UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-K

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

For the Fiscal Year Ended December 31, 2004
or

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

Commission File Number: 0-3024

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

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

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

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

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

Common Stock, $1.66 par value
Title of Class

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

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

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes      No X

As of June 30, 2004, the aggregate market value of the common stock held by non-affiliates of the registrant was $42,894,045 based on the last sale price of $9.00 on The OTC Bulletin Board.

The total number of shares of the registrant’s common stock outstanding as of March 22, 2005: 5,115,435.

Documents Incorporated by Reference: Certain information required by Part III, Items 10-14 of this document is incorporated by reference to specified portions of the registrant’s definitive proxy statement for the annual meeting of shareholders to be held May 5, 2005.

PART I

Item 1.   Business

General Development of Business

New Ulm Telecom, Inc. was incorporated in 1905 under the laws of the State of Minnesota, with headquarters in New Ulm, Minnesota. The Company’s principal line of business is the operation of three incumbent local exchange telephone companies (ILECs). This business consists of connecting customers to the telephone network, providing switched service and dedicated private lines, connecting customers to long distance service providers and providing many other services associated with ILECs. The Company also provides cable television services, Internet access services, including both dial-up access and high-speed digital subscriber line or DSL access, long distance service and installs and maintains telephone systems to the areas in and around its ILEC service territory in southern Minnesota and northern Iowa. The Company began offering service as a competitive local exchange carrier (CLEC) in the city of Redwood Falls, Minnesota in 2002. The Company also has a 9.88% investment in Midwest Wireless Holdings L.L.C. a wireless communications provider in southern Minnesota, northern Iowa, and southwestern Wisconsin. The Company also has a 25.18% investment in FiberComm, LC, a competitive local exchange carrier (CLEC), in Sioux City, Iowa.

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

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

The Company and its five wholly-owned subsidiaries are organized into three business segments as follows:

Telecom Segment

• This Segment contains the operations of the Company’s incumbent local exchange carriers: (ILEC’s) New Ulm Telecom, Inc. (New Ulm), the parent company; Western Telephone Company (Western), a wholly-owned subsidiary; Peoples Telephone Company (Peoples), a wholly-owned subsidiary; its competitive local exchange carrier (CLEC) New Ulm Telecom, Inc.; its investment in FiberComm, LC, a CLEC located in Sioux City, Iowa; and the Company’s operations that provide Internet and video services.

Cellular Segment

• This Segment contains the sales and service of cellular phones and accessories, and the Company’s ownership in Midwest Wireless Holdings L.L.C. (MWH) in which New Ulm Cellular #9, Inc. (Cell #9), a wholly-owned subsidiary, owns 7.55% and Peoples Telephone Company, a wholly-owned subsidiary, owns 2.33%. The Company’s total ownership of MWH was 9.88% as of December 31, 2004.

Phonery Segment

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

Financial information about the Company’s industry segments is included commencing on page 38 of this Form 10-K.

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Dispositions

In January, 2002, Cherokee Cellular, Inc. (CCI) and Three Lakes Cellular, Inc. (TLCI), which owned units of MWH, dissolved. Peoples had an ownership interest in each corporation. The Corporations entered into a transaction that allowed CCI and TLCI to transfer MWH shares directly to the stockholders. Prior to this transaction, Peoples contributed $2,166,000 of cash to these corporations. The stockholders of CCI and TLCI assumed an increase in the value of MWH, resulting in a taxable gain. Recognition of the gain occurred due to the step-up value resulting in the appreciation of the value of MWH. The Company recorded a pre-tax gain of $1,157,915 ($697,065 net of tax), which is reflected in the Cellular Segment in 2002.

Acquisitions

The dissolution of CCI and TLCI, as explained above, allowed the Company to increase its direct ownership in MWH. Peoples acquired an additional 12,050 units in MWH through the dissolution of these two Corporations.

The dissolution of TLCI also allowed Peoples to purchase additional units in MWH. Peoples purchased 12,295 units from other partners in TLCI for approximately $1,940,000 in cash. The investment income subsequent to these transactions is reflected in the Cellular Segment.

Narrative Description of Business

Telecom Segment

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

The Telecom Segment operates three ILEC’s (New Ulm, Western, and Peoples) and one CLEC in the City of Redwood Falls, Minnesota. New Ulm and Western are independent telephone companies that are regulated by the Minnesota Public Utilities Commission (MPUC), and Peoples is an independent telephone company that is regulated by the Iowa Utilities Board (IUB). The Telecom Segment has not experienced a major change in the scope or direction of its operations during the past year. At December 31, 2004, the Company served approximately 17,000 access lines. The Company provides telephone service in Minnesota to the cities of New Ulm, Courtland, Klossner, Searles, Redwood Falls (city only), Springfield, Sanborn and the adjacent rural areas in Brown, Nicollet, Blue Earth and Redwood counties in south central Minnesota, approximately 90 to 120 miles southwest of Minneapolis, Minnesota. The segment also operates six cable television systems in Minnesota (in the cities of New Ulm, Courtland, Redwood Falls, Springfield, Sanborn and Jeffers, and the surrounding rural areas), and one cable television system in Iowa (in the city of Aurelia), servicing approximately 4,470 customers.

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

Alternatives to the Company’s service include customers leasing private line switched voice and data services in or adjacent to the territories served by the Company, which permits the bypassing of local telephone facilities. In addition, microwave transmission services, wireless communications, fiber optic and coaxial cable deployment, Voice over Internet Protocol (VoIP), satellite and other services permit bypass of the local exchange network. These alternatives to local exchange service

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represent a potential threat to the Company’s long-term ability to provide local exchange services at economical rates.

