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

                                    FORM 10-K
(Mark One)
     X        ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                 SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]

                   For the fiscal year ended December 31, 2000

                                       OR

            TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]

                         Commission File Number: 0-18587

                        HECTOR COMMUNICATIONS CORPORATION
             (Exact name of registrant as specified in its charter)

          Minnesota                                            41-1666660
---------------------------------                         --------------------
  (State or other jurisdiction                             (Federal Employer
of incorporation or organization)                          Identification No.)

                              211 South Main Street
                                Hector, MN 55342
              (Address of principal executive offices and zip code)

Registrant's telephone number, including area code: (320) 848-6611

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

                               Title of each class
                          ----------------------------
                          Common Stock, $.01 par value

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

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 a 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)

The  aggregate  market value of the voting stock held by  non-affiliates  of the
Registrant was  approximately  $27,836,000  based upon the closing sale price of
the Company's common stock on the American Stock Exchange on March 23, 2001.

As of March 23, 2001 there were outstanding 3,494,962 shares of the Registrant's
common stock.

Documents  Incorporated  by  Reference:  The Company's  Proxy  Statement for its
Annual Meeting of  Shareholders  to be held on May 17, 2001 is  incorporated  by
reference into Part III of this Form 10-K.
--------------------------------------------------------------------------------


<PAGE>


                                TABLE OF CONTENTS


Item                                                                   Page
                                     PART I

1.   Business                                                             3
2.   Properties                                                          14
3.   Legal Proceedings                                                   14
4.   Submission of Matters to a Vote of Security Holders                 14



                                     PART II

5.   Market for Company's Common Equity and Related
        Stockholder Matters                                              15
6.   Selected Financial Data                                             16
7.   Management's Discussion and Analysis of Financial Condition
        and Results of Operations                                        17
8.   Financial Statements and Supplementary Data                         25
9.   Changes in and Disagreements with Accountants on
        Accounting and Financial Disclosure                              41



                                    PART III

10.  Directors and Executive Officers of the Registrant                  42
11.  Executive Compensation                                              42
12.  Security Ownership of Certain Beneficial Owners and Management      42
13.  Certain Relationships and Related Transactions                      42



                                     PART IV

14.  Exhibits, Financial Statement Schedule and Reports on Form 8-K      43




                                        2
<PAGE>




                                     PART I.

ITEM 1.  BUSINESS

[a]    GENERAL DEVELOPMENT OF BUSINESS

       Hector   Communications   Corporation   ("HCC"   or   "Company")   is   a
telecommunications   holding  company  which,   through  its   wholly-owned  and
majority-owned  subsidiaries,  primarily  provides  local  telephone  and  cable
television  service.  The  Company  also  invests in other  companies  providing
wireless telephone and other telecommunications related services.

       HCC  operates  five  wholly-owned  local  exchange  company  subsidiaries
(generally  referred to as "local  exchange  carriers"  or "LECs")  which served
7,422 access lines in 9 rural communities in Minnesota and Wisconsin at December
31, 2000. HCC, through its subsidiaries,  also provides cable television service
to 4,853 subscribers in Minnesota and Wisconsin.

       HCC's 68% owned subsidiary, Alliance Telecommunications Corporation, owns
and operates six additional LEC subsidiaries which served 31,323 access lines in
28 rural communities in Minnesota,  Wisconsin, Iowa and South Dakota at December
31, 2000. Alliance, through its subsidiaries, also served 8,318 cable television
subscribers   in  Minnesota,   North  Dakota  and  South  Dakota.   Golden  West
Telecommunications  Cooperative,  Inc.  of Wall,  South  Dakota,  and Split Rock
Telecom Cooperative, Inc. of Garretson, South Dakota own the remaining interests
in Alliance.

       Effective June 9, 2000,  Alliance acquired  all  the  outstanding  common
stock of Hager TeleCom, Inc. ("Hager"); a rural  telephone  company  located  in
southwestern Wisconsin.  Hager serves approximately 2,100 access lines, provides
internet  service to 2,700  customers in Hager,  WI and Red Wing,  MN and has an
ownership  interest  in  Midwest  Wireless  Holdings,  LLC.  Purchase  price was
$9,124,500 of cash plus acquisition costs.

[b]    FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS

       The Company is organized in two business segments,  Hector Communications
Corporation and its wholly-owned subsidiaries,  and Alliance  Telecommunications
Corporation and its subsidiaries.  Information  regarding segment  operations is
provided  in Note 11 to the  financial  statements  found  under  Item 8 of this
report.


[c]    NARRATIVE DESCRIPTION OF BUSINESS

(1)    Telephone

       The Company's LEC subsidiaries  provide basic local telephone services to
residential and business customers in Minnesota,  Wisconsin, South Dakota, North
Dakota and Iowa. Local service  revenues are earned by providing  customers with
local service to connecting points within the local exchange  boundaries and, in
certain cases,  to nearby local  exchanges  under extended area service  ("EAS")
plans that eliminate long distance charges to the neighboring exchanges. Monthly
rates for telephone  service  differ among the LECs  depending  upon the cost of
providing  service,  the type and grade of service,  the number of customers and
calling  patterns  within  the  toll free  calling  area  and other factors. The
following chart  presents  the  number  of access  lines  served by Hector's and
Alliance's LEC subsidiaries at December 31, 2000, 1999 and 1998:
<TABLE>
<CAPTION>
                                                                                Access Lines*
                                                          ---------------------------------------------------------
                                                                                 December 31
                                                              --------------------------------------------------
                                                                   2000               1999                1998
                                                              -----------         -----------        -----------
Hector Communications Corporation:
<S>                                                               <C>                <C>                 <C>
       Arrowhead Communications Corporation                         806                817                 780
       Eagle Valley Telephone Company                               731                734                 676
       Granada Telephone Company                                    288                289                 274
       Pine Island Telephone Company                              3,263              3,154               3,019
       Indianhead Telephone Company                               2,334              2,234               2,109
                                                              ----------          ----------         ----------
              Total Hector Access Lines                           7,422              7,228               6,858
                                                              ----------          ----------         ----------
</TABLE>




                                        3
<PAGE>
<TABLE>
<CAPTION>

                                                                                Access Lines*
                                                          ---------------------------------------------------------
                                                                                 December 31
                                                              --------------------------------------------------
                                                                   2000               1999                1998
                                                              -----------         -----------        -----------
Alliance Telecommunications Corporation:
<S>                                                              <C>                <C>                 <C>
       Loretel Systems, Inc.                                     13,234             12,967              12,675
       Sleepy Eye Telephone Company                               6,511              6,467               6,197
       Sioux Valley Telephone Company                             5,939              5,756               5,679
       Hills Telephone Company                                    2,788              2,706               2,618
       Felton Telephone Company                                     764                743                 735
       Hager TeleCom, Inc.                                        2,087
                                                              ----------          ----------         ----------
              Total Alliance Access Lines                        31,323             28,639              27,904
                                                              ----------          ----------         ----------

              Total Access Lines                                 38,745             35,867              34,762
                                                              ==========          ==========         ==========
</TABLE>

* An "access line" is a single or  multi-party  circuit  between the  customer's
establishment and the central switching office.

       The Company's LEC subsidiaries offer their customers a number of enhanced
telecommunications   services,  including  custom  calling  features  like  call
waiting,  caller  identification  and voice  mail.  Charges  for custom  calling
services are generally billed monthly together with the customers' local service
bill.  Internet  access  is also  available,  through  local  dial-up  telephone
numbers,  to all of the Company's local service customers.  The Company provided
internet  services to 7,876 customers at December 31, 2000.  Digital  subscriber
lines ("DSL") permit high-speed Internet access and are available in many of the
Company's service areas.

       The Company  maintains a local presence in each of its LEC  subsidiaries.
The Company  provides  its LEC  subsidiaries  with various  services,  including
finance,  accounting  and  treasury  services,   marketing,   customer  service,
purchasing, engineering and construction, customer billing, rate administration,
credit  and  collection,   and  development  of  administrative  and  procedural
practices.

        Access  revenues  are  received by LECs for  intrastate  and  interstate
exchange services provided to long distance carriers  (generally  referred to as
interexchange  carriers or "IXCs").  These services  enable IXCs to provide long
distance service to end users in the local exchange network.

       Access  revenues  are  determined,  in  the  case  of  interstate  calls,
according to rules promulgated by the Federal Communications  Commission ("FCC")
and administered by the National Exchange Carriers Association  ("NECA"). In the
case of intrastate  calls,  access  revenues are determined by state  regulatory
agencies.  A  relatively  small  portion of the  Company's  access  revenues are
derived from  subscriber  line fees determined by the FCC and billed directly to
end users for access to long  distance  carriers.  The balance of the  Company's
interstate  access revenues is received from NECA, which collects  payments from
IXCs and distributes settlement payments to LECs.

       Settlement payments are based on a number of factors,  including the cost
of  providing  service  and the amount of time the local  network is utilized to
provide long  distance  services.  Since 1984,  a variety of factors,  including
increased  subscriber  counts,  cultural  and  technological  changes,  and rate
reductions by IXCs,  have resulted in a consistent  pattern of increasing use of
the nation's  telephone  network.  This growth has produced  higher revenues for
NECA  and  increased  settlements  for its  participating  LECs.  The  Company's
settlements  from NECA have increased  every year since the pool was established
in 1984, but there can be no assurance that this trend will continue.

       A portion of the Company's  access  revenues is received  from  universal
service  funds  based upon the high cost of  providing  service to rural  areas.
Interstate  universal service fund support accounted for $1,264,000,  $1,040,000
and $951,000 of the Company's  network access  revenues in 2000,  1999 and 1998,
respectively.

       HCC's  LECs also sell and lease  customer  premise  telephone  equipment,
provide inside wiring  services and custom calling  features,  provide  Internet
access and sell and lease other  facilities  for private  line,  teletype,  data
transmission and other  communications  services.  They also provide billing and
collection  services  for  certain  IXCs in lieu of such IXCs  directly  billing
customers within the LEC's service areas.

                                        4
<PAGE>

       The following  table  presents the  percentage  of revenues  derived from
local  service  revenues,  access  revenues,  billing and  collection  services,
nonregulated  telephone activities and cable television  operations for the last
three years:
                                                  Year Ended December 31
                                             --------------------------------
                                               2000         1999        1998
                                             -------      -------     -------
  Local network                                17.6%        17.3%       16.6%
  Network access                               55.1         56.9        55.6
  Billing and collection                        1.8          2.4         2.7
  Nonregulated telephone activities            15.0         12.3        15.0
  Cable television                             10.5         11.1        10.1
                                             -------      -------     -------
                                              100.0%       100.0%      100.0%
                                             =======      =======     =======

(2)    Cable Television

       The Company, through its cable television and LEC subsidiaries,  owns and
operates 45 cable  television  systems serving 13,171  subscribers in Minnesota,
North Dakota, South Dakota and Wisconsin.  Cable television revenues are derived
almost exclusively from monthly fees for basic and premium programming. Fees for
basic  services  range from $9.75 to $26.50 per month.  Basic service  generally
includes the major television networks, non-network independent stations, sports
programming,  news  services  and  automated  information  channels,  children's
programming,  access channels for public,  governmental,  educational and leased
use, senior citizens' programming and religious programming. Premium programming
services,  such  as  the  HBO  or  ShowTime  movie  services,  are  provided  to
subscribers  for an  additional  fee of $1.75 to $11.00  per month per  channel.
Approximately one-third of the Company's cable television customers subscribe to
a premium  channel.  Premium  programming  is obtained from suppliers for a flat
monthly  fee  per  subscriber  and/or  a fee  based  on the  monthly  charge  to
subscribers for the service.

(3)    Investments in Unconsolidated Affiliates

Wireless Telephone Services
---------------------------
       The Company is the largest shareholder of Midwest Wireless Holdings, LLC,
with a 10.4% ownership stake.  Midwest  Wireless  acquired  additional  wireless
operations in Wisconsin and Iowa in 2000, which significantly  increased Midwest
Wireless'  service area, but reduced the Company's  percentage  ownership of the
operation.  Midwest  Wireless  now serves  eleven  rural  service  areas and one
metropolitan  service area in Minnesota,  Wisconsin and Iowa.  Population of the
service areas is  approximately  1,590,000.  Midwest  Wireless  offers  complete
wireless  service,  including  custom  calling  features,   facsimile  and  data
transmission and presently has 200,000  customers.  The Company accounts for its
investment in Midwest  Wireless using the equity method.  Income  recognized was
$1,248,000, $1,481,000, and $1,508,000 in 2000, 1999 and 1998, respectively.

       The  Company  owns  10.4% of  Wireless  North,  which  provides  personal
communications  services ("PCS") to parts of Minnesota,  Wisconsin,  Iowa, North
Dakota and South Dakota.  Wireless North has secured FCC licenses to provide PCS
services in 13 basic trading areas in these states,  encompassing 110,000 square
miles and a population of 2.4 million.  Wireless North is in its start-up phase,
and is building infrastructure in four markets, where it presently serves 11,000
customers.  Its operations have not been profitable to date.  Losses recorded by
the Company on this  investment were $1,597,000 and $1,066,000 in 1999 and 1998,
respectively.  At December 31, 2000, the Company had invested $2,073,000 of cash
and had outstanding loan guarantees of $1,091,000 in Wireless North.

       The  Company  has  had  a  significant   investment  in  Rural   Cellular
Corporation  ("RCC"),  a publicly traded company  providing  cellular  telephone
services in Minnesota and New England.  The Company  obtained its  investment in
RCC through its ownership  interests in the RSAs serving northern  Minnesota and
through  the  acquisitions  of Ollig  Utilities  Company  and  Felton  Telephone
Company.  Company  sales of RCC stock were 326,707  shares and 40,000  shares in
1999 and 1998, respectively. Gains on sales of these securities were $11,600,000
and $179,000 in 1999 and 1998,  respectively.  At December 31, 2000, the Company
owned approximately 10,700 shares of RCC's common stock.

                                        5
<PAGE>

       In December 1998, an Alliance  subsidiary sold its interest in a cellular
telephone  partnership  serving the Sioux Falls, South Dakota MSA. Proceeds from
the sale were  $6,725,000.  Gain on the sale was $4,817,000.  Income  recognized
from the Company's investment in this partnership was $334,000 in 1998.



Onvoy, Inc.
-----------
       Onvoy,  Inc. is a privately held company that provides  integrated voice,
data,  and  network  services  through its fiber  optic  communications  network
linking  communities  throughout  Minnesota,  including  all major  metropolitan
areas.  Onvoy, Inc. is also Minnesota's largest Internet service provider and is
a leading  provider of long distance,  video-  conferencing  and high-speed data
networking  services.  Onvoy's customers include the majority of Minnesota based
Fortune 500  companies and many  small-to-medium  sized  businesses.  Onvoy also
serves  most of the state's  higher  education  institutions,  nearly all of the
state's K-12 schools, public libraries, state and county governments,  more than
70 regional  Internet service  providers and more than two-thirds of the state's
independent local telephone companies.

         The Company is  presently  the second  largest  common  shareholder  of
Onvoy.  During 2000 the Company also purchased  $446,000 of debt issued by Onvoy
to provide additional working capital to Onvoy's operations. However, at the end
of  2000  the  Company  determined  that  due  to  losses  incurred  by  Onvoy's
operations,  the value of the Company's  investment in Onvoy's  common stock was
impaired. Accordingly, the Company established a valuation reserve of $1,273,000
against its investment in Onvoy common stock during the fourth quarter of 2000.


Fiber Optic Transport Facilities
--------------------------------
       The Company has invested approximately  $1,341,000 in five companies that
build and lease  fiber  optic  transport  facilities.  These  facilities  afford
high-quality, high-capacity communications links and generally are used to carry
long-distance  traffic.  Through these  investments,  the Company owns pieces of
fiber   routes   serving  the  Twin   Cities,   Duluth-Superior,   Sioux  Falls,
Fargo-Moorhead,  Rochester,  St. Cloud and Grand Forks,  and extending into Iowa
and Wisconsin.


Bank Stocks
-----------
       As part of its  borrowing  agreements,  the  Company has  investments  in
CoBank,  Rural Telephone  Finance  Cooperative and the Rural Telephone Bank that
totaled  $4,694,000,  $4,644,000 and  $4,365,000 at December 31, 2000,  1999 and
1998, respectively.


Other Investments
-----------------
       The  Company  has a small  ownership  interest  in South  Dakota  Network
Services and Iowa Network Services, each of which provide integrated voice, data
and network  services  within their  respective  states.  The Company is also an
investor  in Fibercom  LLC, a CLEC that has been  established  to provide  local
communications services to business customers in the Sioux City, Iowa area.

(4)    Competition

Telephone
---------
       LECs  may be  subject  to many  forms  of  competition.  Among  potential
competitors are:

- Facilities-based competition from providers with their own local service
   network;
-  Resale competition from resale interconnection  (providers who purchase local
   services  from the LEC at  wholesale  rates and resell the  services to their
   customers);
-  Competition  from unbundled  network element  interconnection  (providers who
   lease some of the network elements from the LEC)
-  Wireless  providers who may charge a competitive  fee for services that could
   compete with wireline based local service.

                                        6
<PAGE>

       Rural  areas  like  those  served  by the  Company  are  less  likely  to
experience competition from facilities-based  competitors due to the significant
investment  in plant and  equipment  required in relation to the lower  customer
density in rural markets.  Competition from resale  interconnection or unbundled
network element interconnection is more likely. Under the Telecommunications Act
of 1996,  the Company's LECs are not currently  required to lease  facilities to
competitors  seeking to  interconnect  with our  network.  However,  there is no
assurance that interconnection may not be required in the future.

       Most   customers   currently   see  wireless   telephone   service  as  a
complementary  service to traditional  wireline  based local  service.  Wireless
service does  directly  compete with  traditional  local  service  among certain
classes  of  customers,  principally  customers  with  seasonal  or lake  homes.
Developments in technology related to cellular, PCS, digital microwave,  coaxial
cable,  fiber optics and other wireline or wireless  services could also lead to
greater competition for traditional local services.

       LECs are  increasingly  subject  to  competition  from  competing  access
providers ("CAPs") which construct,  modify or lease facilities that enable high
volume  long  distance  users to  bypass  the  local  telephone  network.  Cable
television  companies  may  also be able  to  modify  their  networks  to  carry
telephone messages that bypass the local telephone network. The Company believes
its LEC  subsidiaries  have  experienced  only a small  loss of  traffic  due to
bypass.

Cable Television
----------------
       In addition to competition from off-air  television,  other  technologies
also supply services that compete with cable television. These include low power
television stations, multi-point distribution systems, over-the-air subscription
television  and  direct  broadcast  satellite  ("DBS").  Cable  television  also
competes  for  customers  in local  markets  with  providers  of other  forms of
entertainment,   news  and  information.   These   competitors   include  radio,
newspapers,  magazines,  motion picture  theaters,  video cassettes and Internet
service providers.

       All of the Company's cable television  franchises are non-exclusive.  The
1992 Cable Act prohibits  franchising  authorities from unreasonably refusing to
grant  franchises to competing cable  television  systems.  The Company competes
with a municipally owned cable system in one community it serves.  The degree of
competition  from other cable  providers  will be  dependent  upon the state and
federal  regulations  concerning  entry,  interconnection  requirements  and the
degree of  unbundling  of the LECs'  networks.  Competition  will be based  upon
product,  service quality,  breadth of services offered and, to a lesser extent,
on price.

       Maintaining and expanding the Company's cable television  subscriber base
depends on numerous  factors,  including  the  quality  and  quantity of signals
available from "off-air" television  stations,  demand for satellite and premium
television  channels and average  household  income in the cable  service  area.
Promotional  efforts for cable  television  include  telephone and  door-to-door
selling and local media advertising.

(5)    Regulation

       The Company's LECs and cable  television  systems are subject to federal,
state  and  local   regulation.   The   Communications   Act  of  1934  and  the
Telecommunications  Act of 1996 govern Federal regulations.  Under these federal
statutes, the FCC exercises jurisdiction over all interstate  telecommunications
activities.  Intrastate  activities are governed by rules and regulations set by
the respective state public utility commissions.

Federal Regulations
-------------------
       Under federal  regulations,  incumbent local exchange carriers  ("ILECs")
are required to comply with the  Communications  Act of 1934 and rules issued by
the FCC.  While the  Telecommunications  Act of 1996  amended the earlier law to
reduce  regulatory  burdens and promote  competition,  ILECs  remain  subject to
extensive  regulatory  requirements.  ILECs are required to maintain  accounting
records  according to Uniform  System of Accounts,  to structure  access charges
according to FCC rules and to reflect their charges for interstate services at a
rate of return prescribed by the FCC. The FCC also regulates transfer of control
and assignments of operating  authorizations and construction  licenses. The FCC
requires  carriers  providing  access  services  to file  tariffs  with  the FCC
reflecting  rates,  terms and  conditions  of the  services.  Tariffs  filed are
subject to review and potential objection by third parties.

                                        7
<PAGE>

Regulation of Cost Recovery and Nonregulated Revenue Allocation
---------------------------------------------------------------
       As a regulated  common carrier,  the Company's LEC  subsidiaries  can set
maximum rates at a level that allows  recovery of reasonable  costs  incurred to
provide  regulated  service  and earns a  reasonable  return  on the  investment
required to provide these services.

Costs are recovered through:

- Monthly charges to end users for basic local telephone services and enhanced
   services;

- Access charges to interexchange carriers for originating and terminating
   interstate and intrastate interexchange calls; and

-  Payments  from the federal  Universal  Service  Fund and the state  universal
   service  funds  (where  applicable)  that  offset the high cost of  providing
   service in certain rural markets.

       Rates for  regulated  services and the amount of  universal  service fund
support  are set forth by the FCC with  respect to  interstate  services  and by
state regulatory agencies with respect to intrastate services.

       In conjunction  with the recovery of costs and  establishment of rates, a
LEC must first  determine  its  aggregate  costs and then  allocate  those costs
between  regulated and nonregulated  services.  After  identifying the regulated
costs of providing  local  telephone  service,  a LEC must allocate  those costs
among its various local exchange and  interstate  and  intrastate  interexchange
services  and  between  state and  federal  jurisdictions.  Allocating  costs is
complicated  because the same pieces of a LEC's plant and equipment are utilized
for different  services,  such as local  telephone and interstate and intrastate
access services.  The allocation process is called  "separation" and is governed
primarily by FCC  regulations.  The purpose of  separation is to determine how a
carrier's   expenses  are  allocated  and  recovered   from  federal  and  state
jurisdictions.  The FCC is  considering  whether  to  change or  eliminate  this
process.  Any change in separation rules by the FCC could reduce or increase the
LEC's revenues.

