**UNITEDSTATES**

**SECURITIESAND 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, 2007**                                                                                                                                                    |
|                                   |
| **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  incorporation or organization) |   | (I.R.S. Employer  Identification No.) |
|                                                             |   |                                  |
| **221  East Hickory Street  Mankato, Minnesota 56002-3248**      |
| (Address of  principal executive offices and zip code)           |
|                                                             |   |                                  |
| **(800)  326-5789**                                              |
| (Registrant’s  telephone number, including area code)       |

 

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. Seethe definition of “accelerated filer and large accelerated filer” in Rule 12b-2of the Exchange Act. (Check one): Large accelerated filer o Accelerated filer x Non-accelerated filer o.

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

The total number of shares of the registrant's commonstock outstanding as of July 31, 2007: 13,253,812

 

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**TABLE OF CONTENTS**
| **PART I. Financial  Information** |
|------------------------------------|

 
| Description | ** ** | ** **                                                                                                                | ** ** | ** ** |
|-------------|------------|---------------------------------------------------------------------------------------------------------------------------|------------|------------|
|        |       |                                                                                                                      |       |       |
| Item 1.     |       | Financial Statements:                                                                                                     |       |       |
|        |       |                                                                                                                      |       |       |
|        |       | Consolidated  Statements of Operations (unaudited) for the Three Months and Six Months Ended  June 30, 2007 and 2006 |       |       |
|        |       |                                                                                                                      |       |       |
|        |       | Consolidated  Balance Sheets (unaudited) as of June 30, 2007 and December 31, 2006                                        |       |       |
|        |       |                                                                                                                      |       |       |
|        |       | Consolidated  Statements of Cash Flows (unaudited) for the Six Months Ended June 30, 2007  and 2006                       |       |       |
|        |       |                                                                                                                      |       |       |
|        |       | Condensed  Notes to Consolidated Financial Statements (unaudited)                                                         |       |       |
|        |       |                                                                                                                      |       |       |
| Item 2.     |       | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                               |       |       |
|        |       |                                                                                                                      |       |       |
| Item 3.     |       | Quantitative  and Qualitative Disclosures About Market Risk                                                               |       |       |
|        |       |                                                                                                                      |       |       |
| Item 4.     |       | Controls and  Procedures                                                                                                  |       |       |

 
| **PART II. Other Information** |
|--------------------------------|

 
| Description | ** ** | ** **                                                   | ** ** | ** ** |
|-------------|------------|--------------------------------------------------------------|------------|------------|
|        |       |                                                         |       |       |
| 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                                                     |       |       |

 

2

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**HICKORYTECH CORPORATION**

ConsolidatedStatements of Operations(Unaudited)
| ** **                                                                               | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|------------------------------------------------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| **(In Thousands Except Per Share Amounts)**                     | ** ** | **2007**                                        | ** ** | **2006**                                      | ** ** | **2007** | ** ** | **2006** | ** ** |
|                                                                                     | ** ** | ** **                                      |       |                                          | ** ** | ** ** |   |   |   |
| Operating revenues:                                                                      |       |                                            |       |                                          |       |   |   |   |   |
| Telecom sector                                                                           | ** ** | **$**                                           | **20,448** |                                          | $          | 18,912 | ** ** | **$** | **39,485** |   | $ | 37,568 |   |
| Enventis sector                                                                          | ** ** | **25,154**                                      |       | 15,178                                        | ** ** | **43,044** |   | 29,262 |   |
| Total operating  revenues                                                                | ** ** | **45,602**                                      |       | 34,090                                        | ** ** | **82,529** |   | 66,830 |   |
|                                                                                     | ** ** | ** **                                      |       |                                          | ** ** | ** ** |   |   |   |
| Costs and expenses:                                                                      | ** ** | ** **                                      |       |                                          | ** ** | ** ** |   |   |   |
| Cost of sales, Enventis                                                                  | ** ** | **16,559**                                      |       | 8,456                                         | ** ** | **26,873** |   | 16,139 |   |
| Cost of services  (excluding depreciation and amortization)                              | ** ** | **10,778**                                      |       | 10,982                                        | ** ** | **21,695** |   | 21,356 |   |
| Selling, general and  administrative expenses  (excluding depreciation and amortization) | ** ** | **5,891**                                       |       | 5,708                                         | ** ** | **11,727** |   | 11,873 |   |
| Depreciation                                                                             | ** ** | **4,432**                                       |       | 4,207                                         | ** ** | **8,936** |   | 8,253 |   |
| Amortization of  intangibles                                                             | ** ** | **289**                                         |       | 293                                           | ** ** | **578** |   | 586 |   |
| Total costs and  expenses                                                                | ** ** | **37,949**                                      |       | 29,646                                        | ** ** | **69,809** |   | 58,207 |   |
| Operating income                                                                         | ** ** | **7,653**                                       |       | 4,444                                         | ** ** | **12,720** |   | 8,623 |   |
| Other income/(expense):                                                                  | ** ** | ** **                                      |       |                                          | ** ** | ** ** |   |   |   |
| Interest and other  income                                                               | ** ** | **47**                                          |       | 36                                            | ** ** | **131** |   | 65 |   |
| Interest expense                                                                         | ** ** | **(2,031**                                      | **)**      | (1,830                                        | )          | **(4,213** | **)** | (3,478 | ) |
| Total other  income/(expense)                                                            | ** ** | **(1,984**                                      | **)**      | (1,794                                        | )          | **(4,082** | **)** | (3,413 | ) |
|                                                                                     | ** ** | ** **                                      |       |                                          | ** ** | ** ** |   |   |   |
| Income before income taxes                                                               | ** ** | **5,669**                                       |       | 2,650                                         | ** ** | **8,638** |   | 5,210 |   |
| Income taxes                                                                             | ** ** | **2,415**                                       |       | 1,063                                         | ** ** | **3,616** |   | 2,090 |   |
| Income from continuing operations                                                        | ** ** | **3,254**                                       |       | 1,587                                         | ** ** | **5,022** |   | 3,120 |   |
| Discontinued operations:                                                                 | ** ** | ** **                                      |       |                                          | ** ** | ** ** |   |   |   |
| Loss from operations of  discontinued component                                          | ** ** | **(13**                                         | **)**      | (355                                          | )          | **(15** | **)** | (595 | ) |
| Income tax benefit                                                                       | ** ** | **(5**                                          | **)**      | (142                                          | )          | **(6** | **)** | (238 | ) |
| Loss from discontinued operations                                                        | ** ** | **(8**                                          | **)**      | (213                                          | )          | **(9** | **)** | (357 | ) |
| Net income                                                                               | ** ** | **$**                                           | **3,246**  |                                          | $          | 1,374 | ** ** | **$** | **5,013** |   | $ | 2,763 |   |
|                                                                                     | ** ** | ** **                                      |       |                                          | ** ** | ** ** |   |   |   |
|                                                                                     | ** ** | ** **                                      |       |                                          | ** ** | ** ** |   |   |   |
| Basic earnings per share - continuing operations                                         | ** ** | **$**                                           | **0.25**   |                                          | $          | 0.12 | ** ** | **$** | **0.38** |   | $ | 0.24 |   |
| Basic loss per share - discontinued operations                                           | ** ** | **—**                                      |       | (0.02                                         | )          | **—** |   | (0.03 | ) |
|                                                                                     | ** ** | **$**                                           | **0.25**   |                                          | $          | 0.10 | ** ** | **$** | **0.38** |   | $ | 0.21 |   |
|                                                                                     | ** ** | ** **                                      |       |                                          | ** ** | ** ** |   |   |   |
| Basic weighted average common shares outstanding                                         | ** ** | **13,248**                                      |       | 13,152                                        | ** ** | **13,241** |   | 13,143 |   |
|                                                                                     | ** ** | ** **                                      |       |                                          | ** ** | ** ** |   |   |   |
| Diluted earnings per share - continuing operations                                       | ** ** | **$**                                           | **0.25**   |                                          | $          | 0.12 | ** ** | **$** | **0.38** |   | $ | 0.24 |   |
| Diluted loss per share - discontinued operations                                         | ** ** | **—**                                      |       | (0.02                                         | )          | **—** |   | (0.03 | ) |
|                                                                                     | ** ** | **$**                                           | **0.25**   | ** **                                    | **$**      | **0.10** | ** ** | **$** | **0.38** | ** ** | **$** | **0.21** | ** ** |
| Diluted weighted average common and equivalent common shares  outstanding                | ** ** | **13,248**                                      |       | 13,155                                        | ** ** | **13,241** |   | 13,146 |   |
| Dividends per share                                                                      | ** ** | **$**                                           | **0.12**   |                                          | $          | 0.12 | ** ** | **$** | **0.12** |   | $ | 0.12 |   |

 

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

3

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**HICKORYTECH CORPORATION**

Consolidated Balance Sheets(Unaudited)
| **(In Thousands Except Per Share Amounts)**      | ** ** | **June 30,  2007** | ** **  | **December 31,  2006** | ** ** |
|---------------------------------------------------------------------------|------------|-------------------------|-------------|-----------------------------|------------|
| **ASSETS**                                                                | ** ** | ** **              | ** **  | ** **                  | ** ** |
| Current assets:                                                           |       |                    |        |                        |       |
| Cash and cash  equivalents                                                | ** ** | **$**                   | **410**     |                        | $          | 84 |   |
| Receivables, net  of allowance for doubtful accounts of $980 and $851     | ** ** | **28,022**              |        | 20,780                      |       |
| Inventories                                                               | ** ** | **9,169**               |        | 11,294                      |       |
| Deferred income  taxes                                                    | ** ** | **815**                 |        | 815                         |       |
| Prepaid expenses                                                          | ** ** | **1,636**               |        | 1,903                       |       |
| Other                                                                     | ** ** | **945**                 |        | 1,662                       |       |
| Total current  assets                                                     | ** ** | **40,997**              |        | 36,538                      |       |
|                                                                      | ** ** | ** **              |        |                        |       |
| Investments                                                               | ** ** | **3,830**               |        | 3,554                       |       |
|                                                                      | ** ** | ** **              |        |                        |       |
| Property, plant and  equipment                                            | ** ** | **311,037**             |        | 309,264                     |       |
| Less accumulated  depreciation                                            | ** ** | **160,591**             |        | 156,429                     |       |
| Property, plant  and equipment, net                                       | ** ** | **150,446**             |        | 152,835                     |       |
|                                                                      | ** ** | ** **              |        |                        |       |
| Other assets:                                                             | ** ** | ** **              |        |                        |       |
| Goodwill                                                                  | ** ** | **25,239**              |        | 25,239                      |       |
| Intangible  assets, net                                                   | ** ** | **2,562**               |        | 3,140                       |       |
| Financial  derivative instruments                                         | ** ** | **593**                 |        | 2,489                       |       |
| Deferred costs  and other                                                 | ** ** | **2,869**               |        | 3,105                       |       |
| Total other  assets                                                       | ** ** | **31,263**              |        | 33,973                      |       |
|                                                                      | ** ** | ** **              |        |                        |       |
| Total assets                                                              | ** ** | **$**                   | **226,536** |                        | $          | 226,900 |   |
|                                                                      | ** ** | ** **              |        |                        |       |
| **LIABILITIES  AND SHAREHOLDERS’ EQUITY**                            | ** ** | ** **              | ** **  | ** **                  | ** ** |
| Current liabilities:                                                      | ** ** | ** **              |        |                        |       |
| Checks written  in excess of available cash balances                      | ** ** | **$**                   | **—**  |                        | $          | 1,475 |   |
| Short-term  financing                                                     | ** ** | **11,949**              |        | 7,719                       |       |
| Accounts payable                                                          | ** ** | **3,565**               |        | 4,211                       |       |
| Accrued expenses                                                          | ** ** | **5,175**               |        | 5,167                       |       |
| Accrued interest                                                          | ** ** | **390**                 |        | 447                         |       |
| Accrued income  taxes                                                     | ** ** | **522**                 |        | 4,528                       |       |
| Advanced  billings and deposits                                           | ** ** | **3,365**               |        | 3,488                       |       |
| Current portion  - post retirement benefits                               | ** ** | **279**                 |        | 212                         |       |
| Current  maturities of long-term obligations                              | ** ** | **1,603**               |        | 1,560                       |       |
| Total current  liabilities:                                               | ** ** | **26,848**              |        | 28,807                      |       |
|                                                                      | ** ** | ** **              |        |                        |       |
| Long-term liabilities:                                                    | ** ** | ** **              |        |                        |       |
| Debt  obligations, net of current maturities                              | ** ** | **135,089**             |        | 141,529                     |       |
| Accrued income  taxes                                                     | ** ** | **6,814**               |        | —                      |       |
| Deferred income  taxes                                                    | ** ** | **14,536**              |        | 15,332                      |       |
| Deferred revenue                                                          | ** ** | **1,930**               |        | 2,596                       |       |
| Accrued employee  benefits and deferred compensation                      | ** ** | **8,719**               |        | 8,550                       |       |
| Total long-term  liabilities:                                             | ** ** | **167,088**             |        | 168,007                     |       |
|                                                                      | ** ** | ** **              |        |                        |       |
| Total liabilities                                                         | ** ** | **193,936**             |        | 196,814                     |       |
|                                                                      | ** ** | ** **              |        |                        |       |
| Commitments and  contingencies (Note 8)                                   | ** ** | **—**              |        | —                      |       |
|                                                                      | ** ** | ** **              |        |                        |       |
| Shareholders’ equity:                                                | ** ** | ** **              |        |                        |       |
| Common stock, no  par value, $.10 stated value shares authorized: 100,000 | ** ** | ** **              |        |                        |       |
| Shares issued  and outstanding: 13,254 in 2007 and 13,208 in 2006         | ** ** | **1,325**               |        | 1,321                       |       |
| Additional  paid-in capital                                               | ** ** | **10,376**              |        | 9,992                       |       |
| Retained  earnings                                                        | ** ** | **20,225**              |        | 18,323                      |       |
| Accumulated  other comprehensive income                                   | ** ** | **674**                 |        | 450                         |       |
| Total  shareholders’ equity                                          | ** ** | **32,600**              |        | 30,086                      |       |
|                                                                      | ** ** | ** **              |        |                        |       |
| Total liabilities and  shareholders’ equity                          | ** ** | **$**                   | **226,536** |                        | $          | 226,900 |   |

 

The accompanyingnotes are an integral part of the consolidated financial statements.