In order to meet the competition present in the industry, New Ulm, Western and Peoples have deployed new technology for their local exchange networks to increase operating efficiencies and to provide new services to their customers. These new technologies include the latest release of digital switching technology on all of the ILECs switches and installation of SS7 (an out-of-band system) for all of its access lines. New Ulm, Western, and Peoples have also constructed fiber rings (redundant route designs which allow traffic to re-route if trouble appears in the network) that protect their local networks and enable them to provide a very reliable level of service to their customers. The value of the local network is also enhanced by the ability to offer access to high-speed Internet (DSL) to over 95% of their customers. DSL technology offers customers access to high-speed Internet and traditional voice connectivity over the same connection. In addition, New Ulm and Western have enhanced their networks to offer video services over the same facilities that provide their customers with voice and Internet access. This technology is available to approximately 80% of their access lines.

New Ulm currently has competition in the City of Redwood Falls, Minnesota in the provision of traditional telephone service. Qwest is the incumbent provider. (New Ulm entered Redwood Falls as a CLEC in September 2002.) Competition does not currently exist in the other communities and areas served by New Ulm, Western or Peoples for traditional telephone service. The Company is also facing competition in the Minnesota communities of New Ulm, Redwood Falls, and Springfield in the provision of video services. Time Warner is the incumbent provider for video services in New Ulm and Mediacom is the incumbent provider in Redwood Falls and Springfield. Several companies also compete with the Company in providing Internet services. New Ulm, Western, and Peoples constantly respond to competitive pressure with active programs to market products and to enhance their infrastructure for higher customer satisfaction.

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

Cellular Segment

The Cellular Segment derives its revenue from the sales and service of cellular phones and accessories, and the Company’s ownership in MWH. Cell #9 owns a 7.55% and Peoples owns a 2.33% interest in MWH. MWH provides cellular phone service in southern Minnesota, northwestern Iowa and southwestern Wisconsin. The Company records equity earnings in MWH from Cell #9’s and Peoples’ equity ownership in MWH.

Phonery Segment

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

The Phonery Segment is a non-regulated telecommunications business which sells and services telephone apparatus, toll transport services and provides voice-mail services on a retail level

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primarily in the areas served by New Ulm, Western and Peoples. The Phonery specializes in quality custom installation and maintenance of local networking and transport solutions in telecommunications for end user customers.

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

Regulatory Matters

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

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

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

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

The FCC has an open docket on inter-carrier compensation as well as several dockets on VoIP. In February, 2005, the FCC issued a Notice of Public Rule Making (NRPM) requesting comments on various proposals for interconnection compensation reform. The Company cannot predict the outcome of such proceedings, nor can it estimate the impact.

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

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

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

Competition

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

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

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

Forward-Looking Statements

This Form 10-K contains forward-looking statements, as defined in the Private Securities Litigation Reform Act of 1995, that are based on management’s current expectations, estimates and projections about the industry in which the Company operates and management’s beliefs and assumptions. Such forward-looking statements are subject to important risks and uncertainties that could cause the Company’s future actual results to differ materially from such statements. These statements are not guarantees of future performance and involve certain risks, uncertainties and probabilities, which are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in such forward-looking statements, whether as a result of new information, future events or otherwise. Factors that might cause differences include, but are not limited to, the following:

• increased competition in core business segments which may decrease market share and or affect the pricing of services or products;
• the ability to retain key employees;
• changing market conditions which may affect growth rates in the industry;
• the ability to secure financing for future expansion and operations;
• the ability to improve operations with new technologies;
• required investment in technological innovations which may deplete capital resources;
• the continuation of historical trends, including continued declines in access lines and access minutes of use;

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• the economy in general;
• the future of the communications industry and communications services;
• the effect of legal and regulatory changes;
• the sufficiency of cash generated from current operations to fund future liquidity needs;
• adverse determinations in existing and future disputes regarding network access charge billings; and
• other risks and uncertainties which may affect operating results.

Additional information concerning these and other factors that could cause actual results or events to differ materially from current expectations are contained herein. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date on which they were made. Except as otherwise required by law, the Company undertakes no obligation to update any of its forward-looking statements for any reason.

Employees

As of March 22, 2005, the Company had 70 full-time equivalent employees.

Executive Officers of the Registrant

Set forth below are the names, ages and positions of the executive officers of the Company as of March 1, 2005.

The executive officers of the Company are elected annually and serve at the discretion of the Board of Directors. None of the Company’s executive officers is employed pursuant to a written employment contract. There are no familial relationships between any director or executive officer, except that the Chairman of the Board, Mr. James P. Jensen is the brother-in-law of Director, Mr. Gary Nelson.

Background of Executive Officers

Bill Otis has been President and Chief Executive Officer of the Company since 1985. Prior to being President and Chief Executive Officer of the Company he was the Officer Manager/Controller for New Ulm Telecom, Inc. from 1979 to 1985. Mr. Otis is also a director of MWH.

Barbara Bornhoft has been Vice President/Secretary of the Company since 1998.

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

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Item 2.   Properties

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

New Ulm’s host central office equipment was purchased in 1991 and consists of a Nortel Networks DMS-100/200 digital switch. New Ulm also has remote switching sites in three locations: two in New Ulm and one in the city of Courtland. The equipment at these remote switching sites is housed within specially designed central office equipment buildings.

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

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

The Company believes that its property is suitable and adequate to provide the necessary services and believes all properties are adequately insured. Note 5 to the financial statements, found on page 34 of this document, describes the mortgages and collateral relating to the above properties, while Note 2 to the financial statements, found on page 32 of this document, describes the Company’s depreciation policy.

The Company owns various buildings and related land as follows:

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

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

Item 3.    Legal Proceedings

There is no material litigation pending or threatened involving the Registrant or any of its subsidiaries at this time in any court, nor are there any proceedings known to be contemplated by governmental authorities.

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

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

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PART II

Item 5.    Market for the Registrant’s Common Equity and Related Stockholder Matters

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

Record Holders

As of March 22, 2005, there were approximately 1,356 holders of record of the Company’s common stock.

Dividends

Dividends were declared in 2004, 2003 and 2002.

