advances under the financingarrangement are collateralized by the accounts receivable and inventory ofEnventis and a guaranty of the principal indebtedness by HickoryTech. Thecredit facility provides sixty-day payment terms for working capital and can beterminated at any time by either party. Borrowings outstanding under the creditfacility at June 30, 2006 totaled $4,546,000.

LONG-TERM OBLIGATIONS – HickoryTech’s long-term obligations as of June 30, 2006 were$138,762,000, excluding current maturities of $1,300,000 on debt and $393,000 on currentmaturities of capital leases. On December 30, 2005, HickoryTech entered into a$160,000,000 credit agreement with a syndicate of banks which amended itsprevious credit facility. The credit facility is comprised of a $30,000,000revolving credit component that expires on December 30, 2011 and a $130,000,000term loan component. The term loan component is composed of two componentswhich are defined as term loan B and term loan C. Under the terms of the creditfacility, HickoryTech is required to make quarterly payments on the outstandingprincipal of the term loans beginning March 31, 2006. The outstanding principalbalance of term loan B is $109,450,000 as of June 30, 2006, and is held invarying amounts by three of the lenders in the syndicate, U.S. Bank, GECommercial Distribution Finance Corporation and CoBank. Under the terms of termloan B, HickoryTech is required to make quarterly principal payments of$275,000 from March 31, 2006 through December 31, 2011 with the remainder ofthe aggregate principal due in two payments on March 31, 2012 and June 30,2012. The outstanding principal balance of term loan C is $19,900,000 as ofJune 30, 2006, and is held entirely by Rural Telephone Finance Cooperative,(RTFC). Under the terms of term loan C, HickoryTech is required to makequarterly principal payments of $50,000 on the aggregate principal amount fromMarch 31, 2006 through December 31, 2012, with the remainder of the aggregateprincipal due in two payments on March 31, 2013 and June 30, 2013. Under theterms of the revolving credit facility, any outstanding principal is payable infull on December 30, 2011.

Under the credit facility, interest will bepayable at an applicable margin in excess of a prevailing pricing level. Theprevailing pricing level will be based on a Base Rate, LIBOR Rate Loans orRural Telephone Finance Cooperative (RTFC) rate table. The prevailing rate forBase Rate Loans is the higher of Prime Rate or the Federal Funds Rate plus0.5%. The prevailing rate for LIBOR Rate Loans is publicly available. The RTFCrate tables are established based on RTFC policies, are not publicly available,and change from time to time. The applicable margin for the revolving creditfacility, term loan B, and term loan C will be determined quarterly based onthe leverage ratio of HickoryTech. The credit facility also provides for anannual fee on any undrawn commitment of the revolving credit facility, payablequarterly. The credit facility is collateralized by certain property, plant andequipment and contains covenants relating to cash flow and capitalexpenditures. The credit facility requires HickoryTech to enter into ormaintain in effect interest rate protection agreements on at least 50% of thefacility’s outstanding balance and to manage the Company’s exposure to interestrate fluctuations. The Company has complied by protecting over 65% of itsoutstanding debt balance.

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HickoryTech continually monitors the interest rates on its bank loansand has implemented interest rate protection agreements on various portions ofthe overall debt outstanding for varying terms. A higher level of interestexpense is occurring in 2006 because of the higher level of debt outstanding toaccommodate the purchase of Enventis.

HickoryTech is required to comply with specified financial ratios andtests applicable to the Company and its current subsidiaries, including maximumleverage ratio, minimum interest coverage ratio, and maximum capitalexpenditures. HickoryTech’s obligations under the credit facility are securedby a first-priority lien on all property and assets, tangible and intangible,of HickoryTech and its current subsidiaries, including, but not limited to,accounts receivable, inventory, equipment and intellectual property; generalintangibles, cash and proceeds of the foregoing; and a first-priority pledge ofthe capital stock of HickoryTech’s current subsidiaries.

HickoryTech’s Information Solutions Sector leases certain computerequipment under capital lease arrangements. During the six months ended June30, 2006 and 2005, this sector recorded additions to property, plant andequipment of $158,000 and $547,000, respectively, related to these capitallease arrangements.

CONSTRUCTION PLANS- Beginning in 2004, HickoryTech embarked on a five-year network enhancementprogram in its core telephone property in Mankato in support of its broadbandservice strategy. Management believes that the enhancement will support thebroadband product deployment strategies of the future, as well as serving asdefense against competition. These upgrades will give HickoryTech thecapability to offer more diversified services to its core customer base. Also,capital continues to be invested in the Enventis Sector to enhance our IPbackbone, to deploy Multiprotocol Label Switching services and for successbased new sales (directly related to revenue increases). In addition, we havedevoted capital expenditures to digital TV expansion in several new communities outside Mankato. The total capital expenditureprogram in 2006 for all of HickoryTech companies is estimated to be$20,000,000.