4

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**HICKORYTECH CORPORATION**

ConsolidatedStatements of Cash Flows(Unaudited)

 
| ** **                                                                         | ** ** | **Six Months Ended  June 30,** | ** ** |
|------------------------------------------------------------------------------------|------------|-----------------------------------------------|------------|
| **(Dollars In Thousands)**                                               | ** ** | **2007**                                      | ** ** | **2006** | ** ** |
| Cash flows from  operating activities:                                             | ** ** | ** **                                    |       |   |   |
| Net income                                                                         | ** ** | **$**                                         | **5,013**  |   | $ | 2,763 |   |
| Adjustments to  reconcile net income to net Cash provided by operating activities: | ** ** | ** **                                    |       |   |   |
| Loss from  discontinued operations                                                 | ** ** | **9**                                         |       | 357 |   |
| Depreciation and  amortization                                                     | ** ** | **9,514**                                     |       | 8,839 |   |
| Amortization of gain  on sale of financial derivative instrument                   | ** ** | **(609**                                      | **)**      | — |   |
| Accrued  patronage refunds                                                         | ** ** | **75**                                        |       | (543 | ) |
| Deferred income  tax provision (benefit)                                           | ** ** | **(40)**                                      |       | 108 |   |
| Other                                                                              | ** ** | **180**                                       |       | 460 |   |
| Changes in  operating assets and liabilities:                                      | ** ** | ** **                                    |       |   |   |
| Receivables, net                                                                   | ** ** | **(7,254**                                    | **)**      | (2,519 | ) |
| Inventories                                                                        | ** ** | **2,125**                                     |       | (2,966 | ) |
| Accounts payable  and accrued expenses                                             | ** ** | **(695**                                      | **)**      | (2,120 | ) |
| Deferred  revenue, billings and deposits                                           | ** ** | **(789**                                      | **)**      | 697 |   |
| Prepaid expenses                                                                   | ** ** | **268**                                       |       | 3,334 |   |
| Income taxes                                                                       | ** ** | **2,871**                                     |       | 1,309 |   |
| Other                                                                              | ** ** | **872**                                       |       | 1,333 |   |
| Net cash  provided by operating activities                                         | ** ** | **11,540**                                    |       | 11,052 |   |
|                                                                               | ** ** | ** **                                    |       |   |   |
| Cash flows from  investing activities:                                             | ** ** | ** **                                    |       |   |   |
| Additions to  property, plant and equipment                                        | ** ** | **(6,035**                                    | **)**      | (10,268 | ) |
| Other                                                                              | ** ** | **46**                                        |       | 190 |   |
| Net cash used in  investing activities                                             | ** ** | **(5,989**                                    | **)**      | (10,078 | ) |
|                                                                               | ** ** | ** **                                    |       |   |   |
| Cash flows from  financing activities:                                             | ** ** | ** **                                    |       |   |   |
| Short-term  financing, net                                                         | ** ** | **4,230**                                     |       | 4,546 |   |
| Checks written  in excess of available cash balances                               | ** ** | **(1,475**                                    | **)**      | (514 | ) |
| Payments of  capital lease obligations                                             | ** ** | **(202**                                      | **)**      | (244 | ) |
| Repayments on  credit facility                                                     | ** ** | **(10,650**                                   | **)**      | (12,685 | ) |
| Borrowings on  credit facility                                                     | ** ** | **4,000**                                     |       | 10,500 |   |
| Proceeds from  the sale of financial derivative instrument                         | ** ** | **1,936**                                     |       | — |   |
| Proceeds from  issuance of common stock                                            | ** ** | **119**                                       |       | 125 |   |
| Dividends paid                                                                     | ** ** | **(3,174**                                    | **)**      | (3,153 | ) |
| Other                                                                              | ** ** | **—**                                    |       | (32 | ) |
| Net cash used in  financing activities                                             | ** ** | **(5,216**                                    | **)**      | (1,457 | ) |
|                                                                               | ** ** | ** **                                    |       |   |   |
| Cash flows from  discontinued operations                                           | ** ** | ** **                                    |       |   |   |
| Net cash  provided by/(used in) operating activities                               | ** ** | **(9**                                        | **)**      | 48 |   |
| Net cash used in  investing activities                                             | ** ** | **—**                                    |       | (26 | ) |
| Net cash  provided by/(used in) discontinued operations                            | ** ** | **(9**                                        | **)**      | 22 |   |
|                                                                               | ** ** | ** **                                    |       |   |   |
| Net increase (decrease)  in cash and cash equivalents                              | ** ** | **326**                                       |       | (461 | ) |
|                                                                               | ** ** | ** **                                    |       |   |   |
| Cash and cash  equivalents at beginning of period                                  | ** ** | **84**                                        |       | 601 |   |
|                                                                               | ** ** | ** **                                    |       |   |   |
| Cash and cash  equivalents at end of period                                        | ** ** | **$**                                         | **410**    |   | $ | 140 |   |
|                                                                               | ** ** | ** **                                    |       |   |   |
| Supplemental disclosure  of cash flow information:                                 | ** ** | ** **                                    |       |   |   |
| Cash paid for interest                                                             | ** ** | **$**                                         | **4,614**  |   | $ | 3,592 |   |
| Net cash paid  for income taxes                                                    | ** ** | **$**                                         | **756**    |   | $ | 690 |   |
| Non-cash investing  activities:                                                    | ** ** | ** **                                    |       |   |   |
| Property, plant and  equipment acquired with capital leases                        | ** ** | **$**                                         | **455**    |   | $ | 158 |   |

 

The accompanyingnotes are an integral part of the consolidated financial statements.

5

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**HICKORYTECH CORPORATION**

**JUNE 30,2007**

**PART 1.FINANCIAL INFORMATION**

**ITEM 1.   CONDENSED NOTES TO CONSOLIDATED FINANCIALSTATEMENTS (Unaudited)**

NOTE 1 – BASIS OFPRESENTATION AND CONSOLIDATION

The accompanyingunaudited condensed consolidated financial statements of Hickory TechCorporation (HickoryTech or the Company) have been prepared in accordance withaccounting principles generally accepted in the United States (GAAP) forinterim financial information and with the rules and regulations of the Securitiesand Exchange Commission (SEC). Certain information and disclosures normallyincluded in annual financial statements prepared in accordance with GAAP havebeen omitted or condensed pursuant to such rules and regulations. In theopinion of the Company’s management, the unaudited condensed consolidatedfinancial statements reflect all adjustments (consisting only of normal andrecurring accruals) considered necessary for the fair presentation of theCompany’s financial statements and present fairly the results of operations,financial position and cash flows of the Company for the interim periodspresented as required by Regulation S-X, Rule 10-01. These unaudited interimcondensed consolidated financial statements should be read in conjunction withthe consolidated financial statements and notes thereto, together with theCompany’s audited consolidated financial statements and notes thereto containedin the Company’s Annual Report on Form 10-K for the year ended December 31,2006.

The preparation offinancial statements in conformity with GAAP require management to makeestimates and assumptions that affect the reported amounts of assets,liabilities, revenues, expenses and related disclosures at the date of thefinancial statements and during the reporting period. Actual results coulddiffer from these estimates. The results of operations for the interim periodspresented are not necessarily indicative of the results that may be expectedfor the fiscal year as a whole or any other interim period.

The condensed consolidated financial statements ofHickoryTech include Hickory Tech Corporation and its subsidiaries in thefollowing two business segments: the Telecom Sector and the Enventis Sector.All inter-company transactions have been eliminated from the consolidatedfinancial statements.

On December 30, 2005, HickoryTech purchased EnventisTelecom, Inc. (Enventis) from ALLETE, Inc. The purchase price totaled$38,602,000, after adjustments. Enventis is a transport and enterprise InternetProtocol (IP) telephony sales business, which specializes in providingtelecommunications and network solutions. In addition to its statewideSONET-based network, Enventis provides innovative IP services that combinevoice and data onto a single platform. Since 1997, Enventis has providednetwork solutions for a broad spectrum of large corporate, non-profit,government and small business clients. Enventis has offices located in Duluth,Plymouth and Rochester, Minnesota. In the second quarter of 2007, HickoryTechceased operations in Sioux Falls, South Dakota.

Effective December 31, 2006, HickoryTech sold CollinsCommunications Systems Co. (Collins) to Skyview Capital, LLC (Skyview). Theselling price was comprised of a $100,000 note and up to $1,650,000 of earn-outpayments in exchange for all of Collins outstanding capital stock. Skyview paidHickoryTech $100,000 in February 2007. The remaining selling price is due incontingent payments payable over the next four years if financial targets arereached by Skyview. The $100,000 mentioned above has been included in thecalculation of the net loss mentioned below, while the contingent payments havenot been included in the net loss. The agreement contains covenants againstcompetition by the new owner in south-central Minnesota. HickoryTech recorded apre-tax loss on the sale of $3,385,000 ($2,040,000 net of income taxes). TheCollin’s results of operations were formerly reported in the EnterpriseSolutions Sector. The consolidated statements of operations for all periodspresented have been restated to reflect the Collins operations as discontinuedoperations.

Cost of Sales

Cost of sales for the EnventisSector includes the material and labor costs associated with the installationof products for customers.

6

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Cost of Services (excluding depreciationand amortization)

Cost of services includes allcosts related to the delivery of communication services for all HickoryTechSectors. Those operating costs include engineering, customer service, billingand collections, network monitoring and transport costs.

Selling, General andAdministrative Expenses (excluding depreciation and amortization)

Selling, general andadministrative expenses include direct and indirect selling expenses,advertising, and all other general and administrative costs associated with theoperations of the business.

Reclassifications

Certain reclassifications of prior period data havebeen made to conform to the current period’s presentation. The most significantof these reclassifications was to reclassify approximately $1,600,000 oftransport costs from cost of sales to cost of services for the first and secondquarters of 2006. This reclassification resulted in reporting these costs forthe Enventis Sector in a manner consistent with the remainder of theorganization. These reclassifications did not affect the Company’s cash flows,financial position or net income.

Recently Issued AccountingPronouncements

In September 2006, the FinancialAccounting Standards Board (FASB) issued Statement of Financial AccountingStandards (SFAS) No. 157, “Fair Value Measurements.” SFAS No. 157, whichdefines fair value, establishes a framework for measuring fair value inaccordance with GAAP, and expands disclosures about fair value measurements.SFAS No. 157 will apply whenever another standard requires (or permits) assetsor liabilities to be measured at fair value. The standard does not expand theuse of fair value to any new circumstances. SFAS No. 157 is effective for thecalendar year 2008. The Company is currently assessing the impact of SFAS No.157 on its results of operations, cash flows and financial condition.

In February 2007, the FASBissued SFAS No. 159, “The Fair Value Option for Financial Assets and FinancialLiabilities – Including an amendment of FASB Statement No. 115.” SFAS No. 159permits entities to choose to measure many financial instruments and certainother items at fair value. The objective is to improve financial reporting byproviding entities with the opportunity to mitigate volatility in reportedearnings caused by measuring related assets and liabilities differently withouthaving to apply complex hedge accounting provisions. SFAS No. 159 is effectivefor the calendar year 2008. The Company is currently assessing the impact ofSFAS No. 159 on its results of operations, cash flows and financial condition.