Dividends were $.33 per share in 2004, $.33 per share in 2003 and $.33 per share in 2002. The Board of Directors reviews dividend declarations based on anticipated earnings, capital requirements and the operating and financial condition of the Company. There are security and loan agreements underlying CoBank notes that contain certain restrictions on distributions to stockholders, investment in, or loans to others.

Item 6.   Selected Financial Data

Selected Income Statement Data for the Company (consolidated):

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All per share data has been re-stated to reflect the three-for-one stock split effective January 10, 2002.

Selected Balance Sheet Data:

All per share data has been restated to reflect the three-for-one stock split effective January 10, 2002.

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

Results of Operations for 2004, 2003 and 2002

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

Non-GAAP Measurements

In addition to the GAAP results provided in this Form 10-K, the Company has furnished the non-GAAP measure of EBITDA. EBITDA may be reconciled to our GAAP financial measures as follows: EBITDA represents operating income, plus depreciation and amortization expense (noncash expenses). EBITDA, which is not a measure of financial performance or liquidity under United States GAAP, is provided because the Company understands that such information is used by certain investors when analyzing the financial position and performance of the Company. This measure does not replace the presentation of our GAAP financial results. Because of the variety of methods used by companies and analysts to calculate EBITDA, and the fact that EBITDA calculations may not accurately measure a company’s ability to meet debt service requirements, caution should be used in relying on any EBITDA presentation. This non-GAAP measure is provided as supplemental information to our investors in analyzing our performance.

This supplemental comparison is consistent with the manner in which management internally reviews results of operations and evaluates performance in that management reviews the results of operations on both a GAAP basis and using adjusted comparisons. Management does not use the adjusted comparisons in lieu of the comparable GAAP measures, but rather uses the adjusted comparisons to supplement its review of operations.

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Consolidated Results of Operations

2004 Compared to 2003

• 2004 consolidated revenues were $15,101,000, compared with $15,841,000 in 2003, a decrease of $740,000 or 4.7%. The Telecom Segment experienced decreases in its operating revenues resulting from access revenue reductions. These access revenue reductions reflected the continued decline in access minutes of use, reduced access rates, a decrease in settlements from the National Exhange Carrier Association (NECA) and a revenue reduction relating to Qwest disputed billings (see note 12 on page 37). Due to this ongoing dispute, network access revenues were decreased by $408,952 in June, 2004. This represents an adjustment for recognized revenues since 1995 (the start of the dispute). The billing dispute with Qwest is ongoing and management believes it has taken an appropriately conservative approach to the recording of Qwest revenues so that the Company does not expect significant future downward revenue adjustments for this dispute. A decrease in NECA settlements was attributed to the parent company, New Ulm Telecom, Inc. NECA settlements for the parent are based on the actual costs to provide service. In 2004 these settlements decreased approximately $375,000 due to a decline in central office switching and circuit equipment costs allocated to the interstate jurisdiction. The Company anticipates that it will continue to be affected by the common industry trends of declining access minutes of use and reduced access rates. The Company believes, despite the decline in the Telecom Segment revenues, that this sector has positioned itself for future revenue growth. The Company expects growth to be realized through increases in revenue due to new and expanded service offerings: digital video and digital subscriber line (DSL), Internet service provision, and the continued growth of a Competitive Local Exchange Carrier (CLEC) in the City of Redwood Falls, Minnesota. Also, the Company continually evaluates new and emerging technologies to keep the Company’s service offerings innovative and competitive. The Telecom segment has invested heavily in its infrastructure, which has allowed it to enhance its local network so that it could offer a “triple-play” of services to its subscribers. In the telecommunications industry, a “triple-play” of services refers to offering telephone, Internet, and video services over the same infrastructure. The Company expects that continued investment in its infrastructure will allow the Company to continue to offer its customers new technologies as they emerge, and that the geographic expansion of the Company’s service offerings will provide this segment with continued future growth. The Telecom segment invested $3,004,000 in its infrastructure in 2004, which allowed it to enhance its local network, offer new services to its subscribers and expand its service territory to Redwood Falls, Minnesota. The Cellular segment experienced an increase in revenues due to an increase in its sales and service revenues of cellular phones and accessories. The Phonery segment had no significant change.
• 2004 consolidated operating expenses were $12,469,000, compared with $11,867,000 in 2003, an increase of $602,000 or 5.1%. The Telecom segment provided $498,000 of the total increase, which related to expenses from an increase in the number of customers subscribing to Internet and video services and the continued growth of CLEC services in Redwood Falls, Minnesota. The Cellular segment had an increase in expense due to the increase in cellular phone and accessory sales. The Phonery segment expenses had no significant change.
• 2004 consolidated net income was $3,292,000 compared with $3,813,000 in 2003. The decrease in consolidated net income was $521,000 or 13.7%. This decrease was attributed to decreases in the Company’s access network revenues and an increase in operating expenses, offset by revenue increases in its non-regulated offerings, such as DSL and video services, a reduction in interest expense due to reduction of principal amounts outstanding and an increase in other investment income.

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2003 Compared to 2002

• 2003 consolidated revenues were $15,841,000, compared with $14,334,000 in 2002, an increase of $1,507,000 or 10.5%. The Telecom segment provided for the increase in revenues with the continued success of its new service offerings: digital video and DSL, which began in 2001, and the introduction of competitive local exchange services in Redwood Falls, Minnesota. The Telecom segment invested $4,132,000 in its infrastructure in 2003, which allowed it to enhance its local network, offer new services to its subscribers and expand its service territory to Redwood Falls, Minnesota. The other segments had no significant change.
• 2003 consolidated operating expenses were $11,867,000, compared with $10,754,000 in 2002, an increase of $1,113,000 or 10.3%. The Telecom segment provided $1,611,000 of the total increase, of which $624,000 related to depreciation expense, with the remaining increase due to the expenses associated with the segment’s new service offerings: digital video and DSL, and the introduction of CLEC services in Redwood Falls, Minnesota. Total Company write-offs of bankrupt carrier receivables in fiscal year 2002 were $400,000.
• 2003 consolidated net income was $3,813,000 compared with $3,990,000 in 2002. The decrease in consolidated net income was $177,000 or 4.4%. Consolidated net income in 2002 included a pre-tax gain of $1,157,000 ($697,000 after taxes) due to the dissolution of two corporations within the Cellular Segment. This increase was attributed to increased profitability of the Company’s telephone operations, including its non-regulated offerings, such as DSL and video services, a reduction in interest expense due to reduction of principal amounts outstanding and an increase in other investment income.