Interstate End-User Rates
-------------------------
       The part of the  local  telephone  network  running  from  the  switching
facility to the customer is called the "local loop." Costs to construct, operate
and maintain the loop are among the most  significant  costs incurred by a local
exchange carrier. The FCC has established a rate structure that provides for the
recovery  of a portion of the cost of the local  loop  allocated  to  interstate
jurisdiction directly from end-users through the assessment of a subscriber line
charge.  The remaining portions of the interstate local loop costs are recovered
from interstate access charges to interexchange carriers.

       Due to demographic and geographic conditions, costs to provide local loop
and switching services are often higher, on a per customer basis, in rural areas
compared to urban  areas.  Absent a regulatory  framework to permit  recovery of
these costs, rural LECs would be compelled to charge  considerably  higher rates
for local  network  services.  Consequently,  the FCC  provides  for  additional
interstate recovery by eligible  telecommunications carriers through the federal
Universal  Service  Fund.  Funds from the  federal  Universal  Service  Fund are
available to local exchange  carriers  whose local loop costs are  significantly
above the national average as determined by FCC rules.

Interstate Access Rates
-----------------------
       Interstate access rates are developed on the basis of a LEC's measurement
of its  interstate  costs to  provide  access  service  to IXCs  divided  by its
projected  demand for service.  The  resulting  rates are published in the LEC's
interstate  access tariff and filed with the FCC, at which time they are subject
to challenge by third parties and to review by the FCC.

       The FCC  recognized  that the rate  making and tariff  filing  process is
administratively  burdensome for small local exchange carriers. In 1983, the FCC
established the National Exchange Carriers  Association  ("NECA") to develop and
administer interstate access service rates, terms and conditions.  NECA develops
interstate  access rates on the basis of data  provided by  participating  local
exchange  carriers and blended to yield average rates.  These rates are intended
to generate revenue equal to the aggregate costs plus a return on the investment
of all of the participants.

                                        8
<PAGE>

       Individual  LECs are likely to have  service  costs that  differ from the
revenues generated by applying the overall NECA tariff rates. To allow for this,
revenues  generated by  participating  LECs are pooled and  redistributed on the
basis of each individual  company's costs. This process eliminates the burden of
individual  tariff  filing and  produces a system in which small  companies  can
share and spread risk. For example,  if a small local exchange carrier filed its
own tariff and  subsequently  suffered the loss of major  customers that utilize
interstate access service,  the local exchange carrier could suffer  significant
under-recovery  of its costs. In the NECA pool  environment,  the impact of this
loss is reduced because it is spread over all of the pool participants.

       NECA  operates  separate  pools for traffic  sensitive  costs  (primarily
switching costs) and non-traffic  sensitive costs  (primarily loop costs).  LECs
can choose to develop and administer their own interstate access charges and not
participate  in the NECA pools.  HCC's LECs located in Minnesota  and  Wisconsin
participate in the traffic sensitive NECA pools.  HCC's LECs located in Iowa and
South Dakota do not  participate  in the traffic  sensitive  NECA pools.  All of
HCC's LECs participate in the non-traffic sensitive NECA pools.

       The FCC is reviewing its rates and policies  governing  interstate access
and the rate of return  applicable to incumbent local exchange  carriers who are
subject to  rate-of-return,  rather than price cap,  regulation.  The outcome of
this review could directly affect HCC's earnings. The outcome of this proceeding
cannot be predicted at this time.

The Telecommunications Act
--------------------------
       The  Telecommunications  Act was enacted to promote  competition  without
jeopardizing  the  availability  of nationwide  universal  service at affordable
rates.  These two objectives have resulted in a complex set of rules intended to
promote competitive entry in the provision of local telephone  services,  except
where entry would  adversely  effect the  provision of universal  service or the
public interest.

     - Promotion of Local Service Competition and the Rural Exemptions
       ---------------------------------------------------------------

       The   Telecommunications  Act  made  competitive  entry  into  the  local
telephone  business more  attractive to other  carriers by removing  barriers to
competition.   In  order  to  promote  competition  the  Telecommunications  Act
established  new  interconnection  rules,  generally  requiring  local  exchange
carriers to allow competing  carriers to interconnect with their local networks.
Congress recognized,  however, that the desire to promote competition conflicted
with the ability of some existing LECs to provide universal service to high cost
customers.   Congress  exempted  these  LECs  (classified  as  "Rural  Telephone
Companies")  from  interconnection  requirements  until the  continuation of the
exemption  was no longer  required  by the  public  interest,  as defined in the
Telecommunications Act.

       Under the Telecommunications Act, all local exchange carriers,  including
both  incumbent  local  exchange  carriers  and new  competitive  carriers,  are
required to:

- Offer reasonable and nondiscriminatory resale of their telecommunications
   services,

- Ensure that customers can keep their telephone numbers when changing carriers,

-  Ensure  that  competitors'  customers  can use the same number of digits when
   dialing and receive  nondiscriminatory access to telephone numbers,  operator
   service, directory assistance and directory listing,

- Ensure access to telephone poles, ducts, conduits and rights of way and

- Compensate competitors for the costs of terminating traffic.

       The   Telecommunications  Act  also  requires  incumbent  local  exchange
carriers to:

-  Negotiate in good faith the terms and conditions of interconnection  with any
   competitive carrier making a bona fide request for same,

                                        9
<PAGE>

-  Interconnect   their   facilities   and   equipment   with   any   requesting
   telecommunications carrier at any technically feasible point,

-  Unbundle and provide  nondiscriminatory access to unbundled network elements,
   such as local loops, switches and transport facilities,  at nondiscriminatory
   rates and on nondiscriminatory terms and conditions,

- Offer resale interconnection at wholesale rates,

-  Provide  reasonable  notice  of  changes  in the  information  necessary  for
   transmission  and  routing of  services  over the  incumbent  local  exchange
   carrier's facilities or in the information necessary for interoperability and

-  Provide  for  the   physical   collocation   of   equipment   necessary   for
   interconnection  or access to unbundled  network  elements at the premises of
   the incumbent local exchange carrier, at rates, terms and conditions that are
   just, reasonable and nondiscriminatory.

       In  order  to  implement  interconnection  requirements,  local  exchange
carriers  generally  enter into  negotiated  interconnection  arrangements  with
competing  carriers.  Local  exchange  carriers  may also offer  interconnection
tariffs, available to all competitors.
       Competitors  are required to compensate a local exchange  carrier for the
cost  of   providing   interconnection   services.   In  the   case  of   resale
interconnection,  the  rules  provide  that the  rates  charged  should  be on a
wholesale  basis and reflect the current  retail  rates of the  incumbent  local
exchange carrier,  excluding the portion of costs avoided by the incumbent local
exchange  carrier.  In the case of unbundled  network  element  interconnection,
rates are based on costing methodologies that employ a forward-looking  economic
cost pricing  methodology  known as total element long run incremental cost. The
Telecommunications Act specifies that resale and unbundled network element rates
are to be  negotiated  among the  parties,  or, if the parties  fail to reach an
agreement,  arbitrated  by the relevant  state  regulatory  authority.  Once the
parties have come to agreement, the proposed rates are subject to final approval
by the state regulatory commission.

       The Company's LEC subsidiaries are defined as "rural telephone companies"
under  the  Telecommunications  Act.  As rural  telephone  companies,  they were
granted  rural  exemptions  from  the  requirements   relating  to  both  resale
interconnection  and  unbundled  network  element  interconnections.  The  rural
exemptions   are  continued   until   regulatory   authorities   determine  that
interconnection is technically feasible, not unduly economically  burdensome and
consistent with the Telecommunications Act's universal service provisions.

       - Promotion of Universal Service
         ------------------------------

       While the  Telecommunications  Act promoted  Congress' policy of ensuring
that affordable service is provided to consumers universally in rural, high-cost
areas of the  country,  the  Telecommunications  Act altered the  framework  for
providing universal service by:

- Providing for the identification of those services eligible for universal
   service support,

- Requiring the FCC to make implicit subsidies explicit,

- Expanding the types of communications carriers required to pay universal
   service support and

- Allowing competitive local exchange carriers to be eligible for funding.

       These and other  provisions  were intended to make provision of universal
service support compatible with a competitive market.

                                       10
<PAGE>

       Pursuant to the  Telecommunications  Act, federal  Universal Service Fund
payments  are only  available  to  carriers  that  are  designated  as  eligible
telecommunications  carriers by a state public  utilities  commission.  In areas
served by rural LECs,  the  Telecommunications  Act provides that a state public
utilities  commission  may designate  more than one eligible  telecommunications
carrier,  in  addition  to the  incumbent  local  exchange  carrier,  only after
determining  that the designation of an additional  eligible  telecommunications
carrier will serve the public interest.  As a result, an incumbent rural LEC has
an opportunity to maintain its status as the sole recipient of federal Universal
Service Fund payments in its service area, even if it is subsequently  subjected
to competition.  HCC's rural LEC  subsidiaries are currently the sole designated
eligible telecommunications carriers in their respective service areas except in
one area where a wireless  competitor was approved as an eligible provider.  The
addition of a second eligible  telecommunications carrier in these service areas
could have the effect of reducing  the amount of funds  available  to HCC's LECs
from the federal  Universal  Service  Fund.  Such a reduction  could  materially
adversely  affect HCC's  ability to achieve a  reasonable  rate of return on the
capital invested in its network.

       In May 1997,  the FCC  implemented  new rules  for  interstate  universal
service support.  The new rules provide for separate federal  Universal  Service
Fund programs for rural and  non-rural  telephone  companies.  The new rules for
non-rural companies base support upon "forward-looking  costs" derived from cost
proxy models.  It is uncertain  whether these models will fully compensate local
exchange  carriers for the cost of providing  local service in high-cost  areas.
The FCC set the implementation date for the new system as January 1, 1999, which
was  postponed to January 1, 2000 for  non-rural  telephone  companies.  The FCC
established a Rural Task Force,  which  investigated how to adapt the proxy cost
models  approved for larger carriers for rural  telephone  companies.  The Rural
Task Force has proposed  that  revenues for small rural  telephone  companies be
based on embedded costs rather than forward looking costs.  Such a plan has been
proposed by a multi-association  group ("MAG"). The MAG plan is currently in the
comment phase and has not been agreed to by any of the interested  parties.  The
Company  does not expect a new plan to be put in effect  before  January 1, 2002
and cannot  predict the effect of any new plan on  operations.  In the  interim,
support mechanisms for rural carriers remain unchanged.

State Regulation of Rural LECs
------------------------------
       HCC's LEC  subsidiaries  are subject to regulation  by  Minnesota,  South
Dakota, Iowa and Wisconsin regulatory agencies with respect to:

- Intrastate toll rates,
- Intrastate  access  charges  billed to  intrastate  IXCs, - Service  areas,  -
Service  standards,  - Accounting  and related  matters,  and - The use of radio
frequencies in telephone operations

       In some cases state  regulations also apply to local service rates,  rate
of return,  depreciation rates,  construction plans and borrowings,  and certain
other financial transactions.

       Local   service   rates  are  not  directly   determined   by  regulatory
authorities, but are limited by regulation of these other areas. The Company has
sought  appropriate  increases in local and other service rates and approval for
changes in rate structures necessary to achieve reasonable rates and earnings.

       The bulk of the Company's  access lines are located in Minnesota.  A bill
passed by the 1995 Minnesota  legislature  allows  telephone  companies  serving
fewer than 50,000  access lines to elect to provide  service  under an alternate
form of  regulation.  Companies  choosing  alternative  regulation  agree not to
increase rates for two years, other than in extraordinary  circumstances.  These
companies  are not  subject  to rate of return  review by the  Public  Utilities
Commission for the same two years. All of HCC's Minnesota-based LEC subsidiaries
elected  alternative rate regulation  election  effective January 1, 1996. Local
rate increases  after January 1, 1998 are not subject to review by the Minnesota
Public Utilities Commission unless the lower of 500 or five percent of customers
file a petition requesting such review.

       The Minnesota  Public Utilities  Commission is  investigating  intrastate
access rates charged by local  telephone  companies to IXCs.  The commission has
proposed a plan reducing  intrastate  access  charges and  implementing  a state
universal  service fund to compensate  high cost  companies.  The Company cannot
predict the  outcome of the rate  investigation  or if any part of the  proposed
plan will be adopted.

                                       11
<PAGE>

       Where  applicable,  HCC's  LECs also  participate  in  intrastate  access
tariffs  approved by state  regulatory  authorities  for  intrastate  intra-LATA
(Local  Access  Transport  Area)  and  inter-LATA  services.   These  intrastate
arrangements  are intended to  compensate  LECs for the costs,  including a fair
rate of return, of facilities provided in originating and terminating intrastate
long distance services.

Cable Television System Regulation
----------------------------------
       The FCC regulates the providers of satellite  communications services and
facilities for the  transmission of programming  services,  the cable television
systems that carry such services,  and, to some extent,  the availability of the
programming  services  themselves  through its regulation of program  licensing.
Municipalities  and other state and local  government  authorities also regulate
cable  television  systems.  FCC  regulations  contain many detailed  provisions
including:

o "Must carry" rules regarding the broadcast  television and translator  signals
that must be  included  in  channel  offerings  to  subscribers,  o  Exclusivity
provisions  which  require  the  deletion  of  certain  programming  carried  by
out-of-area stations where it would duplicate programming
       carried by local stations,
       o  Technical  standards  and  performance  testing  requirements,  and  o
       Franchise fees applicable to state and local cable television franchises.

Thus far, HCC's cable systems have not  experienced  any difficulty in complying
with the FCC rules.

       In Minnesota,  the award of cable franchises and certain aspects of cable
operations  are subject to rules of the Minnesota  Cable  Communications  Board.
Cable television  systems are operated under 15 year,  non-exclusive  franchises
granted by local  government  authorities.  Franchises  contain many conditions,
including  time  limitations  on  commencement  or completion  of  construction,
approval of initial fees charged to subscribers for basic service, the number of
channels  offered  and  the  types  of  programming.  HCC  does  not  anticipate
difficulty in obtaining  renewal of its  franchises  at the  expiration of their
current terms.

       The regulation of cable television at the federal, state and local levels
is subject to the political  process and has been in constant flux over the past
decade.  This process continues in the context of legislative  proposals for new
laws and the adoption or deletion of  administrative  regulations  and policies.
The Company anticipates further material developments in these areas, but cannot
anticipate their direction and impact on its cable television operations.

(6)      Business Strategy


       The   Company   is   focused   on   business   opportunities   in   rural
telecommunications. Its three-part strategy is to:

- Expand its existing operations through internal growth
-  Pursue acquisitions of attractive properties, particularly the acquisition of
   additional rural telephone exchanges and cable television properties
- Participate in opportunities afforded by new telecommunications technologies

       Future growth in existing  telephone and cable  operations is expected to
come from providing  service to new or presently  unserved homes and businesses,
from sales of enhanced  services to existing  customers  and from  providing new
services made possible by improvements in technology.

       The Company continually assesses acquisition  opportunities.  Competition
to acquire  attractive  telephone  or cable  television  properties  is intense.
Acquisitions  of rural  telephone  exchanges  are  subject  to the  approval  of
regulatory  agencies in some states and, in some cases,  to federal waivers that
may affect the form of  regulation  or amount of  interstate  cost  recovery  of
acquired telephone exchanges.  The Company will aggressively pursue acquisitions
of telephone exchanges,  but there is no assurance that acquisitions can be made
on  acceptable  terms  or that  regulatory  approval,  where  required,  will be
received.

                                       12
<PAGE>

       The  Company  has   aggressively   invested  in  new   telecommunications
technologies,   primarily  through   investments  in  partnerships  and  limited
liability  companies.  The  Company  has  substantial  investments  in  wireless
communications  companies,  fiber optic  transport  groups,  CLECs and  Internet
service  providers.   The  Company  intends  to  pursue  additional   investment
opportunities in the future.

(7)    Employees

       At March 1, 2001, the Company had 168 full-time and part-time  employees,
of which 118  employees  work in the Alliance  operations  and 50 work in Hector
operations.  None of the Company's  employees are represented  under  collective
bargaining agreements. HCC believes its employee relations to be good.


(8)    Executive Officers of Registrant

       The  executive  officers  of the  Company and their ages at March 1, 2001
were as follows:

       Name                          Age                   Position

       Curtis A. Sampson             67          Chairman of the Board and Chief
                                                  Executive Officer

       Steven H. Sjogren             58          President and Chief Operating
                                                  Officer

       Paul N. Hanson                54          Vice President and Treasurer

       Charles A. Braun              43          Chief Financial Officer


       Executive  officers  serve at the pleasure of the Board of Directors  and
are elected  annually for  one-year  terms.  Each  officer  above has served the
Company in the indicated capacity since 1990.

       Mr.  Sjogren  devotes his full time to the  Company's  business.  Messrs.
Sampson, Hanson and Braun each devote approximately 40% of their working time to
the Company's  business with the balance devoted to management  responsibilities
at  Communications  Systems,  Inc.  ("CSI"),  a  diversified  telecommunications
holding company also located in Hector, Minnesota, for which they are separately
compensated by CSI.

[d]    FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND
       EXPORT SALES

       Not Applicable.





                                       13
<PAGE>



ITEM 2.   PROPERTIES

       The  Company's  telephone  property  consists  mainly of  central  office
switching  equipment,  the land and  buildings in which the equipment is housed,
and connecting lines consisting of aerial and underground  cable,  conduit,  and
poles  and  wires  which  connect  customers'  premises  with  central  offices.
Connecting  lines are  generally  located under or above public rights of way or
land  owned,  for the most part,  by others,  pursuant  to  consents  of various
governmental  bodies  or  private  leases,  permits,  easements,  agreements  or
licenses. The Company also owns customer-leased  telephones and related terminal
equipment and a small amount of connecting  lines that are located on customers'
premises.

       The  connecting  lines  constitute  approximately  56% of  the  Company's
telephone  property in service.  Central office switching  equipment  represents
approximately 33%. Telephones and related equipment constitute approximately 1%.
Land, buildings,  data processing  equipment,  service vehicles and construction
equipment  constitute the remaining 10%. The Company owns  substantially all the
land and  buildings  in which its central  office  equipment  is located.  HCC's
principal  general  offices,  administrative  services  department  and business
office are  located in Hector,  Minnesota  and leased to HCC from CSI.  Alliance
owns the building in Ada, Minnesota where its general offices are located.

       The physical assets of the Company's cable television  systems consist of
signal  reception  equipment  and  distribution   electronics  and  cables.  The
receiving  equipment  is  comprised  of a tower and  antennas  for  reception of
broadcast  television  signals and one or more satellite dishes for reception of
satellite  signals.  The Company owns or leases the land on which the towers for
its cable systems and the buildings  containing  other  receiving  equipment are
located. Pole attachment space is leased from utilities serving the community.

       See Note 6 of "Notes to Consolidated Financial Statements" for additional
information regarding pledged assets.

ITEM 3.  LEGAL PROCEEDINGS

       No material  litigation or other claims are presently pending against the
Company.

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

       Not applicable.



                                       14
<PAGE>



                                     PART II

ITEM 5.       MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
              STOCKHOLDER MATTERS

[a]    MARKET INFORMATION

       The  Company's  common  stock is traded on the  American  Stock  Exchange
("AMEX").  The table below presents the range of high and low trading prices for
the Company's stock for each period as reported by AMEX:

                               2000                               1999
                    ------------------------           -------------------------
Quarter                High              Low              High               Low

First               $ 15.75          $ 11.63           $  9.63           $  8.06
Second                14.88            11.38             11.13              8.00
Third                 14.25            12.38             14.88             10.00
Fourth                13.25            10.00             17.25             12.00

[b]    HOLDERS

         At  March  1,  2001  there  were  561   holders  of  record  of  Hector
Communications Corporation common stock.

[c]    DIVIDENDS

       HCC has not paid cash  dividends on its common  stock or preferred  stock
since it began  operating  as a public  company  in 1990,  nor does HCC have any
obligations to pay dividends on its preferred  stock.  The financing  agreements
between HCC's  subsidiaries and their lenders,  and HCC and its lenders restrict
the ability of HCC to pay dividends.  At the present time, HCC intends to retain
earnings to finance the expansion of its business,  and does not  anticipate any
cash  dividends  will  be  paid  in the  foreseeable  future.  See  Management's
Discussion and Analysis of Financial  Condition and Results of  Operations,  and
also Note 6 to the Consolidated  Financial  Statements under Item 8 herein for a
description of restrictions on dividends.



                                       15
<PAGE>
ITEM 6.  SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>

                                          SELECTED CONSOLIDATED FINANCIAL INFORMATION
                                            (in thousands except per share amounts)

                                                                                      Year Ended December 31
                                                                    ------------------------------------------------------------
                                                                           2000        1999        1998        1997        1996
--------------------------------------------------------------------------------------------------------------------------------

Selected Income Statement Information

<S>                                                                    <C>         <C>         <C>         <C>         <C>
Revenues                                                               $ 37,790    $ 34,117    $ 31,839    $ 28,866    $ 20,658

Costs and Expenses                                                       26,799      23,063      21,192      19,113      14,066
--------------------------------------------------------------------------------------------------------------------------------

Operating Income                                                         10,991      11,054      10,647       9,753       6,592

Other Income (Expenses), net                                             (2,471)      7,401         (40)     (3,367)     (3,518)
--------------------------------------------------------------------------------------------------------------------------------

Income Before Income Taxes                                                8,520      18,455      10,606       6,386       3,074

Income Tax Expense                                                        4,207       7,513       4,949       2,867       1,540
--------------------------------------------------------------------------------------------------------------------------------

Income Before Minority Interest                                           4,313      10,942       5,657       3,519       1,534

Minority Interest in Earnings of Alliance
  Telecommunications Corporation                                          1,004       3,463       1,747         798         325
--------------------------------------------------------------------------------------------------------------------------------

Net Income                                                             $  3,309    $  7,479    $  3,910    $  2,721    $  1,209
================================================================================================================================

Basic Net Income Per Common Share                                      $    .93    $   2.42    $   1.63    $   1.44    $    .65
Diluted Net Income Per Common Share                                    $    .86    $   1.96    $   1.15    $    .93    $    .53

Average Shares Outstanding:
  Common shares only                                                      3,544       3,095       2,403       1,893       1,870
  Common and potential common shares                                      3,851       3,945       3,937       3,732       3,694
===============================================================================================================================

Selected Balance Sheet Information

Working Capital                                                        $  8,960    $ 18,736    $  6,554    $  8,504    $  1,307
Property, Plant and Equipment, net                                       56,227      51,410      50,810      45,927      47,039
Excess of Cost Over Net Assets Acquired, net                             55,475      51,405      53,004      51,170      52,510
Total Assets                                                            158,678     166,797     150,680     139,291     137,348
Long-Term Debt                                                           84,378      86,282      94,232      97,793      96,127
Stockholders' Equity                                                     39,108      39,982      22,720      14,447       9,946
--------------------------------------------------------------------------------------------------------------------------------

Operating  results for 1996 include the  operations of Ollig  Utilities  Company
from the April 25, 1996 purchase date.
</TABLE>






                                       16
<PAGE>



 ITEM 7.           MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                       CONDITION AND RESULTS OF OPERATIONS

       Hector  Communications  Corporation  ("HCC") owns a 100% interest in five
LEC  subsidiaries  and one cable  television  subsidiary.  At December 31, 2000,
these  subsidiaries  provided  telephone  service to 7,422  customers in 9 rural
communities in Minnesota and Wisconsin. They also owned cable television systems
serving  4,853   customers  in  Minnesota  and   Wisconsin.   HCC's   100%-owned
subsidiaries  also  have  substantial  investments  in other  telecommunications
ventures, including, Midwest Wireless Holdings, LLC and Wireless North LLC.