NOTE 2 – EARNINGS AND CASHDIVIDENDS PER COMMON SHARE

Basic earnings pershare (EPS) are computed by dividing net income by the weighted average numberof shares of common stock outstanding during the applicable period. Shares usedin the EPS dilution calculation, are based on the weighted average number ofshares of common stock outstanding during the period increased by potentiallydilutive common shares. Potentially dilutive common shares include stock optionsand stock subscribed under the Hickory Tech Corporation Amended and RestatedEmployee Stock Purchase Plan (ESPP). Dilution is determined using the treasurystock method. The dilutive effect shown below for 2006 has been revised fromwhat was previously reported to reflect the treasury stock method, consistentwith the method currently applied. There was no impact to EPS due to thisrevision.

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|                                      | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|--------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                           | ** ** | **June 30,**                | ** ** | **June 30,**              | ** ** |
| ** **                           | ** ** | **2007**                         | ** ** | **2006**                       | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                           | ** ** | ** **                       | ** ** | ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** |
| Income from  continuing operations   |       | $                                | 3,254      |                           | $          | 1,587 |   | $ | 5,022 |   | $ | 3,120 |   |
| Loss from  discontinued operations   |       | (8                               | )          | (213                           | )          | (9 | ) | (357 | ) |
| Net Income                           |       | $                                | 3,246      |                           | $          | 1,374 |   | $ | 5,013 |   | $ | 2,763 |   |
|                                 |       |                             |       |                           |       |   |   |   |   |
| Weighted average  shares outstanding |       | 13,247,508                       |       | 13,151,626                     |       | 13,241,079 |   | 13,142,770 |   |
| Stock options  (dilutive only)       |       | —                           |       | —                         |       | — |   | — |   |
| Stock subscribed  (ESPP)             |       | —                           |       | 3,084                          |       | — |   | 3,371 |   |
| Total dilutive  shares outstanding   |       | 13,247,508                       |       | 13,154,710                     |       | 13,241,079 |   | 13,146,141 |   |
|                                 |       |                             |       |                           |       |   |   |   |   |
| Earnings (loss)  per share:          |       |                             |       |                           |       |   |   |   |   |
| Basic - continuing operations        |       | $                                | 0.25       |                           | $          | 0.12 |   | $ | 0.38 |   | $ | 0.24 |   |
| Basic - discontinued operations      |       | $                                | —     |                           | $          | (0.02 | ) | $ | — |   | $ | (0.03 | ) |
|                                 |       |                             |       |                           |       |   |   |   |   |
| Diluted - continuing operations      |       | $                                | 0.25       |                           | $          | 0.12 |   | $ | 0.38 |   | $ | 0.24 |   |
| Diluted -  discontinued operations   |       | $                                | —     |                           | $          | (0.02 | ) | $ | — |   | $ | (0.03 | ) |

 

Options to purchase 486,050 shares and 551,451 shares for the three andsix months ended June 30, 2007 and 2006, respectively, were not included in thecomputation of diluted EPS, because their effect on diluted EPS would have beenanti-dilutive.

Cash dividends are based on the number of common shares outstanding atthe respective record dates. Listed below is the number of shares outstandingas of the record date for the first and second quarters of 2007 and 2006,respectively.
| Shares outstanding on record date | ** ** | **2007**   | ** ** | **2006**   | ** ** |
|-------------------------------------------------------|------------|------------|------------|------------|------------|
| First quarter  (Feb. 15)                              |       | 13,207,970 |       | 13,133,928 |       |
| Second quarter (May 15)                               |       | 13,243,525 |       | 13,153,067 |       |

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 both the secondquarter of 2007 and the second quarter of 2006.

During the first six months of 2007 and 2006, shareholders have electedto reinvest $119,000 and $125,000, respectively, of dividends into HickoryTechcommon stock pursuant to the Hickory Tech Corporation Dividend ReinvestmentPlan.

NOTE 3 – ACCUMULATED OTHER COMPREHENSIVE INCOME/(LOSS)

HickoryTech follows the provisions of SFAS No. 130, “ReportingComprehensive Income.” This statement established rules for the reporting ofcomprehensive income and its components. In addition to net income,HickoryTech’s comprehensive income includes changes in unrealized gains andlosses on derivative instruments qualifying and designated as cash flow hedgesand recognized Net Periodic Benefit Cost related to the Company’sPost-Retirement Benefit Plans. Comprehensive income for the three months endedJune 30, 2007 and 2006 was $3,337,000 and $1,409,000, respectively.Comprehensive income for the six months ended June 30, 2007 and 2006 was$5,246,000 and $2,973,000, respectively.

InMarch 2007, the Company terminated its two outstanding interest-rate swapagreements with original maturities in June 2008, in exchange for $1,936,000 inproceeds. Immediately following the termination of these two agreements,HickoryTech executed a new interest-rate swap agreement, effectively locking inthe interest rate on $60,000,000 of variable-interest rate debt through March2010.

8

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Themarket value of the cumulative gain or (loss) on financial derivativeinstruments is reported as a component of accumulated other comprehensiveincome (loss) in shareholders’ equity and will be recognized in earnings overthe term of the original swap agreement.

The following summary sets forth the components of accumulated othercomprehensive income (loss), net of tax:
|                            | ** ** | ** **             | ** ** | ** **             | ** ** | ** **         | ** ** | ** **              | ** ** | **Accumulated**   | ** ** |
|----------------------------|------------|------------------------|------------|------------------------|------------|--------------------|------------|-------------------------|------------|-------------------|------------|
| ** **                 | ** ** | **Unrecognized**       | ** ** | **Unrecognized**       | ** ** | **Unrecognized**   | ** ** | **Unrealized**          | ** ** | **Other**         | ** ** |
| ** **                 | ** ** | **Net Actuarial** | ** ** | **Prior Service** | ** ** | **Transition**     | ** ** | **Gain**                | ** ** | **Comprehensive** | ** ** |
| ** **                 | ** ** | **Loss (1)**      | ** ** | **Credit (1)**    | ** ** | **Asset (1)** | ** ** | **on Derivatives** | ** ** | **Income**        | ** ** |
| December 31,  2006         |       | $                      | (867       | )                      | $          | 37                 |       | $                       | (217       | )                 | $          | 1,497 |   | $ | 450 |   |
| 2007 Activity              |       | —                 |       | —                 |       | —             |       | 123                     |       | 123               |       |
| Net Periodic Benefit  Cost |       | 11                     |       | (2                     | )          | 9                  |       | —                  |       | 18                |       |
| March 31, 2007             |       | $                      | (856       | )                      | $          | 35                 |       | $                       | (208       | )                 | $          | 1,620 |   | $ | 591 |   |
| 2007 Activity              |       | —                 |       | —                 |       | —             |       | 65                      |       | 65                |       |
| Net Periodic Benefit  Cost |       | $                 | 11         |                   | $     | (2                 | )          | $                  | 9          |              | —     |   | 18 |   |
| June 30, 2007              |       | $                      | (845       | )                      | $          | 33                 |       | $                       | (199       | )                 | $          | 1,685 |   | $ | 674 |   |

 

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*   (1)*Amounts pertain to our postretirement benefit plans.

NOTE 4 – ACQUISITION, DISPOSITION and DISCONTINUED OPERATIONS

Acquisition of Enventis

On December 30, 2005 HickoryTech purchased Enventis from ALLETE, Inc.The purchase price was cash of $35,500,000 in exchange for the common stock ofEnventis, with further purchase price adjustments and transaction costs. Afterpurchase price adjustments, the total purchase consideration was $38,602,000.Enventis had no debt at the time of the acquisition. The purchase agreementoutlined certain purchase price adjustments, which resulted in cash paymentsbetween ALLETE and HickoryTech in the first quarter of 2006. These purchaseprice adjustments were for working capital, capital expenditures and employeebenefits. There are no contingent payments or earn-out payments.

The financing for the estimated $38,602,000 total purchaseconsideration for Enventis, plus an additional $8,500,000 for Enventis workingcapital, was obtained 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 a final maturity on June 30, 2013.

Disposition of Collins

Effective December 31, 2006,HickoryTech sold Collins to Skyview. The selling price was comprised of a$100,000 note and up to $1,650,000 of earn-out payments in exchange for all ofthe Collins outstanding capital stock. Skyview paid HickoryTech $100,000 inFebruary 2007. The remaining selling price is due in contingent paymentspayable over the next four years if financial targets are reached by Skyview.The $100,000 mentioned above has been included in the calculation of the netloss mentioned below, while the contingent payments have not been included inthe net loss. The agreement contains covenants against competition by the newowner in south-central Minnesota. HickoryTech recorded a pre-tax loss on thesale of $3,385,000 ($2,040,000 net of income taxes). The Collins results ofoperations were formerly reported in the Enterprise Solutions Sector. Theconsolidated statements of operations for all periods presented have beenrestated to reflect the Collins operations as discontinued operations.

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NOTE 5 – INVENTORIES

Inventories are valued using the lower of cost (perpetual weightedaverage-cost or specific identification) or market method. HickoryTech adjustsits inventory carrying value for estimated obsolescence or unmarketableinventory to the estimated market value based upon assumptions about futuredemand and market conditions. As market and other conditions change, additionalinventory reserves may be established at the time that the facts that give riseto the lower value become known.

NOTE 6 – INTANGIBLE ASSETS

Goodwill is subject to an impairment test annually as well as uponcertain 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 several 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 may also change and could result in adetermination of additional impairment charges to reduce the carrying value ofgoodwill.

The carrying value ofHickoryTech’s goodwill is $25,239,000 as of June 30, 2007 and December 31,2006.

The components of HickoryTech’s other intangible assets are as follows:
| ** **                           | ** ** | ** **            | ** ** | **June 30, 2007** | ** ** | **December 31, 2006** | ** ** |
|--------------------------------------|------------|-----------------------|------------|-----------------------------|------------|---------------------------------|------------|
| ** **                           | ** ** | ** **            | ** ** | **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      |                            | $          | 1,980 |   | $ | 4,229 |   | $ | 1,504 |   |
| Other intangibles                    |       | 1 -  5 years          |       | 730                         |       | 417                             |       | 730 |   | 315 |   |
| Total                                |       |                  |       | $                           | 4,959      |                            | $          | 2,397 |   | $ | 4,959 |   | $ | 1,819 |   |

As required by SFAS No. 142, we periodically reassess the carryingvalue, useful lives and classifications of identifiable assets. Amortizationexpense related to the definite-lived intangible assets for the three monthsended June 30, 2007 and 2006 was $289,000 and $293,000, respectively.Amortization expense related to the definite-lived intangible assets for thesix months ended June 30, 2007 and 2006 was $578,000 and $586,000,respectively. Total estimated amortization expense for the remaining six monthsof 2007 and the five years subsequent to 2007 is as follows: 2007 (July 1through December 31) - $579,000; 2008 - $1,127,000; 2009 - $853,000; 2010 -$3,000; none in 2011 and 2012.

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NOTE 7 – QUARTERLY SECTOR FINANCIAL SUMMARY
| ** **                                | ** ** | ** **  | ** ** | ** **   | ** ** | **Corporate and** | ** ** | **HickoryTech**  | ** ** |
|-------------------------------------------|------------|-------------|------------|--------------|------------|------------------------|------------|------------------|------------|
| **(Dollars In Thousands)**      | ** ** | **Telecom** | ** ** | **Enventis** | ** ** | **Eliminations**       | ** ** | **Consolidated** | ** ** |
| Three Months  Ended June 30, 2007         |       |        |       |         |       |                   |       |             |       |
|                                      |       |        |       |         |       |                   |       |             |       |
| Revenue from  Unaffiliated Customers      |       | $           | 20,448     |         | $          | 25,154                 |       | $                | —     |   | $ | 45,602 |   |
| Intersegment  revenues                    |       | 111         |       | 85           |       | (196                   | )          | —           |       |
| Total                                     |       | 20,559      |       | 25,239       |       | (196                   | )          | 45,602           |       |
|                                      |       |        |       |         |       |                   |       |             |       |
| Depreciation and  amortization            |       | 3,789       |       | 927          |       | 5                      |       | 4,721            |       |
| Operating  income/(loss)                  |       | 6,239       |       | 1,649        |       | (235                   | )          | 7,653            |       |
| Interest expense                          |       | (18         | )          | —       |       | (2,013                 | )          | (2,031           | )          |
| Income  taxes/(benefit)                   |       | 2,490       |       | 660          |       | (735                   | )          | 2,415            |       |
| Income/(loss)  from Continuing operations |       | 3,736       |       | 990          |       | (1,472                 | )          | 3,254            |       |
|                                      |       |        |       |         |       |                   |       |             |       |
| Identifiable  assets                      |       | 153,182     |       | 66,103       |       | 7,251                  |       | 226,536          |       |
| Property, plant  and equipment, net       |       | 117,053     |       | 33,303       |       | 90                     |       | 150,446          |       |
| Capital  expenditures                     |       | 2,288       |       | 1,017        |       | —                 |       | 3,305            |       |
|                                           |            |             |            |              |            |                        |            |                  |            |  |  |  |  |

