Nuvera Communications, Inc. - Annual Report: 2007 (Form 10-K)

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

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

For the Fiscal Year Ended December 31, 2007

or

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

Commission File Number: 0-3024

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

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

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

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

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

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

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

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

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

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

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PART I

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

Item 1. Business

General Development of Business

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

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

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

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

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

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

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

Telecom Segment

Cellular Segment

Phonery Segment

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

Narrative Description of Business

Telecom Segment

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

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

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

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

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

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

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

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Cellular Segment

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

Phonery Segment

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

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

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

Regulatory Matters

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

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

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

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

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

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

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

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

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

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

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

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

Competition

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

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

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

Employees

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

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Executive Officers of the Registrant

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

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

Background of Executive Officers

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

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

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

Item 1A.    Risk Factors.

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

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

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

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

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

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

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

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

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

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

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

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

Technological advances in the telecommunications industry create increased operating costs.

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

Future regulation may result in lower revenues.

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

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

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

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

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

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

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

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

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

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

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

The Company’s stock price is volatile.

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

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

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

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

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

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

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

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

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

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

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

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

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

Item 1B.    Unresolved Staff Comments.

None.

Item 2.   Properties

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

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

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

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

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

The Company owns various buildings and related land as follows:

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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.

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

Item 3.    Legal Proceedings

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

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

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

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PART II

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

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

Record Holders

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

Dividends

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

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

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Item 6.   Selected Financial Data

Selected Income Statement Data for the Company (consolidated):

Selected Balance Sheet Data:

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

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

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Results of Operations for 2007, 2006 and 2005

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

Consolidated Results of Operations

2007 Compared to 2006

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2006 Compared to 2005

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Results of Operations by Business Segment

Telecom Segment

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

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

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

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

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

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

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

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

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Cellular Segment

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

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

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

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

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

Phonery Segment

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

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

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

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

Other Income and Interest Expense

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

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

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

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

Liquidity and Capital Resources

Cash Flows from Operations

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

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

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

Cash Flows from Investing Activities

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

Cash Flows Used In Financing Activities

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

Dividends

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

Share Repurchase

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

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Long Term Obligations

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

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

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

Liquidity Outlook

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

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

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

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

Effects of Inflation

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

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Critical Accounting Policies and Estimates

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

Valuation of Long-Lived Assets:

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

Valuation of Goodwill:

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

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Depreciation of Property, Plant and Equipment

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

Revenue Recognition:

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

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

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

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

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

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

Income Taxes:

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

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

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

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

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

Recently Issued Accounting Pronouncements

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

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

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

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

Item 7a. Quantitative and Qualitative Disclosures About Market Risk

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

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Item 8. Financial Statements and Supplementary Data

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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

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

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

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

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

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

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

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Table of Contents

NEW ULM TELECOM, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2007 AND 2006