Results of Operations by Business Segment

Telecom Segment

Telecom Segment revenues represented 85.6% of 2004 consolidated operating revenues. Revenues are primarily earned by providing approximately 17,000 customers access to the local networks of its ILEC and CLEC operations, and by providing inter-exchange access for long distance network carriers. The Telecom segment also earns revenue through billing and collecting for various long distance companies, directory advertising, providing Internet services and video services (a new venture undertaken in 2001) to its subscribers. The Telecom segment also began offering CLEC services in the City of Redwood Falls, Minnesota in September 2002. Total Telecom segment revenues have increased 9.8% since 2002. All information contained in this table is before intercompany eliminations.

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Total Telecom segment revenues decreased $739,950 or 5.1% in 2004 over 2003 and increased $1,975,000 or 15.7% in 2003 over 2002.

Local network revenue increased in the Telecom segment by $243,000 or 6.1% in 2004 over 2003 and increased $256,000 or 6.9% in 2003 over 2002. The number of access lines served decreased 1.5% in 2004 over 2003, as compared to an increase of 2.3% in 2003 over 2002. The decrease in access lines in 2004 was primarily due to the decreased demand for access lines as DSL service became available to a greater portion of the Company’s service areas and as the Company satisfied customers’ desire for Internet services at higher speeds than is available through traditional dial-up service. DSL is used to provide both traditional voice connectivity and access to high-speed Internet service over the same facilities, which eliminates the need for customers to have second lines dedicated solely to providing Internet service. The increase in access lines in 2003 was primarily due to growth in the segment’s CLEC activity in Redwood Falls, which was started in late 2002. Growth in the segment’s basic voice service revenue for CLEC customers accounted for approximately $51,000 and $156,000 of the 2004 and 2003 increases in local network revenue, respectively. In addition, charges for the voice portion of DSL service were responsible for $169,000 and $114,000 of the 2004 and 2003 increases in local network revenues, respectively. Overall, the revenue increases were accomplished with promotion and packaging of vertical services, most notably, DSL, and focused marketing to potential customers. In 2002, the Telecom segment also entered into a number of interconnection agreements with wireless providers, which allows these providers access to its customers at the local service level. The interconnection agreements increased local network revenues by $36,000 for 2004 over 2003 and revenues were constant for 2003 over 2002.

Network access revenue decreased $1,684,000 or 24.7% in 2004 over 2003 and increased $585,000 or 9.4% in 2003 over 2002. Access minutes in 2004 decreased by 1.6% over 2003 and in 2003 decreased by 9.2% over 2002. The decreases in network access revenue were reflected by the overall decrease in minutes of use over the last two years and the negative effects of network access pricing, a common industry trend. Overall, the industry trend of decreasing minutes of use experienced by the Company was partially offset in the Telecom Segment by the increase in minutes of use generated by the CLEC activities in Redwood Falls. The continued utilization of the Internet (e-mail, voice-over-IP) and wireless services will likely erode any potential increases in the volume of switched access minutes of use, likely contributing to future decreases in network access revenues. The Telecom segment has invested over $14,900,000 in capital expenditures since 2002. These capital expenditures, which have enhanced this segment’s infrastructure, allowed New Ulm, Western, and Peoples to receive additional settlements from the National Exchange Carrier Association (NECA) in previous years. However, in 2004, the parent company, New Ulm Telecom, Inc. had a decrease in their NECA settlements due to a decline in central office switching and circuit equipment costs allocated to the interstate jurisdiction. New Ulm, Western, and Peoples are eligible for high-cost loop and safety net universal service funding. In 2004, the Telecom segment saw a decrease of $327,000 in the receipt of this funding compared to 2003. In 2003, the Telecom segment received $588,000 in additional funding over 2002. In June 2004, the Telecom segment recognized a $408,952 reduction in revenues due to the ongoing access billing dispute with Qwest, an interexchange carrier that provides long distance service. The dispute relates to the use of estimated terminating traffic and the related access charges. The dispute is ongoing and is before the Minnesota Public Utilities Commission for resolution. The Company’s reserves conservatively reflect its present expectations regarding the resolution of this pending matter. (See note 12 on page 37)

Other operating revenues increased $701,000 or 18.7% in 2004 over 2003 and increased $1,135,000 or 43.5% in 2003 over 2002. Due to the infrastructure enhancements that have taken place since 2000, the Telecom Segment offers video and Internet services over the existing

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infrastructure. The video product was responsible for $436,000 of increased revenues in 2004 as compared to $438,000 of the increase for 2003 over 2002. The Telecom segment provided additional Internet revenues of $256,000 in 2004 over 2003, and $227,000 in 2003 over 2002, primarily from the high-speed Internet portion of DSL service. The take-back of some billing and collection services by inter-exchange carriers resulted in a decreased revenues from 2004 to 2003 of $10,000, and a $41,000 decrease for 2003 over 2002.

Cash operating expenses increased $627,000 or 8.5% in 2004 over 2003 and $987,000 or 15.5% in 2003 over 2002. Increases in the cash operating expenses for the CLEC activity in Redwood Falls accounted for $114,000 of the total increases in 2004 over 2003 and $599,000 in 2003 over 2002. Cash operating expenses have increased due to the continued growth of CLEC operations in Redwood Falls, Minnesota and the increasing array of services offered, such as video and DSL, that allow the Company to offer the “triple-play” of services to its customers. The Telecom segment recognized the value of being able to compete in all aspects of communication services. This realization motivated the segment to enhance its awareness of customer satisfaction (including 24 hours a day, 7 days a week access to Internet support due to customer desire for this service), offer additional services (video and DSL), pursue aggressive marketing to achieve brand recognition, and provide solutions for customers’ evolving communications needs. The Company has expanded its services and product offerings in an effort to meet its objective of achieving 100% customer satisfaction by making the customer its top priority, deserving its best service, attitude and consideration. The Telecom segment also realizes the potential for growth by competitively offering its range of services to an increasing number of communities. The Telecom segment began offering its services in the City of Redwood Falls, Minnesota in September 2002. The Company is always striving for cost efficiencies and technological improvement to enhance its operating margins for the Telecom segment.