 
| ** **                                | ** ** | ** **  | ** ** | ** **   | ** ** | **Corporate and** | ** ** | **HickoryTech**  | ** ** |
|-------------------------------------------|------------|-------------|------------|--------------|------------|------------------------|------------|------------------|------------|
| ** **                                | ** ** | **Telecom** | ** ** | **Enventis** | ** ** | **Eliminations**       | ** ** | **Consolidated** | ** ** |
| Three Months  Ended June 30, 2006         |       |        |       |         |       |                   |       |             |       |
|                                      |       |        |       |         |       |                   |       |             |       |
| Revenue from  Unaffiliated Customers      |       | $           | 18,912     |         | $          | 15,178                 |       | $                | —     |   | $ | 34,090 |   |
| Intersegment  revenues                    |       | 32          |       | —       |       | (32                    | )          | —           |       |
| Total                                     |       | 18,944      |       | 15,178       |       | (32                    | )          | 34,090           |       |
|                                      |       |        |       |         |       |                   |       |             |       |
| Depreciation and  amortization            |       | 3,713       |       | 768          |       | 19                     |       | 4,500            |       |
| Operating  income/(loss)                  |       | 4,000       |       | 731          |       | (287                   | )          | 4,444            |       |
| Interest expense                          |       | (18         | )          | —       |       | (1,812                 | )          | (1,830           | )          |
| Income  taxes/(benefit)                   |       | 1,595       |       | 298          |       | (830                   | )          | 1,063            |       |
| Income/(loss)  from Continuing operations |       | 2,395       |       | 437          |       | (1,245                 | )          | 1,587            |       |
|                                      |       |        |       |         |       |                   |       |             |       |
| Identifiable  assets                      |       | 155,832     |       | 53,926       |       | 9,796                  |       | 219,554          |       |
| Property, plant  and equipment, net       |       | 119,413     |       | 31,709       |       | 162                    |       | 151,284          |       |
| Capital  expenditures                     |       | 3,848       |       | 2,593        |       | —                 |       | 6,441            |       |
|                                           |            |             |            |              |            |                        |            |                  |            |  |  |  |  |

 

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| ** **                                | ** ** | ** **  | ** ** | ** **   | ** ** | **Corporate and** | ** ** | **HickoryTech**  | ** ** |
|-------------------------------------------|------------|-------------|------------|--------------|------------|------------------------|------------|------------------|------------|
| **(Dollars In Thousands)**      | ** ** | **Telecom** | ** ** | **Enventis** | ** ** | **Eliminations**       | ** ** | **Consolidated** | ** ** |
| Six Months Ended  June 30, 2007           |       |        |       |         |       |                   |       |             |       |
| Revenue from  Unaffiliated Customers      |       | $           | 39,485     |         | $          | 43,044                 |       | $                | —     |   | $ | 82,529 |   |
| Intersegment  revenues                    |       | 218         |       | 147          |       | (365                   | )          | —           |       |
| Total                                     |       | 39,703      |       | 43,191       |       | (365                   | )          | 82,529           |       |
|                                      |       |        |       |         |       |                   |       |             |       |
| Depreciation and  amortization            |       | 7,702       |       | 1,802        |       | 10                     |       | 9,514            |       |
| Operating  income/(loss)                  |       | 10,342      |       | 3,029        |       | (651                   | )          | 12,720           |       |
| Interest expense                          |       | (35         | )          | —       |       | (4,178                 | )          | (4,213           | )          |
| Income  taxes/(benefit)                   |       | 4,147       |       | 1,218        |       | (1,749                 | )          | 3,616            |       |
| Income/(loss)  from Continuing operations |       | 6,175       |       | 1,812        |       | (2,965                 | )          | 5,022            |       |
|                                      |       |        |       |         |       |                   |       |             |       |
| Identifiable  assets                      |       | 153,182     |       | 66,103       |       | 7,251                  |       | 226,536          |       |
| Property, plant  and equipment, net       |       | 117,053     |       | 33,303       |       | 90                     |       | 150,446          |       |
| Capital  expenditures                     |       | 3,934       |       | 2,101        |       | —                 |       | 6,035            |       |
|                                           |            |             |            |              |            |                        |            |                  |            |  |  |  |  |

 
| ** **                                | ** ** | ** **  | ** ** | ** **   | ** ** | **Corporate and** | ** ** | **HickoryTech**  | ** ** |
|-------------------------------------------|------------|-------------|------------|--------------|------------|------------------------|------------|------------------|------------|
| ** **                                | ** ** | **Telecom** | ** ** | **Enventis** | ** ** | **Eliminations**       | ** ** | **Consolidated** | ** ** |
| Six Months Ended  June 30, 2006           |       |        |       |         |       |                   |       |             |       |
| Revenue from  Unaffiliated Customers      |       | $           | 37,568     |         | $          | 29,262                 |       | $                | —     |   | $ | 66,830 |   |
| Intersegment  revenues                    |       | 64          |       | —       |       | (64                    | )          | —           |       |
| Total                                     |       | 37,632      |       | 29,262       |       | (64                    | )          | 66,830           |       |
|                                      |       |        |       |         |       |                   |       |             |       |
| Depreciation and  amortization            |       | 7,290       |       | 1,505        |       | 44                     |       | 8,839            |       |
| Operating  income/(loss)                  |       | 8,261       |       | 1,298        |       | (936                   | )          | 8,623            |       |
| Interest expense                          |       | 104         |       | —       |       | (3,582                 | )          | (3,478           | )          |
| Income  taxes/(benefit)                   |       | 3,351       |       | 526          |       | (1,787                 | )          | 2,090            |       |
| Income/(loss)  from Continuing operations |       | 5,025       |       | 775          |       | (2,680                 | )          | 3,120            |       |
|                                      |       |        |       |         |       |                   |       |             |       |
| Identifiable  assets                      |       | 155,832     |       | 53,926       |       | 9,796                  |       | 219,554          |       |
| Property, plant  and equipment, net       |       | 119,413     |       | 31,709       |       | 162                    |       | 151,284          |       |
| Capital  expenditures                     |       | 7,075       |       | 3,100        |       | 93                     |       | 10,268           |       |
|                                           |            |             |            |              |            |                        |            |                  |            |  |  |  |  |

 

NOTE 8- COMMITMENTS AND CONTINGENCIES

HickoryTech is involved in certain contractual disputesin the ordinary course of business. HickoryTech does not believe the ultimateresolution of any of the existing matters will have a material adverse effecton its financial position, results of operations or cash flows. HickoryTech didnot experience any changes to material contractual obligations in the first sixmonths of 2007. Refer tothe Company’s Annual Report on Form 10-K for the year ended December 31, 2006for the discussion relating to commitments and contingencies.

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NOTE 9 – STOCK COMPENSATION

Referto the Company’s Annual Report on Form 10-K for the year ended December 31,2006 for a complete description of its stock-based compensation plans.

OnJanuary 1, 2006, the Company adopted SFAS No. 123(R) (revised 2004),“Share-Based Payment,” (SFAS No. 123(R)), which requires the measurement andrecognition of compensation expense for all share-based payment awards made toemployees and directors, including employee stock options and employee stockpurchases related to the ESPP, based on estimated fair values. SFAS No. 123(R)supersedes the Company’s previous accounting under Accounting Principles BoardOpinion No. 25, “Accounting for Stock Issued to Employees” (APB No. 25)for periods beginning in 2006. In March 2005, the SEC issued StaffAccounting Bulletin No. 107 (SAB No. 107) relating to SFAS No. 123(R). TheCompany has applied the provisions of SAB No. 107 in its adoption of SFAS No.123(R). The Company adopted SFAS No. 123(R) using the modified prospectivetransition method, which requires the application of the accounting standard asof January 1, 2006.

Share-basedcompensation expense recognized under SFAS No. 123(R) for the three monthsended June 30, 2007 was approximately $27,000 pre-tax and $19,000 after tax.Approximately $13,000 of this after-tax expense relates to the expensing ofstock options and $6,000 to the ESPP. In addition, share-based compensationexpense recognized under SFAS No 123(R) for the six months ended June 30, 2007was approximately $54,000 pre-tax and $37,000 after tax. Approximately $25,000of this after-tax expense relates to the expensing of stock options and $12,000to the ESPP.

Share-basedcompensation expense recognized under SFAS No. 123(R) for the three-monthsended June 30, 2006 was approximately $41,000 pre-tax and $25,000 after tax andwas primarily related to the expensing of stock options. Share-basedcompensation expense recognized under SFAS No. 123(R) for the six-months endedJune 30, 2006 was approximately $86,000 pre-tax and $52,000 after tax and wasprimarily related to the expensing of stock options.

Share-basedcompensation expense recognized during a period is based on the value of theportion of share-based payment awards that are ultimately expected to havevested during the period. Share-based compensation expense recognized in theCompany’s Consolidated Statement of Operations for the first six months of 2007and 2006 included compensation expense for share-based payment awards grantedprior to, but not yet vested as of June 30, 2007 and 2006. Compensation expensefor awards granted prior to 2006 is based on the grant date fair valueestimated in accordance with the fair value provisions of SFAS No. 123.Compensation expense for awards granted in 2006 and subsequent periods isdetermined in accordance with the provisions of SFAS No. 123(R). Share-basedcompensation expense is recognized in the Consolidated Statement of Operationsfor the six months ended June 30, 2007 and 2006 and is based on awardsultimately expected to vest. We use historical data to estimate pre-vestingforfeitures. SFAS No. 123(R) requires forfeitures to be estimated at the timeof the grant and revised, if necessary, in subsequent periods if actualforfeitures differ from those estimates. The Company accounted for forfeituresas they occurred for the periods prior to 2006. The cumulative adjustment forthe change in accounting principle was immaterial.

Thefair value of each option award is estimated on the date of the grant using aBlack-Scholes option valuation model. The Company uses a seven-year period tocalculate the historical volatility of its stock price for use in the valuationmodel. The dividend yield rate is based on the Company’s current dividendpayout pattern and current market price. The risk-free rate for options isbased on a U.S. Treasury rate commensurate with the expected terms. Theexpected term of options granted is derived from historical experience andrepresents the period of time that options granted are expected to be outstanding.

Therewere no option awards granted during the six months ended June 30, 2007 and2006, respectively. The Stock Award Plan provides forthe issuance of stock options, however, no current compensation programs haveoptions as a component.

Asof June 30, 2007 there was $53,000 of total unrecognized compensation costsrelated to non-vested stock options granted under the Company’s Stock AwardPlan. This expense is expected to be recognized over a weighted average periodof 2 years.

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A summary of stock option activity is as follows:
|                                 | ** ** | ** ** | ** ** | **Weighted Average** | ** ** |
|---------------------------------|------------|------------|------------|---------------------------|------------|
| ** **                      | ** ** | **Shares** | ** ** | **Exercise Price**   | ** ** |
| Outstanding at  January 1, 2007 |       | 515,884    |       | $                         | 12.75      |   |
| Granted                         |       | —     |       | —                    |       |
| Exercised                       |       | —     |       | —                    |       |
| Forfeited                       |       | —     |       | —                    |       |
| Expired                         |       | (29,834    | )          | 11.43                     |       |
| Outstanding at  June 30, 2007   |       | 486,050    |       | $                         | 12.83      |   |
| Exercisable at June 30,  2007   |       | 455,721    |       | $                         | 13.09      |   |

 

The following table provides certain informationwith respect to stock options outstanding at June 30, 2007:
|                             | ** ** | ** **             | ** ** | ** **                | ** ** | **Weighted Average** | ** ** |
|-----------------------------|------------|------------------------|------------|---------------------------|------------|---------------------------|------------|
| **Range of**           | ** ** | **Stock Options** | ** ** | **Weighted Average** | ** ** | **Remaining**             | ** ** |
| **Exercise Prices**    | ** ** | **Outstanding**        | ** ** | **Exercise Price**   | ** ** | **Contractual Life** | ** ** |
| $6.00 - $8.00               |       | 15,000                 |       | $                         | 6.95       |                      | 9.2  years |   |
| $8.00 - $12.00              |       | 182,500                |       | 10.28                     |       | 5.9  years                |       |
| $12.00 - $16.00             |       | 230,050                |       | 13.87                     |       | 3.6  years                |       |
| $16.00 - $21.00             |       | 58,500                 |       | 18.21                     |       | 3.7  years                |       |
|                        |       | 486,050                |       | $                         | 12.83      |                      | 4.6  years |   |
|                        |       |                   |       |                      |       |                      |       |
| Aggregate intrinsic  value: |       | $                      | 59,800     |                      |       |                      |       |   |
|                             |            |                        |            |                           |            |                           |            |  |  |

 