OTHER -HickoryTech operates with original equity capital, retained earnings and recentadditions to indebtedness in the form of bank term and revolving lines ofcredit. HickoryTech believes its current level of debt to total capital anddebt relative to its ability to generate operating cash flow is acceptable forongoing operations.

CRITICAL ACCOUNTING POLICIES

Management’s discussion and analysis of financial condition and resultsof operations stated in this Quarterly Report on Form 10-Q are based uponHickoryTech’s consolidated financial statements, which have been prepared inaccordance with accounting principles generally accepted in the United Statesand, where applicable, conform to the accounting principles as prescribed byfederal and state telephone utility regulatory authorities. HickoryTechpresently gives accounting recognition to the actions of regulators whereappropriate, as prescribed by Statement of Financial Accounting Standards(SFAS) No. 71, “Accounting for the Effects of Certain Types of Regulation.” Thepreparation of these financial statements requires management to make estimatesand judgments that affect the reported amounts of assets, liabilities,revenues, and expenses and related disclosure of contingent assets andliabilities. Management believes that the application of the accountingpolicies, which are important to HickoryTech’s financial position and resultsof operations, requires significant judgments and estimates on the part ofmanagement. A description of the critical accounting policies adhered to byHickoryTech is contained in the Management’s Discussion and Analysis ofFinancial Condition and Results of Operations in HickoryTech’s Annual Report onForm 10-K for the year ended December 31, 2005. HickoryTech adopted SFAS No.123(R), “Share-Based Payment,” as of January 1, 2006 and has chosen to use themodified prospective basis of the Black-Scholes option-pricing model tocalculate future stock compensation expense, using a fair value method asprescribed under SFAS No. 123(R). The valuation of equity instrumentsunderlying stock-based compensation and the period during which the relatedstock compensation expense is recognized will be based in part on variousassumptions, including the estimated useful life of equity instruments, stockvolatility, interest rates and vesting terms. For the historical impact ofshare-based payments to employees under APB No. 25, refer to the disclosures inNote 9 of the Notes to Consolidated Financial Statements.

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUTMARKET RISK

HickoryTech does not have operations subject to risks of foreigncurrency fluctuations. HickoryTech does, however, use derivative financialinstruments to manage exposure to interest rate fluctuations. HickoryTech’sobjectives for holding derivatives are to minimize interest rate risks usingthe most effective methods to eliminate or reduce the impact of theseexposures. Variable rate debt instruments are subject to interest rate risk.HickoryTech has entered into interest rate protection agreements with remainingmaturities of twenty-four months to manage its exposure to interest ratemovements on a portion of its variable rate debt obligations. The effectiveportion of the cumulative gain or loss on these derivative instruments isreported as a component of accumulated other comprehensive income/loss inshareholders’ equity and is recognized in earnings when the term of theprotection agreement is concluded. HickoryTech’s earnings are affected bychanges in interest rates as a portion of its long-term debt has variableinterest rates based on LIBOR. If interest rates for the portion of HickoryTech’slong-term debt based on variable rates had averaged 10% more for the quarterended June 30, 2006, HickoryTech’s interest expense would have increased by$192,000.  There have not been anymaterial changes over the first six months of 2006.

ITEM4.   CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures. As of the end of the period covered by thisQuarterly Report on Form 10-Q(the Evaluation Date), the Company carried out anevaluation, under the supervision and with the participation of the Company’smanagement, including the Chief Executive Officer and Chief Financial Officer,regarding the effectiveness of the design and operation of the Company’sdisclosure controls and procedures (as defined in Rule 13a-15(e) promulgatedunder the Securities Exchange Act of 1934, as amended). Based upon thatevaluation, the Chief Executive Officer and Chief Financial Officer haveconcluded that, as of the Evaluation Date, the Company’s disclosure controlsand procedures were effective.

Changes in Internal Controls. As disclosed in HickoryTech’s Annual Report on Form 10-K for thefiscal year ended December 31, 2005, the Company is still working to implementan internal control structure at Enventis, a wholly owned subsidiary of theCompany acquired on December 30, 2005. The Company expects to have fullyimplemented the internal control structure at Enventis by the end of the thirdquarter of 2006.

As disclosed in our Annual Report on Form 10-K for the fiscal yearended December 31, 2005, the Company was still working to fully incorporate newenterprise resource planning (ERP) software into its procedures for internalcontrol over financial reporting. As of January 1, 2006, the Company beganusing the following modules located within the ERP software: general ledger,purchasing, accounts payable, billing, accounts receivable, inventory, assetmanagement, payroll, time and labor, and project costing. Two other modules,benefits administration and human resources, were implemented in 2005 and werebeing used as of January 1, 2006. The Company has fully incorporated theinternal control structure surrounding this software as of the second quarterof 2006.