Non-cash operating expenses decreased $14,000 or 0.3% in 2004 over 2003 and increased $624,000 or 17.4% in 2003 over 2002. Depreciation expense was the main cause of the changes in non-cash operating expenses. There was very little change in the amount of depreciation in 2004 as compared to 2003 reflecting the effect of having some assets becoming fully depreciated. The increase in depreciation expense in 2003 as compared to 2002 was reflective of the new investments of over $14,900,000 in the segment’s infrastructure since 2002 as mentioned above. These investments have allowed the Telecom Segment to offer video and DSL services, as well as expand its service territory to Redwood Falls, Minnesota.

The Telecom segment capital expenditures for 2004 and 2003 were $3,004,000 and $4,132,000. The single largest construction project for both 2004 and 2003 consisted of building out facilities to provide video and DSL in the rural areas surrounding New Ulm. The segment had capital projects of $7,766,799 in 2002 due to building facilities in Redwood Falls for CLEC activities and $7,111,700 in 2001 due to the plant upgrades in the city of New Ulm, allowing the segment to offer video and DSL to its customers utilizing the same infrastructure. The segment’s capital budget for 2005 is approximately $2,649,000.

Cellular Segment

The Cellular segment operations include the sales and service of cellular phones and accessories, and the Company’s 9.88%, 9.88%, and 9.92% ownership interest in MWH in 2004, 2003, and 2002, respectively. The operating income from sales of cellular phones and accessories continues to grow due to increased sales and cellular activation commissions. The Cellular segment receives commissions from MWH for subscribing customers to their service. These commissions allow the Cellular segment to give customers discounts on cellular phones as incentives for customers to subscribe to MWH’s cellular phone service. Cellular investment revenues and operating income continue to grow as MWH adds customers. Acquisitions by MWH in Iowa and Wisconsin in 2000 have had a significant impact on revenues and profitability of MWH. MWH acquired additional properties in Iowa in 2003 that diluted the Company’s ownership from 9.92% to 9.88%.

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The operating revenues from sales of cellular phones and accessories, and activation commissions increased by $142,368 or 42.0% in 2004 over 2003, and $21,486 or 6.8% in 2003 over 2002. These increases primarily resulted from the commissions the Company received due to its success in selling MWH service. In 2004, Cellular investment income increased $725,000 or 26.7% over 2003 as compared to a decrease of $78,000 in 2003 over 2002. The 2004 increase was due to the overall growth in customers and profitability in MWH in 2004. The 2003 decrease was due primarily to increased depreciation as MWH continues to build-out its network infrastructure. The 2003 investment income decreased despite a 10% increase in revenues and a 3.6% increase in cash operating income in 2003 over 2002 for MWH.

The Company used the equity method, which applies the Company’s ownership percentage to MWH revenues and expenses for the segment information below.

A recap of income for the Cellular segment, which includes its share of the income from its investment in MWH (recorded on the equity method), is contained in the following table.

Phonery Segment

The Phonery Segment represented 11.4% of 2004 consolidated operating revenues. Revenues are earned primarily by sales, installation and service of business telephone systems and data communications equipment. In addition, the Phonery segment leases network capacity to provide additional network access revenues and re-sells long distance service. This segment’s expertise is the quality installation and maintenance of CPE, provision of customer long distance needs and transport solutions in communications to end-user customers. All information contained in this table is before intercompany eliminations.

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Phonery revenues decreased $28,000 or 1.5% in 2004 over 2003 and increased $46,000 or 2.5% in 2003 over 2002. In 2004, the Phonery segment had an increase in sales, service and installation revenues of approximately $120,000. This increase was offset by a decrease in the resale of long distance toll revenues of approximately $35,000 and a decrease of approximately $113,000 in leased network capacity revenues. The decrease in leased network capacity network revenues included a June 2004 decrease of $19,745 related to the Qwest dispute (see note 12 on page 37). In 2003, a decrease in sales, service and installation revenues of approximately $115,000 was offset by an increase in the re-sale of long distance toll revenues of approximately $145,000 and an increase of approximately $16,000 in leased network capacity.

Cash operating expenses decreased $26,000 or 2.8% in 2004 over 2003, and increased $26,000 or 2.9% in 2003 over 2002. The changes in cash operating expenses related primarily to the changes in the expenses associated with the revenues for the resale of long distance over the past two years. The Phonery segment continues striving for cost efficiencies and continues to seek new technologies to better serve customer needs and to operate efficiently.

Noncash operating expenses decreased $4,000 or 5.0% in 2004 over 2003 and $1,000 or 1.9% in 2003 over 2002. The decreases were attributable to decreased depreciation expense, as some of the segment’s older equipment has become fully depreciated.

Other Income and Interest Expense

Interest expense decreased $13,000 in 2004 over 2003 and $315,000 in 2003 over 2002. The 2004 decrease can be attributed to continued reduction of amounts outstanding and historically low interest rate on the Company’s debt. The 2003 decrease over 2002 was due primarily to a 2002 payment of $271,000 for the early extinguishment of the Phoenix debt (which is included in interest expense in 2002). The CoBank loan weighted average interest rate is variable and was 3.95% at December 31, 2004, 2.62% at December 31, 2003 and 2.82% at December 31, 2002.