The following table provides certain information with respect to stockoptions exercisable at June 30, 2007:
|                             | ** ** | ** **             | ** ** | ** **                | ** ** | **Weighted Average** | ** ** |
|-----------------------------|------------|------------------------|------------|---------------------------|------------|---------------------------|------------|
| **Range of**           | ** ** | **Stock Options** | ** ** | **Weighted Average** | ** ** | **Remaining**             | ** ** |
| **Exercise Prices**    | ** ** | **Exercisable**        | ** ** | **Exercise Price**   | ** ** | **Contractual Life** | ** ** |
| $8.00 - $12.00              |       | 167,171                |       | $                         | 10.22      |                      | 5.8  years |   |
| $12.00 - $16.00             |       | 230,050                |       | 13.87                     |       | 3.6  years                |       |
| $16.00 - $21.00             |       | 58,500                 |       | 18.21                     |       | 3.7  years                |       |
|                        |       | 455,721                |       | $                         | 13.09      |                      | 4.4  years |   |
|                        |       |                   |       |                      |       |                      |       |
| Aggregate intrinsic  value: |       | $                      | 27,550     |                      |       |                      |       |   |
|                             |            |                        |            |                           |            |                           |            |  |  |

As of June 30, 2007, the following amount of shares,were available for each stock-based compensation plan:
| Plan                                         | ** ** | **Shares Available** | ** ** |
|----------------------------------------------|------------|---------------------------|------------|
| Employee Stock  Purchase Plan                |       | 500,000                   |       |
| Retainer Stock  Plans for Directors          |       | 233,875                   |       |
| Non-Employee  Directors’ Incentive Plan |       | 190,000                   |       |
| Stock Award Plan                             |       | 984,145                   |       |

Shares issued under otherstock-based compensation plans are as follows:
|                                           | ** ** | **For Three Months Ended** | ** ** | **For Six Months Ended** | ** ** |
|-------------------------------------------|------------|-------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                | ** ** | **June 30, 2007**               | ** ** | **June 30, 2007**             | ** ** |
| Retainer Stock  Plans for Directors       |       | 1,794                                     |       | 4,133                                   |       |
| market price/fair value at time of grant  |       | $                                         | 9.05       |                                    | $          | 7.86 |   |
|                                      |       |                                      |       |                                    |       |
| Stock Award Plan                          |       | 1,084                                     |       | 36,044                                  |       |
| market  price/fair value at time of grant |       | $                                         | 8.39       |                                    | $          | 7.00 |   |

 

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NOTE10 – FINANCIAL DERIVATIVE INSTRUMENTS

HickoryTech uses financial derivative instrumentsto manage its overall exposure to fluctuations in interest rates.  HickoryTech accounts for derivativeinstruments in accordance with SFAS No. 133, “Accounting for DerivativeInstruments and Hedging Activities,” as amended by SFAS No. 149, “Amendment ofStatement 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 in earnings.

The Company utilizes interest-rate swapagreements that qualify as cash-flow hedges, to manage its exposure to interestrate fluctuations on a portion of the Company’s variable-interest rate debt. InMarch 2007, the Company terminated its two outstanding interest-rate swapagreements, with original maturities of June 2008 in exchange for $1,936,000 inproceeds. Proceeds of $609,000 were recognized as an offset to interest expensein the first and second quarters of 2007. The remaining proceeds will berecognized as an offset to interest expense over the remaining original term ofthe agreements, a period of 12 months, ending in June 2008. Immediatelyfollowing the termination of the two swap agreements discussed above,HickoryTech executed a new interest-rate swap agreement, effectively locking inthe interest rate on $60,000,000 of variable-interest rate debt through March,2010.

The market value of the cumulative gain or (loss)on financial derivative instruments is reported as a component of accumulatedother comprehensive income (loss) in shareholders’ equity and will berecognized in earnings over the term of the swap agreement. The fair value ofHickoryTech’s derivatives at June 30, 2007 and December 31, 2006 is a net assetof $593,000 and $2,489,000, respectively.

NOTE 11 – EMPLOYEE POST-RETIREMENT BENEFITS

HickoryTech provides post-retirement health care and life insurancebenefits for certain employees. HickoryTech accounts for these post-retirementbenefits in accordance with SFASNo. 158, “Employers’ Accounting for Defined Benefit Pension and OtherPostretirement Plans – an amendment of FASB Statements No. 87, 88, 106 and132(R).” New employees hired on orafter January 1, 2007 are not eligible for post-retirement health care and lifeinsurance benefits.
|                                          | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                               | ** ** | **June 30,**                | ** ** | **June 30,**              | ** ** |
| **(Dollars in Thousands)**     | ** ** | **2007**                         | ** ** | **2006**                       | ** ** | **2007** | ** ** | **2006** | ** ** |
| Components of net  periodic benefit cost |       |                             |       |                           |       |   |   |   |   |
| Service cost                             |       | $                                | 71         |                           | $          | 81 |   | $ | 142 |   | $ | 162 |   |
| Interest cost                            |       | 114                              |       | 107                            |       | 228 |   | 214 |   |
| Amortization of  transition obligation   |       | 15                               |       | 15                             |       | 30 |   | 30 |   |
| Amortization of  prior service cost      |       | (3                               | )          | (3                             | )          | (6 | ) | (6 | ) |
| Recognized net  actuarial loss           |       | 18                               |       | 31                             |       | 36 |   | 62 |   |
| Net periodic  benefit cost               |       | $                                | 215        |                           | $          | 231 |   | $ | 430 |   | $ | 462 |   |

 
|                                                              | ** ** | **June 30, 2007** | ** ** |
|--------------------------------------------------------------|------------|-----------------------------|------------|
| Employer’s  contributions for current premiums          |       |                        |       |
| Contributions made for the six months ended June 30,  2007   |       | $                           | 134        |   |
| Expected contributions for remainder of 2007                 |       | 140                         |       |
| Total estimated  employer contributions for fiscal year 2007 |       | $                           | 274        |   |

 

NOTE 12 - INCOME TAXES

*The effective income tax rate fromcontinuing operations of approximately 42.6% for the second quarter of 2007 and40.1% for the second quarter of 2006 exceeds the federal statutory rateprimarily due to state income taxes and accrued interest expense onunrecognized tax benefits.*

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HickoryTech adopted theprovisions of FASB Interpretation No. 48 (FIN No. 48), “Accounting forUncertainty in Income Taxes-an interpretation of FASB Statement No. 109,”on January 1, 2007. Among other things, FIN No. 48 provides guidance to addressuncertainty in tax positions and clarifies the accounting for income taxes byprescribing a minimum recognition threshold which income tax positions mustachieve before being recognized in the financial statements. As of the date ofadoption, HickoryTech had approximately $7,414,000 of unrecognized taxbenefits. Approximately $748,000 of the unrecognized tax benefits relateto a deferred tax asset that is fully reserved for financial reporting purposes.The unrecognized tax benefits in their entirety, if recognized, would affectthe effective income tax rate in any future periods. As a result ofadoption, the Company recognized a credit of approximately $62,000 in theJanuary 1, 2007 retained earnings balance. There have been no significantchanges to these amounts during the six months ended June 30, 2007.

The Company recognizesinterest and penalties related to income tax matters as income taxexpense. As of the date of the adoption, the Company had $172,000 (net oftax) accrued for interest and nothing accrued for penalties related to taxmatters. As of June 30, 2007, the Company has accrued $320,000 (net of tax) forinterest related to unrecognized tax benefits.

TheCompany files consolidated income tax returns in the United States federaljurisdiction and combined or separate income tax returns in various statejurisdictions. In general, as of the date of the adoption, the Company is nolonger subject to United States federal income tax examinations for the yearsprior to 2003 and is no longer subject to examinations by state tax authoritiesfor the years prior to 2002.

**ITEM 2. MANAGEMENT'SDISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION.**

#### FORWARD-LOOKINGSTATEMENTS

*This Quarterly Reporton Form 10-Q contains certain forward-looking statements within the meaning ofthe safe harbor provisions of the Private Securities Litigation Reform Act of1995. Statements in this Quarterly Report on Form 10-Q that are not historicalfact, are forward-looking statements that are based on our currentexpectations, estimates and projections about the industry in which we operateand our beliefs and assumptions. Forward-looking statements may be identifiedby the use of terminology such as “may,” “will,” “believes,” “seeks,”“projects,” “expects,” “plans,” “intends,” “estimates,” “continues,” “should”or “anticipates” and similar expressions. Such forward-looking statements aresubject to important risks and uncertainties that could cause our future actualresults to differ materially from such statements. These statements are notguarantees of future performance and involve certain risks, uncertainties andprobabilities, which are difficult to predict. Therefore, actual outcomes andresults may differ materially from what is expressed or forecasted in suchforward-looking statements, whether as a result of new information, futureevents or otherwise. Factors that might cause such a difference include, butare not limited to, those contained in Item 1A of Part II, “Risk Factors” ofthis quarterly report on Form 10-Q and Item 1A, “Risk Factors,” of our AnnualReport on Form 10-K for the year ended December 31, 2006, which is incorporatedherein by reference. The Cautionary Statement in Part 1 of our Annual Report onForm 10-K provides a comprehensive list of sources for risks and uncertainties,which may influence forward looking statements and is incorporated herein byreference. You are cautioned not to place undue reliance on theseforward-looking statements, which speak only as of the date on which they weremade. Except as otherwise required by federal securities law, we undertake noobligation to update any of its forward-looking statements for any reason.*

**RESULTS OF OPERATIONS**

OVERVIEW-TRENDS

We operate in twobusiness segments: the Telecom Sector and the Enventis Sector. The TelecomSector includes our historical rural telephone business operations, includingthree incumbent local exchange carriers (“ILECs”), a competitive local exchangecarrier (“CLEC”) and a company providing data processing services for thetelecommunications industry (National Independent Billing, Inc.).

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The EnventisSector operations are conducted through Enventis Telecom, Inc, which weacquired on December 30, 2005.  Enventisprovides integrated fiber network, IPtelephony and data services, through 1,500 route miles of fiber network servingmore than 300 business customers in over 40 communities in the Upper Midwest.We offer these services through two major product line offerings: EnterpriseNetwork Services, which is a telecom equipment provision service, andEnterprise Transport Services, which is a fiber optic transmission service forwholesale and retail use by customers.

Our consolidatedrevenues increased 33.8% and our income from continuing operations increased105.0% in the three months ended June 30, 2007 compared to the three monthsended June 30, 2006. Our consolidated revenues increased 23.5% and our incomefrom continuing operations increased 61.0% in the six months ended June 30,2007 compared to the six months ended June 30, 2006. These substantialimprovements in the results of operations were a function of improvements inboth the Telecom and Enventis Sectors. Enventis Sector revenues increased 66.3%during the three months and 47.6% during the six months ended June 30, 2007,and income more than doubled as compared to the same periods in the prior year.More importantly, the combination of a $1,890,000 recovery from a switchedaccess dispute with a large interexchange carrier, as well as increased usageof DSL and digital TV services, made our Telecom revenues increase 8.5% and5.5% in the three and six months ended June 30, 2007 compared to the three andsix months ended June 30, 2006.

Longer term, weexpect local service and network access revenues in our Telecom Sector tocontinue to trend downward because of competition from CLECs, cable TVproviders, VoIP, wireless telephone, other telephone competitors and due toreduced usage and pricing on the network access service we provide. Although wewere largely successful in the six months ended June 30, 2007 in offsettingthis declining revenue with increased revenue from DSL and digital TVcustomers, the margins on these services are not as high as the margins on ourwireline access services. Our Telecom margins and revenue will be furtherimpacted by new interstate network access rates that go into effect on July 1,2007, as well as by the competitive voice services that will be offered by theprimary cable TV provider in Mankato, our largest market, in the third quarterof 2007. Accordingly, while we will continue to work to offset decliningrevenue with new services to our customers in the Telecom Sector, the trendtoward decreasing profitability in this Sector may resume.

We believe thatour Enventis Sector provides a platform for longer-term growth. Enventisrevenues for 2006 represented a 14.1% increase over the unaudited Enventisrevenues for 2005. The 2007 first quarter revenues for Enventis were 27.5%higher than those in the first quarter of 2006, while second quarter revenueswere 66.3% higher than those in the second quarter of 2006. Enventis hasprovided profitable operations and recorded positive operating income in eachof the six quarters since its acquisition. The Enventis Enterprise NetworkServices product line is subject to cyclical highs and lows depending oncustomer demand. Enterprise Transport Services contains more of a recurringrevenue stream and is supported by long-term contracts. Both the EnterpriseNetwork Service and the Enterprise Transport Service product lines showexcellent growth characteristics.

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SECTOR RESULTS OF OPERATIONS FROM CONTINUING OPERATIONS

TELECOM – Thefollowing table provides a breakdown of the Telecom Sector operating results.