There have been no otherchanges in the Company’s internal control over financial reporting during theCompany’s most recently completed fiscal quarter that have materially affected,or are reasonably likely to materially affect, the Company’s internal controlover financial reporting.

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PART II. OTHERINFORMATION

Item1.           Legal Proceedings.

Other than routine litigation incidental to HickoryTech’s business,there are no material pending legal proceedings to which HickoryTech is a partyor to which any of its property is subject.

Item1A      Risk Factors.

The following risk factor previously disclosed in Item 1A, “RiskFactors,” to our Form 10-K for the fiscal year ended December 31, 2005, hasbeen updated to reflect new information.

**The telecommunications industry is highly competitive.**

The Telecommunications Act of 1996 permitted competition amongcommunication companies for the rights to interconnect with establishednetworks and to establish new networks in order to offer telephone service to customers in afranchised area. We serve as an incumbent local exchange carrier in a number offranchised areas, as well as competing in a number of markets against otherestablished incumbents. The differentiating competitive factors includeproducts and service, technology advancement, reputation and price. Competitionhas increased in many of the markets that we serve and encompasses a majorityof the lines serviced in those markets. This enhances the risk that we may notbe able to respond on a timely or profitable basis. In addition, othertelecommunication carriers look to stay competitive by altering their choice ofnetworking routes, points of interconnection, technology or signaling protocol,and other telecommunication issues, all which could have a material adverseaffect on our profitability.

Item2.             Unregistered Sales of Equity Securities and Useof Proceeds.

None.

Item3.             Defaults Upon Senior Securities.

None.

Item4.             Submission of Matters to a Vote of SecurityHolders.

a.                                       The annual shareholders’ meeting was held onApril 24, 2006.

b.                                    Three directors were elected to serve three-yearterms. The names of the directors elected at the annual meeting and theapplicable votes were as follows:

 

|                  | ** ** | ** ** | ** ** | ** **   | ** ** | **Broker**    | ** ** |
|------------------|------------|------------|------------|--------------|------------|---------------|------------|
| **Director**     | ** ** | **For**    | ** ** | **Withheld** | ** ** | **Non-votes** | ** ** |
| Lyle T. Bosacker |       | 10,336,524 |       | 232,787      |       | None          |       |
| Myrita P. Craig  |       | 10,331,742 |       | 237,569      |       | None          |       |
| John E. Duffy    |       | 10,321,077 |       | 248,234      |       | None          |       |

 

The following directors’ termsshall continue after the meeting:

 

Robert D. Alton,Jr.James W. BrackeJames H. HoldregeLyle G. JacobsonStarr J. KirklinR. Wynn Kearney, Jr.Dale E. Parker

 

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c.                                       An amendment to change the HickoryTech Bylawslimiting the age at which a HickoryTech director can stand for election fromage 70 to age 72 was approved. The votes were as follows:
| For              |   | 9,500,010 |   |
|------------------|--------|-----------|--------|
| Against          |   | 1,005,523 |   |
| Abstain          |   | 34,042    |   |
| Broker Non-votes |   | 29,736    |   |

 

Item5.             Other Information.

None.

Item6.             Exhibits.

Exhibit 10.1 Separation Agreement between Hickory Tech Corporation andJohn Duffy

Exhibit 10.2 Mutual General Release Agreement between Hickory TechCorporation and John Duffy

Exhibit 31.1(a) Certification pursuant to Rule 13a-14(a) under theExchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of2002

Exhibit 31.2(b) Certification pursuant to Rule 13a-14(a) under theExchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of2002

Exhibit 32.1(a) Certification pursuant to 18 U.S.C. 1350, as adoptedpursuant to Section 906 of the Sarbanes-Oxley Act of 2002

Exhibit 32.2(b) Certification pursuant to 18 U.S.C. 1350, as adoptedpursuant to Section 906 of the Sarbanes-Oxley Act of 2002

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SIGNATURES

Pursuant to the requirements of the Securities ExchangeAct of 1934, the registrant has duly caused this report to be signed on itsbehalf by the undersigned, thereunto duly authorized.
| Dated: | August 4, 2006 |                                                 | HICKORY TECH CORPORATION |
|--------|----------------|------------------------------------------------------|--------------------------|
|   |           |
|   |           |
|   | By:            | /s/ John W. Finke                                    |                     |
|   |           | John W. Finke, President and Chief Executive Officer |
|   |           |                                                 |
|   |           |                                                 |
|   | By:            | /s/ David A. Christensen                             |                     |
|   |           | David A. Christensen, Senior Vice President and      |
|   |           | Chief Financial Officer                              |
|        |                |                                                      |                          |  |  |  |

 

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