Interest income decreased approximately $15,000 in 2004 over 2003 and $36,000 in 2003 over 2002. The decrease in 2004 was primarily due to historically low interest rates on invested funds. The decrease in 2003 was primarily due to the payoff of a note receivable from an officer in May, 2003.

The Company recognized a one-time pretax gain of $1,157,915 in 2002 due to the dissolution of two cellular corporations held by the Telecom Segment.

Other investment income decreased $157,000 in 2004 over 2003, as compared to an increase of $348,000 in 2003 over 2002. Included in other income was the Company’s 25.18% equity

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ownership in FiberComm, LC. The Company recorded a $179,000 loss from FiberComm, LC in 2004, as compared to recording income of $64,000 in 2003. Also included in other investment income was the patronage credit the Company earns from CoBank as part of its debt agreements with CoBank. The patronage earned in 2004 was $184,000, as compared to $154,000 in 2003.

Factors Affecting Future Performance

The Company’s future results of operation and other forward-looking statements are subject to risks and uncertainties, including, but not limited to, the effects of deregulation in the telecommunications industry as a result of the Telecommunications Act of 1996. Such forward-looking statements are subject to risks and uncertainties that could cause the Company’s actual results to differ materially from such statements and the Company disclaims any obligation to update or revise any forward-looking statements based on the occurrence of future events or the receipt of new information. See “Forward-Looking Statements” in Item 1 of this Form 10-K.

Liquidity and Capital Resources

Cash Flows from Operations

Cash generated by operations for the year ended December 31, 2004 was $7,819,000 as compared to $8,110,000 in 2003 and $5,767,000 in 2002.

The 2004 decrease was primarily the result of the $521,000 decrease in net income in 2004 as compared to 2003. This was due primarily to the conservative reduction in revenue taken to adjust reserves for the billing dispute with Qwest. (See note 12 on page 37)

The 2003 increase was driven primarily by an increase in operating income of $393,000 in 2003 as compared to 2002 despite an increase in depreciation and amortization expense (non-cash) of $623,000. This was primarily due to efficiencies achieved in 2003 as it was the second year of CLEC activities in Redwood Falls, Minnesota, and an increase in income taxes deferred to future periods due to changes in federal income tax lives and methods for depreciation of fixed assets, which allow the Company to deduct these assets for tax purposes more quickly than for financial statement purposes.

Cash generated by operations continues to be the Company’s primary source of funding for existing operations, capital expenditures, debt service, and dividend payments to shareholders. At December 31, 2004, the Company had working capital of $227,000 as compared to working capital of $1,245,000 at December 31, 2003. Cash and cash equivalents at December 31, 2004 were $2,739,000 as compared to $2,201,000 at December 31, 2003.

Cash Flows from Investing Activities

The Company operates in a capital intensive business. The Company is continuing to upgrade its local networks for changes in technology to provide the most advanced services to its customers. Additions to property, plant and equipment were $3,004,000 in 2004, $4,132,000 in 2003 and $7,767,000 in 2002. The 2004 and 2003 additions were financed through cash flows from operations. The additions in 2002 were financed partially through operations and partially through advances on the Company’s revolving credit facility with CoBank. The Company expects plant additions to total $2,649,000 for 2005, which are expected to be financed through cash flows from operations. In 2002, the Company also expended $4,106,000 for additional ownership units in MWH

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Cash Flows from Financing Activities

The Company advanced long-term debt of $9,178,000 in 2002 from its revolving credit facility with CoBank. These advances were used to help finance its additions to property plant and equipment primarily for the build-out of its CLEC network in Redwood Falls, Minnesota, and expanding its cable television (CATV) offerings in New Ulm, Minnesota. The Company also utilized these funds to retire previously issued debt from Phoenix Home Life Insurance Company of $2,567,000 in 2002 and purchase additional ownership units of MWH.

Dividends

The Company paid dividends of $1,704,466 in 2004, $1,704,517 in 2003, and $1,704,517 in 2002. This represented a dividend of $.33 per share for the past three years. The Company continues to reinvest in its infrastructure while maintaining dividends to shareholders. The Board of Directors reviews dividend declarations based on anticipated earnings, capital requirements and the operating and financial condition of the Company. Paying dividends at the existing level is not expected to negatively impact the liquidity of the Company.

Share Repurchase Program

During the first quarter of 2004, the Company repurchased 150 shares of its common stock at $9.35 per share in a private transaction. The repurchase was made pursuant to the default provisions of a loan agreement between the Company and a former non-executive officer employee. The Company repurchased no shares in 2002 or 2003. At this time, the Company does not anticipate any significant share repurchases in 2005.

Long Term Obligations

The Company’s long-term obligations consist primarily of debt issued from CoBank. In December, 2001, the Company refinanced its revolving credit facilities with CoBank with a $15 million term loan and a reducing revolving credit facility of $10 million (total debt outstanding under both facilities at December 31, 2001 was $17,566,666). Interest on both CoBank loans is variable based on CoBank’s reference rate. The interest rates on both CoBank loans were 3.95% at December 31, 2004 and 2.62% at December 31, 2003. The Company also has an unsecured loan in the amount of $178,246, with the City of Redwood Falls, Minnesota that bears interest at 5%.

The following table details the Company’s contractual obligations, along with the cash payments due each period (excluding interest expense).

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Liquidity Outlook

The Company has not conducted a public equity offering. It operates with original equity capital, retained earnings and additions to indebtedness in the form of senior debt and bank lines of credit. The Company believes its debt to total capital proportions of 40 to 60 percent will be adequate for the foreseeable future.

By utilizing cash flow from operations and current cash balances, the Company feels it has adequate resources to meet its anticipated operating, capital expenditures, and debt service requirements.