**TELECOM SECTOR**
| ** **                                                                               | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|------------------------------------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                                                               | ** ** | **June 30,**                | ** ** | **June 30,**              | ** ** |
| **(Dollars in Thousands)**                                                     | ** ** | **2007**                         | ** ** | **2006**                       | ** ** | **2007** | ** ** | **2006** | ** ** |
| Revenues before  intersegment eliminations:                                              |       |                             |       |                           |       |   |   |   |   |
|                                                                                     |       |                             |       |                           |       |   |   |   |   |
| Revenues                                                                                 |       |                             |       |                           |       |   |   |   |   |
| Local Service                                                                            | ** ** | **$**                            | **4,227**  |                           | $          | 4,576 | ** ** | **$** | **8,675** |   | $ | 9,171 |   |
| Network Access                                                                           | ** ** | **9,378**                        |       | 7,415                          | ** ** | **16,737** |   | 14,756 |   |
| Long Distance                                                                            | ** ** | **1,297**                        |       | 1,254                          | ** ** | **2,629** |   | 2,402 |   |
| Data                                                                                     | ** ** | **1,715**                        |       | 1,486                          | ** ** | **3,391** |   | 2,877 |   |
| Internet                                                                                 | ** ** | **1,130**                        |       | 1,131                          | ** ** | **2,256** |   | 2,284 |   |
| Digital TV                                                                               | ** ** | **536**                          |       | 318                            | ** ** | **1,025** |   | 603 |   |
| Directory                                                                                | ** ** | **899**                          |       | 903                            | ** ** | **1,784** |   | 1,797 |   |
| Message Processing  & Billing                                                        | ** ** | **514**                          |       | 534                            | ** ** | **1,203** |   | 1,222 |   |
| Intersegment                                                                             | ** ** | **111**                          |       | 32                             | ** ** | **218** |   | 64 |   |
| Other                                                                                    | ** ** | **752**                          |       | 1,295                          | ** ** | **1,785** |   | 2,456 |   |
| Total telecom revenues                                                                   | ** ** | **$**                            | **20,559** |                           | $          | 18,944 | ** ** | **$** | **39,703** |   | $ | 37,632 |   |
|                                                                                     |       |                             |       |                           |       |   |   |   |   |
| Total Telecom revenues  before intersegment eliminations:                                |       |                             |       |                           |       |   |   |   |   |
| Unaffiliated  customers                                                                  | ** ** | **$**                            | **20,448** |                           | $          | 18,912 | ** ** | **$** | **39,485** |   | $ | 37,568 |   |
| Intersegment                                                                             | ** ** | **111**                          |       | 32                             | ** ** | **218** |   | 64 |   |
|                                                                                     | ** ** | **20,559**                       |       | 18,944                         | ** ** | **39,703** |   | 37,632 |   |
|                                                                                     |       |                             |       |                           |       |   |   |   |   |
| Cost of services  (excluding depreciation and amortization)                              | ** ** | **7,158**                        |       | 8,049                          | ** ** | **15,013** |   | 15,738 |   |
| Selling, general, and  administrative expenses (excluding depreciation and amortization) |       | **3,373**                        |       | 3,182                          |       | **6,646** |   | 6,343 |   |
| Depreciation and  amortization                                                           | ** ** | **3,789**                        |       | 3,713                          | ** ** | **7,702** |   | 7,290 |   |
|                                                                                     |       |                             |       |                           |       |   |   |   |   |
| Operating income                                                                         | ** ** | **$**                            | **6,239**  |                           | $          | 4,000 | ** ** | **$** | **10,342** |   | $ | 8,261 |   |
| Net income                                                                               | ** ** | **$**                            | **3,736**  |                           | $          | 2,395 | ** ** | **$** | **6,175** |   | $ | 5,025 |   |
|                                                                                     |       |                             |       |                           |       |   |   |   |   |
| Capital expenditures                                                                     | ** ** | **$**                            | **2,288**  |                           | $          | 3,848 | ** ** | **$** | **3,934** |   | $ | 7,075 |   |
|                                                                                     |       |                             |       |                           |       |   |   |   |   |
| Key metrics                                                                              |       |                             |       |                           |       |   |   |   |   |
| Access lines                                                                             | ** ** | **67,022**                       |       | 69,307                         |       |   |   |   |   |
| Long distance customers                                                                  | ** ** | **41,287**                       |       | 40,788                         |       |   |   |   |   |
| Internet customers                                                                       | ** ** | **20,526**                       |       | 19,205                         |       |   |   |   |   |
| Digital Subscriber Line  (DSL) customers                                                 | ** ** | **16,677**                       |       | 14,282                         |       |   |   |   |   |
| Digital TV customers                                                                     | ** ** | **5,194**                        |       | 3,389                          |       |   |   |   |   |

 

Revenues

Telecom Sectoroperating revenues before intersegment eliminations were $20,559,000, which is$1,615,000 or 8.5% higher in the three months ended June 30, 2007 compared tothe three months ended June 30, 2006, and were $39,703,000, which is $2,071,000or 5.5% higher in the six months ended June 30, 2007 compared to the six monthsended June 30, 2006. The increase in both periods was primarily due toincreases in network access, data, digital TV and intersegment revenues, offsetby decreases in other and local service revenues.

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Local servicerevenue was $4,227,000, which is $349,000 or 7.6% lower in the three monthsended June 30, 2007 compared to the three months ended June 30, 2006. Localservice revenue was $8,675,000, which is $496,000 or 5.4% lower in the sixmonths ended June 30, 2007 compared to the six months ended June 30, 2006. Thedecrease in both periods was primarily due to a 2,285 or 3.3% decrease inaccess lines from June 30, 2006 to June 30, 2007. Another significantcontributor is a decline in reciprocal compensation received from wirelesscarriers under contract using minute-of-use pricing. Many of these contractsand their associated pricing are being re-negotiated. A higher degree ofcompetition from ILEC’s, CLEC’s and cable TV providers serving in our markets,and from wireless substitution, could impact our local service revenue infuture periods.

Network access revenue was $9,378,000, which is$1,963,000 or 26.5% higher in the three months ended June 30, 2007 compared tothe three months ended June 30, 2006, and $16,737,000, which is $1,981,000 or13.4% higher in the six months ended June 30, 2007 compared to the six monthsended June 30, 2006. These increases in revenue were primarily due to thesettlement of a switched access dispute with a large interexchange carrier,which resulted in a non-recurring increase in revenue of $1,890,000. On July 1,2007, new interstate network access rates went into effect, which will causefurther reductions in network access revenues of approximately 5.0%. Acombination of changing minutes of use (MOU), carriers optimizing their networkcosts and lower demand for dedicated lines may negatively impact future accessrevenues. In addition, future federal or state access reform may providefurther negative influences.

Long distance revenue was$1,297,000, which is $43,000 or 3.4% higher in the three months ended June 30,2007 compared to the three months ended June 30, 2006. Long distance revenuewas $2,629,000, which is $227,000 or 9.5% higher in the six months ended June30, 2007 compared to the six months ended June 30, 2006. The increases wereprimarily due to an increase in the long distance customer base of 499 or 1.2%in the three months ended June 30, 2007 compared to the three months ended June30, 2006. Also contributing to the increase in long distance revenue was anincrease in MOUs in the second quarter of 2007 compared to the second quarterof 2006.

Data revenue was $1,715,000, which is $229,000 or 15.4% higher in thethree months ended June 30, 2007 compared to the three months ended June 30,2006, and was $3,391,000, which is $514,000 or 17.9% higher in the six monthsended June 30, 2007 compared to the six months ended June 30, 2006. Theincrease in both periods was primarily due to an increase in DSL customers of2,395 or 16.8% between June 30, 2007 and June 30, 2006. Also contributing tothe increase in data revenue was a $114,000 increase in the three month period,and a $250,000 increase in the six month period of Ethernet services to largebusiness customers. We believe that Ethernet service revenues will continue toprovide growth opportunities. Expanded networking opportunities among mediumand large enterprise customers are key drivers for this growth.

Digital TV revenue was $536,000, which is$218,000 or 68.6% higher in the three months ended June 30, 2007 compared tothe three months ended June 30, 2006 and $1,025,000, which is $422,000 or 70.0%higher in the six months ended June 30, 2007 compared to the six months endedJune 30, 2006. This increase was primarily the result of the offering ofdigital TV in three additional communities in 2006 and one additional communityin 2007, which resulted in a 1,805 or 53.3% increase in digital TV customers atJune 30, 2007 compared to June 30, 2006. Also contributing to the increase indigital TV revenue was an increase in rates charged to customers ofapproximately 5.0%, which went into effect in April 2007.

Other revenue, consisting primarily of revenues from cable networkservices, sales of Customer Premise Equipment (CPE), circuit private lines,maintenance, and add, moves and changes was $752,000, which is $543,000 or41.9% lower in the three months ended June 30, 2007 compared to the threemonths ended June 30, 2006. This decrease was primarily due to the loss of$347,000 from Project SOCRATES (see below) and decreased revenue from CPE salesof $199,000. Partially offsetting the loss of the Project SOCRATES and CPErevenues was an increase in billing and collections revenue of $36,000. UntilJune 2006, HickoryTech had been providing Internet access and videoconferencing 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.

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Other revenue was $1,785,000, which is $671,000 or 27.3% lower in thesix months ended June 30, 2007 compared to the six months ended June 30, 2006.This decrease was primarily due to the loss of $693,000 from Project SOCRATES(see above) and decreased revenue from CPE sales of $93,000, partially offsetby increases in pay station revenue of $95,000 and billing and collectionsrevenue of $48,000.

Cost of Services (excluding Depreciation and Amortization)

Telecom Sector cost of services (excludingdepreciation and amortization) was $7,158,000, which is $891,000 or 11.1% lowerin the three months ended June 30, 2007 compared to the three months ended June30, 2006, and was $15,013,000, which is $725,000 or 4.6% lower in the sixmonths ended June 30, 2007 compared to the six months ended June 30, 2006. Thedecrease in both periods was primarily due to the settlement of a switchedaccess dispute with a large interexchange carrier in the second quarter of2007, which resulted in the reversal of bad debt expense of $325,000. Alsocontributing to the decrease in cost of services was a $201,000 decrease in thethree month period, and $216,000 decrease in the six month period, inprofessional fees due to lower fees associated with provisioning software, a$148,000 decrease  in the three monthperiod and $257,000 decrease in the six month period in contract labor due tothe retirement of mainframe computer functions in 2006, a $129,000 decrease inthe three month period and $175,000 decrease in the six month period inmiscellaneous expense due to write-offs of potential liabilities associatedwith discontinued operations and a $124,000 decrease during the three monthperiod and $278,000 decrease during the six month period in consulting fees.These decreases in cost of services were offset during the six month period bya $440,000 increase in programming expense incurred in connection with digitalTV services.

Selling, General and Administrative Expenses (excludingDepreciation and Amortization)

Telecom Sector selling, general andadministrative expenses (excluding depreciation and amortization) were$3,373,000, which is $191,000 or 6.0% higher in the three months ended June 30,2007 compared to the three months ended June 30, 2006. This increase wasprimarily due to increases in legal expenses of $83,000, regulatory fees of$38,000, incentive compensation of $33,000 and an increase in maintenancecontracts of $30,000.

Selling, general and administrative expenses(excluding depreciation and amortization) were $6,646,000, which is $303,000 or4.8% higher in the six months ended June 30, 2007 compared to the six monthsended June 30, 2006. This increase was primarily due to a $113,000 increase inaccess fees, a $111,000 increase in legal fees and a $62,000 increase inmaintenance contracts

Depreciation and Amortization

Telecom Sector depreciation and amortization were$3,789,000, which is $76,000 or 2.0% higher in the three months ended June 30,2007 compared to the three months ended June 30, 2006. Depreciation was$3,762,000, which is $79,000 or 2.2% higher in the three months ended June 30,2007 compared to the three months ended June 30, 2006. This increase wasprimarily due to an increase in fixed asset spending in 2006. Amortization was$27,000, which is $3,000 or 11.9% lower in the three months ended June 30, 2007compared to the three months ended June 30, 2006.

Depreciation and amortization were $7,702,000,which is $412,000 or 5.7% higher in the six months ended June 30, 2007 comparedto the six months ended June 30, 2006. Depreciation was $7,649,000, which is$421,000 or 5.8% higher in the six months ended June 30, 2007 compared to thesix months ended June 30, 2006. This increase was primarily due to an increasein fixed asset spending in 2006. Amortization was $53,000 in the six monthsended June 30, 2007 and $62,000 in the six months ended June 30, 2006.

Operating Income

Telecom Sector operating income was $6,239,000, a$2,239,000 or 56.0% increase in the three months ended June 30, 2007 comparedto the three months ended June 30, 2006, and was 10,342,000, a $2,081,000 or25.2% increase in the six months ended June 30, 2007 compared to the six monthsended June 30, 2006. The increase in both periods was due to the increasedrevenues and decreased cost of services, offset by the small increases inselling, general and administrative expenses (excluding depreciation andamortization) and in depreciation, all of which are described above.