       HCC also owns a 68% interest in Alliance  Telecommunications  Corporation
("Alliance").  At December 31, 2000, Alliance, through its six LEC subsidiaries,
provided  telephone  service  to 31,323  customers  in 28 rural  communities  in
Minnesota,  Wisconsin,  South  Dakota  and Iowa.  Alliance's  subsidiaries  also
provided cable  television  services to 8,318  subscribers  in Minnesota,  South
Dakota  and  North  Dakota.   Alliance's   subsidiaries   also  own  substantial
investments  in Midwest  Wireless  Holdings,  LLC, and  Wireless  North LLC, own
marketable   securities   portfolios  with  investments  in   telecommunications
providers  Illuminet  Holdings,  Inc. and Rural Cellular  Corporation,  and have
other  investments.  The  minority  interest in Alliance is owned by Golden West
Telecommunications Cooperative and Split Rock Telecom Cooperative.

Results of Operations
---------------------

2000 Compared to 1999
---------------------
       Consolidated   revenues   increased  11%  to  $37,790,000  in  2000  from
$34,117,000 in 1999. The following  table shows revenues by operating  group for
2000 compared to 1999:
<TABLE>
<CAPTION>

                                                   Alliance                               Hector
                                             Year Ended December 31                Year Ended December 31
                                             2000              1999               2000               1999
<S>                                 <C>               <C>               <C>               <C>
Local network                       $     4,934,548   $      4,250,474  $      1,715,694  $       1,664,204
Network access                           15,299,095         14,587,083         5,513,268          4,831,878
Billing and collection                      527,740            650,839           166,431            173,700
Nonregulated activities                   4,879,785          3,527,645           800,130            647,415
Cable television                          2,469,407          2,306,786         1,484,004          1,477,292
                                    ---------------   ----------------  ----------------  -----------------
                                    $    28,110,575   $     25,322,827  $      9,679,527  $       8,794,489
                                    ---------------   ----------------  ----------------  -----------------
</TABLE>

       Consolidated  local  service  revenues  grew to  $6,650,000  in 2000 from
$5,915,000  in 1999, an increase of $735,000 or 12%.  Revenue  growth was due to
the  acquisition  of Hager TeleCom,  Inc. in June 2000,  which added $348,000 to
local  service  revenues in 2000 and also due to increased  demand for telephone
lines to provide advanced telecommunications services such as Internet services.

       Network access  revenues rose to $20,812,000 in 2000 from  $19,419,000 in
1999, an increase of $1,393,000 or 7%. The  acquisition of Hager  TeleCom,  Inc.
accounted  for $523,000 of the increase.  Increased  universal  service  support
payments  accounted  for  $224,000.  The balance was due to increased use of the
telephone network by customers and increased settlements payments from NECA.

       Nonregulated revenues grew to $5,680,000 in 2000 from $4,175,000 in 1999,
an increase  of  $1,505,000  or 36%.  The  acquisition  of Hager  TeleCom,  Inc.
accounted  for $762,000 of the  increase.  The  Company's  deregulated  revenues
consist mainly of internet service fees, rents from leased of fiber-optic  cable
facilities, sales of telecommunications  equipment,  engineering fees, directory
revenues and sales commissions.  Cable television revenues rose to $3,953,000 in
2000 from  $3,784,000  in 1999,  an increase of $169,000 or 4% due to  increased
customer service rates.  Billing and collection revenues declined to $694,000 in
2000 from $825,000 in 1999, a decrease of $131,000 or 16% as IXCs  continued the
trend toward self-billing of customers.

                                       17
<PAGE>

       Consolidated  operating  costs and expenses grew to  $26,799,000  in 2000
from  $23,063,000 in 1999, an increase of $3,736,000 or 16%. The  acquisition of
Hager  TeleCom,  Inc.  accounted for  $1,265,000 of the increase.  The following
table shows costs and expenses by operating group for 2000 compared to 1999:
<TABLE>
<CAPTION>

                                                   Alliance                               Hector
                                             Year Ended December 31               Year Ended December 31
                                             2000              1999               2000               1999
<S>                                 <C>               <C>               <C>               <C>
Plant operations                    $     3,586,255   $      2,944,902  $      1,224,546  $       1,142,021
Depreciation and amortization             7,354,503          5,930,740         2,821,781          2,616,879
Customer operations                       1,641,054          1,583,327           310,304            329,191
General and administrative                3,842,955          3,149,918         1,772,180          1,544,670
Other operating expenses                  2,791,331          2,295,122         1,454,337          1,526,310
                                    ---------------   ----------------  ----------------  -----------------
                                    $    19,216,098   $     15,904,009  $      7,583,148  $       7,159,071
                                    ---------------   ----------------  ----------------  -----------------
</TABLE>


       Consolidated  plant operations  expenses  increased to $4,811,000 in 2000
from  $4,087,000 in 1999, an increase of $724,000 or 18% due to the  acquisition
of  Hager,   increased  labor  costs  and  increased   charges  from  suppliers.
Depreciation and  amortization  increased to $10,176,000 in 2000 from $8,548,000
in 1999, an increase of $1,628,000 or 19% due to increased  depreciation  on new
telephone switching equipment and the acquisition of Hager.  Customer operations
expenses  increased 2% to $1,951,000 in 2000 from $1,913,000 in 1999 due largely
to growth in the number of customers served. General and administrative expenses
increased to $5,615,000 in 2000 from $4,695,000 in 1999, an increase of $920,000
or  20%  due  to  the  acquisition  of  Hager  and  increased  cable  television
administrative fees. Other operating expenses increased $424,000 or 11%.

       Consolidated  operating income decreased  $63,000 or 1% to $10,991,000 in
2000 from $11,054,000 in 1999.

       Consolidated  interest expenses  decreased $628,000 to $5,955,000 in 2000
from  $6,583,000  in  1999.  The  decrease  was  due to  expense  reductions  on
convertible debentures that were retired or converted into common stock in 1999.

       In 2000,  the  Company  had  income  from  unconsolidated  affiliates  of
$611,000  compared to a loss of $336,000 in 1999. The Company recorded income on
its Wireless North PCS investment  (due to adjustments in its debt guarantee) of
$15,000  in 2000  compared  to a loss of  $1,597,000  in 1999.  Income  from the
Company's  investments  in Northern  Transport  Group and South Dakota  Networks
totaled $535,000 in the 2000 period.  The Company took a charge against earnings
of $1,273,000 in 2000 based on its revaluation of its investment in Onvoy,  Inc.
Income from Midwest Wireless Holdings,  LLC decreased to $1,248,000 in 2000 from
$1,481,000,in  1999.  The  decrease  was due to  price  competition  from  other
wireless  service  providers  and  costs  associated  with  its  acquisition  of
additional service areas in Iowa and Wisconsin.

       Alliance had gains on sales of marketable  securities totaling $1,622,000
in 2000  compared to gains on sales of  $13,203,000  in 1999.  Most of the gains
were on sales  of US West  (now  Qwest)  stock  sold in 2000 and  sales of Rural
Cellular Corporation in 1999. Alliance continues to hold a significant portfolio
of marketable  securities.  Interest and dividend income increased to $1,251,000
in 2000 from $1,116,000 in 1999 due to investments of the cash proceeds from the
marketable securities sales.

       Consolidated  income before income taxes  decreased to $8,520,000 in 2000
from  $18,455,000 in 1999. The Company's  effective  income tax rate of 49.4% is
higher than the standard U.S. tax rate due to state income taxes and because the
goodwill  amortization  expenses  from  the  Company's  acquisitions  cannot  be
deducted.  Income before the minority interest in Alliance's  earnings decreased
to $4,313,000 in 2000 from $10,942,000 in 1999. Minority interest on earnings of
Alliance was  $1,004,000  in 2000  compared to  $3,463,000  in 1999.  Net income
decreased to $3,309,000 in 2000 compared to $7,479,000 in 1999.




                                       18
<PAGE>



1999 Compared to 1998
---------------------
       Consolidated   revenues   increased  7%  from   $31,839,000  in  1998  to
$34,117,000 in 1999. The following  table shows revenues by operating  group for
1999 compared to 1998:
<TABLE>
<CAPTION>

                                                   Alliance                               Hector
                                             Year Ended December 31               Year Ended December 31
                                             1999              1998               1999               1998
<S>                                 <C>               <C>               <C>               <C>
Local network                       $     4,250,474   $      3,730,079  $      1,664,204  $       1,560,732
Network access                           14,587,083         13,480,391         4,831,878          4,229,530
Billing and collection                      650,839            683,132           173,700            182,635
Nonregulated activities                   3,527,645          4,283,839           647,415            489,528
Cable television                          2,306,786          1,774,495         1,477,292          1,424,333
                                    ---------------   ----------------  ----------------  -----------------
                                    $    25,322,827   $     23,951,936  $      8,794,489  $       7,886,758
                                    ---------------   ----------------  ----------------  -----------------
</TABLE>

       Consolidated  local  service  revenues  grew from  $5,291,000  in 1998 to
$5,915,000 in 1999, an increase of $624,000 or 12%. Revenue growth was due to:

-  Addition of extended area service to Sioux Falls from Alliance's South Dakota
   telephone exchanges
-  Increased demand for telephone lines to provide  advanced  telecommunications
   services such as Internet services
- Increased  development  within the LECs'  service  areas,  and - The full year
effect of Alliance's acquisition of Felton Telephone Company
   ("Felton").

The  number  of access  lines  served by the LECs  increased  3% from  34,762 to
35,867.

     Network  access  revenues rose from  $17,710,000  in 1998 to $19,419,000 in
1999,  an  increase  of  $1,709,000  or 10%.  The  increase  was  chiefly due to
increased  use of the  telephone  network by  customers,  increased  settlements
payments from NECA and increased universal service support funds.

       Nonregulated revenues fell from $4,773,000 in 1998 to $4,175,000 in 1999,
a decrease of $598,000 or 13%.  Revenue  decreases from equipment leases in 1999
more than offset increased  Internet  revenues.  Cable television  revenues rose
from  $3,199,000  in 1998 to  $3,784,000 in 1999, an increase of $585,000 or 18%
due to rate increases and the full-year  effect of the June 1998  acquisition by
Alliance  of  additional  cable  systems  from  Spectrum   Cablevision   Limited
Partnership.  Billing and collection  revenues declined from $866,000 in 1998 to
$825,000 in 1999, a decrease of $41,000 or 5% as IXCs continued the trend toward
self-billing of customers.

       Consolidated  operating costs and expenses grew from  $21,192,000 in 1998
to  $23,063,000  in 1999, an increase of  $1,871,000 or 9%. The following  table
shows costs and expenses by operating group for 1999 compared to 1998:
<TABLE>
<CAPTION>

                                                   Alliance                              Hector
                                             Year Ended December 31                Year Ended December 31
                                             1999              1998               1999               1998
<S>                                 <C>               <C>               <C>               <C>
Plant operations                    $     2,944,902   $      2,821,318  $      1,142,021  $         933,994
Depreciation and amortization             5,930,740          5,712,509         2,616,879          2,068,701
Customer operations                       1,583,327          1,549,019           329,191            254,649
General and administrative                3,149,918          2,575,215         1,544,670          1,375,954
Other operating expenses                  2,295,122          2,646,862         1,526,310          1,253,586
                                    ---------------   ----------------  ----------------  -----------------
                                    $    15,904,009   $     15,304,923  $      7,159,071  $       5,886,884
                                    ---------------   ----------------  ----------------  -----------------
</TABLE>

       Consolidated plant operations  expenses increased from $3,755,000 in 1998
to  $4,087,000  in 1999,  an increase  of  $332,000  or 9%, due to training  and
maintenance  contracts  associated with new telephone  switches and offerings of
enhanced  telephone  services.  Depreciation  and  amortization  increased  from
$7,781,000  in 1998 to $8,548,000 in 1999, an increase of $767,000 or 10% due to
increased depreciation on new telephone switching equipment. Customer operations
expenses  increased 6% from $1,804,000 in 1998 to $1,913,000 in 1999 due largely
to growth in the number of customers served. General and administrative expenses
increased from $3,951,000 in 1998 to $4,695,000 in 1999, an increase of $744,000
or 19% due to increased cable television  selling and  administrative  expenses.
Other operating expenses decreased $79,000 or 2%.

                                       19
<PAGE>

       Consolidated  operating income increased  $407,000 or 4% from $10,647,000
in 1998 to $11,054,000 in 1999.

       Consolidated interest expenses decreased $732,000 from $7,315,000 in 1998
to $6,583,000 in 1999. The decrease was due to expense reductions on convertible
debentures that were retired or converted into common stock in 1998 and 1999.

       In 1999,  the Company  had a  loss  from  investments  in  unconsolidated
affiliates  of $336,000  compared to income of $883,000 in 1998.  The  Company's
share of loss from its Wireless  North PCS  investment  was  $1,597,000  in 1999
compared to  $1,066,000  in 1998.  Income from Midwest  Wireless  Holdings,  LLC
decreased from $1,508,000 in 1998 to $1,481,000,in 1999. The decrease was due to
price competition from other wireless service providers.  The Company had income
in 1998 from the Sioux Falls,  South Dakota MSA,  prior to its sale by Alliance,
of $334,000 in 1998 compared to no income in 1999.

       Alliance had gains on sales of marketable securities totaling $13,203,000
in 1999  compared to gains on sales of $965,000 in 1998.  Most of the gains were
on sales of Rural Cellular  Corporation stock that Alliance sold over the course
of 1999.  Alliance  continues  to hold a  significant  portfolio  of  marketable
securities.  Consolidated  investment income increased $507,000 from $609,000 in
1998 to  $1,116,000  in 1999 due to  investments  of the cash  proceeds from the
marketable  securities  sales.  Alliance's  1998  income  included a gain before
income taxes of  $4,817,000  from the sale of its 12.25%  interest in a cellular
telephone  partnership  serving  the Sioux  Falls,  South  Dakota MSA to CommNet
Cellular, Inc.

       Consolidated  income before income taxes  increased  from  $10,606,000 in
1998 to $18,455,000 in 1999. The Company's effective income tax rate of 40.7% is
higher than the standard U.S. tax rate due to state income taxes and because the
goodwill amortization expenses from the acquisition of Ollig Utilities cannot be
deducted.  Income before the minority interest in Alliance's  earnings increased
93% from  $5,657,000 in 1998 to  $10,942,000.  Minority  interest on earnings of
Alliance were  $3,463,000  in 1999  compared to  $1,747,000 in 1998.  Net income
increased 91% to $7,479,000 in 1999 compared to $3,910,000 in 1998.

Liquidity and Capital Resources
-------------------------------

       Operations
       ----------

       Cash  flows  from  consolidated  operating  activities  were  $7,981,000,
$6,693,000 and $9,623,000 in 2000, 1999 and 1998, respectively.  The increase in
cash flows from operations in 2000 was due to higher levels of noncash  expenses
in 2000.  At December  31,  2000,  the  Company's  cash,  cash  equivalents  and
marketable  securities totaled  $16,729,000  compared to $39,274,000 at December
31, 1999.  Alliance's  cash and  securities  were  $10,225,000  of this total at
December 31, 2000. Working capital at December 31, 2000 was $8,960,000  compared
to  $18,736,000 at December 31, 1999. The current ratio was 1.8 to 1 at December
31, 2000  compared to 2.3 to 1 at December  31,  1999.  Most of the  decrease in
working capital was due to cash payments made to acquire Hager TeleCom, Inc.

        The Company makes  periodic  improvements  to its  facilities to provide
up-to-date  services to its telephone and cable television  customers.  Hector's
plant  additions  in  2000,  1999  and  1998  were  $3,111,000,  $2,902,000  and
$2,652,000,  respectively.  Alliance's  plant  additions in 2000  (excluding the
acquisition of Hager TeleCom,  Inc.),  1999 and 1998 (excluding the acquisitions
of  Felton  and  Spectrum)   were   $6,335,000,   $4,640,000   and   $5,163,000,
respectively.  Plant  additions for 2001 for Hector and Alliance are expected to
total  $4,530,000  and  $7,109,000,  respectively.  These plant  additions  will
provide  customers  with  additional  advanced  telecommunications  services and
expand usage of high capacity fiber optics in the telephone network. The Company
has contracted with Next Level Communications to provide $1,433,000 of broadband
equipment as part of these additions.

                                       20
<PAGE>

       Investments
       -----------

       Investment  income has been  derived  almost  exclusively  from  interest
earned  on  the  Company's  cash  and  cash  equivalents.  Interest  income  has
fluctuated in relation to changes in interest rates and availability of cash for
investment.  In 2000,  Alliance  received  $5,421,000  from sales of  marketable
securities,   principally  USWest  common  stock.  In  1999,  Alliance  received
$18,920,000  from sales of marketable  securities,  principally  Rural  Cellular
Corporation  common stock. In 1998,  Alliance received  $1,820,000 from sales of
interests in Rural Cellular Corporation,  MediaOne Group, Inc., Comnet Cellular,
Inc. and Illuminet  Holdings,  Inc. At December 31, 2000,  Alliance continued to
maintain a significant  marketable  securities portfolio consisting primarily of
shares of Illuminet Holdings, Inc. and Rural Cellular Corporation.

       The Company is an investor  in  Wireless  North LLC, a limited  liability
corporation that has licenses to operate PCS systems in 13 markets in Minnesota,
Wisconsin, North Dakota and South Dakota. The Company invested cash of $183,000,
$1,032,000 and $761,000 in Wireless North in 2000, 1999 and 1998,  respectively.
Cash received as return of capital in 2000 due to  investment by Touch  America,
Inc. in Wireless  North were  $409,000.  Investments  in Wireless North prior to
1998 consisted of $510,000 of cash and debt  guarantees  which have been reduced
by $282,000 to $1,091,000.  The PCS systems are in start-up mode and continue to
incur  significant  losses.   Wireless  North  is  currently  up  for  sale  and
expressions of interest have been received from other investors. The Company has
accrued  losses on Wireless  North up to the total of its cash  investments  and
loan  guarantees.  It cannot  predict the effect a sale of Wireless  North would
have on its future financial results.

        The Company  continues  to maintain its  ownership  in Midwest  Wireless
Holdings,  LLC through  acquisition  of additional  partnership  interests.  The
acquisition  of  Hager  TeleCom,  Inc.  added  .8%  to the  Company's  ownership
interest. Cash expended to purchase Midwest Wireless Holdings, LLC interests was
$380,000 in 1998.  At December  31, 2000,  the  Company's  ownership  percentage
totaled 10.4%. In December,  1998, the Company sold its 12.25% interest in Sioux
Falls Cellular,  Ltd., which provides cellular service in the Sioux Falls, South
Dakota MSA to CommNet Cellular, Inc. for $6,725,000.

       The Company's  Alliance  subsidiary  has committed to invest  $600,000 in
2001 to support the CLEC operations in Breckenridge,  MN and Wahpeton, ND of 702
Communications  (Val Ed Co.).  The Company  cannot  predict if additional  funds
beyond this amount will be required.

       Debt and Loan Commitments
       -------------------------

       As part of financing its 68% ownership interest in Alliance,  the Company
borrowed  $6,000,000 from CoBank (St. Paul Bank for Cooperatives before its 1999
merger with CoBank).  In 1998, the Company replaced the loan with a 15-year term
loan from Rural Telephone Finance Cooperative ("RTFC"). The interest rate on the
loan varies  according to the rate RTFC charges for similar loans.  The interest
rate was 8.4% at December 31, 2000.

       The  Company  carries  a  significant  amount  of debt due to  Alliance`s
borrowing to finance the acquisition of Ollig Utilities Company.  Interest rates
on Alliance's  acquisition  loan from CoBank have been locked for periods of one
to ten years at rates averaging  7.5%. The  outstanding  balance on this loan at
December 31, 2000 was $44,902,300. CoBank is a cooperative, owned and controlled
by its customers.  Each customer  borrowing  from the bank on a patronage  basis
shares in the bank's net income  through  payment  of  patronage  refunds.  As a
condition of maintaining the loan,  Alliance  invested  $344,000 and $509,000 of
cash in the bank in 1999 and 1998, respectively.  The Company recorded a loss of
$200,000 in 1999 due to  writedown of the value of this bank stock in the merger
between CoBank and St. Paul Bank for Cooperatives.

       In  1995  the  Company  made  a  public  offering  of  8.5%   convertible
subordinated debentures. Value of the offering was $12,650,000.  Proceeds to the
Company,  after  underwriting,  accounting and legal expenses were  $11,300,000.
During 1999 and 1998, the Company issued calls to retire the  debentures,  which
resulted in $10,757,000 of debentures  being converted into stock and $1,893,000
of debentures being purchased and retired.

                                       21
<PAGE>

       The Company's LEC  subsidiaries  borrow from the Rural Utilities  Service
("RUS") and the Rural  Telephone  Bank ("RTB") to help finance asset  additions.
Proceeds from long-term  borrowings  from RUS and RTB were $700,000,  $6,156,000
and $737,000 in 2000, 1999 and 1998, respectively.  The average interest rate on
outstanding  RUS and RTB loans is 5.5%.  At December  31, 2000  unadvanced  loan
commitments  from the RUS and RTB to Hector's and  Alliance's  LEC  subsidiaries
totaled  $11,498,000.  Subsequent to year end, an Alliance  subsidiary  received
preliminary commitments from RUS & RTB for a new $13,000,000 loan.