Effects of Inflation

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

Critical Accounting Policies and Estimates

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

Valuation of Long-Lived Assets:

In 2002, the Company adopted SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” Under this statement, the Company would record impairment losses on long-lived assets used in operations when events and circumstances indicate the assets might be impaired and the undiscounted cash flows estimated to be generated by those assets are less than the carrying amounts of those assets. In assessing the recoverability of long-lived assets, the Company compares the carrying value to the undiscounted future cash flows the assets are expected to generate. If the total of the undiscounted future cash flows is less than the carrying amount of the assets, the Company would write down such assets based on the excess of the carrying amount over the fair value of the assets. Fair value is generally determined by calculating the discounted future cash flows expected from those assets. Changes in these estimates could have a material adverse effect on the assessment of our long-lived assets, thereby requiring us to write down the assets. Write-downs of long-lived assets are recorded as impairment charges and are a component of operating expenses. The Company has reviewed its long-lived assets and concluded that no impairment charge on its long-lived assets is necessary.

Valuation of Goodwill:

The Company has goodwill on its books related to prior acquisition of telephone properties and acquisition of ownership interests in MWH. The Company was required to test goodwill for

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impairment annually or at other times if events have occurred or circumstances exist that indicate the carrying value of goodwill may no longer be recoverable. The impairment test for goodwill involves a two-step process: step one consists of a comparison of the fair value of a reporting unit with its carrying amount, including the goodwill allocated to each reporting unit. If the carrying amount is in excess of the fair value, step two requires the comparison of the implied fair value of the reporting unit goodwill with the carrying amount of the reporting unit goodwill. Any excess of the carrying value of the reporting unit goodwill over the implied fair value of the reporting unit goodwill will be recorded as an impairment loss, which is a component of operating expenses. The Company tested goodwill for impairment and concluded that no impairment charge on its existing goodwill was necessary as of December 31, 2004, nor has it recorded impairment charges for goodwill in prior years.

Depreciation of Property, Plant and Equipment

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

Revenue Recognition:

The Company recognizes revenue when services are rendered. The majority of the Company’s revenues are earned from providing services to its customers and providing access to its network to inter-exchange carriers.

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

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

Interstate access rates are established by a nationwide pooling of companies known as the National Exchange Carriers Association (NECA). The FCC established NECA in 1983 to develop and administer interstate access service rates, terms and conditions. Revenues are pooled and redistributed on the basis of each Company’s actual or average costs. New Ulm settlements from the pools are based on its actual costs to provide service, while Western and Peoples settle based on nationwide average schedules. Access revenues for New Ulm include an estimate of the final cost study for the year which is trued up subsequent to December 31. Management believes the estimates included in the preliminary cost study are reasonable. There has been a decline in the level of interstate access charges paid by the carriers in recent years, and the Company believes this trend will continue. The Company cannot predict the future impact that industry changes will have on interstate access revenues in 2005.

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

Recently Issued Accounting Pronouncements

In March, 2004, the FASB issued EITF 03-16, “Accounting for Investments in Limited Liability Companies.” This requires that an investment in a limited liability company (LLC) that maintains a specific ownership account for each investor should use the equity method of accounting unless the interest is so minor that the investor has virtually no influence over operating and financial policies. Practice has generally viewed investments of more than 3 to 5 percent to be more than minor. EITF 03-16 is effective for periods beginning after June 15, 2004. The adoption of these provisions did not have a material impact on the Company’s financial position or results of operation.

In December, 2004, the FASB issued SFAS No. 123(R), “Share-Based Payments,” which is a revision of SFAS No.123 and supersedes APB Opinion No.25. SFAS No.123(R) requires all share-based payments to employees, including grants of employee stock options, to be valued at fair value on the date of the grant, and to be expensed over the applicable vesting period. SFAS 123 (R) is effective for all stock-based awards granted on or after July 1, 2005. In addition, companies must also recognize compensation expense related to any awards that are not fully vested as of the effective date. The adoption of SFAS 123(R) is not expected to have a material impact on the Company’s financial position or results of operation.

Item 7a.    Quantitative and Qualitative Disclosures About Market Risk

The Company does not have operations subject to risks of foreign currency fluctuations, nor does the Company use derivative financial instruments in its operations or investment portfolio. The Company’s earnings are affected by changes in interest rates, as its long-term debt is based on a national variable rate. If interest rates for the portion of the Company’s long-term debt based on variable rates had averaged 10% more (2.94% to 3.23%) for the entire year ended December 31, 2004, the Company’s interest expense would have increased approximately $55,000 in 2004. Should interest rates rise significantly, management would likely act to mitigate its exposure to the change by converting a portion of its variable-rate debt to fixed-rate debt.

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Item 8.    Financial Statements and Supplementary Data

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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

We have audited the accompanying consolidated balance sheets of New Ulm Telecom, Inc. (a Minnesota Corporation) and subsidiaries as of December 31, 2004 and 2003, and the related consolidated statements of income, stockholders’ equity and cash flows for each of the years in the three-year period ended December 31,2004. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We did not audit the financial statements of Midwest Wireless Holdings L.L.C., a limited liability company, the investment in which, as discussed in Note 3 to the financial statements, is accounted for by the equity method of accounting. The investment in Midwest Wireless Holdings L.L.C. was $17,685,547 and $15,155,015 as of December 31, 2004 and 2003, respectively, and the equity in its net income was $3,436,159, $2,710,717 and $2,788,861 for each of the three years in the period ended December 31, 2004. The financial statements of Midwest Wireless Holdings L.L.C. were audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to the amounts included for Midwest Wireless Holdings L.L.C., is based solely on the report of the other auditors.

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

In our opinion, based on our audits and the report of other auditors, the consolidated financial statements referred to above, present fairly, in all material respects, the financial position of New Ulm Telecom, Inc. and subsidiaries as of December 31, 2004 and 2003, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2004 in conformity with accounting principles generally accepted in the United States of America.