20

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Net Income

Telecom Sector net income from operations was$3,736,000, a $1,341,000 or 56.0% increase in the three months ended June 30,2007 compared to the three months ended June 30, 2006 and $6,175,000, a$1,150,000 or 22.9% increase in the six months ended June 30, 2007 compared tothe six months ended June 30, 2006. This increase was primarily due to theincrease in operating income mentioned above, offset by the change in taxes.

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

**ENVENTISSECTOR**
| ** **                                                                               | ** ** | **Three Months Ended  June 30,**                                              | ** ** | **Six Months Ended  June 30,**                                                | ** ** |
|------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------|------------|
| **(Dollars in Thousands)**                                                     | ** ** | **       2007       ** | ** ** | **       2006       ** | ** ** | **       2007       ** | ** ** | **       2006       ** | ** ** |
| Revenues before  intersegment eliminations:                                              |       |                                                                                         |       |                                                                                         |       |   |   |   |   |
| Enterprise  Network Services                                                             | ** ** | **$**                                                                                        | **19,968** |                                                                                         | $          | 11,144 | ** ** | **$** | **33,145** |   | $ | 21,175 |   |
| Enterprise  Transport Services                                                           | ** ** | **5,186**                                                                                    |       | 4,034                                                                                        | ** ** | **9,899** |   | 8,087 |   |
| Intersegment                                                                             | ** ** | **85**                                                                                       |       | —                                                                                       | ** ** | **147** |   | — |   |
|                                                                                     | ** ** | **$**                                                                                        | **25,239** |                                                                                         | $          | 15,178 | ** ** | **$** | **43,191** |   | $ | 29,262 |   |
|                                                                                     |       |                                                                                         |       |                                                                                         |       |   |   |   |   |
| Total Enventis revenues  before intersegment eliminations:                               |       |                                                                                         |       |                                                                                         |       |   |   |   |   |
| Unaffiliated  customers                                                                  | ** ** | **$**                                                                                        | **25,154** |                                                                                         | $          | 15,178 | ** ** | **$** | **43,044** |   | $ | 29,262 |   |
| Intersegment                                                                             | ** ** | **85**                                                                                       |       | —                                                                                       | ** ** | **147** |   | — |   |
|                                                                                     | ** ** | **$**                                                                                        | **25,239** |                                                                                         | $          | 15,178 | ** ** | **$** | **43,191** |   | $ | 29,262 |   |
|                                                                                     |       |                                                                                         |       |                                                                                         |       |   |   |   |   |
| Cost of sales                                                                            | ** ** | **16,559**                                                                                   |       | 8,456                                                                                        | ** ** | **26,873** |   | 16,139 |   |
| Cost of services (excluding  depreciation and amortization)                              |       | **3,786**                                                                                    |       | 2,932                                                                                        |       | **6,984** |   | 5,619 |   |
| Selling, general and  administrative expenses, (excluding depreciation and amortization) |       | **2,318**                                                                                    |       | 2,291                                                                                        |       | **4,503** |   | 4,701 |   |
| Depreciation and  amortization                                                           | ** ** | **927**                                                                                      |       | 768                                                                                          | ** ** | **1,802** |   | 1,505 |   |
|                                                                                     |       |                                                                                         |       |                                                                                         |       |   |   |   |   |
| Operating income                                                                         | ** ** | **$**                                                                                        | **1,649**  |                                                                                         | $          | 731 | ** ** | **$** | **3,029** |   | $ | 1,298 |   |
| Net income                                                                               | ** ** | **$**                                                                                        | **990**    |                                                                                         | $          | 437 | ** ** | **$** | **1,812** |   | $ | 775 |   |
|                                                                                     |       |                                                                                         |       |                                                                                         |       |   |   |   |   |
| Capital expenditures                                                                     | ** ** | **$**                                                                                        | **1,017**  |                                                                                         | $          | 2,593 | ** ** | **$** | **2,101** |   | $ | 3,100 |   |

 

Revenues:

Enventis operatingrevenues before intersegment eliminations were $25,239,000, which is$10,061,000 or 66.3% higher in the three months ended June 30, 2007 compared tothe three months ended June 30, 2006. This increase was primarily due to an$8,824,000 increase in the Enterprise Network Services product line, which waslargely the result of revenue recognized from a large contract with a customerof approximately $6,500,000. In addition, Enventis noted increases in theirVOIP, wireless and data products in the second quarter of 2007 compared to thesecond quarter of 2006. The Enterprise Transport Services product line revenuesincreased by $1,152,000 in the three months ended June 30, 2007 compared to thethree months ended June 30, 2006, with the increase being primarily attributedto increased wholesale business revenues of $765,000 and an increase in theEncompass line of business of $297,000.

Enventis operatingrevenues before intersegment eliminations were $43,191,000, which is$13,929,000 or 47.6% higher in the six months ended June 30, 2007 compared tothe six months ended June 30, 2006. This increase was primarily due to an$11,970,000 increase in the Enterprise Network Services product line, which waslargely the result of revenue recognized from a large contract with a customermentioned above. In addition, Enventis has noted increases in their VOIP,wireless and data products in the first six months of 2007 compared to thefirst six months of 2006. The Enterprise Transport Services product linerevenues increased by $1,812,000 in the fist six months ended June 30, 2007 comparedto the first six months ended June 30, 2006, with the increase being primarilyattributed to increased wholesale business revenues and an increase in theEncompass line of business mentioned above.

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Cost of Sales

Enventis Sector cost of sales was $16,559,000,which is $8,103,000 or 95.8% higher in the three months ended June 30, 2007compared to the three months ended June 30, 2006. Cost of sales was$26,873,000, which is $10,734,000 or 66.5% higher in the six months ended June30, 2007 compared to the six months ended June 30, 2006. This increase was dueto the costs incurred to support the substantially increased revenue in theEnterprise Network Services product line.

Cost of Services (excluding Depreciation and Amortization)

Enventis Sector cost of services (excludingdepreciation and amortization) was $3,786,000, which is $854,000 or 29.1%higher in the three months ended June 30, 2007 compared to the three monthsended June 30, 2006. This increase was primarily due to a $404,000 increase incircuit expenses associated with an increase in off-net revenues, a $304,000increase in wages and benefits due to increased staffing and a $247,000increase in professional fees due to external project management on large jobs,offset by a decrease in bad debt expense of $126,000.

Cost of services (excluding depreciation andamortization) was $6,984,000, which is $1,365,000 or 24.3% higher in the sixmonths ended June 30, 2007 compared to the six months ended June 30, 2006. Thisincrease was primarily due to a $721,000 increase in wages and benefits due toincreased staffing and a $691,000 increase in circuit expenses associated withan increase in off-net revenues.

Selling, General and Administrative Expenses (excluding Depreciationand Amortization)

Enventis Sector selling, general andadministrative expenses (excluding depreciation and amortization) were$2,318,000, which is $27,000 or 1.2% higher in the three months ended June 30,2007 compared to the three months ended June 30, 2006.

Selling, general and administrative expenses(excluding depreciation and amortization) were $4,503,000, which is $198,000 or4.2% lower in the six months ended June 30, 2007 compared to the six monthsended June 30, 2006. This decrease was primarily due to a decrease in wages andbenefits of $1,023,000, which was largely the result of a decrease in retentionpayments made to certain employees. Partially offsetting the decrease inselling, general and administrative expenses was a $322,000 increase ininter-company executive services, a $154,000 increase in commissions associatedwith the increase in revenues, a $115,000 increase in professional fees, a$107,000 increase in computer expenses, a $54,000 increase in rent expenses anda $43,000 increase in consulting fees.

Depreciation and Amortization

Enventis Sector depreciation and amortizationwere $927,000, which is $159,000 or 20.7% higher in the three months ended June30, 2007 compared to the three months ended June 30, 2006. Depreciation was$664,000, which is $159,000 or 31.7% higher in the three months ended June 30,2007 compared to the three months ended June 30, 2006. This increase wasprimarily due to an increase in assets in 2006. Amortization was $263,000 inthe three months ended June 30, 2007 and 2006.

Depreciation and amortization were $1,802,000,which is $297,000 or 19.7% higher in the six months ended June 30, 2007compared to the six months ended June 30, 2006. Depreciation was $1,277,000,which is $297,000 or 30.2% higher in the six months ended June 30, 2007 comparedto the six months ended June 30, 2006. This increase was primarily due to anincrease in assets in 2006. Amortization was $525,000 in the six months endedJune 30, 2007 and 2006.

Operating Income

Enventis Sector operating income was $1,649,000,which is $918,000 or 125.6% higher in the three months ended June 30, 2007compared to the three months ended June 30, 2006. This increase was primarilydue to the $10,061,000 increase in revenues, offset by the $8,103,000 increasein cost of sales, the $854,000 increase in cost of services (excludingdepreciation and amortization), the $159,000 increase in depreciation and the$27,000 increase in selling, general and administrative expenses (excludingdepreciation and amortization), all of which are described above.

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Operating income was $3,029,000, which is$1,731,000 or 133.4% higher in the six months ended June 30, 2007 compared tothe six months ended June 30, 2006. This increase was primarily due to the$13,929,000 increase in revenues and the $198,000 decrease in selling, generaland administrative expenses (excluding depreciation and amortization), offsetby the $10,734,000 increase in cost of sales, the $1,365,000 increase in costof services (excluding depreciation and amortization) and the $297,000 increasein depreciation , all of which are described above.

Net Income

Enventis Sector net income was $990,000, which is$553,000 or 126.5% higher in the three months ended June 30, 2007 compared tothe three months ended June 30, 2006, and was $1,812,000, which is $1,037,000or 133.8% higher in the six months ended June 30, 2007 compared to the sixmonths ended June 30, 2006.  Theseincreases were primarily due to the increase in operating income mentionedabove, offset by taxes.

INTEREST EXPENSE:

Consolidated interest expensewas $2,031,000, which is $201,000 or 11.0% higher in the three monthsended June 30, 2007 compared to the three months ended June 30, 2006. Interest expense was $4,213,000, which is$735,000 or 21.1% higher in the six months ended June 30, 2007 comparedto the six months ended June 30, 2006. These increases were primarily due to a lower cooperative dividendreceived than had been accrued at December 31, 2006 from one of the Company’sparticipating lenders and a lower quarterly accrual of cooperative dividends inthe first and second quarters of 2007. Cooperative dividends are accounted foras an offset to interest expense as earned.

The outstanding balance of therevolving credit facility was $136,050,000 at June 30, 2007 and $142,700,000 atDecember 31, 2006. The interest expense level of future quarters, while notaffected by the receivable change, is expected to remain at approximately thesame level seen in the first and second quarters of 2007 because of the newinterest rate swap agreements initiated in March 2007. The average effectiveinterest rate on outstanding debt was 5.92% for the three months ended June 30,2007 compared to 5.04% for the three months ended June 30, 2006.

INCOME TAXES

*The effective income tax rate fromcontinuing operations of approximately 42.6% for the second quarter of 2007 and40.1% for the second quarter of 2006 exceeds the federal statutory rateprimarily due to state income taxes and interest expense accrued onunrecognized tax benefits. Due to the effects of implementing FIN No. 48, “Accountingfor Uncertainty in Income Taxes”, additional income taxes accruals ofapproximately $100,000 per quarter were accrued beginning in the second quarterof 2007.*

INCOMEFROM CONTINUING OPERATIONS

Consolidatedincome from continuing operations was $3,254,000, which is $1,667,000 or 105.0%higher in the threemonths ended June 30, 2007 compared to the three months ended June 30, 2006.This increase was primarily due to the increase in operating income, partiallyoffset by the increase in interest expense, both of which are described above,and the increase in income taxes.

*Consolidatedincome from continuing operations was $5,022,000, which is $1,902,000 or 61.0%higher*in the six months ended June 30,2007 compared to the six months ended June 30, 2006. This increase wasprimarily due to the increase in operating income, partially offset by theincrease in interest expense, both of which are described above, and theincrease in income taxes

LIQUIDITY AND CAPITAL RESOURCES

CASH FLOWS

Cashgenerated from operations was $11,540,000 in the first six months of 2007compared to $11,052,000 in the first six months of 2006. Cash provided byoperations in the first six months of 2007 was primarily attributable to netincome plus non-cash expenses, including depreciation and amortization of$9,514,000. The increase of $7,254,000 in outstanding accounts receivablebalances is due to the double digit sales growth seen in the Enventis sectorand is also the result of customer installations in progress evolving into thebilling stage. A decrease in inventory on hand of $2,125,000, primarily seen inthe Enventis sector, was a direct consequence of the increased billings tocustomers noted above.

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Cashgenerated from operations in the first six months of 2006 was primarilyattributable to net income plus non-cash expenses, including depreciation andamortization of $8,839,000 as well as for a decrease in prepaid assets of$2,818,000 related to the Enventis acquisition.

Cashused in investing activities was $5,989,000 in the first six months of 2007compared to $10,268,000 in the first six months of 2006. The decrease of$4,233,000 in capital spending from June 2007 to June 2006 is primarily relatedto reduced expenditures for our network enhancement program, which is nearlycomplete and a concentrated effort to focus spending on revenue generatingproducts, services and key strategic initiatives.

Cash used in financing activities increased$3,759,000 in 2007 primarily due to our continued efforts to reduce borrowingsunder our long-term credit facility. The long-term debt balance was reduced by$6,640,000 to total $135,089,000 as of June 30, 2007. A net decrease in thecash balance of $961,000 and proceeds of $1,936,000 relating to the terminationof two outstanding interest-rate swap agreements also contributed to the changein net cash used in financing activities.

WORKING CAPITAL

Working capital (i.e. currentassets minus current liabilities) was $14,149,000 as of June 30, 2007, comparedto working capital of $7,731,000 as of December 31, 2006. The ratio of currentassets to current liabilities was 1.5 to 1.0 as of June 30, 2007 and 1.3 to 1.0as of December 31, 2006.

SHORT-TERM FINANCING ARRANGEMENT

Enventis has a $13,000,000 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 Hickory Tech Corporation.The credit facility provides sixty-day payment terms for working capital andcan be terminated at any time by either party. Borrowings outstanding under thecredit facility were $11,949,000 and $7,719,000 at June 30, 2007 and December31, 2006, respectively.

LONG-TERM OBLIGATIONS

Long-termobligations as of June 30, 2007 were $135,089,000 excluding current maturitiesof $1,300,000 on debt and $303,000 on capital leases. On December 30, 2005, weentered into a $160,000,000 credit agreement with a syndicate of banks(subsequently amortized to a $158,700,000 facility as of December 31, 2006),which amended our previous credit facility. The credit facility is comprised ofa $30,000,000 revolving credit component that expires on December 30, 2011 anda $130,000,000 term loan component.

Theterm loan component is comprised of two components, which are defined as termloan B and term loan C. The outstanding principal balance of term loan B is$108,350,000 as of June 30, 2007 and is held in varying amounts by three of thelenders in the syndicate (US Bank, GE Commercial Distribution FinanceCorporation and CoBank). Under the terms of term loan B, we are required tomake quarterly principal payments of $275,000 from June 30, 2007 throughDecember 31, 2011 with the remainder of the aggregate principal due in twopayments on March 31, 2012 and June 30, 2012. The outstanding principal balanceof term loan C is $19,700,000 as of June 30, 2007 and is held entirely by RuralTelephone Finance Cooperative. Under the terms of term loan C, we are requiredto make quarterly principal payments of $50,000 on the aggregate principalamount from June 30, 2007 through December 31, 2012 with the remainder of theaggregate principal due in two payments on March 31, 2013 and June 30, 2013.

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Underthe terms of the revolving credit facility, any outstanding principal ispayable in full on December 30, 2011. The outstanding balance of the revolvingcredit facility is $8,000,000 as of June 30, 2007. Under the credit facility,interest will be payable at an applicable margin in excess of a prevailingpricing level. The prevailing pricing level will be based on a Base Rate, LIBORRate Loans or Rural Telephone Finance Corporation (RTFC) rate table. Theprevailing rate for Base Rate Loans is the higher of Prime Rate or the FederalFunds Rate plus 0.5%. The prevailing rate for LIBOR Rate Loans is publiclyavailable. The RTFC rate tables are established based on RTFC policies, whichare not publicly available and change from time to time. The applicable marginfor the revolving credit facility, term loan B and term loan C will bedetermined quarterly, based on our leverage ratio. The credit facility alsoprovides for payment of a fee on any un-drawn commitment of the revolvingcredit facility and is payable quarterly. The credit facility requires us toenter into or maintain in effect, interest rate protection agreements on atleast 50% of the facility’s outstanding balance in order to manage our exposureto interest rate fluctuations. We continually monitor the interest rates on ourbank loans and have implemented interest rate protection agreements on variousportions of the overall debt outstanding for varying terms.

Ourdebt requires us to comply, on a consolidated basis, with specified financialratios and tests including maximum leverage ratio, minimum interest coverageratio and maximum capital expenditures. Our obligations under the creditfacility are secured by a first-priority lien on all of our property andassets, tangible and intangible, and all of the property of our subsidiariesincluding, but not limited to accounts receivable, inventory, equipment andintellectual property; general intangibles, cash and proceeds of theforegoing.  We have also pledged thecapital stock of our subsidiaries to secure the credit facility.

OurTelecom Sector leases certain computer equipment under capital leasearrangements. During the three months ended June 30, 2007 and 2006, this Sectorrecorded additions to property, plant and equipment of $455,000 and $158,000,respectively, related to these capital lease arrangements.

CONSTRUCTION PLANS

Wehave nearly completed the network enhancement program in specific marketswithin our core telephone property. In both our Telecom and Enventis Sectors,capital spending is becoming more “success-based,” meaning the capital spendingis associated with defined revenue producing services and strategicinitiatives. We expect the level of total capital spending over the next two tothree years to be below the level of capital spending experienced in 2006. Webelieve that the enhancements of the past several years will support thebroadband product deployment strategies of the next few years, as well asserving as a defense against competition in these specific markets within ourcore businesses. These upgrades will give us the capability to offer morediversified services to our core customer base.

COMMITMENTS AND CONTINGENCIES

We are involved in certain contractual disputes in the ordinary courseof business. We do not believe the ultimate resolution of any of these existingmatters will have a material adverse effect on our financial position, resultsof operations or cash flows. We did not experience any changes to materialcontractual obligations in the first six months of 2007. Refer to our Annual Report on Form 10-K forthe year ended December 31, 2006 for the discussion relating to commitments andcontingencies.

OTHER

We operate with original equitycapital, retained earnings and indebtedness in the form of bank term andrevolving lines of credit. We believe the current level of debt to totalcapital is acceptable for ongoing operations.

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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 onHickoryTech’s consolidated financial statements, which have been prepared inaccordance with GAAP and where applicable, conform to the accounting principlesas prescribed by federal and state telephone utility regulatory authorities. Wepresently give accounting recognition to the actions of regulators whereappropriate, as prescribed by SFAS No. 71, “Accounting for the Effects ofCertain Types of Regulation.” The preparation of these financial statementsrequires management to make estimates and judgments that affect the reportedamounts of assets, liabilities, revenues and expenses, and the relateddisclosure of contingent assets and liabilities. We believe that theapplication of the accounting policies, which are important to our financialposition and results of operations, requires significant judgments andestimates on the part of management. A description of the critical accountingpolicies that we adhere to is contained in the Management’s Discussion and Analysisof Financial Condition and Results of Operations in our Annual Report on Form10-K for the year ended December 31, 2006. We adopted SFAS No. 123(R),“Share-Based Payment,” as of January 1, 2006 and have 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 contained in thisQuarterly Report on Form 10-Q.

**ITEM 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

We do not have operations subject to risks of foreign currencyfluctuations. We do, however, use derivative financial instruments to manageexposure to interest rate fluctuations. Our objectives for holding derivativesare to minimize interest rate risks using the most effective methods toeliminate or reduce the impact of these exposures. Variable rate debtinstruments are subject to interest rate risk. In March 2007, we terminated twooutstanding interest-rate swap agreements, with original maturities of June2008, in exchange for $1,936,000 in proceeds. Proceeds of $609,000 wererecognized as an offset to interest expense in the first six months of 2007.The unrecognized portion of the proceeds is recorded as a component ofaccumulated other comprehensive income (loss) in shareholders’ equity and willbe recognized as an offset to interest expense over the remaining original termof the agreement (12 months ending in June 2008). Immediately following thetermination of the two agreements discussed above, we executed a new interest-rateswap agreement, effectively locking in the interest rate on $60,000,000 ofvariable-rate debt through March of 2010.

The cumulative gain or loss on current 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. Our earnings are affected by changes ininterest rates as a portion of its long-term debt has variable interest ratesbased on LIBOR. If interest rates for the portion of our long-term debt basedon variable rates had averaged 10% more for the quarter ended June 30, 2007 ourinterest expense would have increased $206,000.

**ITEM 4. CONTROLS AND PROCEDURES**

Evaluation of Disclosure Controls and Procedures.

As of the end of the period covered by this Quarterly Report on Form10-Q (the Evaluation Date), we carried out an evaluation, under the supervisionand with the participation of our management, including our Chief ExecutiveOfficer and Chief Financial Officer, regarding the effectiveness of the designand operation of our disclosure controls and procedures (as defined in Rule13a-15(e) promulgated under the Securities and Exchange Act of 1934, asamended). Based upon that evaluation, our Chief Executive Officer and ChiefFinancial Officer have concluded that, as of the end of the period covered bythis Quarterly Report, our disclosure controls and procedures were effective inensuring that information required to be disclosed by us in the reports that wefile or submit under the Exchange Act is recorded, processed, summarized andreported within the time periods specified in applicable rules and forms andthat such information is accumulated and communicated to our management,including our Chief Executive Officer and Chief Financial Officer, in a mannerthat allows timely decisions regarding required disclosure.

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There have been nochanges in our internal control over financial reporting during our mostrecently completed fiscal quarter that have materially affected, or arereasonably likely to materially affect, our internal control over financialreporting.
| **PART II. OTHER INFORMATION** |
|--------------------------------|
| ** **                     |
| Item 1.                        |   | Legal Proceedings. |   |   |
|                           |   | Other than routine litigation incidental to our  business, including the items listed below, there are no pending material  legal proceedings to which we are a party or to which any of our property is  subject. |
|                           |   |   |   |   |
|                           |   | HickoryTech is investigating a potential civil  dispute being discussed with a municipality regarding contract payments from  HickoryTech to the municipality in support of the Company’s CLEC product  line. No formal dispute or claim has been filed to-date. |
|                           |   |   |   |   |
|                           |   | In June 2007, HickoryTech withdrew its civil  complaint against a large interexchange carrier related to an access  avoidance scheme for prepaid calling card traffic dating back to 1999. In  return for the settlement of this complaint and release of further claims on  this matter, HickoryTech received a cash payment. |
|                           |   |   |   |   |
| Item 1A.                       |  Risk Factors. |   |   |
|                           |   | There have not been any material changes to the risk  factors previously disclosed in Item 1A, “Risk Factors,” of our Annual Report  on Form 10-K for the fiscal year ended December 31, 2006. |
|                           |   |   |   |   |
| Item 2.                        |   | Unregistered Sales of  Equity Securities and Use of Proceeds. |   |   |
|                           |   | None. |   |   |
|                           |   |   |   |   |
| Item 3.                        |   | Defaults Upon Senior  Securities. |   |   |
|                           |   | None. |   |   |
|                           |   |   |   |   |
| Item 4.                        |   | Submission of Matters  to a Vote of Security Holders. |   |   |
|                           |   | a. | The annual shareholders’ meeting was held on May 7,  2007. |   |   |
|                           |   | b. | Three directors were elected at the annual meeting  to serve three-year terms. The names of the directors elected at the annual  meeting and the applicable votes were as follows: |
|                                |  |  |  |  |  |

 
| Director          | ** ** | **For**    | ** ** | **Withheld** | ** ** |
|-------------------|------------|------------|------------|--------------|------------|
|              |       |       |       |         |       |
| James H. Holdrege |       | 10,260,048 |       | 573,580      |       |
| Lyle G. Jacobson  |       | 902,154    |       | 1,931,474    |       |
| Starr J. Kirklin  |       | 10,132,470 |       | 701,159      |       |

 
|  |   | c. | A proposal to approve our amended and restated  Employee Stock Purchase Plan was approved at the annual meeting. The votes  were as follows: |
|--|--------|----|----------------------------------------------------------------------------------------------------------------------------------------------|

 
| For              |   | 5,881,746 |   |
|------------------|--------|-----------|--------|
| Against          |   | 503,769   |   |
| Abstain          |   | 199,376   |   |
| Broker Non-votes |   | 4,248,737 |   |

 
| Item 5. |   | Other Information. |   |   |
|---------|--------|--------------------|--------|--------|
|    |   | None.              |   |   |

 

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Item 6. ExhibitsListing.
|        | Exhibit 31.1 Certification pursuant to Rule  13a-14(a) under the Exchange Act, as adopted pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002 |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                 |   |
|   | Exhibit 31.2 Certification pursuant to Rule  13a-14(a) under the Exchange Act, as adopted pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002 |
|   |                                                                                                                                                 |   |
|   | Exhibit 32.1 Certification pursuant to 18 U.S.C.  1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                         |
|   |                                                                                                                                                 |   |
|   | Exhibit 32.2 Certification pursuant to 18 U.S.C.  1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                         |

 

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SIGNATURES

Pursuant to the requirements ofthe Securities Exchange Act of 1934, the registrant has duly caused this reportto be signed on its behalf by the undersigned, thereunto duly authorized.
| Dated: | August 1, 2007                                       |   | 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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