       The Company's loan  agreements  place  significant  restrictions  on cash
distributions from the subsidiaries to the parent company.  Substantially all of
the LEC's assets are pledged or are subject to  mortgages to secure  obligations
to the RUS and RTB. Alliance's loan covenants with CoBank also restrict dividend
payments at the Alliance level. A portion of any dividend  payment from Alliance
to Hector  would also be subject to federal and state  income  taxes.  It is the
Company's  plan,  in so far as possible,  to maintain  its cash  balances at the
subsidiary level to support their operations.

         By utilizing  cash flow from  operations,  current cash and  investment
balances,  and other  available  financing  sources,  the  Company  feels it has
adequate resources to meet its anticipated  operating,  debt service and capital
expenditure requirements.


       Acquisitions
       ------------

       Effective  June 9, 2000,  Alliance  acquired all the  outstanding  common
stock of Hager TeleCom,  Inc.  ("Hager");  a rural telephone  company located in
southwestern Wisconsin.  Hager serves approximately 2,100 access lines, provides
internet  service to 2,700  customers in Hager,  WI and Red Wing,  MN and has an
ownership  interest  in  Midwest  Wireless  Holdings,  LLC.  Purchase  price was
$9,124,500 of cash plus acquisition costs.

       Effective April 1, 1998,  Alliance  acquired all the  outstanding  common
stock of Felton Telephone Company ("Felton");  a rural telephone company located
in  northwestern  Minnesota  adjacent to areas  already  served by the Company's
telephone subsidiaries.  Felton serves approximately 700 access lines and held a
significant portfolio of marketable  securities,  including investments in Rural
Cellular  Corporation,  U.S. West Communications,  Inc. and MediaOne Group, Inc.
Purchase  price was  $3,650,000,  which includes a cash  downpayment  and seller
financing of the balance through a $3,149,000  note payable bearing  interest at
8.25%. The note matures April 1, 2005.

       Effective  June  9,  1998,  Alliance  acquired  the  assets  of  8  cable
television  systems serving 4,000 customers in 19 rural communities in Minnesota
and North Dakota from Spectrum  Cablevision  Limited  Partnership  ("Spectrum").
Several  of  these   communities   are  also  served  by  Alliance's   telephone
subsidiaries.  Purchase price was approximately  $4,559,000.  Financing for this
purchase  included  $2,000,000 from a new line of credit  arrangement with Rural
Telephone Finance  Cooperative.  In 1997, Alliance acquired one small system for
$120,000.

       The Company is always looking to acquire properties that advance its plan
to be a provider of top quality telecommunications  services to rural customers.
In the past,  the  Company  has been a member of  investor  groups  that  sought
unsuccessfully to acquire rural telephone properties offered for sale by GTE and
Qwest.  The  Company  cannot  predict  if it will  be  successful  in  acquiring
additional  properties and does not currently  have financing  plans in place to
pay for possible acquisitions.

Effects of Inflation
--------------------
       The  Company's  local  exchange  telephone  companies  are subject to the
jurisdiction  of  Minnesota,   Iowa,  South  Dakota  and  Wisconsin   regulatory
authorities with respect to a variety of matters, including rates for intrastate
access  services,  the  conditions  and  quality of  service,  issuance of debt,
depreciation rates and accounting methods. 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 implemented prospectively.




                                       22
<PAGE>



New Accounting Standards
------------------------
         In June 1998, the Financial Accounting Standards Board issued Statement
of Financial  Accounting  Standards  (SFAS) No. 133,  "Accounting for Derivative
Instruments  and Hedging  Activities"  (as  amended)  which was to be  effective
January 1, 2000 but was deferred to fiscal years  beginning after June 15, 2000.
The  Company  has not yet  determined  the impact of this  pronouncement  on its
financial statements.

         In December 1999, the Securities and Exchange  Commission  issued Staff
Accounting  Bulletin  No. 101,  (SAB 101),  "Revenue  Recognition  in  Financial
Statements". SAB 101 summarizes certain of the staff's views regarding generally
accepted accounting principles for revenue recognition and deferred costs in the
financial  statements.  SAB 101 did not have a material  effect on the Company's
financial statements.

Factors Affecting Future Performance
------------------------------------
       From time to time in  reports  filed  with the  Securities  and  Exchange
Commission,  in press releases,  and in other communications to shareholders and
the investing  public,  the Company may make statements  regarding the Company's
future  financial  performance.  Such forward looking  statements are subject to
risks and  uncertainties,  including  but not  limited  to,  the  effects of the
Telecommunications Act, new technological developments which may reduce barriers
for  competitors  entering  the  Company's  local  exchange or cable  television
markets,   higher  than  expected   expenses  and  other  risks   involving  the
telecommunications  industry  generally.  All  such  forward-looking  statements
should be considered in light of such risks and uncertainties.




                                       23
<PAGE>





                              REPORT OF MANAGEMENT

The management of Hector Communications Corporation and its subsidiary companies
is responsible for the integrity and objectivity of the financial statements and
other  financial  information  contained  in the annual  report.  The  financial
statements and related  information  were prepared in accordance  with generally
accepted   accounting   principles  and  include   amounts  that  are  based  on
management's informed judgments and estimates.

In fulfilling its responsibilities  for the integrity of financial  information,
management  maintains  accounting  systems and related controls.  These controls
provide reasonable assurance,  at appropriate costs, that assets are safeguarded
against  losses and that  financial  records are  reliable  for use in preparing
financial  statements.  Management  recognizes its responsibility for conducting
the  Company's  affairs  according  to the highest  standards  of  personal  and
corporate conduct.

The  Audit  Committee  of the Board of  Directors,  composed  solely of  outside
directors,  meets with the independent  auditors and management  periodically to
review accounting,  auditing,  financial reporting and internal control matters.
The independent auditors have free access to this committee,  without management
present to discuss  the  results  of their  audit work and their  opinion on the
adequacy of internal financial controls and the quality of financial reporting.


                                            /s/ Curtis A. Sampson
                                            -----------------------------------
                                            Curtis A. Sampson
                                            Chairman and Chief Executive Officer


                                            /s/ Charles A. Braun
                                            -----------------------------------
                                            Charles A. Braun
March 29, 2001                              Chief Financial Officer


                                       24
<PAGE>



ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

(a)  FINANCIAL STATEMENTS

                          INDEPENDENT AUDITORS' REPORT

Shareholders and Board of Directors
Hector Communications Corporation

We  have  audited  the  accompanying   consolidated  balance  sheets  of  Hector
Communications Corporation and subsidiaries as of December 31, 2000 and 1999 and
the  related  consolidated   statements  of  income  and  comprehensive  income,
stockholders'  equity,  and cash flows for each of the three years in the period
ended December 31, 2000. These financial  statements are the  responsibility  of
the Company's  management.  Our responsibility is to express an opinion on these
financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the 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  provide a  reasonable  basis for our
opinion.

In our opinion, the consolidated  financial statements referred to above present
fairly,   in  all  material   respects,   the   financial   position  of  Hector
Communications Corporation and subsidiaries as of December 31, 2000 and 1999 and
the results of their operations and their cash flows for each of the three years
in the period ended December 31, 2000 in conformity with  accounting  principles
generally accepted in the United States.


/s/ Olsen Thielen & Co., Ltd.
-----------------------------
Olsen Thielen & Co., Ltd.
February 14, 2001
St. Paul, Minnesota




                                       25
<PAGE>
<TABLE>
<CAPTION>

                               HECTOR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
                                          CONSOLIDATED BALANCE SHEETS

                                                      ASSETS
                                                                                            December 31
                                                                                ----------------------------------
                                                                                        2000                1999
                                                                                -------------        -------------
CURRENT ASSETS:
<S>                                                                             <C>                  <C>
  Cash and cash equivalents                                                     $  13,834,110        $  27,055,772
  Construction fund (Note 6)                                                          317,837              283,604
  Accounts receivable (net of allowance for doubtful accounts of
    $360,000 and $447,000, respectively)                                            5,548,622            4,854,365
  Materials, supplies and inventories, at average cost                                825,673              616,985
  Other current assets                                                                302,704              171,432
                                                                                -------------        -------------
      TOTAL CURRENT ASSETS                                                         20,828,946           32,982,158

PROPERTY, PLANT AND EQUIPMENT,net  (Notes 1 and 5)                                 56,226,525           51,410,033

OTHER ASSETS:
  Excess of cost over net assets acquired, less amortization
    of $8,212,000 and $6,473,000 (Note 1)                                          55,475,430           51,405,010
  Marketable securities (Note 3)                                                    2,895,272           12,218,303
  Wireless telephone investments (Note 4)                                          12,509,975            9,688,981
  Other investments (Notes 1 and 6)                                                10,527,727            8,768,797
  Other assets (Note 1)                                                               214,106              323,405
                                                                                -------------        -------------
      TOTAL OTHER ASSETS                                                           81,622,510           82,404,496
                                                                                -------------        -------------

TOTAL ASSETS                                                                    $ 158,677,981        $ 166,796,687
                                                                                =============        =============

                                       LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
  Notes payable and current portion of long-term debt (Note 6)                  $   6,337,200        $   5,607,100
  Accounts payable (Note 10)                                                        2,664,520            2,481,507
  Accrued expenses                                                                  2,479,779            2,184,626
  Income taxes payable                                                                387,100            3,973,019
                                                                                -------------        -------------
     TOTAL CURRENT LIABILITES                                                      11,868,599           14,246,252

LONG-TERM DEBT, less current portion (Note 6)                                      84,378,149           86,281,656

DEFERRED INVESTMENT TAX CREDITS (Note 7)                                               79,668              140,386

DEFERRED INCOME TAXES (Note 7)                                                      6,603,310            9,435,515

DEFERRED COMPENSATION (Note 9)                                                        904,071              897,113

COMMITMENTS AND CONTINGENCIES (Note 4)

MINORITY INTEREST IN ALLIANCE TELECOMMUNICATIONS, CORP.                            15,736,317           15,813,847

STOCKHOLDERS' EQUITY: (Notes 1, 6 and 8)
  Preferred stock, par value $1.00 per share; 3,000,000 shares authorized:
    Convertible Series A, 221,300 and 229,300 shares issued and outstanding           221,300              229,300
  Common stock, par value $.01 per share; 10,000,000 shares authorized;
    3,504,363 and 3,574,712 shares issued and outstanding                              35,044               35,747
  Additional paid-in capital                                                       12,844,776           13,274,444
  Retained earnings                                                                24,945,512           23,115,945
                                                                                -------------        -------------
                                                                                   38,046,632           36,655,436
  Accumulated other comprehensive income (Note 3)                                   1,061,235            3,326,482
                                                                                -------------        -------------
     TOTAL STOCKHOLDERS' EQUITY                                                    39,107,867           39,981,918
                                                                                -------------        -------------

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                                      $ 158,677,981        $ 166,796,687
                                                                                =============        =============

See notes to consolidated financial statements.
</TABLE>

                                       26
<PAGE>
<TABLE>
<CAPTION>
                                 HECTOR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
                             CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

                                                                                Year Ended December 31
                                                                    ------------------------------------------------
                                                                           2000             1999              1998
                                                                    -------------    -------------     -------------
REVENUES:
<S>                                                                 <C>              <C>               <C>
  Local network                                                     $   6,650,242    $   5,914,678     $   5,290,811
  Network access                                                       20,812,363       19,418,961        17,709,921
  Billing and collection                                                  694,171          824,539           865,767
  Nonregulated activities                                               5,679,915        4,175,060         4,773,367
  Cable television revenues                                             3,953,411        3,784,078         3,198,828
                                                                    -------------    -------------     -------------
    TOTAL REVENUES                                                     37,790,102       34,117,316        31,838,694

COSTS AND EXPENSES:
  Plant operations                                                      4,810,801        4,086,923         3,755,312
  Depreciation and amortization                                        10,176,284        8,547,619         7,781,210
  Customer operations                                                   1,951,358        1,912,518         1,803,668
  General and administrative                                            5,615,135        4,694,588         3,951,169
  Other operating expenses                                              4,245,668        3,821,432         3,900,448
                                                                    -------------    -------------     -------------
    TOTAL COSTS AND EXPENSES                                           26,799,246       23,063,080        21,191,807
                                                                    -------------    -------------     -------------

OPERATING INCOME                                                       10,990,856       11,054,236        10,646,887

OTHER INCOME (EXPENSES):
  Interest expense                                                     (5,954,603)      (6,582,536)       (7,315,153)
  Income (loss) from investments in unconsolidated
    affiliates (Note 4)                                                   610,846         (335,537)          883,096
  Interest and dividend income                                          1,250,748        1,116,098           609,071
  Gain on sale of marketable securities (Note 3)                        1,622,226       13,203,062           965,069
  Gain on sale of cellular partnership (Note 4)                                                            4,817,498
                                                                    -------------    -------------     -------------
    OTHER INCOME (EXPENSES), net                                       (2,470,783)       7,401,087           (40,419)
                                                                    -------------    -------------     -------------
INCOME BEFORE INCOME TAXES                                              8,520,073       18,455,323        10,606,468

INCOME TAX EXPENSE (Note 7)                                             4,207,000        7,513,000         4,949,000
                                                                    -------------    -------------     -------------
INCOME BEFORE MINORITY INTEREST                                         4,313,073       10,942,323         5,657,468

MINORITY INTEREST IN EARNINGS OF
  ALLIANCE TELECOMMUNICATIONS CORPORATION                               1,003,650        3,463,142         1,747,225
                                                                    -------------    -------------     -------------
NET INCOME                                                              3,309,423        7,479,181         3,910,243
                                                                    -------------    -------------     -------------
OTHER COMPREHENSIVE INCOME (LOSS):
  Unrealized holding gains (losses) on marketable securities           (3,903,896)      20,784,075           492,287
  Reclassification adjustment for gains included in net income         (1,622,226)     (13,203,062)         (965,069)
                                                                    -------------    -------------     -------------
OTHER COMPREHENSIVE INCOME (LOSS) BEFORE
  INCOME TAXES                                                         (5,526,122)       7,581,013          (472,782)
                                                                    -------------    -------------     -------------
Income tax expense (benefit) related to unrealized
  holding gains and losses on marketable securities                    (1,539,833)       8,450,555           189,519
Income tax benefit related to reclassification adjustment for
  gains included in net income                                           (639,862)      (5,368,207)         (371,529)
                                                                    -------------    -------------     -------------
Income tax expense (benefit) related to items of other
  comprehensive income (loss)                                          (2,179,695)       3,082,348          (182,010)
Minority interest in other comprehensive income (loss) of
  Alliance Telecommunications Corporation                              (1,081,180)       1,559,887
                                                                    -------------    -------------     -------------
Other Comprehensive Income (Loss)                                      (2,265,247)       2,938,778          (290,772)
                                                                    -------------    -------------     -------------
COMPREHENSIVE INCOME                                                $   1,044,176    $  10,417,959     $   3,619,471
                                                                    =============    =============     =============
BASIC NET INCOME PER COMMON SHARE (Note 1)                          $         .93    $        2.42     $        1.63
                                                                    =============    =============     =============
DILUTED NET INCOME PER COMMON SHARE (Note 1)                        $         .86    $        1.96     $        1.15
                                                                    =============    =============     =============

AVERAGE SHARES OUTSTANDING (Notes 1 and 8):
  Common shares only                                                    3,544,000        3,095,000         2,403,000
  Common and potential common shares                                    3,851,000        3,945,000         3,937,000

See notes to consolidated financial statements.
</TABLE>

                                       27
<PAGE>
<TABLE>
<CAPTION>
                                        HECTOR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
                                         CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

                                                                                                  Unearned
                                                                                                  Employee  Accumulated
                                                                        Additional                   Stock       Other
                                   Preferred Stock       Common Stock      Paid-in     Retained  Ownership Comprehensive
                                   Shares    Amount     Shares  Amount     Capital     Earnings     Shares     Income         Total
                                  -------  --------  --------- ------- -----------  ----------- ----------  ----------  -----------
<S>                               <C>      <C>       <C>       <C>     <C>          <C>         <C>         <C>         <C>
BALANCE AT DECEMBER 31, 1997      378,100  $378,100  2,079,364 $20,794 $ 1,712,954  $11,726,521 $  (69,724) $  678,477  $14,447,122
Net income                                                                            3,910,243                           3,910,243
Issuance of common stock under
 Employee Stock Purchase Plan                           10,753     107      73,013                                           73,120
Issuance of common stock under
 Employee Stock Option Plan                             48,200     482     354,931                                          355,413
Issuance of common stock in
 exchange for preferred stock     (35,300)  (35,300)    35,300     353      34,947                                                0
Issuance of common stock from
 exercise of outstanding warrants                        7,876      79      61,091                                           61,170
Conversion of convertible
 debentures into common stock                          479,569   4,796   4,096,134                                        4,100,930
ESOP Shares Allocated                                                       (6,629)                 69,724                   63,095
Change in unrealized gains on
 marketable securities, net of
 deferred taxes                                                                                               (290,772)    (290,772)
                                  -------  --------  --------- ------- -----------  ----------- ----------  ----------  -----------
BALANCE AT DECEMBER 31, 1998      342,800   342,800  2,661,062  26,611   6,326,441   15,636,764         -      387,705   22,720,321
Net income                                                                            7,479,181                           7,479,181
Issuance of common stock under
 Employee Stock Purchase Plan                           14,890     149     104,267                                          104,416
Issuance of common stock under
 Employee Stock Option Plan                             43,675     437     361,475                                          361,912
Issuance of common stock in
 exchange for preferred stock    (113,500) (113,500)   113,500   1,135     112,365                                                0
Issuance of common stock from
 exercise of outstanding warrants                        8,742      87         (87)                                               0
Conversion of convertible
 debenturex into common stock                          730,438   7,304   6,350,007                                        6,357,311
Issuance of common stock to ESOP                         2,405      24      19,976                                           20,000
Change in unrealized gains on
 marketable securities, net of
 deferred taxes                                                                                              2,938,777    2,938,777
                                  -------  --------  --------- ------- -----------  ----------- ----------  ----------  -----------
BALANCE AT DECEMBER 31, 1999      229,300   229,300  3,574,712  35,747  13,274,444   23,115,945        -     3,326,482   39,981,918
Net income                                                                            3,309,423                           3,309,423
Issuance of common stock under
 Employee Stock Purchase Plan                           10,742     108     115,167                                          115,275
Issuance of common stock under
 Employee Stock Option Plan                             37,620     376     266,813                                          267,189
Issuance of common stock in
 exchange for preferred stock      (8,000)   (8,000)     8,000      80       7,920                                                0
Issuance of common stock from
 exercise of outstanding warrants                       88,311     883     756,417                                          757,300
Issuance of common stock to ESOP                         6,928      69      96,923                                           96,992
Purchase and retirement of
 common stock                                         (221,950) (2,219) (1,672,908)  (1,479,856)                         (3,154,983)
Change in unrealized gains on
 marketable securities, net of
 deferred taxes                                                                                             (2,265,247)  (2,265,247)
                                  -------  --------  --------- ------- -----------  ----------- ----------  ----------  -----------
BALANCE AT DECEMBER 31, 2000      221,300  $221,300  3,504,363 $35,044 $12,844,776  $24,945,512 $      -    $1,061,235  $39,107,867
                                  =======  ========  ========= ======= ===========  =========== ==========  ==========  ===========


See notes to consolidated financial statements.
</TABLE>

                                       28
<PAGE>
<TABLE>
<CAPTION>

                                     HECTOR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
                                           CONSOLIDATED STATEMENTS OF CASH FLOWS

                                                                                         Year Ended December 31
                                                                             ------------------------------------------------
                                                                                    2000             1999              1998
                                                                             -------------     ------------      ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S>                                                                           <C>              <C>               <C>
  Net Income                                                                  $ 3,309,423      $ 7,479,181       $ 3,910,243
  Adjustments to reconcile net income to net cash
    provided by operating activities:
      Depreciation and amortization                                            10,177,520        8,663,181         7,957,527
      Minority stockholders' interest in earnings
         of Alliance Telecommunications Corporation                             1,003,650        3,463,142         1,747,225
      Gain on sales of marketable securities                                   (1,622,226)     (13,203,062)         (965,069)
      Gain on sale of wireless partnership investment                                                             (4,817,498)
      Loss (income) from unconsolidated affiliates                               (610,846)         335,537          (883,096)
      Proceeds from wireless cellular investments                                 716,653          709,668         1,206,505
      Noncash patronage refunds                                                    (8,780)         (12,569)
      Changes in assets and liabilities net of effects from
        the purchase of Hager Telecom, Inc. and Felton Telephone Company:
        Increase in accounts receivable                                          (566,951)        (727,508)          (37,845)
        Decrease (increase) in materials, supplies and inventories               (172,847)         (88,146)           21,188
        Decrease in other current assets                                          111,795            8,702            46,455
        Increase (decrease) in accounts payable                                   (62,254)           7,981           866,321
        Increase (decrease) in accrued expenses                                   121,137          477,147          (193,287)
        Increase (decrease) in income taxes payable                            (3,426,965)       1,942,370         1,455,010
        Decrease in deferred investment tax credits                               (60,718)        (112,215)         (136,016)
        Decrease in deferred income taxes                                        (934,383)      (2,157,467)         (604,706)
        Increase (decrease) in deferred compensation                                6,958          (93,042)           49,730
                                                                             -------------     -------------    -------------
          Net cash provided by operating activities                             7,981,166        6,692,900         9,622,687

CASH FLOWS FROM INVESTING ACTIVITIES:
  Purchases of property, plant and equipment                                   (9,446,190)      (7,541,926)       (9,716,135)
  Sales of temporary cash investments                                                                                300,000
  Sales of marketable securities                                                5,420,957       18,920,352         1,819,653
  Purchases of marketable securities                                                            (1,768,648)
  Investments in wireless telephone                                              (183,276)      (1,031,587)       (1,140,457)
  Proceeds from wireless PCS investments                                          408,846
  Decrease (increase) in construction fund                                          8,169          (83,113)         (122,801)
  Purchases of other investments                                               (2,393,458)      (1,052,230)       (1,083,592)
  Proceeds from other investments                                                 205,584          463,734           114,536
  Proceeds from sale of wireless partnership investment                                                            6,725,140
  Decrease (increase) in excess of cost over net assets acquired                                    15,170        (2,797,123)
  Decrease (increase) in other assets                                             109,954          (52,109)          (62,012)
  Increase in cash from purchase of Felton Telephone Company                                                         196,500
  Payments for purchase of Hager Telecom, Inc., net of cash acquired           (8,532,392)
                                                                             -------------    -------------     -------------
         Net cash provided by (used in) investing activities                  (14,401,806)       7,869,643        (5,766,291)

CASH FLOWS FROM FINANCING ACTIVITIES:
  Repayment of notes payable and long-term debt                                (5,485,803)      (8,815,220)       (8,911,738)
  Proceeds from issuance of notes payable and long-term debt                      700,000        6,156,087         6,733,179
  Issuance of common stock                                                      1,139,764          466,328           489,703
  Purchase of stock                                                            (3,154,983)
  ESOP shares allocated                                                                                               63,095
                                                                             -------------    -------------     -------------
         Net cash used in financing activities                                 (6,801,022)      (2,192,805)       (1,625,761)
                                                                             -------------    -------------     -------------

NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS                          (13,221,662)      12,369,738         2,230,635

CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR                                 27,055,772       14,686,034        12,455,399
                                                                             -------------    -------------     -------------

CASH AND CASH EQUIVALENTS AT END OF YEAR                                     $ 13,834,110     $ 27,055,772      $ 14,686,034
                                                                             =============    =============     =============

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
  Interest paid                                                              $  6,189,304     $  6,700,250      $  7,096,930
  Income taxes paid                                                             8,639,597        7,840,312         4,262,666
</TABLE>


See notes to consolidated inancial statements.

                                       29
<PAGE>




               HECTOR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
---------------------------------------------------

Description of business: Hector Communications  Corporation owns a 100% interest
in  five  local  exchange  telephone   subsidiaries  and  one  cable  television
subsidiary. The Company also owns a 68% interest in Alliance  Telecommunications
Corporation, which owns and operates six local exchange telephone companies, two
cable  television   companies,   an  engineering  company,  and  a  credit  card
communications  company. At December 31, 2000, the Company's wholly and majority
owned subsidiaries provided telephone service to 38,745 access lines in 37 rural
communities in Minnesota, Wisconsin, South Dakota and Iowa. Its cable television
operations   provided  cable  television   services  to  13,171  subscribers  in
Minnesota,  South  Dakota and  Wisconsin.  The  Company is also an  investor  in
partnerships   and   corporations   providing   wireless   telephone  and  other
telecommunications related services.

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

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

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

Property,  plant and  equipment:  Property,  plant and  equipment is recorded at
cost.  Depreciation  is computed using  principally  the  straight-line  method.
Depreciation  included in costs and  expenses  was  $8,415,178,  $6,942,357  and
$6,260,624 for 2000,  1999 and 1998,  respectively.  Maintenance and repairs are
charged to operations and additions or improvements  are  capitalized.  Items of
property  sold,  retired or  otherwise  disposed  of in the  ordinary  course of
business  are  removed  from  assets  and any gains or losses  are  included  in
accumulated depreciation.

Wireless  telephone  investments:  The Company has  significant  investments  in
Midwest  Wireless  Holdings,  LLC and  Wireless  North,  LLC. The Company is the
largest  shareholder of Midwest  Wireless  Holdings,  LLC and the fourth largest
shareholder  of  Wireless  North,  LLC and  has the  ability  to  influence  the
operating  and financial  policies of these  companies.  The Company  recognizes
income and losses from these  investments  on the equity  method of  accounting.
Income  and  losses  recognized  from  these  investments  are  material  to the
Company's operating results.

Other  assets:  The excess of cost over net assets of  subsidiaries  acquired in
purchase  transactions  is being  amortized  on the  straight-line  method  over
periods ranging from fifteen to forty years.  Amortization included in costs and
expenses was  $1,739,225,  $1,583,380  and  $1,499,456  in 2000,  1999 and 1998,
respectively.

                                       30
<PAGE>

In 1999 and 1998 the Company  amortized  debenture  issue incurred in completing
its February, 1995 public offering of convertible subordinated  debentures.  The
debenture  issue costs were  amortized  over the expected life of the debentures
(Note 6).  Amortization  cost  included in interest  expense  was  $115,562  and
$176,317 in 1999 and 1998, respectively. When the debentures were converted into
common stock,  the remaining  issue costs were charged to capital.  $256,151 and
$233,549  of  debenture  issue  costs were  charged to capital in 1999 and 1998,
respectively. None of the convertible debentures remain outstanding.

Other investments consist of Rural Telephone Bank stock, CoBank stock, long-term
certificates of deposit,  and investments in stock companies and partnerships of
other telecommunications  service providers.  Long-term investments in companies
that are not  intended  for resale or are not readily  marketable  are valued at
cost, which does not exceed net realizable  value.  During the fourth quarter of
2000,  the Company  established a valuation  reserve of  $1,273,000  against its
investment  in  Onvoy,  Inc.  common  stock.   Investments  in  joint  ventures,
partnerships and limited  liability  companies are recorded on the equity method
of  accounting,  which reflects  original cost and  recognition of the Company's
share of operating income or losses from the respective operations.

Other  assets are cable  television  franchises  owned by the  Company and other
deferred  charges.  Amortization  included in expenses was $21,881,  $21,882 and
$21,130 for 2000, 1999 and 1998, respectively.

Financial  instruments:  The fair value of the Company's  financial  instruments
approximates  carrying value except for long-term investments in other companies
and  long-term  debt payable to the Rural  Utilities  Service  ("RUS") and Rural
Telephone Bank ("RTB").  Other long-term investments are not intended for resale
and not  readily  marketable,  thus a  reasonable  estimate of fair value is not
practicable.  The  fair  value  of  long-term  debt  owed  to RUS  and  RTB  was
$37,162,000  and $34,117,000 at December 31, 2000 and 1999,  respectively.  Fair
values were  estimated  based on current  rates  offered to the Company for debt
with similar terms and maturities.

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

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.   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.

Net income per share: Basic net income per common share is based on the weighted
average number of common shares outstanding during each year. Diluted net income
per common  share  takes into effect the  dilutive  effect of  potential  common
shares  outstanding.  The Company's  potential common shares outstanding include
preferred  stock,  stock  options,  warrants  and  convertible  debentures.  The
calculation  of the  Company's net income per share is included in Exhibit 11 of
this form 10-K.

Statement of cash flows: The Company  considers  temporary cash investments with
an original maturity of three months or less to be cash equivalents. During 1999
and 1998, the Company issued calls to retire outstanding convertible debentures.
As a result  of these  calls,  $6,493,000  and  $4,264,000  of  debentures  were
converted  into  common  stock  in  noncash   transactions  in  1999  and  1998,
respectively.

New  accounting  principles:  In June 1998, the Financial  Accounting  Standards
Board  issued  Statement  of  Financial  Accounting  Standards  (SFAS) No.  133,
"Accounting  for Derivative  Instruments  and Hedging  Activities"  (as amended)
which was to be effective  January 1, 2000 but  subsequently  deferred to fiscal
years  beginning  after June 15, 2000.  The Company has not yet  determined  the
impact of this pronouncement on its financial statements.

                                       31
<PAGE>

Basis of presentation: Certain amounts in the 1998 and 1999 financial statements
have been reclassified to conform to the 2000 financial statement  presentation.
These  reclassifications  had no effect on net income or stockholders' equity as
previously reported.

NOTE 2 - ACQUISITIONS.

Effective June 9, 2000, Alliance Telecommunications Corporation acquired all the
outstanding  common stock of Hager TeleCom,  Inc.  ("Hager");  a rural telephone
company  located in southwestern  Wisconsin.  Hager serves  approximately  2,100
access lines,  provides internet service to 2,700 customers in Hager, WI and Red
Wing,  MN and has an  ownership  interest  in Midwest  Wireless  Holdings,  LLC.
Purchase price was $9,124,500 of cash plus acquisition costs. The acquisition is
being  accounted for as a purchase.  Excess of cost over net assets  acquired in
the  transaction  was  $5,810,000,  which is being  amortized on a straight-line
basis over 25 years.  The  operations  of Hager,  which were not material to the
Company's financial statements,  are included in the Company's financial results
from the purchase date. In the  acquisition,  the following assets were acquired
and liabilities assumed:
      Property, plant and equipment                              $   3,819,916
      Excess of cost over net assets acquired                        5,809,643
      Investment in Midwest Wireless Holdings, LLC                   2,500,000
      Long-term debt                                                (3,612,396)
      Deferred taxes                                                  (281,872)
      Other assets and liabilities                                     978,961
                                                                 --------------
        Total purchase price                                         9,214,252
      Less cash and cash equivalents acquired                         (681,860)
                                                                 --------------
      Payment for purchase of Hager TeleCom, Inc.,
        net of cash acquired                                     $   8,532,392
                                                                 ==============

Effective April 1, 1998, Alliance  Telecommunications  Corporation  acquired all
the outstanding  common stock of Felton Telephone  Company  ("Felton");  a rural
telephone  company located in northwestern  Minnesota  adjacent to areas already
served by the Company's telephone subsidiaries.  Felton serves approximately 700
access  lines  and  held  a  significant  portfolio  of  marketable  securities,
including investments in Rural Cellular  Corporation,  U.S. West Communications,
Inc. and MediaOne Group,  Inc.  Purchase price was $3,650,000,  which includes a
cash  downpayment and seller  financing of the balance through a $3,149,000 note
payable  bearing  interest  at  8.25%.  The  note  matures  April 1,  2005.  The
acquisition is being accounted for as a purchase. Excess of cost over net assets
acquired  in the  transaction  was  $536,000,  which  is  being  amortized  on a
straight-line  basis over 40 years.  The  operations  of Felton,  which were not
material to the Company's  financial  statements,  are included in the Company's
financial  results from the purchase  date.  In the  acquisition,  the following
assets were acquired and liabilities assumed:
      Property, plant and equipment                              $   1,427,800
      Excess of cost over net assets acquired                          536,215
      Marketable securities                                          4,363,854
      Long-term debt                                                (1,770,895)
      Deferred taxes and credits                                    (1,709,976)
      Other assets and liabilities                                     803,002
                                                                 --------------
        Total purchase price                                         3,650,000
      Less notes payable issued to seller                           (3,149,358)
      Less cash and cash equivalents acquired                         (590,944)
      Less deposits and acquisition costs paid in 1997                (106,198)
                                                                 --------------
      Increase in cash from purchase of Felton
        Telephone Company                                        $     196,500
                                                                 ==============

Effective  June 9, 1998,  Alliance  acquired  the  assets of 8 cable  television
systems  from  Spectrum  Cablevision  Limited  Partnership  ("Spectrum").  These
systems  serve 4,000  cable  television  customers  in 19 rural  communities  in
Minnesota and North Dakota,  including  several  communities  also served by the
Company's telephone subsidiaries.  Purchase price was approximately  $4,559,000.
The  acquisition is being  accounted for as a purchase.  Excess of cost over net
assets acquired in the transaction was $2,784,000, which is being amortized over
15 years on a straight-line  basis.  The operations of the cable systems,  which
were not material to the  Company's  financial  statements,  are included in the
Company's financial results from the purchase date.

                                       32
<PAGE>

NOTE 3 - MARKETABLE SECURITIES AND GAINS ON SALES OF INVESTMENTS

Marketable   securities  consist  principally  of  equity  securities  of  other
telecommunications  companies obtained by the Company's subsidiaries in sales of
investments  in  wireless  telephone  partnerships.  The  acquisition  of Felton
Telephone Company included a substantial  portfolio of marketable  securities of
this type.  The Company's  marketable  securities  portfolio  was  classified as
available-for-sale at December 31, 2000 and December 31, 1999. The cost and fair
values of available-for-sale investment securities was as follows:
<TABLE>
<CAPTION>
                                                                   Gross            Gross
                                                                Unrealized       Unrealized           Fair
                                                 Cost              Gains           Losses             Value
                                            --------------    -------------     -------------    -------------
<S>                                        <C>               <C>               <C>              <C>
December 31, 2000                          $       277,444   $    2,630,212    $     (12,384)   $    2,895,272
December 31, 1999                                4,074,353        8,174,811          (30,861)       12,218,303
</TABLE>

Net unrealized gains on marketable securities, net of related deferred taxes and
minority  interest,  are included in stockholders'  equity as accumulated  other
comprehensive income at December 31, 2000 and 1999 as follows:
<TABLE>
<CAPTION>

                                                  Net            Deferred                          Accumulated
                                              Unrealized          Income          Minority        Comprehensive
                                                 Gains             Taxes          Interest           Income
                                            --------------    -------------     -------------    -------------
<S>                                        <C>               <C>               <C>              <C>
December 31, 2000                          $     2,617,828   $  (1,077,886)    $    (478,707)   $    1,061,235
December 31, 1999                                8,143,950      (3,257,581)       (1,559,887)        3,326,482
</TABLE>

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

Gross  proceeds from sales of  available-for-sale  securities  were  $5,421,000,
$18,920,000 and $1,820,000 in 2000, 1999 and 1998  respectively.  Gross realized
gains on sales of these securities were $1,622,000,  $13,203,000 and $965,000 in
2000,  1999 and  1998,  respectively.  Realized  gains on sales are based on the
difference between net sales proceeds and the book value of the securities sold,
using the specific identification method.


NOTE 4 - WIRELESS TELEPHONE INVESTMENTS

Investments in wireless telephone  partnerships and limited liability  companies
are recorded on the equity method of accounting,  which  reflects  original cost
and  recognition  of the  Company's  share of income or losses.  At December 31,
2000, the Company owned 10.4% of Midwest  Wireless  Holdings LLC, which provides
cellular service to rural service areas in Minnesota, Wisconsin and Iowa and the
Rochester,  Minnesota  MSA.  Income  from  this  investment,  net of  associated
amortization  expense,  was $1,248,000,  $1,481,000 and $1,508,000 in 2000, 1999
and 1998,  respectively.  Cash distributions received from Midwest Wireless were
$717,000, $710,000 and $848,000 in 2000, 1999 and 1998, respectively. The excess
of cost over the  Company's  share of equity in Midwest  Wireless at the time of
acquisition,  net of  amortization  reserves,  was  $8,821,000 and $6,897,000 at
December 31, 2000 and 1999, respectively.  Excess cost is being amortized on the
straight-line  method over  periods  ranging  from  twenty-five  to forty years.
Amortization expense was $249,000, $183,000 and $158,000 in 2000, 1999 and 1998,
respectively.  At December 31, 2000,  the Company's  cumulative  share of income
from Midwest Wireless was $6,567,000, of which $3,889,000 was undistributed.

The Company  owns 10.4% of  Wireless  North,  LLC which has  licenses to provide
personal communications services in Minnesota, Wisconsin, North Dakota and South
Dakota.  At December 31, 2000,  the Company had invested  $2,073,000 of cash and
guaranteed debt of $1,091,000 in Wireless  North.  Its PCS systems have not been
profitable  to  date.  The  Company's  share  of  Wireless  North's  losses  was
$1,597,000 and $1,066,000 in 1999 and 1998, respectively.  The Company suspended
use of the equity  method of  accounting  when its recorded  losses  equaled the
total of its cash investments and loan guarantees.  As a result, the Company has
unrecorded losses of $1,400,000 on its investment. The Company cannot predict if
it will be necessary to provide additional capital to Wireless North.



                                       33
<PAGE>



Summarized audited financial  information for these companies for 2000, 1999 and
1998 is as follows:

                                           Year Ended December 31
                                     2000          1999             1998
                               -------------   ------------    ------------
Current assets                 $  16,817,981   $  1,602,675    $ 14,894,978
Noncurrent assets                283,197,391     94,755,699      84,844,144
Current liabilities               32,891,714     13,815,844      14,856,061
Noncurrent liabilities           172,488,204     66,079,559      51,090,911
Minority interest                  5,844,777
Members' equity                   88,790,677     26,462,971      33,792,150
Revenues                         107,527,471     60,228,148      50,268,747
Expenses                         106,571,860     55,910,186      41,649,381
Net income                           955,611      4,317,962       8,619,366

In December, 1998, the Company sold its 12.25% interest in Sioux Falls Cellular,
Ltd., which provides  cellular service in the Sioux Falls,  South Dakota MSA for
$6,725,000 of cash. Gain on the sale was $4,817,000. Income from this investment
prior to the sale  (net of  associated  amortization  expense  of  $29,000)  was
$334,000 in 1998.

NOTE 5 - PROPERTY, PLANT AND EQUIPMENT

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

                                                          December 31
                                 Estimated     -------------------------------
                                useful life            2000             1999
                               ------------    --------------    -------------
    Land                                       $      630,750    $     606,397
    Buildings                    5-40 years         6,314,045        5,562,920
    Machinery and equipment      3-15 years         2,754,648        2,016,253
    Furniture and fixtures       5-10 years         2,208,319        2,142,535
    Telephone plant              5-33 years        74,408,575       64,107,388
    Cable television plant      10-15 years         9,436,721        8,948,737
    Construction in progress                        1,558,474        1,236,205
                                               --------------    -------------
                                                   97,311,532       84,620,435
         Less accumulated depreciation             41,085,007       33,210,402
                                               --------------    -------------
                                               $   56,226,525    $  51,410,033
                                               ==============    =============

NOTE 6 - NOTES PAYABLE AND LONG-TERM DEBT
<TABLE>
<CAPTION>
                                                                           December 31
                                                                ---------------------------------
                                                                       2000               1999
                                                                ------------         ------------
Notes payable to CoBank, payable by Alliance
 Telecommunications Corporation in monthly installments,
<S>                                                             <C>                  <C>
 average interest rate of 7.5%, due 2001 to 2011                $ 44,902,300         $ 47,580,800
Rural Utilities Service ("RUS") and Rural Telephone Bank ("RTB") mortgage notes,
 payable  by   telephone   company   subsidiaries   in  monthly  and   quarterly
 installments, average rate of 5.5%, due 2001 to 2028 40,129,684 38,041,254
Notes payable to Rural Telephone Finance Cooperative
  in quarterly installments, interest rate of 8.4%, due 2013       3,560,905            3,743,712
Notes payable to former owners of Felton Telephone
  Company, payable by a subsidiary of Alliance Tele-
  communications Corporation in monthly installments,
  interest rate of 8.25%, due 2005                                 2,122,460            2,522,990
                                                                ------------         ------------
                                                                  90,715,349           91,888,756
Less current portion                                               6,337,200            5,607,100
                                                                ------------         ------------
                                                                $ 84,378,149         $ 86,281,656
                                                                ============         ============
</TABLE>




                                       34
<PAGE>



       In 1996, the Company's 68% owned subsidiary,  Alliance Telecommunications
Corporation  negotiated  a term  loan  agreement  with  the St.  Paul  Bank  for
Cooperatives ("St. Paul Bank") to provide financing for the acquisition of Ollig
Utilities  Company.  As a condition to receiving the loans,  Alliance  purchased
stock in the bank.  In 1999,  St. Paul Bank merged with  CoBank.  As part of the
merger, Alliance's St. Paul Bank stock was revalued. Alliance recorded a loss of
$199,995 in 1999 due to this  revaluation.  At  December  31,  2000,  Alliance's
investment in CoBank stock was $3,254,000.

       CoBank is a  cooperative,  owned and  controlled by its  customers.  Each
customer  borrowing from the bank on a patronage  basis shares in the bank's net
income  through  payment of  patronage  refunds.  Patronage  refund  accrued was
$231,000 in 2000;  approximately  30% will be received in cash, with the balance
in stock in the bank.  The accrued  patronage  refund was shown in the Company's
operating  statement as a reduction of interest expense. No patronage refund was
accrued for 1999 or 1998.  The Company  cannot  predict what  patronage  refunds
might be in future years.

       Alliance's loan from CoBank is secured by a pledge of  substantially  all
the assets of Alliance and its  subsidiaries.  The loan  covenants also restrict
Alliance's  ability to pay dividends to its shareholders.  Interest rates on the
loan are  fixed for  periods  ranging  from one to ten years at rates  averaging
approximately  7.5%.  Principal payments began in January 1997 and will continue
until March 2011.

       The Rural Utilities  Service (RUS) and the Rural Telephone Bank (RTB) are
the Company's primary sources of long-term  financing for additions to telephone
plant and equipment. The RUS has made long-term, low-interest loans to telephone
companies  since 1949 for the purpose of  improving  telephone  service in rural
areas.  The RUS is authorized  to make hardship  loans at a 5% interest rate and
cost-of-money  loans at a rate reflecting the  government's  cost of money for a
like term. The RTB advances funds at the average U.S.  government  cost-of-money
for the year for like maturities.  In some cases RTB loans are made concurrently
with RUS loans.  At December 31, 2000,  the  Company's  local  exchange  carrier
subsidiaries  had  unadvanced  loan  commitments  under the RUS and RTB programs
aggregating   approximately   $11,498,000  to  finance   specific   construction
activities in future years.

       Substantially  all of the  telephone  plant  of the LEC  subsidiaries  is
pledged or is subject to mortgages to secure  obligations to the RUS and RTB. In
addition,  the amount of  dividends  on common stock that may be paid by the LEC
subsidiaries to the Company is limited by certain financial  covenants set forth
in the mortgages. At December 31, 2000, $3,756,000 of retained earnings of these
subsidiaries was available for dividend payments to HCC.

         The  Company is  continuing  its  construction  program to upgrade  its
telephone and cable  television  properties.  Planned  expenditures  for HCC and
Alliance  properties in 2001 are $4,530,000 and  $7,109,000,  respectively.  The
Company  intends to use RUS and RTB loan funds to help finance  these  projects.
Loan  funds   received  are   deposited  in   construction   fund  accounts  and
disbursements  are restricted,  subject to RUS approval,  to construction  costs
authorized by the loan agreements.

       The Company  has a term loan and a  $5,000,000  revolving  line of credit
from Rural Telephone Financing  Cooperative  ("RTFC").  The interest rate on the
term loan varies  according to the rate charged by the Lender for similar  loans
(8.4% at December 31, 2000).  Interest on borrowings  against the credit line is
at the bank's  prime rate plus 1.5%.  Both the credit line and the term loan are
secured by a pledge of the stock of HCC's wholly owned subsidiaries.

       In  February  1995  the  Company  completed  a  public  offering  of 8.5%
convertible  subordinated  debentures.  During 1999 and 1998, the Company issued
calls to retire the  debentures,  which  resulted in  $10,757,000  of debentures
being  converted  into stock and  $1,893,000 of debentures  being  purchased and
retired.

       The annual requirements for principal payments on notes payable and long-
term debt are as follows:
                           2001               $    6,337,200
                           2002                    6,548,100
                           2003                    7,018,500
                           2004                    7,513,000
                           2005                    7,560,100



                                       35
<PAGE>


NOTE 7 - INCOME TAXES

       Hector Communications  Corporation and its wholly owned subsidiaries file
a consolidated  tax return  separate from the  consolidated  return for Alliance
Telecommunications  Corporation  and  its  subsidiaries.   Income  tax  expenses
(benefits) consist of the following:
                                          Year Ended December 31
                                  -----------------------------------------
                                         2000         1999          1998
                                  -------------  ------------  ------------
Currently payable taxes:
     Federal                       $ 4,053,000   $ 8,120,000   $ 4,445,000
     State                           1,149,000     1,662,000     1,244,000
                                   ------------  ------------  ------------
                                     5,202,000     9,782,000     5,689,000

Deferred income taxes (benefit)       (934,000)   (2,157,000)     (604,000)
Deferred investment tax credits        (61,000)     (112,000)     (136,000)
                                   ------------  ------------  ------------
                                   $ 4,207,000   $ 7,513,000   $ 4,949,000
                                   ============  ============  ============

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

                                                      2000          1999
                                                 ------------  ------------
Accelerated depreciation                         $(6,101,310)  $(6,012,515)
Alternative minimum tax credits                       56,000        28,000
Marketable securities                             (1,120,000)   (4,073,000)
Partnership and LLC investments                     (393,000)     (286,000)
Deferred compensation                                366,000       363,000
Other                                                589,000       545,000
                                                 ------------  ------------
                                                 $(6,603,310)  $(9,435,515)
                                                 ============  ============

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

                                                  Year Ended December 31
                                             ---------------------------------
                                               2000         1999         1998
                                             -------      -------      -------
Tax at U.S. statutory rate                     35.0%        35.0%        35.0%
Surtax exemption                               (1.0)           -         (1.0)
State income taxes, net of federal benefit      8.0          3.8          7.8
Excess of cost over net assets acquired         7.0          3.0          5.1
Investment tax credits                         ( .7)        ( .6)        (1.3)
Other                                           1.1         ( .5)         1.1
                                             -------      -------      -------
Effective tax rate                             49.4%        40.7%        46.7%
                                             =======      =======      =======

NOTE 8 - STOCKHOLDERS' EQUITY

       Preferred stock is entitled to share ratably with common  shareholders in
any dividends or distributions paid by the Company,  but are not entitled to any
dividend distribution separate from common shareholders.  Preferred shareholders
have no voting rights.  Each share of preferred  stock is  convertible  into one
share of common stock.

       Common shares are reserved for issuance in  connection  with stock option
plans under which 800,000 shares may be issued pursuant to stock options,  stock
appreciation rights,  restricted stock or deferred stock granted to officers and
key  employees.  Exercise  prices of stock options under the plan cannot be less
than fair market value of the stock on the date of grant.  Rules and  conditions
governing awards of stock options,  stock appreciation  rights and restricted or
deferred  stock are  determined  by the  Compensation  Committee of the Board of
Directors,  subject to certain  limitations  incorporated into the plan. Another
provision of the plans  automatically  grants 2,000 shares of nonqualified stock
options  per  year to each  nonemployee  director.  Options  issued  under  this
provision  have a ten-year term and an exercise  price not less than fair market
value at date of grant. At December 31, 2000,  300,675 shares remained available
to be issued under the plans.

                                       36
<PAGE>

       Changes in  outstanding  employee and director  stock options  during the
three years ended December 31, 2000 is as follows:
                                                                      Average
                                                     Number of  exercise price
                                                       shares        per share
                                               ----------------  -------------
Outstanding at December 31, 1997                        239,750  $        7.27
                  Granted                                74,775          11.50
                  Exercised                             (48,200)          6.75
                  Canceled                                 (300)          7.50
                                               ----------------- -------------
Outstanding at December 31, 1998                        266,025           8.55
                  Granted                                91,400           8.80
                  Exercised                             (43,675)          7.93
                  Canceled                               (6,100)          8.44
                                               ----------------- -------------
Outstanding at December 31, 1999                        307,650           8.72
                  Granted                                96,100          12.22
                  Exercised                             (46,575)          7.28
                  Canceled                               (8,100)         10.53
                                               ----------------- -------------
Outstanding at December 31, 2000                        349,075  $        9.83
                                               ================= =============

Options issued to officers and key employees are subject to vesting. Options are
vested and become exercisable one-third at the date of issue, one-third one year
from date of issue and one-third  two years from date of issue.  At December 31,
2000,  267,191 stock options are  currently  exercisable  at an average price of
$9.45 per share.  The  following  table  summarizes  the status of stock options
outstanding at December 31, 2000:
                                           Weighted Average        Weighted
                                               Remaining            Average
Range of Exercise Prices        Shares        Option Life       Exercise Price
------------------------      --------        -----------       --------------
$  6.50 to $  8.50             168,150          2.1 years       $        7.82
$  8.51 to $10.93               20,000          5.8 years                9.86
$10.94 to $13.20               160,925          3.9 years               11.92

Effective  August 1, 1990,  the 1990 Employee  Stock  Purchase Plan ("ESPP") was
adopted,  for which  100,000  shares  were  reserved.  Under  terms of the plan,
eligible employees may acquire shares of common stock through payroll deductions
of not more  than 10% of  compensation.  The price of  shares  purchased  by the
employees is 85% of the lower of fair market value for such shares on one of two
specified  dates in each plan year. A participant is limited to the  acquisition
in any plan year to the number of shares which their payroll  deductions for the
year would  purchase  based on the market  price on the first day of the year or
$25,000,  whichever  is less.  Shares  issued to  employees  under the plan were
10,742,  14,890 and 10,753 for the plan years ended  August 31,  2000,  1999 and
1998, respectively. At December 31, 2000 employees had subscribed to purchase an
additional 12,700 shares in the current plan cycle ending August 31, 2001.

The Company has adopted the disclosure  provisions of SFAS No. 123,  "Accounting
for Stock-Based  Compensation",  but applies APB Opinion No. 25, "Accounting for
Stock Issued to  Employees"  for  measurement  and  recognition  of  stock-based
transactions  with its  employees.  If the  Company  had  elected  to  recognize
compensation cost for its stock based  transactions  using the method prescribed
by SFAS No. 123, net income and earnings per share would have been as follows:

                                          Year Ended December 31
                                 -----------------------------------------
                                       2000           1999           1998
                                 -----------    -----------    -----------
Net income                       $ 2,958,163    $ 7,211,118    $ 3,709,988
Basic net income per share       $       .83    $      2.33    $      1.54
Diluted net income per share     $       .77    $      1.90    $      1.10

       The fair value of the Company's stock options and Employee Stock Purchase
Plan  transactions used to compute pro forma net income and net income per share
disclosures is the estimated present value at grant date using the Black-Scholes
option-pricing  model.  The following table displays the assumptions used in the
model:



                                       37
<PAGE>



                                            Year Ended December 31
                                      ------------------------------------
                                         2000          1999          1998
                                      --------      --------      --------
Expected volatility                      29.6%         28.2%         23.3%
Risk free interest rate                    .5%          5.3%          5.6%
Expected holding period - employees    4 years       4 years       4 years
Expected holding period - directors    7 years       7 years       7 years
Dividend yield                              0%            0%            0%

       Pro  forma  stock-based  compensation  cost was  $351,260,  $268,063  and
$200,255  and in 2000,  1999 and 1998,  respectively.  Fair value of all options
issued was $443,534, $286,529 and $271,770 in 2000, 1999 and 1998, respectively.

       In 1995  the  Company  issued  $12,650,000  (par  value)  of  convertible
subordinated  debentures.  The debentures were  convertible into common stock of
the  Company at a rate of 112.5  common  shares per $1,000 par value  debenture.
During  1998  and  1999  the  Company  issued  calls  retiring  the  debentures;
$10,757,000  of debentures  being  converted into common stock and $1,893,000 of
debentures  being retired for cash. The  underwriters of the debenture  offering
also received  warrants to purchase  shares of the  Company's  common stock at a
price of $8.70 per share.  88,311  shares,  8,742  shares and 7,876  shares were
issued  upon  exercise  of warrants  in 2000,  1999 and 1998,  respectively.  At
December 31, 2000, no warrants remain outstanding.

       Effective  August 1, 1990,  the Board of  Directors  adopted a  leveraged
employee stock ownership plan ("ESOP"). Contributions to the ESOP are determined
by the Board on an annual basis and can be made in cash or by issuing  shares of
the Company's  common stock.  ESOP expense  reflects the market value of company
stock  contributed  to the  accounts  of eligible  employees  at the time of the
contribution. ESOP expense was $100,000, $97,000, and $83,000 for 2000, 1999 and
1998,  respectively.  At December 31, 2000,  the ESOP held 64,914  shares of the
Company's  common  stock,  all of which had been  allocated  to the  accounts of
participating   employees.  All  eligible  employees  of  Hector  Communications
Corporation  participate  in the plan  after  completing  one  year of  service.
Employees of Alliance  Telecommunications  Corporation do not participate in the
plan.  Contributions are allocated to each participant based on compensation and
vest 30% after three years of service and  incrementally  thereafter,  with full
vesting after seven years.

       In 1999 the Board of Directors adopted a shareholders' rights plan. Under
the plan, the Board of Directors  declared a distribution of one right per share
of common stock.  Each right entitles the holder to purchase  1/100th of a share
of a new series of Junior  Participating  Preferred  Stock of the  Company at an
initial  exercise  price of $65. The rights expire on July 27, 2009.  The rights
will become  exercisable  only  following the  acquisition by a person or group,
without  the  prior  consent  of the Board of  Directors,  of 15% or more of the
Company's  voting  stock,  or following  the  announcement  of a tender offer or
exchange  offer to  acquire an  interest  of 15% or more.  If the rights  become
exercisable,  each  rightholder  will be entitled to  purchase,  at the exercise
price,  common  stock with a market  value  equal to twice the  exercise  price.
Should the Company be acquired, each right would entitle the holder to purchase,
at the exercise price, common stock of the acquiring company with a market value
equal to twice the exercise price.  Any rights owned by the acquiring  person or
group would become void.




                                       38
<PAGE>



NOTE 9 - EMPLOYEE BENEFIT PLANS

       The Company has 401(k)  savings  plans for its  employees.  Employees who
meet  certain age and service  requirements  may  contribute  up to 15% of their
salaries  to the plan on a pretax  basis.  The  Company  matches  a  portion  of
employee contributions.  Contributions to the plan by the Company for 2000, 1999
and 1998 were approximately $172,000, $152,000 and $135,000, respectively.

       Employees of Alliance Telecommunications Corporation who meet certain age
and service  requirements  are eligible to participate in a profit sharing plan.
Contributions  are determined  annually by Alliance's Board of Directors and are
allocated   proportionately  to  the  participants  in  each  allocation  group.
Contributions  to the plan by the Company in 2000,  1999 and 1998 were $220,000,
$224,000 and $177,000, respectively.

Alliance has a deferred compensation agreement with two former officers of Ollig
Utilities,  Inc.  Under the  agreement,  the  salaries  of these  officers  were
continued after their retirement based on a formula stated in the agreement. The
Company's  expense  under the plan was  $100,000  and $143,000 in 2000 and 1998,
respectively.  The Company  incurred no expense  under this  agreement  in 1999.
Payments made under the agreement were $93,000 in each of the last three years.

NOTE 10 - TRANSACTIONS WITH COMMUNICATIONS SYSTEMS, INC.

Transactions  between the Company and  Communications  Systems,  Inc. (CSI), the
Company's former parent, are based on a distribution  agreement,  which provides
for the  Company's  use of certain of CSI's staff and  facilities,  with related
costs paid by the Company.  Services  provided by CSI  aggregated  approximately
$314,000, $270,000 and $300,000 in 2000, 1999 and 1998, respectively.

Employees  of the  Company  also  participated  in a joint  self-funded  medical
insurance program with employees of CSI through August,  1999. Costs paid by the
Company  into  this  program  were  $429,000  and  $595,000  in 1999  and  1998,
respectively.

Costs of services  from CSI may not be  indicative of the costs of such services
had they been obtained from a different  party.  Intercompany  accounts with CSI
are handled on an open account basis.  Outstanding  amounts  payable to CSI were
$172,000 and $428,000 at December 31, 2000 and 1999, respectively.




                                       39
<PAGE>



NOTE 11 - SEGMENT INFORMATION

The Company is  organized  into two  business  segments:  Hector  Communications
Corporation and its wholly owned subsidiaries,  and Alliance  Telecommunications
Corporation and its  subsidiaries.  No single customer  accounted for a material
portion  of the  Company's  revenues  in any of the last  three  years.  Segment
information is as follows:
<TABLE>
<CAPTION>

                                                    Hector          Alliance       Consolidated
                                             ---------------    --------------   ---------------
Year Ended December 31, 2000
<S>                                         <C>                <C>               <C>
Revenues                                    $      9,679,527   $    28,110,575   $    37,790,102
Costs and expenses                                 7,583,148        19,216,098        26,799,246
                                             ---------------    --------------    --------------
Operating income                                   2,096,379         8,894,477        10,990,856
Interest expense                                    (952,574)       (5,002,029)       (5,954,603)
Income (loss) from unconsolidated
  affiliates                                         611,321              (475)          610,846
Interest and dividend income                         375,541           875,207         1,250,748
Gain on sale of marketable securities                                1,622,226         1,622,226
                                             ---------------    --------------    --------------
Income before income taxes                  $      2,130,667   $     6,389,406   $     8,520,073
                                             ===============    ==============    ==============

Depreciation and amortization               $      2,821,781   $     7,354,503   $    10,176,284
                                             ===============    ==============    ==============

Total assets                                $     30,116,889   $   128,561,092   $   158,677,981
                                             ===============    ==============    ==============

Capital expenditures                        $      3,111,108   $     6,335,082   $     9,446,190
                                             ===============    ==============    ==============

Year Ended December 31, 1999
Revenues                                    $      8,794,489   $    25,322,827   $    34,117,316
Costs and expenses                                 7,159,071        15,904,009        23,063,080
                                             ---------------    --------------    --------------
Operating income                                   1,635,418         9,418,818        11,054,236
Interest expense                                  (1,279,386)       (5,303,150)       (6,582,536)
Loss from unconsolidated affiliates                 (259,588)          (75,949)         (335,537)
Interest and dividend income                         198,559           917,539         1,116,098
Gain on sale of marketable securities                               13,203,062        13,203,062
                                             ---------------    --------------    --------------
Income before income taxes                  $        295,003   $    18,160,320   $    18,455,323
                                             ===============    ==============    ==============

Depreciation and amortization               $      2,616,879   $     5,930,740   $     8,547,619
                                             ===============    ==============    ==============

Total assets                                $     29,141,485   $   137,655,202   $   166,796,687
                                             ===============    ==============    ==============

Capital expenditures                        $      2,901,944   $     4,639,982   $     7,541,926
                                             ===============    ==============    ==============

Year Ended December 31, 1998
Revenues                                    $      7,886,758   $    23,951,936   $    31,838,694
Costs and expenses                                 5,886,884        15,304,923        21,191,807
                                             ---------------    --------------    --------------
Operating income                                   1,999,874         8,647,013        10,646,887
Interest expense                                  (1,835,244)       (5,479,909)       (7,315,153)
Income from unconsolidated affiliates                 60,665           822,431           883,096
Interest and dividend income                         199,094           409,977           609,071
Gain on sale of marketable securities                                  965,069           965,069
Gain on sale of cellular partnership                                 4,817,498         4,817,498
                                             ---------------    --------------    --------------
Income before income taxes                  $        424,389   $    10,182,079   $    10,606,468
                                             ===============    ==============    ==============

Depreciation and amortization               $      2,068,701   $     5,712,509   $     7,781,210
                                             ===============    ==============    ==============

Total assets                                $     26,215,059   $   124,464,728   $   150,679,787
                                             ===============    ==============    ==============

Capital expenditures                        $      2,651,776   $     7,064,359   $     9,716,135
                                             ===============    ==============    ==============
</TABLE>

                                       40
<PAGE>




 (b)  SUPPLEMENTAL FINANCIAL INFORMATION

                      Unaudited Quarterly Operating Results
                     (in thousands except per share amounts)


                                                     Quarter Ended
                                     -------------------------------------------
                                       March 31    June 30    Sept.30     Dec.31
------------------------------------------ -------------------------------------
                           2000
Revenues                                $ 8,488    $ 9,343    $ 9,758    $10,201
Operating income                          2,197      2,773      3,178      2,842
Net income                                1,205        851      1,027        227
Basic net income per share              $   .33    $   .24    $   .29    $   .06
Diluted net income per share            $   .30    $   .22    $   .27    $   .06


                           1999
Revenues                                $ 8,319    $ 8,724    $ 8,935    $ 8,139
Operating income                          2,826      3,347      3,130      1,752
Net income                                  755        719      2,232      3,773
Basic net income per share              $   .28    $   .26    $   .65    $  1.07
Diluted net income per share            $   .22    $   .22    $   .57    $   .95





ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
               AND FINANCIAL DISCLOSURE

Not applicable.



                                       41
<PAGE>



                                    PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The information called for by paragraphs (a), (c), (d), (e), and (f) of Item 401
under  Regulation  S-K,  to the extent  applicable,  will be set forth under the
caption  "Election of Directors" in the Company's  definitive proxy material for
its May 17, 2001 Annual Meeting of Shareholders to be filed within 120 days from
the  end of  the  Registrant's  fiscal  year,  which  information  is  expressly
incorporated by reference herein. The information called for by paragraph (b) of
Item 401 is set forth under Item 1(c) herein. The information called for by Item
405 under Regulation S-K, to the extent applicable,  will be set forth under the
caption  "Certain  Transactions"  in the Company's above  referenced  definitive
proxy material.

ITEM 11.  EXECUTIVE COMPENSATION

The  information  called  for by Item 402  under  Regulation  S-K to the  extent
applicable,  will be set forth under the caption "Executive Compensation" in the
Company's  definitive  proxy materials for its May 17, 2001 Annual Meeting to be
filed  within  120 days  from the end of the  Registrant's  fiscal  year,  which
information is expressly incorporated herein by reference.

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The  information  called for by Item 403 under  Regulation S-K will be set forth
under  the  captions  "Security  Ownership  of  Certain  Beneficial  Owners  and
Management"  and  "Election of  Directors"  in the  Company's  definitive  proxy
materials  for its May 17, 2001 Annual  Meeting to be filed within 120 days from
the  end of  the  Registrant's  fiscal  year,  which  information  is  expressly
incorporated herein by reference.

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The  information  called for by Item 404 under  Regulation S-K will be set forth
under the caption  "Certain  Transactions"  in the  Company's  definitive  proxy
materials  for its May 17, 2001 Annual  Meeting to be filed within 120 days from
the  end of  the  Registrant's  fiscal  year,  which  information  is  expressly
incorporated herein by reference.



                                       42
<PAGE>



                                     PART IV

ITEM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULE, AND REPORTS ON FORM 8-K

(a)      (1)  Consolidated Financial Statements
              ---------------------------------

         The   following    Consolidated    Financial   Statements   of   Hector
Communications Corporation and subsidiaries appear at pages 26 to 42 herein:

         Independent Auditors' Report for the years ended
         December 31, 2000, 1999 and 1998

         Consolidated Balance Sheets as of December 31, 2000 and 1999

         Consolidated  Statements  of Income  and  Comprehensive  Income for the
         years ended December 31, 2000, 1999 and 1998

         Consolidated Statements of Stockholders' Equity for the years ended
         December 31, 2000, 1999 and 1998

         Consolidated Statements of Cash Flows for the years ended
         December 31, 2000, 1999 and 1998

         Notes to Consolidated Financial Statements

(a)  (2) Financial Statement Schedule                                Page Herein
         ----------------------------                                -----------

         The following  financial  statement  schedule is being filed as part of
         this Form 10-K Report:

         Independent Auditors' Report on financial statement schedule
         for the years ended December 31, 2000, 1999 and 1998               46

         Schedule I - Condensed Financial Information of Registrant      47-50

All other  schedules are omitted as the required  information is inapplicable or
the information is presented in the financial statements or related notes.

         Separate  financial  statements of Midwest Wireless  Holdings LLC, a 50
         percent or less owned equity method investment, included as this entity
         constitutes a  "significant  subsidiary"  pursuant to the provisions of
         Regulation S-X, Article 3-09. 51-63

(a)  (3) Exhibits
         --------

         The exhibits which  accompany or are  incorporated by reference in this
report,  including  all  exhibits  required  to be filed with this  report,  are
described  on the  Exhibit  Index  which  begins  on page  64 of the  sequential
numbering system used in this report.

(b) REPORTS ON FORM 8-K FILED DURING THE THREE MONTHS ENDED DECEMBER 31, 2000

         Not Applicable.


                                       43
<PAGE>



                                                     SIGNATURES

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

                                        HECTOR COMMUNICATIONS CORPORATION

Dated: March 29, 2001                   /s/ Curtis A. Sampson
                                        ----------------------------------------
                                        Curtis A. Sampson, Chairman of the Board
                                        of Directors and Chief Executive Officer

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

         Each person whose  signature  appears  below  constitutes  and appoints
CURTIS A.  SAMPSON and PAUL N.  HANSON as his true and lawful  attorneys-in-fact
and  agents,   each  acting  alone,   with  full  power  of   substitution   and
resubstitution,  for  him  and in his  name,  place  and  stead,  in any and all
capacities, to sign any or all amendments to this Annual Report on Form 10-K and
to file the same, with all exhibits  thereto,  and other documents in connection
therewith,  with the  Securities  and Exchange  Commission,  granting  unto said
attorneys-in-fact  and agents, each acting alone, full power and authority to do
and perform each and every act and thing  requisite  and necessary to be done in
and about the  premises,  as fully to all  intents  and  purposes as he might or
could do in person,  hereby ratifying and confirming all said  attorneys-in-fact
and agents, each acting alone, or his substitute or substitutes, may lawfully do
or cause to be done by virtue thereof.

Signature                Title                                    Date

/s/Curtis A. Sampson     Chairman of the Board of Directors,      March 29, 2001
--------------------     Chief Executive Officer and Director
Curtis A. Sampson

/s/Steven H. Sjogren     President, Chief Operating Officer,      March 29, 2001
--------------------     and Director
Steven H. Sjogren

/s/Paul N. Hanson        Vice President, Treasurer and            March 29, 2001
--------------------     Director
Paul N. Hanson

/s/Charles A. Braun      Chief Financial Officer and              March 29, 2001
--------------------     Principal Accounting Officer
Charles A. Braun

                         Director                                 March 29, 2001
--------------------
Robert L. Hammond, Jr.

/s/James O. Ericson      Director                                 March 29, 2001
--------------------
James O. Ericson

/s/Paul A. Hoff          Director                                 March 29, 2001
--------------------
Paul A. Hoff

/s/Wayne E. Sampson      Director                                 March 29, 2001
--------------------
Wayne E. Sampson




                                       44
<PAGE>







--------------------------------------------------------------------------------





                       SECURITIES AND EXCHANGE COMMISSION


                             Washington, D.C. 20549

                                    FORM 10-K



                  ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d)


                     OF THE SECURITIES EXCHANGE ACT OF 1934

                                       OF

                        HECTOR COMMUNICATIONS CORPORATION

                                       FOR

                          YEAR ENDED DECEMBER 31, 2000




                         ------------------------------

                          FINANCIAL STATEMENT SCHEDULE






--------------------------------------------------------------------------------






                                       45
<PAGE>



          INDEPENDENT AUDITORS' REPORT ON FINANCIAL STATEMENT SCHEDULE


Shareholders and Board of Directors
Hector Communications Corporation

The audit of the  consolidated  financial  statements  of Hector  Communications
Corporation and subsidiaries referred to in our opinion dated February 14, 2001,
included the related financial  statement  schedule as listed in item 14(a)2. In
our opinion,  this financial statement schedule,  when considered in relation to
the basic  consolidated  financial  statements,  presents fairly in all material
respects the information set forth therein.

/s/ Olsen Thielen and Co., Ltd.
-------------------------------
Olsen Thielen and Co., Ltd.
St. Paul, Minnesota
February 14, 2001



                                       46
<PAGE>
<TABLE>
<CAPTION>

                                  HECTOR COMMUNICATIONS CORPORATION
                                  ---------------------------------
                      SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
                          HECTOR COMMUNICATIONS CORPORATION (PARENT COMPANY)

                                            BALANCE SHEETS
                                                                                 December 31
                                                                       -------------------------------
                                                                                2000              1999
                                                                       -------------     -------------
Assets:
<S>                                                                    <C>               <C>
  Cash                                                                 $      12,083
  Investment in subsidiaries                                              40,060,671     $  41,255,044
  Other current assets                                                       551,992           464,374
  Property, plant and equipment, net                                         658,366            92,548
  Accounts with subsidiaries                                               1,474,677         2,157,388
  Other investments                                                          846,153           449,582
  Other assets                                                                                  25,000
                                                                       -------------     -------------
Total Assets                                                           $  43,603,942     $  44,443,936
                                                                       =============     =============

Liabilities and Stockholders' Equity:
  Cash overdraft                                                                         $      29,931
  Accounts payable                                                     $     188,880           257,787
  Other current liabilities                                                  746,290           430,588
  Current portion of long-term debt                                          195,000           183,000
  Long-term debt                                                           3,365,905         3,560,712
  Stockholders' equity:
    Preferred stock, par value $1.00 per share; 3,000,000 shares authorized:
      Convertible Series A, 221,300 and 229,300
        shares issued and outstanding                                        221,300           229,300
    Common stock, par value $.01 per share;
      10,000,000 shares authorized; 3,504,363 and
      3,574,712 shares issued and outstanding                                 35,044            35,747
    Additional paid-in capital                                            12,844,776        13,274,444
    Retained earnings                                                     24,945,512        23,115,945
    Accumulated other comprehensive income                                 1,061,235         3,326,482
                                                                       -------------     -------------
Total Liabilities and Stockholders' Equity                             $  43,603,942     $  44,443,936
                                                                       =============     =============
</TABLE>

                                       47
<PAGE>
<TABLE>
<CAPTION>

                                            HECTOR COMMUNICATIONS CORPORATION
                                            ----------------------------------
                               SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
                                   HECTOR COMMUNICATIONS CORPORATION (PARENT COMPANY)

                                      STATEMENT OF INCOME AND COMPREHENSIVE INCOME

                                                                                   Year Ended December 31
                                                                   --------------------------------------------------
                                                                          2000              1999               1998
                                                                   -------------     -------------      -------------
Revenues:
<S>                                                                <C>               <C>                <C>
  Sales                                                            $     109,326     $     303,779      $     286,569

Expenses:
  Operating expenses                                                     215,104           116,466            103,164
  Amortization of goodwill                                                34,721            34,721             41,245
  Interest expense, net                                                  284,942           719,739          1,329,491
  Income tax benefit                                                    (122,816)         (170,504)          (412,835)
                                                                   -------------     -------------      -------------
    Total expenses                                                       411,951           700,422          1,061,065

Income (loss) before equity in earnings of
  subsidiaries                                                          (302,625)         (396,643)          (774,496)

Equity in earnings of subsidiaries                                     3,612,048         7,875,824          4,684,739
                                                                   -------------     -------------      -------------
Net income                                                             3,309,423         7,479,181          3,910,243

Other comprehensive income (loss):
  Unrealized holding gains (losses) of subsidiaries on
    marketable securities                                             (3,903,896)       20,784,075            492,287
  Reclassification adjustment for gains of subsidiaries
    included in net income                                            (1,622,226)      (13,203,062)          (965,069)
                                                                   -------------     -------------      -------------
Other comprehensive income (loss) before
  income taxes                                                        (5,526,122)        7,581,013           (472,782)
                                                                   -------------     -------------      -------------
Income tax expense related to unrealized holding gains
  (losses) of subsidiaries on marketable securities                   (1,539,833)        8,450,555            189,519
Income tax benefit related to reclassification adjustment for
  gains of subsidiaries included in net income                          (639,862)       (5,368,207)          (371,529)
                                                                   -------------     -------------      -------------

Income tax expense (benefit) related to items of other
  comprehensive income                                                (2,179,695)        3,082,348           (182,010)
Minority interest in other comprehensive income (loss)
  of subsidiaries                                                     (1,081,180)        1,559,887
                                                                   -------------     -------------      -------------

Other comprehensive income (loss)                                     (2,265,247)        2,938,778           (290,772)
                                                                   -------------     -------------      -------------

Comprehensive income                                                 $ 1,044,176     $  10,417,959      $   3,619,471
                                                                   =============     =============      =============

</TABLE>

                                       48
<PAGE>

<TABLE>
<CAPTION>

                                            HECTOR COMMUNICATIONS CORPORATION
                                            ---------------------------------
                               SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
                                   HECTOR COMMUNICATIONS CORPORATION (PARENT COMPANY)

                                                STATEMENTS OF CASH FLOWS

                                                                                   Year Ended December 31
                                                                       --------------------------------------------------
                                                                              2000              1999               1998
                                                                       -------------     -------------      -------------
Cash flows from operating activities:
<S>                                                                    <C>               <C>                <C>
 Net income                                                            $   3,309,423     $   7,479,181      $   3,910,243
  Adjustments  to  reconcile  net  income  to net  cash  provided  by  operating
   activities:
    Income from other investments                                             (3,141)
    Noncash patronage refund                                                  (8,780)          (12,569)
    Equity in earnings of subsidiaries                                    (3,612,048)       (7,875,824)        (4,684,739)
    Dividends from subsidiaries                                                                                 1,671,639
    Depreciation and amortization                                             90,661           190,151            272,326
    Changes in assets and liabilities:
     Decrease (increase) in other current assets                            (101,478)         (310,195)           (90,163)
     Decrease (increase) in accounts with subsidiaries                       682,711         3,651,869         (2,935,762)
     Increase (decrease) in cash overdraft                                   (29,931)           29,931
     Increase (decrease) in accounts payable                                 (68,907)         (129,455)           240,890
     Increase (decrease) in other current liabilities                        412,694           213,616           (103,691)
                                                                       -------------     -------------      -------------
 Net cash provided by (used in) operating activities                         671,204         3,236,705         (1,719,257)

Cash flows from investing activities:
  Purchases of property, plant and equipment                                (621,758)          (44,214)           (10,167)
  Cash investments in affiliates                                                               (18,600)
  Purchases of other investments                                            (350,000)                            (342,171)
  Cash proceeds from other investments                                                           2,897
  Decrease (increase) in other assets                                         25,000           (25,000)
                                                                       -------------     -------------      -------------
 Net cash used in investing activities                                      (946,758)          (84,917)          (352,338)

Cash flows from financing activities:
  Issuance of debt                                                                                              5,996,281
  Repayment of long-term debt                                               (182,807)       (3,626,140)        (4,519,429)
  Issuance of common stock                                                 1,139,764           466,328            489,703
  Purchase of stock                                                       (3,154,983)
  Investment by affiliate in parent company stock                          2,485,663
  ESOP shares allocated                                                                                            63,095
                                                                       -------------     -------------      -------------
 Net cash provided by (used in) financing activities                         287,637        (3,159,812)         2,029,650
                                                                       -------------     -------------      -------------

Net decrease in cash and cash equivalents                                     12,083            (8,024)           (41,945)

Beginning cash and cash equivalents                                                -             8,024             49,969
                                                                       -------------     -------------      -------------
Ending cash and cash equivalents                                       $      12,083     $           -      $       8,024
                                                                       =============     =============      =============


Supplemental disclosures of cash flow information:
  Interest paid                                                        $     307,899     $     890,545      $   1,231,676
  Income taxes paid                                                          505,166           168,500             45,000

</TABLE>

                                       49
<PAGE>



              NOTES TO CONDENSED FINANCIAL STATEMENT OF REGISTRANT

Note 1 - Basis of Presentation

Pursuant to the rules and regulations of the Securities and Exchange Commission,
the Condensed  Financial  Statements of the Registrant do not include all of the
information  and notes  normally  included in financial  statements  prepared in
accordance with generally accepted accounting  principles.  It is suggested that
these  Condensed   Financial   Statements  be  read  in  conjunction   with  the
Consolidated Financial Statements and Notes thereto included in the Registrant's
Annual Report as referenced in Form 10-K, Part II, Item 8.

Note 2 - Transactions with Subsidiaries

The Registrant  received cash dividends from its  subsidiaries  of $1,671,639 in
1998. No dividends were received in 2000 or 1999.

In 2000, a subsidiary of the Company  purchased  171,425 shares of the Company's
common stock for $2,485,663. For financial presentation purposes, this stock has
been retired.

Note 3 - Long Term Debt

                                                         December 31
                                               --------------------------------
                                                    2000                 1999
                                               -----------         ------------
Notes payable to Rural Telephone Finance
  Cooperative in quarterly installments,
  interest rate of 8.4%, due 2013              $ 3,560,905         $  3,743,712
Less current portion                               195,000              183,000
                                               -----------         ------------
                                               $ 3,365,905         $  3,560,712
                                               ===========         ============


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

                    2001                      195,000
                    2002                      209,000
                    2003                      223,000
                    2004                      238,000
                    2005                      254,000



                                       50
<PAGE>




Midwest Wireless
Holdings L.L.C.
Report on Audits of Consolidated Financial Statements
For the Years Ended December 31, 2000 and 1999


















                                       51
<PAGE>


                        Report of Independent Accountants




To the Board of Managers

Midwest Wireless Holdings L.L.C.:



In our opinion, the accompanying  consolidated  statements of financial position
and the  related  consolidated  statements  of  operations,  changes in members'
equity and cash flows present fairly,  in all material  respects,  the financial
position of Midwest Wireless  Holdings L.L.C. (the Company) and its subsidiaries
at December 31, 2000 and 1999, and the consolidated  results of their operations
and their  cash flows for the years then  ended in  conformity  with  accounting
principles  generally accepted in the United States of America.  These financial
statements   are  the   responsibility   of  the   Company's   management;   our
responsibility  is to express an opinion on these financial  statements based on
our audits.  We conducted  our audits of these  statements  in  accordance  with
auditing  standards  generally  accepted in the United States of America,  which
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,  assessing the  accounting  principles
used and  significant  estimates made by management,  and evaluating the overall
financial  statement  presentation.   We  believe  that  our  audits  provide  a
reasonable basis for our opinion.





                                                     PRICEWATERHOUSECOOPERS LLP



February 2, 2001




                                       52
<PAGE>



Midwest Wireless Holdings L.L.C.
Consolidated Statements of Financial Position
At December 31, 2000 and 1999
--------------------------------------------------------------------------------

 ASSETS                                                 2000            1999

Current assets:
    Cash and cash equivalents                     $   2,043,704   $   1,378,350
    Restricted cash                                                   1,000,000
    Accounts receivable, less allowance for
        doubtful accounts of $477,152 and
        $258,120 in 2000 and 1999, respectively       8,751,005       4,726,962
    Inventories                                       2,718,772       2,519,796
    Other                                               850,215         527,482
                                                  -------------   -------------

      Total current assets                           14,363,696      10,152,590

Property, cellular plant and equipment, net          73,523,318      43,997,663
FCC licenses, net                                   169,125,264      16,514,927
Investments in cooperatives                           7,530,617       2,201,408
Deferred acquisition costs                                            1,046,824
                                                  -------------   -------------

      Total assets                                $ 264,542,895   $  73,913,412
                                                  =============   ==============


                         LIABILITIES AND MEMBERS' EQUITY

Current liabilities:
    Current portion of long-term debt             $  10,415,285   $   2,426,350
    Accounts payable                                  6,125,308       3,029,225
    Accrued commissions                               1,554,219         818,592
    Other accrued expenses                            7,303,171       3,862,594
                                                  -------------   -------------

      Total current liabilities                      25,397,983      10,136,761

Other liabilities                                     2,103,289       1,156,949
Revolving loan                                        2,500,000       2,000,000
Long-term debt                                      119,922,125      26,334,775
                                                  -------------   -------------

      Total liabilities                             149,923,397      39,628,485

Minority interest                                     5,844,777       4,847,057

Commitments

Members' equity                                     108,774,721      29,437,870
                                                  -------------   -------------


      Total liabilities and members' equity       $ 264,542,895   $  73,913,412
                                                  =============   =============







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




                                       53
<PAGE>



Midwest Wireless Holdings L.L.C.
Consolidated Statements of Operations
For the years ended December 31, 2000 and 1999
--------------------------------------------------------------------------------

                                                       2000             1999

Operating revenues:
    Subscriber service                            $ 63,993,328    $  40,279,007
    Roamer service                                  29,721,562       11,671,572
    Equipment sales                                  9,015,304        5,651,878
    Service fees                                     1,461,887          400,000
                                                  ------------    -------------

                                                   104,192,081       58,002,457
                                                  ------------    -------------

Operating expenses:
    Operations and maintenance                      19,785,719       10,502,756
    Cost of equipment sold                          10,458,625        5,570,633
    Depreciation                                    12,278,169        7,528,105
    Amortization of FCC licenses                     3,780,643          494,381
    Selling, general and administrative             24,520,349       14,711,883
    Home roamer costs                                8,823,278        1,699,261
                                                  ------------    -------------

                                                    79,646,783       40,507,019
                                                  ------------    -------------

      Operating income                              24,545,298       17,495,438
                                                  ------------    -------------

Other income (expense):
    Interest expense                                (8,651,813)      (1,291,817)
    Interest and dividend income                       312,229          230,760
    Other                                               (6,186)        (393,575)
                                                  ------------    -------------

                                                    (8,345,770)      (1,454,632)
                                                  ------------    -------------

Net income before minority interest                 16,199,528       16,040,806

Minority interest                                   (1,902,457)      (2,219,563)
                                                  -------------   -------------

Net income                                        $ 14,297,071    $  13,821,243
                                                  =============   =============










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




                                       54
<PAGE>


<TABLE>
<CAPTION>
Midwest Wireless Holdings L.L.C.
Consolidated  Statements  of Changes  in  Members'  Equity  For the years  ended
December 31, 2000 and 1999
------------------------------------------------------------------------------------------------------------------



                                                                                                         Total
                                                              Capital           Accumulated            Members'
                                                           Contributions           Income               Equity

<S>                                                        <C>                <C>                <C>
Balance, December 31, 1998                                 $   13,659,443     $   19,162,709     $     32,822,152

Redemption of units                                            (1,012,261)       (11,751,826)         (12,764,087)

Equity adjustment for minority interests
      related to redemption                                       670,371            777,852            1,448,223

Distributions to members                                                          (5,889,661)          (5,889,661)

Net income                                                                        13,821,243           13,821,243
                                                           ---------------    ---------------    -----------------

Balance, December 31, 1999                                     13,317,553         16,120,317           29,437,870

Issuance of units related to the acquisition
      of Iowa properties                                       51,418,250                              51,418,250

Issuance of units related to the acquisition
      of Wisconsin properties                                  20,061,217                              20,061,217

Distributions to members                                                          (6,439,687)          (6,439,687)

Net income                                                                        14,297,071           14,297,071
                                                           ---------------    ---------------    -----------------

Balance, December 31, 2000                                 $   84,797,020     $   23,977,701     $    108,774,721
                                                           ===============    ===============    =================

</TABLE>
















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




                                       55
<PAGE>


<TABLE>
<CAPTION>

Midwest Wireless Holdings L.L.C.
Consolidated Statements of Cash Flows
For the years ended December 31, 2000 and 1999
------------------------------------------------------------------------------------------------------------------

                                                                                        2000              1999

Cash flows from operating activities:
<S>                                                                               <C>                <C>
    Net income                                                                    $  14,297,071      $ 13,821,243
    Adjustments to reconcile net income to net cash provided by
        operating activities:
      Net income allocated to minority interest                                       1,902,457         2,219,563
      Provision for bad debts                                                           623,261          (211,225)
      Capitalized interest                                                             (608,199)         (243,973)
      Depreciation                                                                   12,278,169         7,582,105
      Amortization of FCC licenses                                                    3,780,643           494,381
      Loss on disposal of equipment                                                      27,278           390,567
      Accretion of discount on marketable securities                                                     (124,204)
      Changes in assets and liabilities:
        Accounts receivable                                                          (2,665,409)         (287,379)
        Inventories                                                                    (122,081)         (895,770)
        Accounts payable                                                              1,471,296          (674,665)
        Other accrued expenses                                                        3,253,070           388,877
        Other liabilities                                                               946,340           639,458
        Other                                                                          (322,733)         (174,858)
                                                                                  --------------     -------------

      Net cash provided by operating activities                                      34,861,163        22,924,120
                                                                                  --------------     -------------

Cash flows from investing activities:
    Acquisition of cellular properties                                              (96,215,489)
    Payments for property, cellular plant and equipment                             (28,028,072)      (20,141,712)
    Purchase of FCC licenses                                                           (354,900)         (287,300)
    Purchases of cooperative stock                                                   (5,329,209)         (653,121)
    Purchases of marketable securities                                                                 (6,679,526)
    Proceeds received upon maturity of marketable securities                                           10,750,000
    Payments for deferred acquisition costs                                                              (921,824)
    Release (restriction) of cash                                                     1,000,000        (1,000,000)
                                                                                  --------------     -------------

      Net cash used in investing activities                                        (128,927,670)      (18,933,483)
                                                                                  --------------     -------------

Cash flows from financing activities:
    Proceeds on revolving loan                                                          500,000         2,000,000
    Proceeds on long-term debt borrowings                                           107,706,887        13,368,420
    Payments on long-term debt                                                       (6,130,602)       (1,534,435)
    Distributions to members                                                         (6,439,687)       (5,889,661)
    Distribution from subsidiary to minority interest                                  (904,737)         (940,503)
    Redemption of units                                                                               (12,764,087)
                                                                                  --------------     -------------

      Net cash provided by (used in) financing activities                            94,731,861        (5,760,266)
                                                                                  --------------     -------------

Net change in cash and cash equivalents                                                 665,354        (1,769,629)

Cash and cash equivalents, beginning of year                                          1,378,350         3,147,979
                                                                                  --------------     -------------

Cash and cash equivalents, end of year                                            $   2,043,704      $  1,378,350
                                                                                  ==============     =============

Supplemental disclosure:
    Cash paid during the year for interest                                        $   7,587,435      $  1,156,323
    Equity units issued for acquisitions                                             71,479,467

</TABLE>


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




                                       56
<PAGE>



Midwest Wireless Holdings L.L.C.
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------

1.       Organization and Significant Accounting Policies

       Organization and Basis of Consolidation
       Midwest  Wireless  Holdings  L.L.C.  (the Company) was formed in November
       1999 as a Delaware  limited  liability  company to  acquire  and  operate
       cellular  communications  properties in the Midwest portion of the United
       States of America.  Upon its formation,  the Company exchanged its equity
       units for  approximately  86% of the  equity  units of  Midwest  Wireless
       Communications,   L.L.C.   The  transaction  was  accounted  for  on  the
       historical  cost basis as a combination of entities under common control,
       and  the  consolidated   financial  statements  reflect  the  results  of
       operations as if the combination had occurred on January 1, 1999.

       The consolidated financial statements include the Company's wholly-owned
       subsidiaries, Midwest Wireless Iowa, L.L.C. and Midwest Wireless
       Wisconsin, L.L.C., as well as its majority-owned subsidiary, Midwest
       Wireless Communications, L.L.C.  All significant intercompany balances
       and transactions have been eliminated in consolidation.

       Revenue Recognition
       Service  revenue  consists  of the base  monthly  service fee and airtime
       revenue.  Base  monthly  service fees are billed one month in advance and
       are  recognized  in the month  earned.  Airtime  and  roamer  revenue  is
       recognized  when the service is provided.  The Company  recognizes  other
       service  revenues  from  equipment  installations,  equipment  sales  and
       connection fees when earned.

       Use of Estimates
       The  preparation 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 at the date of the financial statements
       and  disclosure of contingent  assets and  liabilities at the date of the
       financial  statements.  Estimates  also  affect the  reported  amounts of
       revenues and expenses during the periods  reported.  Actual results could
       differ from those estimates.

       Concentration of Credit Risk
       The Company  provides  cellular  service  and  cellular  telephones  to a
       diversified group of consumers within a concentrated  geographical  area.
       The Company  performs credit  evaluations of its customers and requires a
       deposit when deemed  necessary.  Receivables  are generally due within 30
       days.

       Cash and Cash Equivalents
       For the purpose of the  statements of cash flows,  the Company  considers
       all  investments  purchased  with original  maturities of three months or
       less to be cash equivalents.

       Cellular Telephone Inventories
       Inventories consist primarily of cellular phones and accessories held for
       resale with cost  determined  using the specific  identification  method.
       Losses on sales of cellular  phones are recognized in the period in which
       sales are made as a cost of acquiring subscribers.




                                       57
<PAGE>



Midwest Wireless Holdings L.L.C.
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------

       Property, Cellular Plant and Equipment
       Property,  cellular  plant and equipment is stated at its original  cost.
       Depreciation  is provided  on a  straight-line  basis over the  estimated
       useful lives of the cellular plant and  equipment,  which range from 1 to
       30 years.

       Major  renewals  or  betterments  are   capitalized,   while  repair  and
       maintenance expenditures are charged to operations as incurred.  Interest
       incurred on external borrowings during  construction is capitalized.  The
       cost  and  accumulated  depreciation  of  property,  cellular  plant  and
       equipment  disposed  of or sold  are  eliminated  from  their  respective
       accounts, and the resulting gain or loss is recorded in operations.

       Long-Lived Assets
       The Company  periodically  reviews  long-lived  assets,  FCC licenses and
       fixed assets, for impairment  whenever events or changes in circumstances
       indicate  that the carrying  value of the assets may not be  recoverable.
       Recoverability is based on projected cash flows on an undiscounted basis.

       Federal Communications Commission (FCC) Licenses
       FCC  licenses  consist  of  the  cost  of  acquiring  cellular,  personal
       communication  services (PCS), and local multi-point  distribution (LMDS)
       licenses.  It also  includes  the value  assigned  to  cellular  licenses
       acquired  through  the  acquisitions  of  operating   cellular   systems.
       Amortization  is  computed  using the  straight-line  method  over  lives
       ranging from 10 to 39.5 years.

       Income Taxes
       No provision for income taxes has been recorded since all income,  losses
       and tax credits are  allocated  to the  members  for  inclusion  in their
       respective income tax returns.

       Advertising
       Advertising costs are expensed as incurred.  Total  advertising  expenses
       were  $3,021,650 and $1,754,394 for the years ended December 31, 2000 and
       1999, respectively.

       Accounting for Stock-Based Compensation
       The Company  accounts for employee  stock and options using the intrinsic
       value method.


2.       Select Account Information

       Restricted Cash
       At June 29,  1999,  the  Company  signed a letter of  intent  to  acquire
       certain cellular properties.  In connection with the pending acquisition,
       the Company deposited $1,000,000 into an escrow account.  Upon closing of
       the  acquisition  in 2000,  the  restricted  funds were  released  to the
       Company.

       Deferred Acquisition Costs
       During 1999, the Company paid certain external deferred acquisition costs
       of  $1,046,824  in  connection  with the pending  acquisition  of certain
       cellular  properties.  These costs were allocated as part of the purchase
       price upon the closing of the acquisition in 2000. See Note 3.




                                       58
<PAGE>



Midwest Wireless Holdings L.L.C.
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------

       Property, Cellular Plant and Equipment
                                                     2000                1999

       Land                                $       2,093,598    $     1,696,989
       Plant in service                           94,427,420         56,271,401
       Plant under construction                    9,004,718          8,453,176
                                           ------------------   ----------------
                                                 105,525,736         66,421,566
       Less accumulated depreciation             (32,002,418)       (22,423,903)
                                           ------------------   ----------------
                                           $      73,523,318    $    43,997,663
                                           ==================   ================

       At December 31, 2000 and 1999,  accounts payable includes  $2,891,666 and
       $1,295,835,  respectively,  related to the purchase of property, cellular
       plant and equipment.  The Company  capitalized  interest in the amount of
       $608,199  and  $243,973  for the years ended  December 31, 2000 and 1999,
       respectively.

       FCC Licenses
                                                      2000                1999

       Cellular license                    $     173,541,780    $    17,505,700
       LMDS licenses                                 357,696            357,696
       PCS licenses                                  287,300            287,300
       Other                                         354,900
                                           ------------------   ----------------
                                                 174,541,676         18,150,696
       Less accumulated amortization              (5,416,412)        (1,635,769)
                                           ------------------   ----------------
                                           $     169,125,264    $    16,514,927
                                           ==================   ================


3.       Acquisitions

       On February 29, 2000, the Company,  through its wholly-owned  subsidiary,
       Midwest  Wireless  Iowa,  L.L.C.,  completed its  acquisition of cellular
       communications  properties providing services to a 28-county area of Iowa
       (the "Iowa properties").

       On March 17,  2000,  the  Company  through its  wholly-owned  subsidiary,
       Midwest Wireless Wisconsin, L.L.C., completed its acquisition of cellular
       communications  properties  providing  services  to a  4-county  area  of
       Wisconsin and Minnesota (the "Wisconsin properties").

       The Company  allocated the excess purchase price over net tangible assets
       to FCC licenses and is  amortizing it over 39.5 years.  The  acquisitions
       were accounted for as purchases.  As a result,  the financial  statements
       include  the  operations  related  to the Iowa and  Wisconsin  properties
       beginning at their respective acquisition dates.




                                       59
<PAGE>



Midwest Wireless Holdings L.L.C.
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------

       The following table presents the  computation of the purchase price,  the
       estimated  fair  value  of  tangible  assets  acquired,  and  the  amount
       allocated to FCC licenses.
<TABLE>
<CAPTION>
                                                                                    Iowa              Wisconsin

<S>                                                                         <C>                  <C>
       Cash                                                                 $      89,242,760    $     5,078,783
       Equity units issued                                                         51,418,250         20,061,217
       Acquisition expenses                                                         2,760,681            180,089
       Liabilities assumed:
          Accounts payable and accrued liabilities                                                        28,956
          Customer deposits                                                             4,700             35,600
          Advance revenue                                                             792,218             90,616
                                                                            ------------------   ----------------
             Total purchase price                                                 144,218,609         25,475,261

       Estimated fair value of tangible assets acquired:
          Accounts receivable                                                       1,699,586            282,309
          Inventories                                                                  76,895
          Property, cellular plant and equipment                                    9,101,600          2,497,400
                                                                            ------------------   ----------------
                                                                                   10,878,081          2,779,709
                                                                            ------------------   ----------------
       FCC licenses                                                         $     133,340,528    $    22,695,552
                                                                            ==================   ================

</TABLE>

4.       Members' Capital

       Members' capital includes capital  contributions  made by the members and
       the accumulated income resulting from operations.  Company income or loss
       is  allocated  to the  individual  members  based  upon  their  ownership
       percentage,  as defined in the Limited  Liability  Company Agreement (the
       Agreement).  Pursuant to the Agreement, members are not obligated for the
       debts and  obligations of the Company,  including  accumulated  losses in
       excess of capital contributions.

       Under the Agreement,  no member may transfer or sell any units unless the
       board of  managers  approves  the terms of such  transfer  or sale.  Upon
       receipt  of a bona fide offer in writing  from a third  party,  the other
       members and then the Company have the right to purchase all, but not less
       than all,  of the units at the bona fide offer  price  within a specified
       time frame.

       The  Agreement  also  contains the right of co-sale under which no member
       may  transfer  its  units  to an  acquiring  person,  as  defined  in the
       Agreement,  who after such transfer would be an acquiring  person without
       assuring that each of the other members may  participate  in the transfer
       of units under the same terms and conditions.  The right of co-sale would
       terminate  in the  event  the  Company  completes  a sale  of  securities
       pursuant to a securities  act or if the Company's  market  capitalization
       would exceed $200,000,000.

       Each  member  is  entitled  to one  vote  for each  unit  owned.  Certain
       restrictions  on voting  rights exist when units are sold to an acquiring
       person.



                                       60
<PAGE>



Midwest Wireless Holdings L.L.C.
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------

5.       Debt

       Long-term debt consists of the following:
<TABLE>
<CAPTION>
                                                          Rate at                           Balance at
                                                        December 31                         December 31
                                                      ---------------     ----------------------------------------
                                         Maturity      2000     1999                 2000                   1999
<S>                                       <C>          <C>      <C>       <C>                   <C>
       RTFC note, variable rate           5/12/09      8.40%    6.95%     $        12,052,934   $       13,113,035
       RTFC note, fixed rate              7/29/08      5.75%    5.75%               7,458,340            8,171,831
       RTFC note, variable rate           7/28/08      8.40%    6.95%               6,823,500            7,476,259
       RTFC revolving note                7/29/03      9.10%    7.60%               2,500,000            2,000,000
       RTFC note, variable rate           3/02/10      8.40%                       95,743,583
       RTFC note, variable rate           2/03/15      8.40%                        8,259,053
                                                                          -------------------   ------------------
                                                                          $       132,837,410   $       30,761,125
                                                                          ===================   ==================
</TABLE>

       The Company has entered into various agreements (the Agreements) with the
       Rural Telephone Finance  Cooperative (RTFC). In 2000, the Company entered
       into an  agreement  to fund the  acquisitions  of the Iowa and  Wisconsin
       cellular markets and the construction of a new headquarters building. The
       Agreements  provide for borrowings of up to  $159,725,739.  The principal
       and  interest  on the  variable  and  fixed  rate  notes are  payable  in
       quarterly installments.  The Agreements provide the Company the option to
       fix the interest rate on  borrowings  (or portions  thereof)  through the
       maturity  date.  The variable rate is based on RTFC's cost of capital and
       is adjusted monthly.  The Agreements also provide for a revolving loan of
       up to $10,000,000.  Borrowings  under the revolving loan bear interest at
       the  prime  rate  of 7.6%  and  6.1%  at  December  31,  2000  and  1999,
       respectively,  plus one and one-half percent.  The outstanding  principal
       and interest are due upon maturity.

       The  Agreements  require the Company to maintain an investment in RTFC in
       the amount of at least 5% of the outstanding debt balance. The Agreements
       also contain covenants that restrict distributions to members and require
       the Company to maintain a debt  coverage  service  ratio of not less than
       1.25.  Substantially  all assets of the Company are pledged as collateral
       under the Agreement.

       Maturities of long-term debt are as follows:

                  2001                               $      10,415,285
                  2002                                      11,182,775
                  2003                                      14,507,117
                  2004                                      12,892,539
                  2005                                      13,845,587
                  Thereafter                                69,994,107
                                                     -----------------
                                                     $     132,837,410
                                                     =================



                                       61
<PAGE>



Midwest Wireless Holdings L.L.C.
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------

6.       Commitments

       Future  minimum  rental  payments   required  under   operating   leases,
       principally for real estate related to tower sites, and other contractual
       commitments that have initial or remaining noncancellable terms in excess
       of one year as of December 31, 2000, are as follows:

                  2001                               $         477,776
                  2002                                         405,853
                  2003                                         309,140
                  2004                                         224,424
                  2005                                         144,621
                  Thereafter                                   360,010
                                                     -----------------
                                                     $       1,921,824
                                                     =================

       Rental expense was $773,324 and $666,765 for the years ended December 31,
2000 and 1999, respectively.


7.       Employee Benefits

       The Company  established  the Midwest  Wireless  Holdings  L.L.C.  401(k)
       Profit   Sharing   Plan  and  Trust   (formerly   the  Midwest   Wireless
       Communications  L.L.C.  Profit  Sharing Plan and Trust) (the 401(k) Plan)
       for all  employees  who meet certain  service and age  requirements.  The
       401(k) Plan is comprised of an employer matching  contribution  component
       and a profit sharing component.  Employer matching  contributions to this
       component  of the plan were  $292,508  and  $185,909  for the years ended
       December 31, 2000 and 1999,  respectively.  Profit sharing  contributions
       are  100%  vested  after  five  years  of   employment.   Profit  sharing
       contribution  expenses  were  $309,312  and  $210,606 for the years ended
       December 31, 2000 and 1999, respectively.

       Effective  January 1, 1997, the Company  established the Midwest Wireless
       Holdings L.L.C.  Appreciation  Rights Plan (formerly the Midwest Wireless
       Communications  L.L.C.  Appreciation  Rights Plan) (the Plan) for certain
       key employees. Effective January 1, 2000, the Plan was amended to clarify
       certain  language and  definitions  in the Plan.  The Plan is designed to
       create two  classes of  appreciation  rights,  Class A and Class B, which
       become fully vested three years and five years after the first day of the
       year the rights are granted,  respectively.  Participants in the Plan are
       eligible to receive awards based on defined  increases in members' equity
       from the date of grant through the end of the vesting  period.  The Board
       of Managers granted both Class A and Class B appreciation rights in 1997.
       Under the terms of the Plan, no additional  Class B  appreciation  rights
       will be  granted,  and  additional  Class A  appreciation  rights will be
       granted at the discretion of the Board of Managers. In 2000, the Board of
       Managers  issued  additional  Class A appreciation  rights to certain key
       employees and  authorized  an  additional  9,000 rights for potential new
       Plan  participants.  The Company  recognized  $1,137,500  and $639,458 in
       compensation expense related to the Plan for the years ended December 31,
       2000 and 1999, respectively.




                                       62
<PAGE>



Midwest Wireless Holdings L.L.C.
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------

8.       Option Plan

       During 2000,  the  Company's  Board of Managers  adopted and approved the
       Midwest Wireless  Holdings L.L.C. Unit Option Plan under which options to
       purchase 46,742 units of the Company's membership units may be granted to
       employees  with terms and vesting  periods  determined  by the  Company's
       Board of Managers at the date of grant.  The  exercise  price is equal to
       the fair market value of the units at the time the option is granted,  as
       determined  by the  Board of  Managers.  Options  granted  under the plan
       expire ten years from the date of grant. During 2000, the Company granted
       options to purchase 4,092 membership units under this plan at an exercise
       price of $299.06  per unit.  The  options  granted  vest 100% three years
       after they were  granted.  At December 31, 2000,  there were 42,650 units
       available for issuance under this plan.

       The  following   table   summarizes   information   about  stock  options
       outstanding and exercisable at December 31, 2000:

                      Options Outstanding                   Options Exercisable
      --------------------------------------------------   ---------------------
                                    Weighted
                                   Average      Weighted                Weighted
                                  Remaining      Average                 Average
                                 Contractual    Exercise                Exercise
       Exercise Prices   Number     Life          Price      Number       Price

          $299.06         4,092     9.58        $299.06           -          -

       The Company  accounts for  stock-based  compensation  using the intrinsic
       value method. Accordingly, compensation cost for stock options granted to
       employees  is measured  as the  excess,  if any, of the fair value of the
       stock at the date of the grant  over the amount an  employee  must pay to
       acquire  the  stock.   Such   compensation   costs  are  amortized  on  a
       straight-line  basis over the underlying  option's  vesting term. No such
       compensation  expense was  recognized  for the period ended  December 31,
       2000.

       If the Company had elected to recognize  compensation expense for options
       granted  using the fair value method in 2000,  net income would have been
       as follows:

       Net income:
           As reported                               $      14,297,071
           Pro forma                                        14,251,198

       The  weighted  average  fair  value of  options  at the date of grant was
       $80.71 in 2000.

       The fair value for each option  grant was  estimated at the date of grant
       using  the   Black-Scholes   option-pricing   model  with  the  following
       assumptions:

       Dividend yield                                            2.07%
       Volatility factor                                         1.00%
       Risk-free interest rate                                   6.19%
       Expected lives                                         10 years




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<PAGE>










--------------------------------------------------------------------------------





                       SECURITIES AND EXCHANGE COMMISSION

                             Washington, D.C. 20549

                                    FORM 10-K


                  ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d)

                     OF THE SECURITIES EXCHANGE ACT OF 1934

                                       OF

                        HECTOR COMMUNICATIONS CORPORATION

                                       FOR

                          YEAR ENDED DECEMBER 31, 2000



                                    EXHIBITS






--------------------------------------------------------------------------------



                                       64
<PAGE>

             HECTOR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
                                Exhibit Index To
                 Form 10-K for the Year Ended December 31, 2000

Regulation S-K                              Location in Consecutive Numbering
Exhibit Table                               System as Filed With the
 Reference       Title of Document          Securities and Exchange Commission

    3.1     Articles of Incorporation,      Filed as Exhibit 3.1 to the Form 10
            as amended                      of the Company, File No. 0-18587
                                            (the "Form 10") and incorporated
                                             hereby by reference

    3.2     Bylaws, as amended              Filed as Exhibit 3.2 to the Form 10
                                            of the Company and incorporated
                                            hereby by reference.

    4.1     Indenture dated                 Filed as Exhibit 4.1 to the
            February 24, 1995 between       Company's Registration Statement on
            Hector Communications Corp.     Form S-2 File No. 33-87888 and
            and National City Bank of       incorporated herein by reference
            Minneapolis, trustee

   10.1     1990 Stock Plan                 Filed as Exhibit 10.1 to the Form 10
                                            of the Company and incorporated
                                            herein by reference.

   10.2     Employee Stock Purchase Plan    Filed as Exhibit 10.2 to the Form 10
                                            of the Company and incorporated
                                            herein by reference.

   10.3     Employee Stock Ownership Plan   Filed as Exhibit 10.3 to the Form 10
                                            of the Company and incorporated
                                            herein by reference.

   10.4    Employee Savings Plan and Trust  Filed as Exhibit 10.4 to the Form 10
                                            of the Company and incorporated
                                            herein by reference.

   10.5    Distribution Agreement           Filed as Exhibit 10.5 to the Form 10
                                            of the Company and incorporated
                                            herein by reference.

   10.7    Flexible Benefit Plan            Filed as Exhibit 10.7 to the 1993
                                            Form 10-K and incorporated herein
                                            by reference.

   10.8    Form of Rights Agreement dated   Filed as Exhibit 1 to the Company's
           as of July 27, 1999 between the  Form 8-A on August 9, 1999 and
           Company and Norwest Bank,        incorporated herein by reference.
           Minnesota, National Association

   10.9    1999 Stock Plan                  Filed by the Company on Form S-8 on
                                            December 3, 1999 and incorporated
                                            herein by reference.

   11      Calculation of Earnings          Filed herewith at page 66.
           Per Share

   21      Subsidiaries of the Registrant   Filed herewith at page 67.

   23      Independent Auditors' Consent    Filed herewith at page 68.

   24      Power of Attorney                Included in signatures at page 44.

The exhibits referred to in this Exhibit Index will be supplied to a shareholder
at a charge of $.25 per page upon written  request  directed to HCC's  Assistant
Secretary at the executive offices of the Company.

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<PAGE>
               HECTOR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
                                   EXHIBIT 11
                        CALCULATION OF EARNINGS PER SHARE

                                              Year Ended December 31
                                     ------------------------------------------
Basic:                                    2000            1999           1998
-------                              -----------     -----------    -----------

Net income                           $ 3,309,423     $ 7,479,181    $ 3,910,243
                                     ===========     ===========    ===========

Common shares:

  Weighted average number of common
    shares outstanding                 3,544,349       3,095,028      2,402,794
                                     ===========     ===========    ===========

Net income per common share          $       .93     $      2.42    $      1.63
                                     ===========     ===========    ===========

Diluted:
-------------

Net income                           $ 3,309,423     $ 7,479,181    $ 3,910,243
Interest on convertible debentures,
  net of tax                                             265,783        620,594
                                     -----------     -----------    -----------
  Adjusted net income                $ 3,309,423     $ 7,744,964    $ 4,530,837
                                     ===========     ===========    ===========

Common and common equivalent shares:

  Weighted average number of common
   shares outstanding                  3,544,349       3,095,028      2,402,794
  Assumed conversion of convertible
    debentures into common stock                         431,152      1,119,683
  Dilutive effect of convertible
    preferred shares outstanding         222,863         321,961        352,867
  Dilutive effect of stock options
    outstanding after application of
    treasury stock method                 82,512          73,965         45,441
  Dilutive effect of Employee Stock
    Purchase Plan shares subscribed        1,042             688          4,664
  Dilutive effect of warrants
    outstanding                                           21,734         11,623
                                     -----------     -----------    -----------
                                       3,850,766       3,944,528      3,937,072
                                     ===========     ===========    ===========

Diluted net income per share         $       .86     $      1.96    $      1.15
                                     ===========     ===========    ===========


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<PAGE>




                SUBSIDIARIES OF HECTOR COMMUNICATIONS CORPORATION
                                   EXHIBIT 21

            Subsidiaries                          Jurisdiction of Incorporation

Arrowhead Communications Corporation                        Minnesota
Eagle Valley Telephone Company                              Minnesota
Granada Telephone Company                                   Minnesota
Indianhead Telephone Company                                Wisconsin
North American Communications Corporation                   Minnesota
Pine Island Telephone Company                               Minnesota
Indianhead Communications Corporation                       Wisconsin
Alliance Telecommunications Corporation                     Minnesota
    Ollig Utilities Company                                 Minnesota
    Felton Telephone Company                                Minnesota
    Loretel Systems, Inc.                                   Minnesota
    Sleepy Eye Telephone Company                            Minnesota
    Sioux Valley Telephone Company                        South Dakota
    Hills Telephone Company                                 Minnesota
    OU Connection, Inc.                                     Minnesota
    Aurora Cable TV, Inc.                                 South Dakota
    Loretel Financial Systems, Inc.                         Minnesota
    Hastad Engineering Co.                                  Minnesota
    Valley Cablevision of SD, Inc.                        South Dakota
    Hager TeleCom, Inc.                                     Wisconsin
    Cannon Communications Corp.                             Minnesota

Arrowhead  Communications  Corporation,  Eagle Valley Telephone Company, Granada
Telephone Company,  Indianhead Telephone Company, North American  Communications
Corporation and Indianhead  Communications  Corporation are 100% owned by Hector
Communications Corporation. Pine Island Telephone Company is 69% owned by Hector
Communications Corporation and 31% owned by Indianhead Telephone Company.

Alliance  Telecommunications  Corporation is 68% owned by Hector  Communications
Corporation,  20% owned by Golden West Telecommunications  Cooperative,  Inc. of
Wall, South Dakota and 12% owned by Split Rock Telecom Cooperative of Garretson,
South Dakota.

Loretel  Systems,  Inc.,  Sleepy Eye Telephone  Company,  Sioux Valley Telephone
Company, Hills Telephone Company, Felton Telephone Company, Hager TeleCom, Inc.,
Cannon Communications Corporation, Ollig Utilities Company, OU Connection, Inc.,
Aurora Cable TV, Inc., Loretel Financial  Systems,  Inc., Hastad Engineering Co.
and Valley Cablevision of SD, Inc. are 100% owned by Alliance Telecommunications
Corporation.

The financial  statements of these subsidiaries are included in the Consolidated
Financial Statements of Hector Communications Corporation.



                                       67
<PAGE>



                                   EXHIBIT 23

                          INDEPENDENT AUDITORS' CONSENT

We consent to the  incorporation  by reference in  Registration  Statements  No.
33-39865, 33-39866, 33-65176,  33-87888,  333-45971,  333-45975 and 333-91967 of
Hector  Communications  Corporation  of our  report  dated  February  14,  2001,
appearing  in  this  Annual  Report  on  Form  10-K  of  Hector   Communications
Corporation and its subsidiaries for the year ended December 31, 2000.


/s/ Olsen Thielen and Co., Ltd.
-------------------------------
Olsen Thielen and Co., Ltd.
March 29, 2001
St. Paul, Minnesota

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<PAGE>