/s/ KIESLING ASSOCIATES LLP

West Des Moines, Iowa
February 4, 2005, except for Note 3, for which
the date is February 11, 2005

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NEW ULM TELECOM, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2004 AND 2003

ASSETS

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

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NEW ULM TELECOM, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS (Continued)
DECEMBER 31, 2004 AND 2003

LIABILITIES AND STOCKHOLDERS’ EQUITY

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

25

NEW ULM TELECOM, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002

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

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NEW ULM TELECOM, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
FOR THE THREE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002

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

27

NEW ULM TELECOM, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002

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

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NEW ULM TELECOM, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

New Ulm Telecom, Inc.’s (Company) principal line of business is providing local telephone service, Internet, digital video, and access to long-distance telephone service through local exchange networks. The Company owns and operates three independent telephone companies serving seven communities in southern Minnesota, one community in Iowa and the adjacent rural areas. The Company also has investments in cellular entities and a competitive local exchange carrier (CLEC), and operates cable television systems in eight communities.

Principles of Consolidation

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

Accounting Estimates

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

Cash Equivalents

All highly liquid investments with a maturity of three months or less at the time of purchase are considered cash equivalents.

Receivables

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

Materials, Supplies and Inventories

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

Property, Plant and Equipment

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

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NEW ULM TELECOM, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Recoverability of Long-Lived Assets

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

Investments and Other Assets

Investments in a MWH and FiberComm, LC are recorded using the equity method of accounting, which reflects original cost and equity in undistributed earnings and losses, because management of the Company believes they have the ability to significantly influence the operating and financial policies of these companies.

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

Goodwill and Intangible Assets

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

Revenue Recognition

Revenues are recognized when earned. Local network, cable television and Internet revenues are recognized over the period a subscriber is connected to the network. Interstate access revenues are based on settlements with the National Exchange Carrier Association. Interstate access settlements are based on cost studies for New Ulm Telecom, Inc. and by nationwide average cost schedules for two of its subsidiaries, Western Telephone Company and Peoples Telephone Company. Access revenues for New Ulm Telecom, Inc. include estimates which management believes are reasonable, pending finalization of cost studies. Local network and intrastate access revenues are based on tariffs filed with the state regulatory commissions.

Interest During Construction

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

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NEW ULM TELECOM, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Income Taxes and Investment Tax Credits

The provision for income taxes consists of an amount for taxes currently payable and a provision for tax consequences deferred to future periods. Deferred income taxes are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Significant components of the Company’s deferred taxes arise from differences in the basis of property, plant, and equipment due to the use of accelerated depreciation methods for tax purposes and partnerships due to the difference between book and tax income. For financial statement purposes, deferred investment tax credits are being amortized as a reduction of the provision for income taxes over the estimated useful lives of the related property, plant and equipment. Deferred investment tax credits have been fully amortized at December 31, 2004.

Credit Risk

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

Basic and Diluted Net Income Per Common Share

Basic and diluted net income per common share is based on the weighted average number of shares outstanding of 5,115,435 for 2004, 5,115,585 for 2003, and 5,115,585 for 2002. All per share data has been restated to reflect the three-for-one stock split effective January 10, 2002.

Reclassifications

The consolidated financial statements of New Ulm Telecom, Inc. and its subsidiaries include the following three segments: (i) Telecom Sector, (ii) Cellular Sector, (iii) Phonery Sector. All intercompany activities have been eliminated from the consolidated financial statements.

Beginning in the first quarter quarter 2004, New Ulm Telecom, Inc. and its subsidiaries reported business segments of New Ulm Telecom, Western Telephone, Peoples Telephone, New Ulm Phonery, and Cellular on the basis of functionality. The new basis of segment reporting reflects the integration of New Ulm Telecom, Inc.’s management, sales, service and support functions in the three areas of Telecom, Cellular, and Phonery, as well as reflecting the level at which management reviews and makes resource allocation and other management decisions regarding the operation of the Company. All segment information reported in 2003 has been reclassified to conform to the new presentation. These reclassifications had no impact on previously reported consolidated operating income, net income or stockholders’ equity. See note 13 on page 38, for segment information.

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NEW ULM TELECOM, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 2 – PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment for December 31, 2004 and 2003 includes the following:

Depreciation is computed using the straight-line method based on estimated service or remaining useful lives of the various classes of depreciable assets. The composite depreciation rates on telecommunications plant and equipment for the three years ended December 31, 2004, 2003 and 2002 were 7.2%, 7.6% and 7.4%, respectively. Other property is depreciated over estimated useful lives of three to fifteen years.

NOTE 3 – CELLULAR INVESTMENTS

Cellular investments include a 9.88% ownership interest in units of Midwest Wireless Holdings L.L.C. (MWH) at December 31, 2004 and 2003. This entity provides cellular phone service to southern Minnesota, northwestern Iowa and southwestern Wisconsin. The difference between the carrying amount of the MWH investment and the underlying equity in the net assets of MWH at the time of purchase of ownership interests is $4,890,389 as of December 31, 2004, net of accumulated amortization of $156,391.

Cellular investments consist of the following:

Income and cash distributions from MWH were as follows for the years ended December 31, 2004, 2003 and 2002:

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NEW ULM TELECOM, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 3 – CELLULAR INVESTMENTS (Continued)

The following is summarized financial information from MWH as of, and for, the years ended December 31, 2004, 2003 and 2002:

In January of 2002, Cherokee Cellular, Inc. and Three Lakes Cellular, Inc. were dissolved. These corporations contained units in MWH. Peoples Telephone Company owned stock in each corporation. The units of Midwest Wireless Holdings L.L.C. were transferred directly to the shareholders of Cherokee Cellular, Inc. and Three Lakes Cellular, Inc. The Company recognized a nonmonetary gain of $1,157,915 on the transfer of units in Midwest Wireless Holdings L.L.C.

NOTE 4 – GOODWILL AND INTANGIBLES

Under the provisions of SFAS No. 142, goodwill and intangible assets with indefinite useful lives are not amortized, but instead are tested for impairment on at least an annual basis.

During 2003 and 2004, the Company tested the value of its goodwill as required by SFAS No. 142 and determined that the carrying value of these assets were not impaired.

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

Amortizable intangibles consist of the following:

33

NEW ULM TELECOM, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 5 – LONG-TERM DEBT

Long-term debt is as follows: