--------------------------------------------------------------------------------
                                  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, 1998

                                       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
                      8.5% Convertible Debentures due 2002

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  $16,745,000  based upon the closing sale price of
the Company's common stock on the American Stock Exchange on March 24, 1999.

As of March 24, 1999 there were outstanding 2,663,467 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 18, 1999 is
                                     incorporated  by reference into Part III of
                                     this Form 10-K.
--------------------------------------------------------------------------------
<PAGE>


                                     PART I.

ITEM 1.  BUSINESS

[a]    GENERAL DEVELOPMENT OF BUSINESS

       Hector  Communications  Corporation ("HCC" or "Company") is a diversified
telecommunications   holding  company  which,   through  its   wholly-owned  and
majority-owned subsidiaries, is principally engaged in providing local telephone
service. At December 31, 1998, the Company's wholly and majority owned telephone
subsidiaries  (generally  referred to as "local  exchange  carriers"  or "LECs")
served  approximately  34,700 access lines and provided  telephone service to 35
rural communities in Minnesota,  Wisconsin,  South Dakota and Iowa. In addition,
at  such  date,   through  its  cable  television   subsidiaries  and  four  LEC
subsidiaries,  the Company provided cable  television  services to approximately
13,000 subscribers in Minnesota, South Dakota and Wisconsin. The Company is also
an   investor   in   entities    providing    wireless   telephone   and   other
telecommunications related services.

       Since  becoming  a  publicly-held  company  in 1990,  HCC has  owned  and
operated  five wholly owned local  exchange  company  subsidiaries  which served
6,800 access lines at December 31, 1998. On April 25, 1996, HCC, through its 68%
owned subsidiary, Alliance Telecommunications Corporation ("Alliance"), acquired
Ollig Utilities Company ("Ollig"), a privately owned telecommunications  holding
company for $80  million.  At the time of the  acquisition,  Ollig  subsidiaries
served approximately 25,000 access lines and 3,400 cable television  subscribers
in   Minnesota,   Iowa,   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.

[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)    Business Strategy

       The  Company's  business  strategy is to expand its  existing  operations
through  internal  growth and  acquisitions,  particularly  the  acquisition  of
additional  rural  telephone  exchanges,  and to  explore  other  communications
business   opportunities,   including  the   acquisition  of  cable   television
properties.

       Future growth in existing  telephone and cable  operations is expected to
come from providing  service to new or presently  unserved homes and businesses,
from upgrading existing customers to higher grades of service 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.
Further,  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.   While  management  will  aggressively  pursue
acquisitions of telephone exchanges,  there can be no assurance that the Company
will be able to negotiate  acquisitions  on acceptable  terms or that regulatory
approval, where required, will be received.


                                       2
<PAGE>



(2)    Telephone

       The Company provides  modern,  high-quality  local telephone  service and
access to long distance telephone service through its five wholly owned and five
majority owned local exchange  carrier  subsidiaries.  Local service is directly
provided by the  Company's  LECs and long  distance or toll  service is provided
through  connections with interexchange  carriers ("IXCs"),  primarily AT&T, MCI
and Sprint.  All subscribers have private line service.  The Company's  customer
base is  approximately  81%  residential  and  approximately  19% commercial and
industrial.

       The  following  chart  presents  the number of access lines served by the
Company's LEC subsidiaries at December 31, 1998, 1997 and 1996:
<TABLE>
<CAPTION>

Telephone Company                                                               Access Lines*                      
------------------                                                               December 31                    
                                                              --------------------------------------------------
                                                                   1998               1997                1996  
                                                              -----------         -----------        -----------
Hector Communications Corporation:
<S>                                                              <C>                <C>                 <C>
       Arrowhead Communications Corporation                         780                749                 748
       Eagle Valley Telephone Company                               676                685                 678
       Granada Telephone Company                                    274                275                 276
       Pine Island Telephone Company                              3,019              2,919               2,775
       Indianhead Telephone Company                               2,109              2,076               2,057
Alliance Telecommunications Corporation:
       Loretel Systems, Inc.                                     12,675             12,023              11,852
       Sleepy Eye Telephone Company                               6,197              5,998               5,814
       Sioux Valley Telephone Company                             5,679              5,457               5,355
       Hills Telephone Company                                    2,618              2,545               2,465
       Felton Telephone Company                                     735                                        
                                                              ----------          ----------         ----------
                                                                 34,762             32,727              32,020 
                                                              ==========          ==========         ==========

</TABLE>

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

       The  Company's  policy,   insofar  as  possible,  is  to  maintain  local
management  in each of its local  exchange  carrier  subsidiaries.  The  Company
provides its LEC subsidiaries with centralized  purchasing,  general  management
and other  services.  These services  afford the  subsidiaries  expertise in the
following areas: finance, accounting and treasury services,  marketing, customer
service,   traffic,   engineering  and  construction,   customer  billing,  rate
administration,  credit and collection,  and development of  administrative  and
procedural practices.

Regulation

       The 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.  In some cases, local rates,
rate of  return,  depreciation  rates,  construction  plans and  borrowings  and
certain other  financial  transactions  may be subject to  regulatory  approval.
Local service rates are not directly determined by regulatory  authorities,  but
are limited by regulation of these other areas.  The Company has sought and will
continue to seek  appropriate  increases  in local and other  service  rates and
changes in rate structures to achieve reasonable rates and earnings.

       In Minnesota,  telephone companies serving fewer than 50,000 access lines
can elect to provide  service under an alternate form of  regulation.  Companies
choosing alternative  regulation are not subject to rate of return review by the
Public  Utilities   Commission.   All  of  the  Company's  Minnesota  based  LEC
subsidiaries  elected to be  covered by  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.

                                       3
<PAGE>

       The Federal  Communications  Commission ("FCC") regulates interstate toll
rates,  interstate  access charges paid by IXCs to local  exchange  carriers and
other matters relating to interstate  telephone service.  The FCC also regulates
the use of radio frequencies in telephone  operations.  The Company's  telephone
subsidiaries use common line and traffic  sensitive  tariffs set by the National
Exchange  Carriers  Association  ("NECA") and  participate in the access revenue
pools  administered  by NECA for  interstate  services.  Where  applicable,  the
Company's subsidiaries also participate in intrastate access tariffs approved by
state regulatory  authorities for intrastate  intra-LATA (Local Access Transport
Area) and inter-LATA services.  Such interstate and intrastate  arrangements are
intended to  compensate  LECs,  such as the  Company's  local  exchange  carrier
subsidiaries,  for the costs,  including  a fair rate of return,  of  facilities
furnished in originating and terminating interstate and intrastate long distance
services.

       A number of the telephone  subsidiaries  recover a portion of their costs
via interstate  and intrastate  support  mechanisms.  Reevaluation  and probable
modification of these mechanisms is expected.  The interstate  universal service
fund,  which is  administered by NECA, has been capped and indexed as an interim
measure  pending  regulatory  proceedings.  Interstate  universal  service  fund
support  accounted for $951,000,  $656,000 and $617,000 of the Company's network
access revenues in 1998, 1997 and 1996, respectively. The Telecommunications Act
of 1996 includes provisions to widen the base of providers  contributing support
for universal  service,  but also requires  development  of new  mechanisms  and
eligibility  criteria.  There is no assurance  cost recovery  through direct and
indirect interstate mechanisms will remain at current levels.

       Support  and rate  structures  are in the  process  of being  reduced  in
Minnesota and have been recently changed in Wisconsin. There is no assurance the
states will  continue  to provide  for cost  recovery  from  current  sources at
current  levels.  The Company  expects to seek  higher  local  service  rates to
recover  costs for which current  interstate  or intrastate  recovery may become
unavailable.

Construction and Development Program

       The  Company's  policy is to upgrade the plant and equipment of its local
exchange  carrier  subsidiaries  to  maintain  modern,  high  quality  telephone
service.  Plant  additions  are  made  to  upgrade  service,   replace  existing
facilities  and provide for service  expansions.  This  program  also allows the
Company  to  improve  service,  increase  revenues  and  reduce  costs by taking
advantage of technological developments in the telecommunications industry. 100%
of the  Company's  access  lines  use  digital  switching  technology  and it is
installing   high-capacity   fiber-optic  cable  facilities  where  appropriate.
Financing  for the  telephone  construction  program  is  expected  to come from
internally  generated  funds,  supplemented by long-term  financing from federal
financing programs.

Federal Financing Programs and Other Financing Sources
------------------------------------------------------

       The  Company's  primary  sources of long-term  financing for additions to
telephone  plant and equipment have been the Rural  Utilities  Service (RUS) and
the Rural  Telephone Bank (RTB).  The RUS has made long-term  loans to telephone
companies  since  1949,  at  interest  rates of 2% and 5%,  for the  purpose  of
improving  telephone  service in rural areas.  Since  October 1, 1991 the RUS is
also  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 under loan applications  approved prior to October 1, 1991 at
interest  rates  based  on  the  RTB's  average  cost-of-money.   For  RTB  loan
applications  approved  after October 1, 1991,  advances are 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.

         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, 1998, the Company's local exchange carrier subsidiaries
had  unadvanced  loan  commitments  under the RUS and RTB  programs  aggregating
approximately  $17,552,000 to finance specific construction activities in future
years.  However,  there is no  assurance  the Company  will be able to draw down
funds on these loans and no guarantee  the loan terms or interest  rates will be
acceptable to the Company.  If the Company is unable to borrow funds through the
RUS and RTB  programs  and the LEC  subsidiaries  were to  borrow  instead  from
conventional lenders, the cost of new loans might increase significantly.

                                       4
<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.  The  face  amount  of the  loan was
$55,250,000.  The loan is secured by a pledge of substantially all the assets of
Alliance and its subsidiaries. The Company has fixed interest rates on this loan
for periods  ranging from one to ten years at rates  averaging 7.5%. The Company
made only interest  payments on the loan in 1996.  Principal  payments  began in
January 1997 and will continue until March 2011.

         St. Paul Bank is a cooperative,  owned and controlled by its customers.
As a condition to receiving the loans, the Company  purchased stock in the bank.
The  Company's  investment  in St.  Paul Bank  stock at  December  31,  1998 was
$3,258,000. Each customer borrowing from the bank on a patronage basis shares in
the bank's net  income  through  payment of  patronage  refunds.  The  Company's
patronage  refund from St. Paul Bank was $694,000 and $221,000 in 1997 and 1996,
respectively.   The  Company  did  not  accrue  a  patronage  refund  for  1998.
Approximately  30% of the  patronage  refunds  were  received in cash,  with the
balance in stock of St. Paul Bank.  Patronage refunds are shown in the Company's
operating  statement  as a reduction  of interest  expense.  The Company  cannot
predict what patronage refunds might be in future years.

         In 1996,  the  Company  and one of its cable  television  subsidiaries,
North American Communications Corporation,  negotiated a loan agreement with the
St.  Paul  Bank  for  Cooperatives  to  provide  additional  financing  for  the
acquisition of Ollig Utilities Company. The outstanding loan balance at December
31, 1997 was $4,000,000.  In 1998, the Company replaced this loan with a 15-year
term loan from Rural Telephone Financing Cooperative ("RTFC").  Interest rate on
the loan varies  according to the rate  charged by the Lender for similar  loans
(6.1% at December 31, 1998).

         In 1998, the Company  negotiated a $5,000,000  revolving line of credit
from RTFC. Interest on outstanding  borrowings against the credit line is at the
bank's prime rate plus 1.5% (6.7% at December 31,  1998).  The Company  borrowed
$2,000,000  against  the credit  line in 1998 to help  finance  the  purchase of
additional  cable   television   systems  from  Spectrum   Cablevision   Limited
Partnership. It expects to replace this debt with longer term financing in 1999.
Both the term loan and the credit  line are  secured by a pledge of the stock of
HCC's wholly owned subsidiaries.

         In February 1995, the Company  completed a $12,650,000  public offering
of convertible subordinated debentures. The debentures carry an interest rate of
8.5% and mature  February 15, 2002. The debentures are  convertible  into common
stock of the  Company  at a rate of 112.5  common  shares  per  $1,000 par value
debenture.  The debentures  include  restrictions on payment of dividends to the
Company's shareholders and are subordinated to $4,000,000 of senior indebtedness
owed by the Company to RTFC. As of February 15, 1999,  the Company has the right
to call the debentures at a price ranging from 100% to 102% of par value. During
1998, the Company issued two separate calls to retire debentures, which resulted
in  $4,264,000  of  debentures  being  converted  into  stock  and  $438,000  of
debentures  being  purchased  and  retired.  The  offering's  underwriters  also
received warrants to purchase shares of the Company's common stock at a price of
$8.70 per share. At December 31, 1998,  112,140 warrants remain  outstanding and
expire February 15, 2000.


Competition
-----------

         Under provisions of the Telecommunications Act of 1996, LECs must allow
competitors  access  to the  local  network  facilities.  The law also  mandates
changes in the rules governing universal service supports, permits LECs to enter
the long  distance  business,  and changes  many of the  provisions  of the 1984
consent decree which broke apart AT&T and still restricts the activities of AT&T
and the Regional Bell Operating Companies. The final results of the changes made
by the  new law  will  not be  known  until  rule  making  by the FCC and  state
regulatory  agencies is complete.  Several  provisions of the law are also being
contested  in the  courts,  making some  applications  of the law subject to the
judicial  process.  The  Company  is  monitoring   developments   regarding  the
regulatory  climate  closely,  and expects  its  operations  will be  materially
affected by new rules,  but cannot  predict what effect the law and  regulations
adopted pursuant to the law will have on its business.

                                       5
<PAGE>

         Prior to  passage of the new  telecommunications  law, a series of FCC,
court and state regulatory agency decisions had served to introduce  competition
into many sectors of the telephone industry, including interstate and intrastate
long distance services, special access services and customer premises equipment.
The Company is presently  the only  provider of local  telephone  service in the
areas it serves.  The Company does not know to what extent it will be subject to
local  competition  in the markets it serves as  competition  expands in the new
regulatory  environment.  Technological  developments in competing  technologies
such as wireless telephone,  digital microwave,  coaxial cable, fiber-optics and
other wireless and wired  technologies  may result in other forms of competition
to the Company's  landline  services.  The Company and many other members of the
local exchange  carrier  industry are seeking to maintain a strong,  universally
affordable public telecommunications  network through policies and programs that
are  sensitive to the needs of the small  communities  and rural areas served by
the Company's telephone subsidiaries.

         Certain providers and users of long distance service may seek to bypass
LEC switching services and local distribution facilities,  particularly if these
services are not strategically  priced.  There are many ways these customers may
bypass the  Company's  switching  services.  Users may  construct and operate or
lease facilities to transmit their traffic to an interexchange carrier.  Certain
interexchange carriers provide services that allow users to divert their traffic
from the LEC's usage sensitive  services to flat-rate  services.  Users may also
choose to use wireless  telephone service to bypass the LEC's switching service.
The  Company's  telephone  subsidiaries  have  experienced  only a small loss of
traffic due to bypass.  The Company and the local exchange  carrier industry are
seeking to address bypass  problems by advocating  flexible  pricing,  including
reduced pricing of access and long distance services where appropriate.

         New  telecommunications  laws and  recent  FCC  rulings,  which seek to
promote competition in voice and video  communications,  may provide the Company
with increased  business  opportunities.  Recent changes permit local  telephone
companies  to offer  video  dial tone  services,  permitting  greater  telephone
company   participation   in  the   video   marketplace.   The   rules   against
cross-ownership  of  telephone  and  cable  television  systems  have  also been
somewhat  relaxed.  The FCC has also  authorized  cellular  telephone,  personal
communications   services  and  other  technologies,   which  may  compete  with
traditional  telephone  services  and provide new  business  opportunities.  The
Company actively monitors  legislative and regulatory changes to protect its own
interests and evaluate new opportunities.

         The   Clinton   administration   has   actively   promoted  a  national
communications  policy  directed  toward  creation of a  broadband,  interactive
national   information   infrastructure.   The   administration   has  advocated
legislation based on five principles:  encouraging private investment, providing
and  protecting  competition,  providing  open access to the  telecommunications
network,  avoiding  a  society  of  information  "haves"  and "have  nots",  and
encouraging    flexible   and   responsive    government   action.   Given   the
Administration's  initiatives  as  well as  recent  Congressional  actions,  the
Company expects that eventually  there may be open access to every aspect of the
communications  industry.  However,  the  telecommunications  law also  mandates
continuing  support for universal service and bans  discrimination in toll rates
based on geography.  The Company  believes  high-cost  support funds and similar
cost-averaging  methods  should  continue to be employed to ensure that advanced
communications  services  reach rural  areas.  The  Company  plans to compete by
providing advanced, high-quality voice, data and video services.

Wireless Telephone Services
---------------------------

         Cellular  telephone  services  provide  high  quality,   high  capacity
communications  to and  from  vehicle  mounted  or hand  held  radio  telephones
("cellular telephones"). Cellular technology is a major improvement over earlier
mobile telephone technologies.  Cellular telephone systems are designed to allow
for  maximum  mobility  of the  customer.  In  addition  to  mobility,  cellular
telephone  systems  provide  access  through  system   interconnects  to  local,
regional, national and worldwide telecommunications networks. Cellular telephone
systems  also  offer a full  range  of  ancillary  services  such as  conference
calling,  call  waiting,  call  forwarding,   voice  mail,  facsimile  and  data
transmission.


                                       6
<PAGE>

         The FCC  established  733 cellular  service areas in the United States,
consisting of 305 Metropolitan  Statistical Areas ("MSAs") and 428 Rural Service
Areas ("RSAs"). The FCC granted two licenses to provide cellular service in each
territory. One license was granted to a company or affiliated group of companies
providing local telephone service in the area ("Wireline  Carriers").  The other
license was granted to a company not providing local  telephone  service and not
affiliated  with a local  telephone  company in the service area  ("Non-Wireline
Carriers").  The Company acquired its interests in cellular telephone as part of
the  Wireline  Carrier  group in the RSA  markets  in which it owns a  telephone
operating company.

         At December 31, 1998, the Company was an investor in limited  liability
companies  which  provide cellular  telephone service in five RSAs in Minnesota,
one RSA in North Dakota and the Rochester,  Minnesota MSA. The Company  accounts
for these  investments  using the  equity  method.  Income  recognized  on these
wireless investments was $1,508,000,  $1,210,000, and $391,000 in 1998, 1997 and
1996,  respectively.  The following  table provides the Company's  percentage of
ownership  in  each  venture  and  the  Company's  proportionate  share  of  the
population served by each venture at December 31, 1998:
<TABLE>
<CAPTION>

                                                              Total                                   Company's
                                                           Population            Percent              Share of
Name of Venture                  Service Area            Equivalents(1)         Ownership            Total POPs
--------------------             -----------------       --------------         ----------           -----------
<S>                              <S>                          <C>                 <C>                   <C>   
Midwest Wireless                 Rochester, MN MSA            948,000             10.00%                94,800
  Communications LLC             and MN RSAs 7, 8,
                                 9, 10 and 11

Red River Cellular, Inc.         ND RSA 3                      92,000              1.60%                 1,472
</TABLE>


(1)      Estimated population based on the 1990 United States Census.

       In December,  1998, the Company 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,  after  income  taxes and  before  minority
interest,  was $2,890,000.  Income  recognized from the Company's  investment in
this  partnership  was $334,000,  $377,000 and $109,000 in 1998,  1997 and 1996,
respectively.

         The Company is also an investor in Rural Cellular  Corporation ("RCC"),
a publicly traded company providing cellular telephone services in Minnesota and
New England.  In February 1996, RCC completed an initial  offering of its common
stock to the public. As part of the offering,  the Company sold 61,133 shares of
RCC and  recorded  a gain on sale of  $485,000.  In 1997,  the  Company  sold an
additional 161,469 shares of RCC for a gain of $1,464,000.  In 1998, the Company
sold 40,000 shares of RCC for a gain of $179,000.  As part of the acquisition of
Felton Telephone  Company,  the Company acquired an additional 167,664 shares of
RCC in 1998. At December 31, 1998, the Company owned approximately 3.7% of RCC's
common stock.

         In addition to competition  between the two cellular  licensees in each
territory,  competition for wireless customers includes competing communications
technologies such as conventional  land-line and mobile  telephone,  SMR systems
and  radio  paging.  In  addition,   emerging   technologies  such  as  enhanced
specialized  mobile radio ("ESMR"),  mobile  satellite  communications  systems,
second  generation  cordless  telephones  ("CT-2") and  personal  communications
services ("PCS") offer competition with cellular services.

         The Company  owns  13.06% of  Wireless  North,  a  consortium  of three
limited  partnerships and one limited liability  corporation which have acquired
16 licenses to operate PCS systems in 13 markets in Minnesota,  Wisconsin, North
Dakota  and South  Dakota.  The  Company  has  invested  $1,271,000  of cash and
guaranteed debt of $1,373,000 in these entities. The PCS systems are in start-up
mode and have not been profitable to date. Losses recorded by the Company on its
PCS investments  were  $1,066,000,  $435,000 and $73,000 in 1998, 1997 and 1996,
respectively.  The Company has  committed  to providing  $664,000 of  additional
capital to these entities.  It cannot predict if additional  funding beyond this
amount will be required.

                                       7
<PAGE>

         There are a number of recent technological developments in the wireless
telephone industry. Currently most cellular telephone systems use equipment that
processes  information digitally but transmits radio signals on an analog basis.
Digital radio technology offers advantages,  including less transmission  noise,
greater system capacity and lower  incremental  costs for additional  customers.
The  conversion  from analog to digital radio  technology was expected to take a
number of years,  but is being  accelerated  by  competition  from  digital  PCS
systems.

         The wireless  telephone industry is characterized by high initial fixed
costs.  Accordingly,  when system revenues less variable  operating costs exceed
fixed costs, the system should generate an operating  profit.  Wireless profits,
if any, are dependent on service prices and variable  marketing  costs which are
affected  by  the  amount  and  extent  of  competition.   Until   technological
limitations  on  total  capacity  are  approached,  additional  wireless  system
capacity can normally be added in increments  that closely match demand and cost
proportionately less than the initial fixed costs.

         The licensing (including renewal of licenses), construction, operation,
sale,  interconnection  arrangements  and  acquisition  of wireless  systems are
regulated by the FCC and various state public  utility  commissions.  Changes in
the  regulation of wireless  operators or their  activities  and of other mobile
service  providers (such as the recent FCC issuances of PCS licenses) could have
a material adverse effect on the Company's investment in wireless operations.


Other Telecommunications Investments
         The Company also has  investments  in several other  telecommunications
related  businesses,  including an 12.0%  ownership  interest in Minnesota Equal
Access  Network  Services,  Inc.  ("MEANS").  MEANS was  formed in 1988 to bring
state-of-the-art  telecommunications to rural areas of Minnesota. MEANS is owned
by  shareholders  that  represent  more than  two-thirds  of the local  exchange
carriers  in  Minnesota.  MEANS  operates a fiber optic  communications  network
linking communities  throughout the state,  including all the major metropolitan
areas.  MEANS  also  provides  long-distance   telecommun-ications  services  to
business and residential  customers in rural  Minnesota.  These services include
toll-free  telephone numbers providing access from anywhere in the Unites States
and  Canada,   cellular   telephone   service,   prepaid  calling  cards,  video
conferencing and internet access.



(3)    Cable Television

       The Company,  through its cable  television  and local  exchange  carrier
subsidiaries,   owns  and   operates  46  cable   television   systems   serving
approximately  13,000 subscribers in Minnesota,  North Dakota,  South Dakota and
Wisconsin.  All of its cable  television  systems  offer one or more channels of
premium  programming,  featuring motion pictures  presented  without  commercial
interruption.

       The Company's cable  television  revenues are derived almost  exclusively
from  monthly fees for basic and premium  programming.  The  Company's  fees for
basic  services range from $14.95 to $26.28 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 are provided to  subscribers  for an additional  fee of $6.95 to $10.95
per month per channel. Approximately one-third of the Company's cable television
customers  subscribe  to a premium  channel.  The  Company  obtains  its premium
programming  from suppliers for a flat monthly fee per  subscriber  and/or a fee
based on the monthly charge to subscribers for the service. Subscribers are free
to  discontinue  the cable  service at any time  without  penalty.  The  Company
periodically  increases  its basic and premium  programming  subscriber  fees to
reflect the addition of new cable television services and increased costs due to
inflation.

       The  Company's  cable  television  systems  are  operated  under 15 year,
non-exclusive   franchises  granted  by  local  government  authorities.   These
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.
The Company does not  anticipate it will  experience any difficulty in obtaining
renewal of its franchises at the expiration of their current terms.

                                       8
<PAGE>

       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 area. Cable television
also competes,  in varying degrees,  with other  entertainment  and leisure time
activities.  Promotional  efforts for cable  television  include  telephone  and
door-to-door solicitation and local media advertising.

       All of  the  Company's  franchises  are  non-exclusive  and  the  Company
competes  with a municipally  owned cable system in one community it serves.  In
addition to competition from off-air television,  other technologies also supply
services  provided  by cable  television.  These  include  low power  television
stations, multi-point distribution systems, over-the-air subscription television
and  direct  broadcast  satellite  ("DBS").  The  Company  believes  that  cable
television  presently  offers a wider variety of  programming at lower cost than
any competing  technology.  However, the Company is unable to predict the effect
current or developing sources of competition may have on its business.

       The FCC regulates the Company's cable television systems. FCC regulations
contain many detailed  provisions  including:  "must carry" rules  regarding the
broadcast  television  and  translator  signals the operator must include in its
channel offerings to subscribers, exclusivity provisions (requiring the deletion
of certain programming carried by out-of-area  stations where it would duplicate
programming  carried by local  stations),  technical  standards and  performance
testing  requirements,  and franchise  fees  applicable to state and local cable
television  franchises.  To date, the Company has 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. To
date, the Company has not experienced significant difficulties in complying with
the requirements of Minnesota authorities.

       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.
Further  material  developments in these areas are to be anticipated,  but their
direction  and impact on the Company's  cable  television  operations  cannot be
predicted.

(4)    Employees

       At March 1, 1999, the Company had 150 full-time and part-time  employees,
of which 101  employees  work in the Alliance  operations  and 49 work in Hector
operations.  None of the Company's  employees are represented  under  collective
bargaining agreements. HCC believes its employee relations to be good.




                                       9
<PAGE>



(5)    Executive Officers of Registrant

       The  executive  officers  of the  Company and their ages at March 1, 1999
were as follows:

       Name                           Age        Position
       -----------------              ---        -------------------------------

       Curtis A. Sampson              65         Chairman of the Board and Chief
                                                 Executive Officer

       Steven H. Sjogren              56         President and Chief Operating
                                                 Officer

       Paul N. Hanson                 52         Vice President and Treasurer

       Charles A. Braun               41         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.


                                       10
<PAGE>



ITEM 2.   PROPERTIES

       The Company and its wholly-owned and majority-owned  subsidiaries own and
operate local exchange telephone property in Minnesota,  Wisconsin, South Dakota
and  Iowa.  The  Company  also has cable  television  properties  in  Minnesota,
Wisconsin,  North Dakota and South Dakota. HCC and its wholly-owned subsidiaries
hold approximately 32% of net consolidated property, plant and equipment.
Alliance and its subsidiaries hold the remaining 68%.

       Telephone property consists mainly of central office switching equipment,
together  with the land and  buildings in which such  equipment  is housed,  and
connecting  lines which consist of aerial and underground  cable,  conduit,  and
poles and wires,  substantially  all of which are located  within the  Company's
operating territories.  Substantially all of the customer-leased  telephones and
related  terminal  equipment,  including  private  branch  exchanges and a small
amount of connecting lines, are located on customers' premises. These telephones
and related  equipment  constitute  approximately 1% of the Company's  telephone
property.  The lines,  which connect  customers'  premises with central offices,
constitute  approximately  54% of telephone plant.  These facilities are 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 to leases,  permits,
easements,  agreements  or  licenses,  express or implied  through  use  without
objection by the owners.

       Central office switching  equipment  represents  approximately 30% of the
Company's  telephone  property  in service.  Land,  buildings,  data  processing
equipment,  service vehicles and construction equipment constitute the remaining
15%.  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.

       The principal  physical assets of the Company's cable  television  system
operations  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.



                                       11
<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  currently  being traded on the American
Stock Exchange. Prior to February 20, 1998, the Company's common stock traded on
the National  Market System of the National  Association  of Securities  Dealers
Automated Quotation System ("NASDAQ").

       The table below presents the range of high and low trading prices for the
Company's stock for each period as reported by the respective exchanges.

                              1998                                 1997
Quarter                High              Low              High               Low
--------------------------------------------------------------------------------

First                $12.63            $9.00             $8.50             $7.25
Second                12.25            10.50              9.75              7.38
Third                 11.25             7.75             10.50              7.88
Fourth                 9.00             7.38             10.13              8.50

[b]    HOLDERS

         At March 1, 1999  there  were  approximately  570  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.



                                       12
<PAGE>


<TABLE>
<CAPTION>

ITEM 6.  SELECTED FINANCIAL DATA

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

                                                                                      Year Ended December 31
                                                                    ------------------------------------------------------------
                                                                           1998        1997        1996        1995        1994
--------------------------------------------------------------------------------------------------------------------------------

Selected Income Statement Information

<S>                                                                    <C>         <C>         <C>          <C>         <C>   
Revenues                                                               $ 31,839    $ 28,866    $ 20,658     $ 5,844     $ 5,740

Costs and Expenses                                                       21,192      19,113      14,066       4,992       4,175
--------------------------------------------------------------------------------------------------------------------------------

Operating Income                                                         10,647       9,753       6,592         852       1,565

Other Income (Expenses), net                                                (40)     (3,367)     (3,518)       (980)      2,055
--------------------------------------------------------------------------------------------------------------------------------

Income (Loss) Before Income Taxes                                        10,606       6,386       3,074        (128)      3,620

Income Tax Expense (Benefit)                                              4,949       2,867       1,540         (51)      1,415
--------------------------------------------------------------------------------------------------------------------------------

Income (Loss) Before Minority Interest                                    5,657       3,519       1,534         (77)      2,205

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

Net Income (Loss)                                                      $  3,910    $  2,721    $  1,209     $   (77)    $ 2,205
================================================================================================================================

Basic Net Income (Loss) Per Common Share                               $   1.63    $   1.44    $    .65     $  (.04)    $  1.18
Diluted Net Income (Loss) Per Common Share:                            $   1.15    $    .93    $    .53     $  (.04)    $   .97

Average Shares Outstanding:
  Common shares only                                                      2,403       1,893       1,870       1,866       1,863
  Common and potential common shares                                      3,937       3,732       3,694       1,866       2,266
===============================================================================================================================

Selected Balance Sheet Information

Working Capital                                                        $  6,554    $  8,504    $  1,307     $ 9,679     $ 4,740
Property, Plant and Equipment, net                                       50,810      45,927      47,039      14,609      13,019
Excess of Cost Over Net Assets Acquired, net                             53,004      51,170      52,510         907         839
Total Assets                                                            150,680     139,291     137,348      33,518      22,749
Long-Term Debt                                                           94,232      97,793      96,127      22,096      10,528
Stockholders' Equity                                                     22,720      14,447       9,946       8,134       8,230
--------------------------------------------------------------------------------------------------------------------------------

All potential common shares are anti-dilutive for 1995 and are excluded from calculation of net income per share

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


                                       13
<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 local
exchange telephone subsidiaries and one cable television subsidiary. At December
31, 1998, these subsidiaries  provided telephone service to 6,858 customers in 9
rural  communities  in  Minnesota  and  Wisconsin.  They  also  owned  30  cable
television  systems  serving 4,840  customers in 36 communities in Minnesota and
Wisconsin.   HCC  also   directly   owns   substantial   investments   in  other
telecommunications ventures, including, Midwest Wireless LLC, Wireless North LLC
and MEANS.

In 1996, the Company joined with Golden West Telecommunications  Cooperative and
Split  Rock  Telecom   Cooperative  to  organize   Alliance   Telecommunications
Corporation ("Alliance"). The Company owns a 68% interest in Alliance. Effective
April 25, 1996, Alliance acquired Ollig Utilities Company ("Ollig"). At December
31,  1998,  Alliance,  through  Ollig  and its  five  local  exchange  telephone
subsidiaries,  provided  telephone  service  to  27,904  customers  in 26  rural
communities in Minnesota,  South Dakota and Iowa. Alliance's 16 cable television
systems provided cable television services to approximately 8,160 subscribers in
Minnesota,  South  Dakota and North  Dakota.  Alliance's  subsidiaries  also own
substantial  investments in Midwest Wireless LLC,  Wireless North LLC and MEANS,
own marketable  securities  portfolios  with  investments in  telecommunications
providers like U.S. West  Communications,  Inc.,  MediaOne Group, Inc. and Rural
Cellular Corporation, and has other investments.

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

General
-------

       The Company's  telephone revenues are principally  derived from the local
service and access  revenues  received  by its local  exchange  carrier  ("LEC")
subsidiaries.  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.

       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")  which 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") and, in the case of intrastate calls, 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 are received from NECA,  which  collects
payments from IXCs and distributes settlement payments to LECs 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.  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 since 1984.  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.

       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.  LECs also provide  billing and  collection
services for certain IXCs in lieu of such IXCs directly billing customers within
the LECs service area.

       The Company's cable  television  revenues are derived almost  exclusively
from monthly fees for basic and premium services.

                                       14
<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: <TABLE> <CAPTION>
                                                                       Year Ended December 31               
                                                          --------------------------------------------------
                                                              1998               1997                 1996  
                                                          -----------        ----------          -----------
<S>                                                          <C>                <C>                  <C>  
       Local network                                          16.6%              16.9%                17.8%
       Network access                                         55.6               58.0                 55.8
       Nonregulated telephone activities                      15.0               13.3                 13.0
       Billing and collecting                                  2.7                3.5                  4.3
       Cable television                                       10.1                8.3                  9.1  
                                                          -----------       -----------          -----------
                                                             100.0  %           100.0%               100.0%
                                                          ===========       ===========          ===========
</TABLE>

1998 Compared to 1997
---------------------

       Consolidated revenues increased 10% to $31,839,000. The revenue breakdown
by operating group was as follows:
<TABLE>
<CAPTION>

                                                     Alliance                            Hector
                                               Year Ended December 31             Year Ended December 31
                                               1998              1997             1998              1997
                                          ------------      ------------     ------------      ------------
<S>                                       <C>               <C>              <C>               <C>         
Local Network                             $  3,730,079      $  3,346,733     $   1,560,732     $  1,519,514
Network Access                              13,480,391        12,845,426         4,229,530        3,892,682
Billing and Collection                         683,132           820,540           182,635          209,642
Nonregulated activities                      4,283,839         3,469,234           489,528          369,188
Cable Television                             1,774,495         1,027,602         1,424,333        1,365,804
                                          ------------      ------------     -------------     ------------
                                          $ 23,951,936      $ 21,509,535     $   7,886,758     $  7,356,830
                                          ============      ============     =============     ============

</TABLE>

 Consolidated  local service revenues increased $425,000 or 9%. The increase was
due to increases in access lines served,  which  increased 6% to 34,760.  Growth
was due to increased  development within the Company's service areas,  increased
demand  for  telephone  lines to provide  advanced  telephone  services  such as
internet  services,  and the acquisition by Alliance of Felton Telephone Company
("Felton").  Network access revenues increased $972,000 or 6%. Excluding Felton,
the increase  was $581,000 or 3%. The increase was chiefly due to increased  use
of the telephone  network by customers and increased  universal  service support
funds.  1997  access  revenues  were high due to a one-time  retroactive  tariff
settlement received by an Alliance subsidiary.

       Nonregulated  revenues  increased $935,000 or 24%. Revenue increases were
due to  increased  internet  revenues,  commissions  on sales  of long  distance
services  and  leases of  fiber-optic  transport  facilities.  Cable  television
revenues  increased  $805,000  or 34%  due to the  acquisition  by  Alliance  of
additional cable systems from Spectrum Cablevision Limited Partnership.  Billing
and  collection  revenues  declined  $164,000 or 16% as IXCs continued the trend
toward self-billing of customers.

       Consolidated  operating costs and expenses  increased  $2,079,000 or 11%.
Costs and expenses by operating group were as follows:
<TABLE>
<CAPTION>
                                                     Alliance                            Hector
                                              Year Ended December 31              Year Ended December 31
                                              1998              1997              1998              1997
                                          ------------      ------------     -------------     ------------
<S>                                       <C>               <C>              <C>               <C>         
Plant operations                          $  2,821,318      $  2,714,192     $     933,994     $    916,638
Depreciation and amortization                5,712,509         5,336,031         2,068,701        1,973,699
Customer operations                          1,549,019         1,430,676           254,649          243,435
General and administrative                   2,575,215         2,324,079         1,375,954        1,269,042
Other operating expenses                     2,646,862         1,830,921         1,253,586        1,074,244
                                          ------------      ------------     -------------     ------------
                                          $ 15,304,923      $ 13,635,899     $   5,886,884     $  5,477,058
                                          ============      ============     =============     ============
</TABLE>

                                       15
<PAGE>

       Consolidated  plant operations  expenses increased $124,000 or 3%, due to
the acquisition of Felton.  Depreciation and amortization  increased $471,000 or
6% due to the acquisitions of Felton and the Spectrum cable television  systems.
Customer operations expenses increased $130,000,  or 7% due largely to growth in
the number of customers served.  General and  administrative  expenses increased
$358,000  or 10%  due to the  Company's  expanded  operations.  Other  operating
expenses  increased  $995,000 or 34% due to increased cable television  expenses
from the Spectrum systems.  Consolidated  operating income increased $893,000 or
9%.

       Interest expenses increased $518,000.  The biggest factor in the interest
expense  increase  was the lack of patronage  dividends on interest  paid to St.
Paul Bank. This dividend was $694,000 in 1997, and the Company had anticipated a
similar dividend in 1998. However,  St. Paul Bank has substantial loan exposures
in the  agricultural  economy,  and poor  performance by that economy during the
third and fourth  quarters of 1998 prevented the payment of patronage  dividends
at anticipated rates. The Company also had interest on new borrowings to finance
the  acquisitions  of Felton and the Spectrum cable systems.  This was offset to
some degree by interest  reductions on convertible  debentures that were retired
or converted into common stock in the second and third quarters of 1998.

     Income from partnership and LLC investments  decreased  $425,000 from 1997.
Income from  Midwest  Wireless  LLC  increased  $298,000 to  $1,508,000,  due to
continuing  growth in the number of customers  using cellular  services.  Income
from the Sioux Falls,  South Dakota MSA prior to its sale was $334,000  compared
to  $377,000  for all of 1997.  Losses  from the  Company's  Wireless  North PCS
investment  totaled  $1,066,000  compared to $435,000 in 1997. While the Company
anticipated  substantial  losses from this  operation's  start-up  phase,  it is
concerned  that  anticipated  future  capital  investments  may be inadequate to
finance  Wireless  North's  expansion  plans.  Accordingly,  the Company and its
fellow investors are reviewing  Wireless North's business plans with the goal of
reducing  operating  losses  and  attracting  more  investment  capital  to  the
operation.

       Investment  income  declined  $17,000.  Alliance  had  gains  on sales of
marketable  securities  totaling $965,000 in 1998.  Alliance continues to hold a
significant portfolio of marketable securities. In December, 1998, Alliance sold
its 12.25% interest in a cellular telephone partnership serving the Sioux Falls,
South Dakota MSA to CommNet  Cellular,  Inc. for $6,725,000.  Alliance's gain on
the sale before  income  taxes was  $4,817,000.  Hector had gains on  marketable
securities sales of $1,496,000 in 1997.

       Income before income taxes  increased 66% to  $10,606,000.  The Company's
effective income tax rate of 46.7% is higher than the standard U.S. tax rate due
to state  income  taxes and the effect of  nondeductible  amortization  expenses
associated  with the  acquisition  of Ollig  Utilities.  Income before  minority
interest increased 61% to $5,657,000.  Minority interest on earnings of Alliance
were  $1,747,000  compared  to  $798,000 in 1997.  Net income  increased  44% to
$3,910,000.

1997 Compared to 1996
---------------------

       Consolidated revenues increased 40% to $28,866,000.  Most of the increase
was due to the 1996  acquisition by Alliance  Telecommunications  Corporation of
Ollig Utilities  Company.  The operations of Alliance,  which are  substantially
larger  than  those  of HCC  prior  to the  acquisition,  had a huge  impact  on
operating  results.  1997 results  include twelve months of Alliance  operations
compared  to just eight  months  included  in 1996.  The  following  table shows
revenues from Alliance's operations separate from those of Hector.

<TABLE>
<CAPTION>
                                                     Alliance                                     
                                           Year Ended   Eight Months Ended               Hector         
                                           December 31       December 31          Year Ended December 31
                                               1997              1996             1997              1996       
                                          ------------      ------------     -------------     ------------
<S>                                       <C>               <C>              <C>               <C>         
Local network                             $  3,346,733      $  2,207,217     $   1,519,514     $  1,474,912
Network access                              12,845,426         7,817,153         3,892,682        3,717,729
Billing and collection                         820,540           656,706           209,642          224,908
Nonregulated activities                      3,469,234         2,386,360           369,188          303,895
Cable television                             1,027,602           628,988         1,365,804        1,239,653
                                          ------------      ------------     -------------     ------------
                                          $ 21,509,535      $ 13,696,424     $   7,356,830     $  6,961,097
                                          ============      ============     =============     ============
</TABLE>

                                       16
<PAGE>

         Revenues from Hector's  operations  increased  $396,000 or 6%. Revenues
from telephone  operations  increased  $270,000,  or 5%. Local network  revenues
increased  $45,000 or 3%, due to increases in the number of access lines served.
Network access  revenues  increased  $175,000 or 5% due to increased  interstate
settlements from NECA, which offset lower  intrastate  access revenues.  Billing
and collection revenues decreased $15,000 or 7% as IXCs are continuing to reduce
their  reliance on LECs to provide these  services.  Revenues from  nonregulated
sources  increased  $65,000 or 21% due to  increased  internet  revenues.  Cable
television  revenue increased $126,000 or 10%. The increase was due to increases
in  subscriber  rates and the full year effect of the  acquisition  of two small
cable systems in September 1996.

         Alliance's 1997 revenues benefited from a one-time  retroactive network
access  settlement of $560,000  received  from NECA by one of its  subsidiaries.
This settlement included $390,000 related to 1995 and 1996 settlements.

       Consolidated  operating  costs  and  administrative   expenses  increased
$5,047,000  or 36% over 1996.  1997 results  include  twelve  months of Alliance
operating expenses compared to just eight months included in 1996. The following
table shows operating expenses from Alliance's operations separate from those of
the Company. <TABLE> <CAPTION>
                                                     Alliance                                   
                                           Year Ended    Eight Months Ended              Hector         
                                           December 31       December 31          Year Ended December 31
                                               1997               1996            1997              1996       
                                          ------------      ------------     -------------     ------------
<S>                                       <C>               <C>              <C>               <C>         
Plant operations                          $  2,714,192      $  1,869,098     $     916,638     $    838,787
Depreciation/amortization                    5,336,031         3,493,668         1,973,699        1,934,117
Customer operations                          1,430,676           945,664           243,435          245,277
General and administrative                   2,324,079         1,509,010         1,269,042        1,254,197
Other operating                              1,830,921         1,069,148         1,074,244          906,902
                                          ------------     -------------    --------------     ------------
                                          $ 13,635,899      $  8,886,588     $   5,477,058     $  5,179,280
                                          ============     =============     =============     ============
</TABLE>

       Operating costs and expenses for Hector's  operations  increased $298,000
or 6%. Expense  increases were due to higher  maintenance  expenses on telephone
plant and higher cable  television  expenses due to the  acquisition  of two new
cable systems in 1996.  Consolidated  operating income increased $3,162,000,  or
48%. Operating income from HCC's operations increased 98,000 or 5%.

       Consolidated   interest  expense,  net  of  investment  income  increased
$1,463,000.  Net interest expense for Hector increased $207,000,  reflecting the
full year  effect  of  interest  on  borrowings  from St.  Paul Bank used in the
acquisition  of Ollig and reduced  income due to decreased  cash  available  for
investment.  Net interest  expense on Alliance  increased  $1,256,000 due to the
full year  effect of  interest  on the  acquisition  loan from St. Paul Bank for
Cooperatives  associated  with the purchase of Ollig  Utilities  Company.  HCC's
investment  income  benefited  from gains on sales of  marketable  securities of
$1,496,000  and $688,000 in 1997 and 1996,  respectively.  Income from  wireless
telephone investments increased $806,000 or 160%, due primarily to the Company's
equity interest in the increased profits of Midwest Wireless LLC. These earnings
were more than  enough to offset  start-up  losses of  $435,000  incurred by PCS
partnerships in which the Company holds equity interests.

       Consolidated  income before income taxes  increased  108% to  $6,386,000.
HCC's income before income taxes,  excluding  Alliance,  was  $1,745,000 in 1997
compared to $885,000 in 1996.  Income tax expense  increased to $2,867,000  from
$1,540,000  in 1996.  The  effective  income tax rate of 44.9% in 1997 is higher
than the standard tax rate because the  amortization  expenses  associated  with
excess of cost over net assets acquired in the acquisition of Ollig  ($1,254,000
in 1997) are not tax  deductible.  The 32%  minority  shareholders'  interest in
earnings of Alliance  was  $798,000  in 1997  compared to $325,000 in 1996.  Net
income increased 125% to $2,721,000.

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

       Cash  flows  from  consolidated  operating  activities  were  $9,623,000,
$8,365,000 and $7,064,000 in 1998, 1997, and 1996, respectively. At December 31,
1998, the Company's total cash, cash equivalents, temporary cash investments and
marketable  securities totaled  $23,241,000  compared to $18,241,000 at December
31, 1997. Alliance's cash and securities were $18,908,000 of this total. Working
capital at December 31, 1998 was  $6,554,000  compared to $8,504,000 at December
31, 1997. The current ratio was 1.5 to 1.

                                       17
<PAGE>

       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 holds 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  $4,572,000.  Financing for this
purchase  included  $2,000,000 from a new line of credit  arrangement with Rural
Telephone Finance Cooperative. In September 1996, Hector acquired two additional
cable systems serving 320 subscribers for $319,000.  In 1997,  Alliance acquired
one small system for $120,000.

       On April  25,  1996,  Alliance  purchased  Ollig  Utilities  Company  for
$80,000,000  in cash.  The  Company  owns  68% of  Alliance  with the  remaining
interest  owned by Golden  West  Telecommunications  Cooperative,  Inc. of Wall,
South  Dakota and Split Rock  Telecom  Cooperative,  Inc.  of  Garretson,  South
Dakota.  Alliance financed the acquisition using the combined equity investments
of its shareholders and $55,250,000 of long-term debt financing  provided by St.
Paul Bank for Cooperatives  ("St. Paul Bank").  Interest rates on this debt have
been  locked  for  periods  of one to ten  years at rates  averaging  7.5%.  The
outstanding balance on this loan at December 31, 1998 was $50,525,000.

       St. Paul Bank is a cooperative, owned and controlled by its customers. As
a condition to receiving the loans, the Company  purchased stock in the bank. In
1998, as a condition of maintaining its loan, the Company invested an additional
$509,000 of cash in the stock of St. Paul Bank. Each customer borrowing from the
bank on a patronage  basis  shares in the bank's net income  through  payment of
patronage  refunds.  The  Company's  patronage  refund  from St.  Paul  Bank was
$694,000 and $221,000 in 1997 and 1996,  respectively.  Approximately 30% of the
patronage  refund is  received  in cash,  with the  balance in stock of St. Paul
Bank. Total investment in the bank was $3,258,000 at December 31, 1998.

       In 1996,  the  Company  borrowed  $6,000,000  from St.  Paul Bank to help
finance its $16,903,000 cash investment in Alliance. In 1997, the Company repaid
principal of $2,000,000  on the loan and converted the remaining  balance into a
five-year  term loan. In 1998,  the Company  refinanced  the loan with a 15-year
term loan from Rural Telephone Finance Cooperative.

         The Company makes  periodic  improvements  to its facilities to provide
up-to-date  services  to its  telephone  and  cable  television  customers.  LEC
subsidiaries serve its telephone customers with a 100%-digital switching network
and almost 100% buried outside plant. Hector's plant additions in 1998, 1997 and
1996 were $2,652,000, $2,316,000 and $2,268,000, respectively.  Alliance's plant
additions in 1998, 1997 and 1996 were $5,163,000  (excluding the acquisitions of
Felton and Spectrum), $2,379,000 and $2,901,000,  respectively.  Plant additions
for  1999  for  Hector  and  Alliance  are  expected  to  total  $3,237,000  and
$3,245,000,  respectively,  and will provide customers with additional  advanced
switching  services,  upgrade  the  telephone  switching  system  to  Year  2000
compliance  and expand  usage of high  capacity  fiber  optics in the  telephone
network.

       Hector's  LEC  subsidiaries  have used  loans  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 $737,000,
$2,026,000,  and  $411,000  in 1998,  1997 and 1996,  respectively.  The average
interest rate on outstanding RUS and RTB loans is 5.6%. Substantially all of the
LEC's assets are pledged or are subject to mortgages  to secure  obligations  to
the RUS and RTB. In  addition,  the amount of dividends on common stock that may
be paid to the Company by the LEC  subsidiaries  is limited by  covenants in the
mortgages. At December 31, 1998 unadvanced loan commitments from the RUS and RTB
to Hector's and Alliance's LEC subsidiaries totaled $17,552,000.

                                       18
<PAGE>

         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 1998,  Alliance  received  $1,820,000 from sales of interests in
Rural Cellular  Corporation,  MediaOne Group,  Inc.,  Comnet Cellular,  Inc. and
Illuminet,   Inc.  In  1997,  Hector  sold  161,469  shares  of  Rural  Cellular
Corporation for $1,728,000. In 1996, Hector received $1,499,000 from the sale of
its remaining shares of Telephone and Data Systems,  Inc.,  obtained in the 1994
sale of its Rochester,  MN cellular MSA interest.  Hector also received $554,000
from 61,133 shares of Rural Cellular  Corporation sold in that company's initial
public  offering of its common  stock in February  1996.  At December  31, 1998,
Alliance  continued to maintain a significant  marketable  securities  portfolio
consisting primarily  of  shares  of  Rural  Cellular  Corporation,   U.S.  West
Communications,  Inc. and MediaOne Group,  Inc. owned by Ollig Utilities Company
and Felton Telephone Company prior to their acquisition by the Alliance.

         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 continued to maintain
its ownership in Midwest Wireless through acquisition of additional  partnership
interests.  Cash expended to purchase Midwest Wireless interests was $380,000 in
1998, increasing the Company's total ownership percentage to 10%.

         The Company is an investor in Wireless  North,  a  consortium  of three
limited  partnerships and one limited liability  corporation which have acquired
licenses  to operate PCS systems in 13 markets in  Minnesota,  Wisconsin,  North
Dakota and South Dakota. The Company invested cash of $761,000 in Wireless North
in 1998. Investments in Wireless North in 1997 and 1996 consisted of $510,000 of
cash and debt guarantees of $1,373,000. The PCS systems are in start-up mode and
have incurred significant losses to date. The Company has committed to providing
$664,000  of  additional  capital  to  these  entities.  It  cannot  predict  if
additional funding beyond this amount will be required.

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

     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  1998,  the  Company  acquired  Felton  Telephone  Company  and  eight  cable
television systems from Spectrum Cablevision Limited Partnership. The Company is
currently  a member of  investor  groups  seeking  to  acquire  rural  telephone
properties  expected to be offered for sale by GTE and U.S. West  Communications
in 1999.  The  Company  cannot  predict if it will be  successful  in  acquiring
additional  properties,  nor  does it  have  financing  in  place  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.

Year 2000 Issues
----------------

         The software used by the Company's  data  processing and central office
equipment was  originally  designed to use  references  to calendar  dates on an
abbreviated  basis.  Under this  system,  references  to the  calendar  year are
abbreviated  to the last two digits of the year,  i.e.  1998 is  abbreviated  as
"98".  Most software  using this system does not  recognize  that the year 2000,
abbreviated  as  "00",  follows  1999.  This  causes  computing  errors  in date
sensitive  processes.  The Company  has  surveyed  its  central  office and data
processing systems to locate computer systems that may be subject to this error.

                                       19
<PAGE>

         The Company has determined that the central office switching  equipment
used in its local  telephone  exchanges  to  connect  customer  calls and record
telephone  usage  is not Year  2000  compliant.  If not  corrected,  this  could
interrupt  telephone services for customers,  interrupt  connections between the
Company's  telephone system and the national and worldwide  telephone  networks,
and make the Company unable to accurately  bill  customers for telephone  usage.
The  Company's  system may also be  vulnerable  to Year 2000  problems  in other
telephone networks with which it interconnects. The Company cannot estimate what
its liability to customers and regulators from such a loss of service might be.

         The Company  relies on switching  equipment  and  software  provided by
Nortel,  Inc. and does not itself have the technical  expertise required to make
all the necessary hardware and software corrections required to bring its system
into Year 2000  compliance.  It has contracted with Nortel,  Inc. to upgrade its
equipment  to Year  2000  compliance.  It is the  Company's  understanding  that
Nortel,  Inc. has completed testing of the new software and hardware and that no
additional  action related to this problem will be required when installation is
complete.  Estimated cost is $658,000.  The Company began  upgrading its central
office  equipment  and  related  software to Year 2000  compliance  in the third
quarter of 1998.  Installation  and testing of all the new hardware and software
interconnections is expected to be completed in November 1999.

         The Company's billing,  accounting and management  information  systems
utilize  software  provided by Martin and Associates.  The Company believes this
software to be Year 2000 compliant.

         At the present time,  the Company does not expect Year 2000 problems to
cause any interruption of service to customers or cause material  disruptions to
its own  operations.  The  Company is in  constant  contact  with its  equipment
supplier and with management and service  personnel of other  telephone  service
providers and affected  customers as the upgrade and  integration  process moves
forward.  The  Company  also plans to have  additional  personnel  available  as
required to address any new Year 2000 problems that arise.  The Company does not
expect Year 2000  problems to cause any loss of service to  customers,  but will
continue to monitor the situation and modify its business  plans and  procedures
as the situation warrants.


New Accounting Standards
------------------------

         Effective  January 1, 1998,  the  Company  adopted  the  provisions  of
Statement of Financial  Accounting  Standards No. 130, "Reporting  Comprehensive
Income".  This  statement  establishes  standards for  reporting and  presenting
comprehensive income and its components in the financial statements. The Company
has adjusted the presentation of its financial statements for earlier periods to
comply with the standard.  Adoption of the standard  resulted in the addition of
the change in unrealized marketable securities gains and losses to the Company's
results of operations.

         Effective  January 1, 1998,  the  Company  adopted  the  provisions  of
Statement of Financial Accounting Standards No. 131, "Disclosures about Segments
of an Enterprise and Related Information".  This statement revises the standards
for the way public  enterprises  report  financial and  descriptive  information
about operating segments in financial statements.  Adoption of this standard had
no material effect on the Company's results of operations or financial position,
but did change the disclosure of segment information contained elsewhere in this
report to more closely reflect the Company's  management and ownership structure
(Note 11).

         In June 1998, the Financial Accounting Standards Board issued Statement
of Financial  Accounting  Standards  (SFAS) No. 133,  "Accounting for Derivative
Instruments and Hedging Activities" which is effective January 1, 2000. SFAS 133
requires  companies  to record  derivatives  on the  balance  sheet as assets or
liabilities,  measured at fair value.  Gains or losses resulting from changes in
the values of those  derivatives  would be accounted for depending on the use of
the derivative and whether it qualifies for hedge  accounting.  The Company does
not  believe  the new  standard  will have a  material  effect on its  financial
position or results of operations.


                                       20
<PAGE>



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 of 1996, new technological  developments which may reduce
barriers  for  competitors  entering  the  Company's  local  exchange  or  cable
television markets, Year 2000 problems,  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.



                              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, 1999                              Chief Financial Officer


                                       21
<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, 1998 and 1997 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, 1998. 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  generally   accepted  auditing
standards.  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, 1998 and 1997 and
the results of their operations and their cash flows for each of the three years
in the period ended  December 31, 1998 in  conformity  with  generally  accepted
accounting principles.


/s/ Olsen Thielen & Co., Ltd.
-----------------------------
Olsen Thielen & Co., Ltd.
February 17, 1999
St. Paul, Minnesota




                                       22
<PAGE>

<TABLE>
<CAPTION>


               HECTOR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS

                                     ASSETS
                                                                                            December 31
                                                                                -----------------------------------
                                                                                       1998                 1997
                                                                                --------------       --------------
CURRENT ASSETS:
<S>                                                                             <C>                  <C>           
  Cash and cash equivalents                                                     $   14,686,034       $   12,455,399
  Temporary cash investments                                                                                300,000
  Construction fund (Note 6)                                                           200,491               77,690
  Accounts receivable (net of allowance for doubtful accounts of
    $234,000 and $5,000, respectively)                                               4,140,992            4,003,184
  Materials, supplies and inventories, at average cost                                 528,839              542,681
  Prepaid expenses                                                                     180,134              216,351
                                                                                --------------       --------------
      TOTAL CURRENT ASSETS                                                          19,736,490           17,595,305

PROPERTY, PLANT AND EQUIPMENT,net  (Notes 1 and 5)                                  50,810,464           45,927,153

OTHER ASSETS:
  Excess of cost over net assets acquired, less amortization
    of $4,890,000 and $3,391,000 (Note 1)                                           53,003,560           51,169,677
  Marketable securities (Note 3)                                                     8,555,336            5,485,698
  Wireless telephone investments (Note 4)                                            9,482,902           10,680,655
  Other investments (Notes 1 and 6)                                                  8,259,419            7,231,868
  Deferred debenture issue costs (Note 6)                                              371,311              780,089
  Other assets (Note 1)                                                                460,305              420,511
                                                                                --------------       --------------
      TOTAL OTHER ASSETS                                                            80,132,833           75,768,498
                                                                                --------------       --------------

TOTAL ASSETS                                                                     $ 150,679,787        $ 139,290,956
                                                                                ==============       ==============

                      LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
  Notes payable and current portion of long-term debt (Note 6)                  $    6,808,500       $    4,770,000
  Accounts payable (Note 10)                                                         2,473,526            1,591,546
  Accrued expenses                                                                   1,945,687            2,247,972
  Income taxes payable                                                               1,955,153              481,831
                                                                                --------------       --------------
     TOTAL CURRENT LIABILITES                                                       13,182,866            9,091,349

LONG-TERM DEBT, less current portion (Note 6)                                       94,232,389           97,793,195

DEFERRED INVESTMENT TAX CREDITS (Note 7)                                               252,601              381,180

DEFERRED INCOME TAXES (Note 7)                                                       8,510,637            7,594,092

DEFERRED COMPENSATION (Note 9)                                                         990,155              940,425

COMMITMENTS AND CONTINGENCIES (Note 4)

MINORITY INTEREST IN ALLIANCE TELECOMMUNICATIONS, CORP.                             10,790,818            9,043,593

STOCKHOLDERS' EQUITY: (Notes 1, 6 and 8)
  Preferred stock, par value $1.00 per share; 3,000,000 shares authorized:
    Convertible Series A, 342,800 and 378,100 shares issued and outstanding            342,800              378,100
  Common stock, par value $.01 per share; 10,000,000 shares authorized;
    2,661,062 and 2,079,364 shares issued and outstanding                               26,611               20,794
  Additional paid-in capital                                                         6,326,441            1,712,954
  Retained earnings                                                                 15,636,764           11,726,521
                                                                                --------------       --------------
                                                                                    22,332,616           13,838,369
  Unearned employee stock ownership shares                                                                  (69,724)
  Accumulated other comprehensive income (Note 3)                                      387,705              678,477
                                                                                --------------       --------------
     TOTAL STOCKHOLDERS' EQUITY                                                     22,720,321           14,447,122
                                                                                --------------       --------------

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                                      $  150,679,787       $ 139,290,956
                                                                                ==============       ==============

                                         See  notes  to  consolidated financia statements.

</TABLE>

                                       23
<PAGE>
<TABLE>
<CAPTION>
                                    HECTOR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
                                CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

                                                                                       Year Ended December 31
                                                                        ---------------------------------------------------
                                                                               1998               1997               1996
                                                                        -------------      -------------      -------------
REVENUES:
<S>                                                                     <C>                <C>                <C>          
  Local network                                                         $   5,290,811      $   4,866,247      $   3,682,129
  Network access                                                           17,709,921         16,738,108         11,534,882
  Billing and collection                                                      865,767          1,030,182            881,614
  Nonregulated activities                                                   4,773,367          3,838,422          2,690,255
  Cable television revenues                                                 3,198,828          2,393,406          1,868,641
                                                                        -------------      -------------      -------------
    TOTAL REVENUES                                                         31,838,694         28,866,365         20,657,521

COSTS AND EXPENSES:
  Plant operations                                                          3,755,312          3,630,830          2,707,885
  Depreciation and amortization                                             7,781,210          7,309,730          5,427,785
  Customer operations                                                       1,803,668          1,674,111          1,190,941
  General and administrative                                                3,951,169          3,593,121          2,763,207
  Other operating expenses                                                  3,900,448          2,905,165          1,976,050
                                                                        -------------      -------------      -------------
    TOTAL COSTS AND EXPENSES                                               21,191,807         19,112,957         14,065,868
                                                                        -------------      -------------      -------------

OPERATING INCOME                                                           10,646,887          9,753,408          6,591,653

OTHER INCOME (EXPENSES):
  Interest expense                                                         (7,315,153)        (6,797,354)        (5,399,617)
  Partnership and LLC income (Note 4)                                         883,096          1,308,346            502,837
  Investment income                                                           609,071            625,582            691,215
  Gain on sale of marketable securities (Note 3)                              965,069          1,495,999            687,947
  Gain on sale of cellular partnership (Note 4)                             4,817,498
                                                                        -------------      -------------      -------------
    OTHER EXPENSES, net                                                       (40,419)        (3,367,427)        (3,517,618)
                                                                        -------------      -------------      -------------

INCOME BEFORE INCOME TAXES                                                 10,606,468          6,385,981          3,074,035

INCOME TAX EXPENSE (Note 7)                                                 4,949,000          2,867,000          1,540,000
                                                                        -------------      -------------      -------------

INCOME BEFORE MINORITY INTEREST                                             5,657,468          3,518,981          1,534,035

MINORITY INTEREST IN EARNINGS OF
  ALLIANCE TELECOMMUNICATIONS CORPORATION                                   1,747,225            798,228            325,365
                                                                        -------------      -------------      -------------

NET INCOME                                                                  3,910,243          2,720,753          1,208,670
                                                                        -------------      -------------      -------------

OTHER COMPREHENSIVE INCOME:
  Unrealized holding gains on marketable securities                           492,287          1,754,213          1,465,455
  Reclassification adjustment for gains included in net income               (965,069)        (1,495,999)          (687,947)
                                                                        -------------      -------------      -------------
OTHER COMPREHENSIVE INCOME (LOSS) BEFORE
  INCOME TAXES                                                               (472,782)           258,214            777,508
                                                                        -------------      -------------      -------------
Income tax expense related to unrealized holding gains
  on marketable securities                                                    189,519            752,667            464,521
Income tax benefit related to reclassification adjustment for
  gains included in net income                                               (371,529)          (641,877)          (218,066)
                                                                        -------------      -------------      -------------
Income tax expense (benefit) related to items of other
  comprehensive income                                                       (182,010)           110,790            246,455
                                                                        -------------      -------------      -------------
Other Comprehensive Income (Loss)                                            (290,772)           147,424            531,053
                                                                        -------------      -------------      -------------

COMPREHENSIVE INCOME                                                    $   3,619,471      $   2,868,177      $   1,739,723
                                                                        =============      =============      =============

BASIC NET INCOME PER COMMON SHARE (Note 1)                              $        1.63      $        1.44      $         .65
                                                                        =============      =============      =============

DILUTED NET INCOME PER COMMON SHARE (Note 1)                            $        1.15      $         .93      $         .53
                                                                        =============      =============      =============

AVERAGE SHARES OUTSTANDING (Notes 1 and 8):
  Common shares only                                                        2,403,000          1,893,000          1,870,000
  Common and potential common shares                                        3,937,000          3,732,000          3,694,000

                                         See  notes  to  consolidated financial statements.
</TABLE>

                                       24
<PAGE>

<TABLE>
<CAPTION>


               HECTOR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY


                                                                                               Unearned    Accumulated
                                Preferred Stock      Common Stock     Additional               Employee       Other      
                               ----------------- ------------------      Paid-in   Retained   Stock Owner- Comprehensive
                                 Shares   Amount    Shares    Amount     Capital   Earnings   ship Shares     Income         Total
                               -------- -------- --------- --------- ----------- ------------ -----------  ----------   -----------
<S>                             <C>     <C>      <C>       <C>        <C>        <C>           <C>         <C>          <C>        
BALANCE AT DECEMBER 31, 1995    389,487 $389,487 1,880,294 $  18,803  $   74,215 $  7,797,098  $ (145,256) $   -        $ 8,134,347
Net income                                                                          1,208,670                             1,208,670
Issuance of common stock under
  Employee Stock Purchase Plan                       3,563        36      21,732                                             21,768
ESOP Shares Allocated                                                      6,056                   43,944                    50,000
Change in unrealized gains on
  marketable securities, net
  of deferred taxes                                                                                           531,053       531,053
                               -------- -------- --------- --------- ----------- ------------ -----------  ----------   -----------
BALANCE AT DECEMBER 31, 1996    389,487  389,487 1,883,857    18,839     102,003    9,005,768    (101,312)    531,053     9,945,838
Net income                                                                          2,720,753                             2,720,753
Issuance of common stock                           171,425     1,714   1,488,255                                          1,489,969
Issuance of common stock under
  Employee Stock Purchase Plan                       3,695        37      23,126                                             23,163
Issuance of common stock under
  Employee Stock Option Plan                         9,000        90      61,885                                             61,975
Issuance of common stock in
  exchange for preferred stock  (11,387) (11,387)   11,387       114      11,273                                                  0
ESOP Shares Allocated                                                     26,412                   31,588                    58,000
Change in unrealized gains on
  marketable securities, net 
   of deferred taxes                                                                                          147,424       147,424
                               -------- -------- --------- --------- ----------- ------------ -----------  ----------   -----------
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
                               ======== ======== ========= ========= =========== ============ ===========  ==========   ===========


                                              See notes to consolidated financial statements.

</TABLE>

                                       25
<PAGE>

<TABLE>
<CAPTION>


                                    HECTOR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
                                          CONSOLIDATED STATEMENTS OF CASH FLOWS

                                                                                       Year Ended December 31
                                                                            ----------------------------------------------
                                                                                   1998             1997             1996
                                                                            ------------     ------------      -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S>                                                                         <C>              <C>               <C>        
  Net Income                                                                $  3,910,243     $  2,720,753      $ 1,208,670
  Adjustments  to  reconcile  net  income  to net  cash  provided  by  operating
    activities:
      Depreciation and amortization                                            7,957,527        7,500,078        5,617,722
      Minority stockholders' interest in earnings
         of Alliance Telecommunications Corporation                            1,747,225          798,228          325,365
      Gain on sales of marketable securities                                    (965,069)      (1,495,999)        (687,947)
      Gain on sale of wireless partnership investment                         (4,817,498)
      Income from partnership and LLC investments                               (883,096)      (1,308,346)        (502,837)
      Proceeds from wireless telephone investments                             1,206,505          792,622          437,371
      Noncash patronage refunds                                                                  (661,923)        (220,662)
      Changes in assets and liabilities net of effects from
        the purchase of Ollig Utilities, Inc. and Felton Telephone Company:
        Decrease in marketable securities                                                                        1,499,072
        Increase in accounts receivable                                          (37,845)         (37,430)        (408,601)
        Decrease (increase) in materials, supplies and inventories                21,188          (30,567)          75,557
        Decrease (increase) in prepaid expenses                                   46,455          (56,060)          (6,057)
        Increase (decrease) in accounts payable                                  866,321         (269,033)        (585,734)
        Increase (decrease) in accrued expenses                                 (193,287)         157,333          708,528
        Increase (decrease) in income taxes payable                            1,455,010          422,816         (615,843)
        Decrease in deferred investment tax credits                             (136,016)        (145,167)        (129,000)
        Increase (decrease) in deferred income taxes                            (604,706)          25,394          380,000
        Increase (decrease) in deferred compensation                              49,730          (47,519)         (31,679)
                                                                            ------------     ------------      -----------
          Net cash provided by operating activities                            9,622,687        8,365,180        7,063,925

CASH FLOWS FROM INVESTING ACTIVITIES:
  Purchases of property, plant and equipment                                  (9,716,135)      (4,695,301)      (5,168,997)
  Sales of temporary cash investments                                            300,000          779,900           94,806
  Sales of marketable securities                                               1,819,653        1,728,115          553,645
  Purchases of wireless telephone investments                                 (1,140,457)         (98,933)        (250,000)
  Decrease (increase) in construction fund                                      (122,801)          (3,353)         100,393
  Purchases of other investments                                              (1,083,592)      (1,193,105)      (1,274,443)
  Proceeds from sale of wireless partnership investment                        6,725,140
  Proceeds from other investments                                                114,536           27,667           29,911
  Increase in excess of cost over net assets acquired                         (2,797,123)         (61,107)         (88,517)
  Decrease (increase) in other assets                                            (62,012)          12,534          107,198
  Increase in cash from purchase of Felton Telephone Company                     196,500
  Payment for purchase of Ollig Utilities Company,
    net of cash acquired                                                                                       (69,189,692)
                                                                            ------------     ------------      -----------
         Net cash used in investing activities                                (5,766,291)      (3,503,583)     (75,085,696)

CASH FLOWS FROM FINANCING ACTIVITIES:
  Repayment of notes payable and long-term debt                               (8,911,738)      (5,637,184)      (2,607,031)
  Proceeds from issuance of notes payable and long-term debt                   6,733,179        2,026,000       63,168,775
  Minority interest in Alliance Telecommunications Corporation                                                   7,920,000
  Issuance of common stock                                                       489,703        1,575,107           21,768
  ESOP shares allocated                                                           63,095           58,000           50,000
                                                                            ------------     ------------      -----------
         Net cash provided by (used in) financing activities                  (1,625,761)      (1,978,077)      68,553,512
                                                                            ------------     ------------      -----------

NET INCREASE IN CASH AND CASH EQUIVALENTS                                      2,230,635        2,883,520          531,741

CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR                                12,455,399        9,571,879        9,040,138
                                                                            ------------     ------------      -----------

CASH AND CASH EQUIVALENTS AT END OF YEAR                                    $ 14,686,034     $ 12,455,399      $ 9,571,879
                                                                            ============     ============      ===========

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
  Interest paid                                                             $  7,096,930     $  7,316,215      $ 4,974,256
  Income taxes paid                                                            4,262,666        2,564,157        1,890,825

                                             See notes to consolidated financial statements.
</TABLE>

                                       26
<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 five local exchange  telephone  companies,
two cable  television  companies,  an  engineering  company,  and a credit  card
communications  company. At December 31, 1998, the Company's wholly and majority
owned subsidiaries provided telephone service to 34,700 access lines in 35 rural
communities in Minnesota, Wisconsin, South Dakota and Iowa. Its cable television
operations   provided  cable  television   services  to   approximately   13,000
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  $6,260,624,  $5,807,103  and
$4,305,212 for 1998,  1997 and 1996,  respectively.  Maintenance and repairs are
charged to operations and additions or  betterments  are  capitalized.  Items of
property sold,  retired or otherwise disposed of 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,  LLC and  Wireless  North,  LLC.  The  Company is the largest
shareholder  of Midwest  Wireless,  LLC and the second  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  $1,499,456,  $1,401,889  and  $961,981  in 1998,  1997 and  1996,
respectively.

Deferred  debenture issue costs are the underwriting,  legal and accounting fees
incurred by the Company in  completing  its  February,  1995 public  offering of
convertible  subordinated  debentures.  The  debenture  issue  costs  are  being
amortized over the seven-year life of the debentures (Note 6). Amortization cost
included in interest  expense was $176,317,  $189,112 and $189,112 in 1998, 1997
and 1996,  respectively.  When  debentures are converted into common stock,  any
remaining issue costs are charged to capital.  $233,549 of debenture issue costs
was  charged to capital  in 1998.  Accumulated  amortization  was  $460,425  and
$543,698 at December 31, 1998 and 1997, respectively.



                                       27
<PAGE>

Other investments consist of Rural Telephone Bank stock,  Minnesota Equal Access
Network  Services,  Inc.  stock,  St.  Paul  Bank for  Cooperatives  stock,  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.  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 $21,130,  $100,738 and
$161,417 for 1998, 1997 and 1996, 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
$31,183,000  and $30,215,000 at December 31, 1998 and 1997,  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
1998, the Company issued two separate  calls to retire  outstanding  convertible
debentures.  As a result of these calls,  $4,264,000 of debentures was converted
into common stock in noncash transactions.

New accounting  principles:  Effective  January 1, 1998, the Company adopted the
provisions of Statement of Financial  Accounting  Standards No. 130,  "Reporting
Comprehensive  Income".  This statement  establishes standards for reporting and
presenting  comprehensive income and its components in the financial statements.
The Company has  adjusted  the  presentation  of its  financial  statements  for
earlier periods to comply with the standard.  Adoption of the standard  resulted
in the  addition of the change in  unrealized  marketable  securities  gains and
losses to the Company's results of operations.

Effective  January 1, 1998,  the Company  adopted the provisions of Statement of
Financial  Accounting  Standards  No.  131,  "Disclosures  about  Segments of an
Enterprise and Related  Information".  This statement  revises the standards for
the way public  enterprises  report financial and descriptive  information about
operating  segments in financial  statements.  Adoption of this  standard had no
material  effect on the Company's  results of operations or financial  position,
but did change the disclosure of segment information contained elsewhere in this
report to more closely reflect the Company's  management and ownership structure
(Note 11).



                                       28
<PAGE>

In June 1998,  the  Financial  Accounting  Standards  Board issued  Statement of
Financial  Accounting  Standards  (SFAS) No.  133,  "Accounting  for  Derivative
Instruments and Hedging Activities" which is effective January 1, 2000. SFAS 133
requires  companies  to record  derivatives  on the  balance  sheet as assets or
liabilities,  measured at fair value.  Gains or losses resulting from changes in
the values of those  derivatives  would be accounted for depending on the use of
the derivative and whether it qualifies for hedge  accounting.  The Company does
not  believe  the new  standard  will have a  material  effect on its  financial
position or results of operations.

Basis of presentation: Certain amounts in the 1996 and 1997 financial statements
have been reclassified to conform to the 1998 financial statement  presentation.
These  reclassifications  had no effect on net income or stockholders' equity as
previously reported.

NOTE 2 - ACQUISITIONS.

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  holds 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  $4,572,000.
The  acquisition is being  accounted for as a purchase.  Excess of cost over net
assets acquired in the transaction was $2,797,000, 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.

                                       29
<PAGE>

Effective April 25, 1996,  Alliance  purchased Ollig Utilities Company ("Ollig")
for  $80,000,000  in cash.  The Company owns 68% of Alliance  with the remaining
interest  owned by Golden  West  Telecommunications  Cooperative,  Inc. of Wall,
South  Dakota and Split Rock  Telecom  Cooperative,  Inc.  of  Garretson,  South
Dakota.  Alliance financed the acquisition using the combined equity investments
of  its  shareholders  and  debt  financing   provided  by  St.  Paul  Bank  for
Cooperatives  ("St.  Paul Bank").  The Company's cash investment in Alliance was
approximately $16,903,000.  The acquisition was accounted for as a purchase. The
excess of cost over net  assets  acquired  in the  transaction  was  $51,948,000
(including  $6,272,000  allocated to wireless  telephone  investments)  which is
being  amortized  on a  straight  line  basis  over 40  years.  The  results  of
operations  of Ollig  have been  included  in the  Company's  financial  results
subsequent  to April 25,  1996.In the  acquisition,  the  following  assets were
acquired and liabilities assumed:

      Property, plant and equipment                           $      31,566,292
      Excess of cost over net assets acquired                        52,404,243
      Wireless telephone investments                                  8,704,392
      Marketable securities                                           4,334,814
      Long-term debt                                                (23,023,316)
      Deferred credits                                               (7,028,096)
      Other assets and liabilities                                   13,041,671
                                                              -----------------
      Total purchase price                                           80,000,000
      Acquisition costs                                                  72,730
                                                              -----------------
      Total acquisition expenditures                                 80,072,730
      Less cash and cash equivalents acquired                        (8,092,802)
      Less deposits and acquisition costs paid in 1995               (2,790,236)
                                                              ------------------
      Payment for purchase of Ollig Utilities
          Company, net of cash acquired                       $      69,189,692
                                                              =================

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, 1998 and December 31, 1997. 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, 1998                          $     7,792,397   $    1,949,794    $  (1,386,855)   $    8,555,336
December 31, 1997                                4,449,976        1,035,722           -              5,485,698
</TABLE>

Net unrealized  gains on marketable  securities,  net of related deferred taxes,
are included in stockholders'  equity as accumulated other comprehensive  income
at December 31, 1998 and 1997 as follows: <TABLE> <CAPTION>

                                                                    Net           Deferred         Accumulated
                                                                Unrealized         Income         Comprehensive
                                                                   Gains            Taxes            Income
                                                             --------------    --------------   ---------------
<S>                                                          <C>               <C>              <C>           
December 31, 1998                                            $      562,939    $    (175,235)   $      387,705
December 31, 1997                                                 1,035,722         (357,245)          678,477
</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  $1,820,000,
$1,728,000  and $554,000 in 1998,  1997 and 1996,  respectively.  Gross realized
gains on sales of these  securities  were  $965,000,  $1,496,000 and $485,000 in
1998,  1997 and  1996,  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.

Gross  proceeds  from sales of  securities  in 1996,  which were  classified  as
trading  securities at December 31, 1995, were $1,499,000.  Gross realized gains
on these sales were $203,000 in 1996.

                                       30
<PAGE>

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,
1998,  the Company owned 10.00% of Midwest  Wireless  Communications  LLC, which
provides  cellular  service  to the  former RSA  partnership  areas in  southern
Minnesota and the Rochester,  Minnesota MSA. Income from this investment, net of
associated  amortization  expense,  was  $1,508,000,  $1,210,000 and $391,000 in
1998,  1997 and 1996,  respectively.  Cash  distributions  received from Midwest
Wireless  were  $848,000,   $397,000  and  $203,000  in  1998,  1997  and  1996,
respectively.  The excess of cost over the Company's  share of equity in Midwest
Wireless,  net of  amortization  reserves,  was  $5,990,000  and  $5,818,000  at
December 31, 1998 and 1997, respectively.  Excess cost is being amortized on the
straight-line  method  over forty  years.  Amortization  expense  was  $158,000,
$151,000  and  $105,000 in 1998,  1997 and 1996,  respectively.  At December 31,
1998,  the  Company's  cumulative  share of income  from  Midwest  Wireless  was
$3,406,000, of which $2,155,000 was undistributed.

The  Company  owns 13.06% of  Wireless  North,  a  consortium  of three  limited
partnerships  and one LLC  with  licenses  to  provide  personal  communications
services in Minnesota, Wisconsin, North Dakota and South Dakota. At December 31,
1998,  the  Company  had  invested  $1,271,000  of cash and  guaranteed  debt of
$1,373,000 in Wireless North.  Its PCS systems are in start-up mode and have not
been profitable to date.  Losses were $1,066,000,  $435,000 and $73,000 in 1998,
1997 and 1996, respectively.  The Company has committed to providing $664,000 of
additional  capital to these entities.  It cannot predict if additional  funding
beyond this amount will be required.

Summarized audited financial  information for these companies for 1998, 1997 and
1996 is as follows:

                              Year Ended        Year Ended      Six Months Ended
                             December 31          December          December 31
                                  1998                1997               1996   
                        ----------------    ---------------     ---------------
Current assets         $      14,894,978   $     14,361,193    $      6,211,038
Noncurrent assets             84,844,144         68,816,885          35,243,820
Current liabilities           14,856,061         10,796,036           4,299,058
Noncurrent liabilities        51,090,911         43,117,318          17,393,410
Members' equity               33,792,150         29,264,724          19,762,390
Revenues                      50,268,747         40,330,759          17,982,165
Expenses                      41,649,381         30,581,537          13,970,615
Net income                     8,619,366          9,749,222           4,011,550


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,  was  $334,000,
$377,000 and $109,000 in 1998, 1997 and 1996, respectively. Amortization expense
was  $29,000,  $36,000 and  $24,000 in 1998,  1997 and 1996,  respectively.  The
excess of cost over the  Company's  share of equity in the  partnership,  net of
amortization reserves, was $1,356,000 at December 31, 1997.


                                       31
<PAGE>

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           1998               1997     
                              -----------    ------------        ------------
Land                                         $    589,560        $    556,976
Buildings                     5-40 years        5,379,836           5,171,387
Machinery and equipment       3-15 years        1,238,040           2,089,598
Furniture and fixtures        5-10 years        2,129,062             471,489
Telephone plant               5-33 years       57,385,560          50,638,166
Cable television plant        10-15 years       8,495,861           6,190,412
Construction in progress                        1,027,314             676,535
                                             ------------        ------------
                                               76,245,233          65,794,563
Less accumulated depreciation                  25,434,769          19,867,410
                                             ------------        ------------
                                             $ 50,810,464        $ 45,927,153
                                             ============        ============


NOTE 6 - NOTES PAYABLE AND LONG-TERM DEBT
<TABLE>
<CAPTION>
                                                                          December 31
                                                                ----------------------------
                                                                       1998            1997 
                                                                ------------    ------------
Notes  payable  to  St.  Paul  Bank  for   Cooperatives,   payable  by  Alliance
  Telecommunications Corporation in monthly installments,  average interest rate
  of 7.5%,
<S>                                                             <C>             <C>         
  due 1999 to 2011                                              $ 50,524,700    $ 53,063,200
Rural Utilities  Service ("RUS") and Rural Telephone Ban ("RTB") mortgage notes,
  payable  by  telephone   company   subsidiaries   in  monthly  and   quarterly
  installments,
  average rate of 5.6%, due 1999 to 2026                          33,761,429      32,715,608
Convertible subordinated debentures, payable to
  bondholders, interest rate of 8.5%, due 2002                     7,948,000      12,650,000
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                                 2,891,908
Notes payable to Rural Telephone Finance Cooperative
  In quarterly installments, interest rate of 6.1%, due 2013       3,914,852
Notes payable on line of credit from Rural Telephone
  Finance Cooperative, interest rate of 6.7%, due 1999             2,000,000
Note payable to St. Paul Bank for Cooperatives,
  interest rate of 8.0%                                                            4,000,000
Notes payable to former cable television system owners,
  payable annually by cable television subsidiary,
  interest rate of 6%                                                                134,387
                                                                ------------    ------------
                                                                 101,040,889     102,563,195
Less current portion                                               6,808,500       4,770,000
                                                                ------------    ------------
                                                                $ 94,232,389    $ 97,793,195
                                                                ============    ============
</TABLE>

Substantially all assets of the Company's telephone  subsidiaries are pledged as
collateral  under  the  RUS and  RTB  debt  agreements.  The  telephone  company
subsidiaries  also have  restrictions on  distributions of capital to the parent
company  relative  to their  outstanding  indebtedness.  At December  31,  1998,
$1,300,000 of retained earnings of these subsidiaries was available for dividend
payments to HCC.

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.  The face  amount of the loan was  $55,250,000.  The loan is
secured  by a  pledge  of  substantially  all the  assets  of  Alliance  and its
subsidiaries.  The  Company  has fixed  interest  rates on this loan for periods
ranging from one to ten years at rates averaging approximately 7.5%. The Company
made only interest  payments on the loan in 1996.  Principal  payments  began in
January 1997 and will continue until March 2011.

                                       32
<PAGE>

St. Paul Bank is a  cooperative,  owned and  controlled by its  customers.  As a
condition to receiving the loans,  the Company  purchased stock in the bank. The
Company's  investment  in St. Paul Bank stock at December  31, 1998 and 1997 was
$3,258,000 and $2,749,000,  respectively.  Each customer borrowing from the bank
on a  patronage  basis  shares in the  bank's  net  income  through  payment  of
patronage  refunds.  The  Company's  patronage  refund  from St.  Paul  Bank was
$694,000 and $221,000 in 1997 and 1996,  respectively.  Approximately 30% of the
patronage  refund is  received  in cash,  with the  balance in stock of St. Paul
Bank. The patronage  refund is shown in the Company's  operating  statement as a
reduction of interest expense. The Company did not accrue a patronage refund for
1998, and cannot predict what patronage refunds might be in future years.

In 1996, the Company and one of its cable television  subsidiaries  negotiated a
loan  agreement with the St. Paul Bank to provide  additional  financing for the
acquisition of Ollig Utilities Company. The outstanding loan balance at December
31, 1997 was $4,000,000.  In 1998, the Company replaced this loan with a 15-year
term loan from Rural Telephone Financing Cooperative ("RTFC").  Interest rate on
the loan varies  according to the rate  charged by the Lender for similar  loans
(6.1% at December 31, 1998).

In 1998 the Company negotiated a $5,000,000  revolving line of credit from RTFC.
Interest  on  outstanding  borrowings  against  the credit line is at the bank's
prime  rate  plus  1.5%  (6.7% at  December  31,  1998).  The  Company  borrowed
$2,000,000  against  the credit  line in 1998 to help  finance  the  purchase of
additional  cable   television   systems  from  Spectrum   Cablevision   Limited
Partnership. It expects to replace this debt with longer term financing in 1999.
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  convertible
subordinated  debentures.  The  debentures  carry an  interest  rate of 8.5% and
mature  February 15, 2002. As of February 15, 1999, the Company has the right to
call the debentures at a price  (depending on the trading price of the Company's
common stock) ranging from 100% to 102% of par.  During 1998, the Company issued
two  separate  calls to retire  debentures,  which  resulted  in  $4,264,000  of
debentures being converted into stock and $438,000 of debentures being purchased
and retired.  The debentures include restrictions on payment of dividends to the
Company's shareholders and are subordinated to $4,000,000 of senior indebtedness
owed by the Company to RTFC.

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

                     1999                   $6,808,500
                     2000                    5,165,600
                     2001                    5,512,400
                     2002                   13,814,600
                     2003                    6,236,900

The Company is continuing its construction  program to upgrade its telephone and
cable  television   properties.   Planned  expenditures  for  HCC  and  Alliance
properties in 1999 are  $3,237,000  and  $3,245,000,  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 unadvanced  loan funds available from RUS and
RTB totaling $17,552,000.

                                       33
<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: <TABLE> <CAPTION>
                                                                            Year Ended December 31                 
                                                          --------------------------------------------------------
                                                                   1998                1997              1996     
                                                          -----------------  ------------------  -----------------
Currently payable taxes:
<S>                                                       <C>                <C>                 <C>              
     Federal                                              $       4,445,000  $        2,305,000  $         964,000
     State                                                        1,244,000             682,000            325,000
                                                          -----------------  ------------------  -----------------
                                                                  5,689,000           2,987,000          1,289,000

Deferred income taxes (benefit)                                    (604,000)             25,000            380,000
Deferred investment tax credits                                    (136,000)           (145,000)          (129,000)
                                                          ------------------ ------------------- ------------------
                                                          $       4,949,000  $        2,867,000  $       1,540,000        
                                                          ================== =================== ==================
</TABLE>
<TABLE>
<CAPTION>
Deferred  tax  assets  and  (liabilities)  as of  December  31  related  to  the following:

                                                                   1998               1997     
                                                          -----------------  ------------------
<S>                                                       <C>                <C>                
     Accelerated depreciation                             $      (6,291,637) $       (6,329,092)
     Alternative minimum tax credits                                 69,000              60,000
     Marketable securities                                       (2,947,000)         (1,824,000)
     Deferred compensation                                          400,000             381,000
     Other                                                          259,000             118,000
                                                          -----------------  ------------------
                                                          $      (8,510,637) $       (7,594,092)
                                                          ================== ===================
</TABLE>
<TABLE>
<CAPTION>
The  provision  for income taxes varied from the federal  statutory  tax rate as follows:

                                                                           Year Ended December 31                 
                                                          --------------------------------------------------------
                                                                   1998                1997              1996     
                                                          -----------------  ------------------  -----------------
<S>                                                                  <C>                 <C>               <C>  
Tax at U.S. statutory rate                                           35.0%               35.0%             35.0%
Surtax exemption                                                     (1.0)               (1.0)             (1.0)
State income taxes, net of federal benefit                            7.8                 7.4               7.5
Excess of cost over net assets acquired                               5.1                 8.3              12.1  .
Investment tax credits                                               (1.3)               (2.3)             (4.2)
Other                                                                 1.1                (2.5)               .7   
                                                          -----------------  ------------------  -----------------
Effective tax rate                                                   46.7%               44.9%             50.1%  
                                                          =================  ==================  =================
</TABLE>

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 a stock option plan
(1990 Plan) under which 500,000 shares may be issued to key employees.  The plan
was  effective  August 1, 1990 and expires July 31, 2000.  The term of the stock
options may not exceed ten years.  The exercise price of options issued will not
be less than fair market  value at the time of the grant.  Another  provision of
the 1990 plan  automatically  grants 1,000 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, 1998,  173,975  shares  remained  available to be issued
under the plan.

A summary of changes in  outstanding  employee and director stock options during
the three years ended December 31, 1998 is as follows:


                                       34
<PAGE>

                                                                     Average
                                                    Number of    exercise price
                                                      shares        per share  
Outstanding at December 31, 1995                     201,350  $        7.12
                  Granted                             48,825           6.67
                  Canceled                           (38,000)          6.53
                                            ----------------- -------------
Outstanding at December 31, 1996                     212,175           7.12
                  Granted                             69,775           7.87
                  Exercised                           (9,000)          6.89
                  Canceled                           (33,200)          7.69
                                            ----------------- -------------
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
                                            ================= =============

At December 31, 1998,  198,583  stock  options are  currently  exercisable.  The
following table  summarizes the status of stock options  outstanding at December
31, 1998:
                                            Weighted Average          Weighted
                                               Remaining              Average
Range of Exercise Prices         Shares       Option Life         Exercise Price
$  6.50 to $ 8.50               191,250         2.4 years       $         7.40
$ 10.94 to $12.51                74,775         4.7 years                11.50

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
10,753, 3,695 and 3,563 for the plan years ended August 31, 1998, 1997 and 1996,
respectively.  At December  31, 1998  employees  had  subscribed  to purchase an
additional 16,804 shares in the current plan cycle ending August 31, 1999.

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:
<TABLE>
<CAPTION>
                                                                 Year Ended December 31  
                                            --------------------------------------------------------------
                                                        1998                  1997               1996     
                                            --------------------  --------------------  ------------------
<S>                                         <C>                   <C>                   <C>               
Net income                                  $          3,709,988  $          2,579,427  $        1,139,265
Basic net income per share                  $               1.54  $               1.36  $              .61
Diluted net income per share                $               1.10  $                .89  $              .51
</TABLE>

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. 
<TABLE>
<CAPTION>
                                                              Year Ended December 31  
                                            --------------------------------------------------------------
                                                        1998                  1997               1996     
                                            --------------------  --------------------  ------------------
<S>                                                    <C>                   <C>                 <C>  
Expected volatility                                      23.3%                 21.4%               21.2%
Risk free interest rate                                   5.6%                  6.5%                6.8%
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%
</TABLE>

                                       35
<PAGE>

Pro forma stock-based  compensation  cost was $200,255,  $141,326 and $69,405 in
1998,  1997 and  1996,  respectively.  Fair  value  of all  options  issued  was
$271,770, $180,134 and $98,040, in 1998, 1997 and 1996, respectively.

At December 31, 1997,  the Company had  $12,650,000  (par value) of  convertible
subordinated  debentures  outstanding.  The debentures carry an interest rate of
8.5% and mature  February 15, 2002. The debentures are  convertible  into common
stock of the  Company  at a rate of 112.5  common  shares  per  $1,000 par value
debenture.  During 1998,  the Company issued two separate calls that resulted in
$4,264,000  of  debentures  being  converted  into common  stock and $438,000 of
debentures  being  retired  for  cash.  At  December  31,  1998,  $7,948,000  of
debentures remained  outstanding.  If these remaining  debentures were converted
into common stock,  they would represent 894,150  additional common shares.  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.  In 1998,  7,876
shares were issued upon  conversion  of warrants.  Warrants  for 112,140  shares
remain outstanding, are currently exercisable and expire February 15, 2000.

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 $83,000,  $60,000 and $50,000 for 1998, 1997 and
1996,  respectively.  At December 31, 1998,  the ESOP held 54,667  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.

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 10% 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 1998, 1997 and 1996
were approximately $134,800, $121,400 and $85,700, 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 1998,  1997 and 1996 were $177,000,
$166,000 and $128,900, respectively.

Ollig Utilities  Company had a deferred  compensation  agreement with two of its
former officers that the Company has assumed. Under the agreement,  the salaries
of these  officers  were  continued  after their  retirement  based on a formula
stated in the agreement. The Company's 1998 expense under the plan was $143,000.
The Company  accrued no expense under this  agreement in 1997 or 1996.  Payments
made  under the  agreement  in 1998,  1997 and 1996 were  $93,000,  $47,500  and
$31,700, respectively.

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
$300,000, $264,000 and $258,000 in 1998, 1997 and 1996, respectively.

Employees  of the  Company  also  participate  in a  joint  self-funded  medical
insurance  program with  employees  of CSI.  Costs paid by the Company into this
program  were  $595,000,   $535,000,  and  $157,000  in  1998,  1997  and  1996,
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
$645,000 and $357,000 at December 31, 1998 and 1997, respectively.


                                       36
<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, 1998
<S>                                           <C>              <C>               <C>         
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)
Partnership and LLC income                          60,665          822,431           883,096
Investment 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
                                              ============     ============      ============

Year Ended December 31, 1997
Revenues                                      $  7,356,830     $ 21,509,535      $ 28,866,365
Costs and expenses                               5,477,058       13,635,899        19,112,957
                                              ------------     ------------      ------------
Operating income                                 1,879,772        7,873,636         9,753,408
Interest expense                                (2,059,948)      (4,737,406)       (6,797,354)
Partnership and LLC income                         259,050        1,049,296         1,308,346
Investment income                                  169,878          455,704           625,582
Gain on sale of marketable securities            1,495,999                          1,495,999
                                              ------------     ------------      ------------
Income before income taxes                    $  1,744,751     $  4,641,230      $  6,385,981
                                              ============     ============      ============
Depreciation and Amortization                 $  1,973,699     $  5,336,031      $  7,309,730
                                              ============     ============      ============
Total Assets                                  $ 25,917,132     $113,373,824      $139,290,956
                                              ============     ============      ============
Capital Expenditures                          $  2,316,025     $  2,379,276      $  4,695,301
                                              ============     ============      ============

Year Ended December 31, 1996
Revenues                                      $  6,961,097     $ 13,696,424      $ 20,657,521
Costs and expenses                               5,179,280        8,886,588        14,065,868
                                              ------------     ------------      ------------
Operating income                                 1,781,817        4,809,836         6,591,653
Interest expense                                (2,001,556)      (3,398,061)       (5,399,617)
Partnership and LLC income                          98,538          404,299           502,837
Investment income                                  318,523          372,692           691,215
Gain on sale of marketable securities              687,947                            687,947
                                              ------------     ------------      ------------
Income before income taxes                    $    885,269     $  2,188,766      $  3,074,035
                                              ============     ============      ============
Depreciation and Amortization                 $  1,934,117     $  3,493,668      $  5,427,785
                                              ============     ============      ============
Total Assets                                  $ 25,115,243     $112,232,770      $137,348,013
                                              ============     ============      ============
Capital Expenditures                          $  2,268,183     $  2,900,814      $  5,168,997
                                              ============     ============      ============
</TABLE>
                                       37
<PAGE>


 (b)  SUPPLEMENTAL FINANCIAL INFORMATION
<TABLE>
<CAPTION>

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


                                                                                Quarter Ended                     
                                                          --------------------------------------------------------
                                                               March 31      June 30      Sept 30        Dec 31   
------------------------------------------------------------------------------------------------------------------
                           1998
<S>                                                           <C>          <C>          <C>             <C>     
Revenues                                                      $   7,249    $   8,023    $   8,027       $  8,539
Operating income                                                  2,449        2,928        2,992          2,278
Net income                                                          434          778          874          1,824
Basic net income per share                                    $     .21    $     .34    $     .34       $    .69
Diluted net income per share                                  $     .16    $     .25    $     .26       $    .50

                           1997
Revenues                                                      $   6,882    $   6,855    $   7,975       $  7,154
Operating income                                                  1,979        2,190        3,243          2,340
Net income                                                          131        1,080          696            814
Basic net income per share                                    $     .07    $     .58    $     .37       $    .43
Diluted net income per share                                  $     .06    $     .34    $     .24       $    .27


</TABLE>




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

Not applicable.


                                       38
<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 18, 1999 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 18, 1999 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 18, 1999 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 18, 1999 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.



                                       39
<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 22 to 37 herein:

         Independent Auditors' Report for the years ended 
           December 31, 1998, 1997 and 1996

         Consolidated Balance Sheets as of December 31, 1998 and 1997

         Consolidated  Statements  of Income  and  Comprehensive  Income for the
         years ended December 31, 1998, 1997 and 1996

         Consolidated Statements of Stockholders' Equity for the years ended
         December 31, 1998, 1997 and 1996

         Consolidated Statements of Cash Flows for the years ended 
           December 31, 1998, 1997 and 1996

         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, 1998, 1997 and 1996              43

         Schedule I - Condensed Financial Information of Registrant       44-47

         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 
         Communications LLC, a 50 percent or less owned  equity method
         investment, included as this entity constitutes a "significan
         subsidiary" pursuant to the provisions of Regulation S-X,
         Article 3-09.                                                    48-60

(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 62 of the  sequential
numbering system used in this report.

(b) REPORTS ON FORM 8-K FILED DURING THE THREE MONTHS ENDED DECEMBER 31, 1998

         Not Applicable.


                                       40
<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, 1999                   /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, 1999
--------------------      Chief Executive Officer and Director
Curtis A. Sampson              

/s/Steven H. Sjogren    President, Chief Operating Officer,       March 29, 1999
--------------------     and Director
Steven H. Sjogren                           

/s/Paul N. Hanson       Vice President, Treasurer and             March 29, 1999
--------------------      Director
Paul N. Hanson                              

/s/Charles A. Braun     Chief Financial Officer and               March 29, 1999
--------------------      Principal Accounting Officer
Charles A. Braun                            
/s/Charles R. Dickman
--------------------    Director                                  March 29, 1999
Charles R. Dickman
/s/James O. Ericson
--------------------    Director                                  March 29, 1999
James O. Ericson
/s/Paul A. Hoff
--------------------    Director                                  March 29, 1999
Paul A. Hoff
/s/Wayne E. Sampson
--------------------    Director                                  March 29, 1999
Wayne E. Sampson
/s/Edward E. Strickland
--------------------    Director                                  March 29, 1999
Edward E. Strickland


                                       41
<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, 1998




                          FINANCIAL STATEMENT SCHEDULE




                                       42
<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 17, 1999,
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,  present  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 17, 1999


                                       43
<PAGE>

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

                                       BALANCE SHEETS
                                   December 31
                                                   ----------------------------
                                                         1998            1997
                                                   ------------   -------------
Assets:
  Cash                                             $      8,024   $      49,969
  Investment in subsidiaries                         30,297,399      27,620,410
  Other current assets                                  159,219          69,056
  Property, plant and equipment, net                     88,603         134,288
  Accounts with subsidiaries                          5,809,257       2,873,495
  Other investments                                     616,286         270,021
  Deferred bond issue costs                             371,311         780,089
                                                   ------------   -------------
Total Assets                                       $ 37,350,099   $  31,797,328
                                                   ============   =============

Liabilities and Stockholders' Equity:
  Accounts payable                                 $    387,242   $     146,352
  Other current liabilities                             379,684         553,854
  Current portion of long-term debt                   2,171,000         715,000
  Long-term debt                                     11,691,852      15,935,000
  Stockholders' equity:
    Preferred stock, par value $1.00 per share;
      3,000,000 shares authorized:
      Convertible Series A, 342,800 and 378,100
      shares issued and outstanding                     342,800         378,100
    Common stock, par value $.01 per share;
      10,000,000 shares authorized; 2,661,062 and
      2,079,364 shares issued and outstanding            26,611          20,794
    Additional paid-in capital                        6,326,441       1,712,954
    Retained earnings                                15,636,764      11,726,521
    Unearned employee stock ownership shares                            (69,724)
    Accumulated other comprehensive income              387,705         678,477
                                                   ------------   -------------
Total Liabilities and Stockholders' Equity         $ 37,350,099   $  31,797,328
                                                   ============   =============


                                       44
<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
                                                   ---------------------------------------------
                                                         1998            1997             1996
                                                   ------------   -------------    -------------
Revenues:
<S>                                                <C>            <C>              <C>          
  Sales                                            $    286,569   $     287,345    $     285,799

Expenses:
  Operating expenses                                    103,164          90,464           80,716
  Amortization of goodwill                               41,245          52,126           51,519
  Gain on sale of marketable securities                              (1,464,409)       (484,553)
  Interest expense, net                               1,329,491       1,571,655        1,396,393
  Income tax expense (benefit)                          412,835)         24,315         (272,257)
                                                   ------------   -------------    -------------
    Total expenses                                    1,061,065         274,151          771,818

Income (loss) before equity in earnings of
  subsidiaries                                         (774,496)         13,194         (486,019)

Equity in earnings of subsidiaries                    4,684,739       2,707,559        1,694,689
                                                   ------------   -------------    -------------
Net income                                            3,910,243       2,720,753        1,208,670

Other comprehensive income (loss):
  Unrealized holding gains of subsidiaries on
    marketable securities                               492,287       1,754,213        1,465,455
  Reclassification adjustment for gains o
    subsidiaries included in net income                (965,069)     (1,495,999)        (687,947)
                                                   ------------   -------------    -------------
Other comprehensive income (loss) before
  income taxes                                         (472,782)        258,214          777,508
                                                   ------------    ------------    -------------
Income tax expense related to unrealized 
  holding gains of subsidiaries on marketable
  securities                                            189,519         752,667          464,521
Income tax benefit related to reclassification
  adjustment for gains of subsidiaries included
  in net income                                        (371,529)       (641,877)        (218,066)
                                                   ------------   -------------    -------------

Income tax expense (benefit) related to items
  of other comprehensive income                        (182,010)        110,790          246,455
                                                   ------------   -------------    -------------

Other comprehensive income (loss)                      (290,772)        147,424          531,053
                                                   ------------   -------------    -------------

Comprehensive income                               $  3,619,471   $   2,868,177    $   1,739,723
                                                   ============   =============    =============
</TABLE>



                                       45
<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
                                                              -----------------------------------------------
                                                                      1998            1997             1996
                                                               -------------   -------------    -------------
Cash flows from operating activities:
<S>                                                            <C>             <C>              <C>          
 Net income                                                    $   3,910,243   $   2,720,753    $   1,208,670
  Adjustments to reconcile net income to net cash
   provided by operating activities:
    Gain on sale of marketable securities                                         (1,464,409)        (484,553)
    Equity in earnings of subsidiaries                            (4,684,739)     (2,707,559)      (1,694,689)
    Dividends from subsidiaries                                    1,671,639         527,444
    Depreciation and amortization                                    272,326         304,700          293,601
    Changes in assets and liabilities:
     Decrease (increase) in other current assets                     (90,163)        186,866         (178,633)
     Decrease (increase) in accounts with subsidiaries            (2,935,762)       (428,294)       1,487,228
     Increase (decrease) in accounts payable                         240,890         (19,803)         (17,027)
     Increase (decrease) in other current liabilities               (103,691)       (166,479)             877
                                                               -------------   -------------    -------------
 Net cash provided by (used in) operating activities              (1,719,257)     (1,046,781)         615,474

Cash flows from investing activities:
  Purchases of property, plant and equipment                         (10,167)        (71,485)         (16,286)
  Acquisition costs of stock of affiliate                                                         (12,346,388)
  Purchases of other investments                                    (342,171)       (169,737)
  Cash proceeds from other investments                                             1,646,900          715,598
                                                               -------------   -------------    -------------
 Net cash provided by (used in) investing activities                (352,338)      1,405,678      (11,647,076)

Cash flows from financing activities:
  Issuance of debt                                                 5,996,281                        6,000,000
  Repayment of long-term debt                                     (4,519,429)     (2,000,000)
  Issuance of common stock                                           489,703       1,575,107           21,768
  ESOP shares allocated                                               63,095          58,000           50,000
                                                               -------------   -------------    -------------
 Net cash provided by (used in) financing activities               2,029,650        (366,893)       6,071,768
                                                               -------------   -------------    -------------

Net decrease in cash and cash equivalents                            (41,945)         (7,996)      (4,959,834)

Beginning cash and cash equivalents                                   49,969          57,965        5,017,799
                                                               -------------   -------------    -------------
Ending cash and cash equivalents                               $       8,024   $      49,969    $      57,965
                                                               =============   =============    =============

Supplemental disclosures of cash flow information:
  Interest paid                                                $   1,231,676   $   1,420,884    $   1,248,308
  Income taxes paid                                                   45,000         450,000          300,000

</TABLE>

                                       46
<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, page 23.

Note 2 - Cash Dividends from Subsidiaries

The  Registrant  received  dividends  from its  subsidiaries  of $1,671,639  and
$527,444 in 1998 and 1997, respectively. No dividends were received in 1996.

Note 3 - Long Term Debt
<TABLE>
<CAPTION>

                                                                                 December 31
                                                                  ----------------------------------------              
                                                                              1998               1997    
                                                                  --------------------  ------------------
Convertible subordinated debentures, payable to
<S>                                                               <C>                   <C>               
  debentureholders, interest rate of 8.5%, due 2002               $          7,948,000  $       12,650,000
Notes payable to Rural Telephone Finance Cooperative
  In quarterly installments, interest rate of 6.1%, due 2013                 3,914,852
Notes payable on line of credit from Rural Telephone
  Finance Cooperative, interest rate of 6.7%, due 1999                       2,000,000
Note payable to St. Paul Bank for Cooperatives,
 interest rate of 8.0%                                                                           4,000,000
                                                                  --------------------  ------------------
                                                                            13,862,852          16,650,000
Less current portion                                                         2,171,000             715,000
                                                                  --------------------  ------------------
                                                                  $         11,691,852  $       15,935,000
                                                                  ====================  ==================
</TABLE>


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

                     1999                   $2,171,000
                     2000                      183,000
                     2001                      195,000
                     2002                    8,157,000
                     2003                      223,000

Note 4 - Acquisitions

Acquisition costs in stock of affiliate relate to the Registrant's investment in
Alliance Telecommunications Corporation in 1996.




                                       47
<PAGE>







                     MIDWEST WIRELESS COMMUNICATIONS L.L.C.

              REPORT ON AUDIT OF CONSOLIDATED FINANCIAL STATEMENTS
                 FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997





                                       48
<PAGE>


Report of Independent Accountants


To the Board of Managers
Midwest Wireless Communications 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  Communications L.L.C. (the Company) and subsidiary
at December 31, 1998 and 1997,  and the  consolidated  results of its operations
and its cash  flows  for the  years  then  ended in  conformity  with  generally
accepted   accounting   principles.   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  generally  accepted  auditing
standards 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 the opinion expressed above.




                                                PRICEWATERHOUSECOOPERS LLP

February 5, 1999





                                       49
<PAGE>




Midwest Wireless Communications L.L.C.
Consolidated Statements of Financial Position
as of December 31, 1998 and 1997
<TABLE>
<CAPTION>



                                    ASSETS                                             1998                  1997

Current assets:
<S>                                                                              <C>                   <C>             
    Cash and cash equivalents                                                    $      3,147,979      $      2,063,280
    Marketable securities                                                               3,946,270             5,911,871
    Accounts receivable, less allowance for doubtful accounts of
        $282,287 and $360,122 in 1998 and 1997, respectively                            4,228,358             4,548,991
    Inventories                                                                         1,624,026               770,617
    Other                                                                                 352,624               327,417
                                                                                 -----------------     -----------------

        Total current assets                                                           13,299,257            13,622,176

Property, cellular plant and equipment, net                                            34,078,742            21,032,370
Investment in Switch 2000                                                                       -             1,466,820
FCC licenses, net                                                                      16,736,528            16,832,224
Investments and other                                                                   1,673,287               398,195
                                                                                 -----------------     -----------------

        Total assets                                                             $     65,787,814      $     53,351,785
                                                                                 =================     =================


                        LIABILITIES AND MEMBERS' EQUITY

Current liabilities:
    Current portion of long-term debt                                            $      1,279,048      $      2,767,000
    Accounts payable                                                                    6,212,502             2,106,461
    Accrued commissions                                                                   615,757               649,891
    Accrued liabilities                                                                 3,676,552             2,880,534
                                                                                 -----------------     -----------------

        Total current liabilities                                                      11,783,859             8,403,886

Other liabilities                                                                         517,491               195,247
Long-term debt                                                                         15,648,092            15,149,410
                                                                                 -----------------     -----------------

        Total liabilities                                                              27,949,442            23,748,543

Members' equity                                                                        37,838,372            29,603,242
                                                                                 -----------------     -----------------

        Total liabilities and members' equity                                    $     65,787,814      $     53,351,785
                                                                                 =================     =================


     The accompanying notes are an integral part of the financial statements.
</TABLE>


                                       50
<PAGE>



Midwest Wireless Communications L.L.C.
Consolidated Statements of Operations
for the years ended December 31, 1998 and 1997
<TABLE>
<CAPTION>


                                                                 1998                    1997

Operating revenues:
<S>                                                   <C>                     <C>             
     Retail service                                   $     33,403,860        $     27,785,727
     Roamer service                                         12,393,902              10,374,827
     Equipment sales                                         3,321,271               2,123,505
                                                     -----------------       -----------------

                                                            49,119,033              40,284,059
                                                     -----------------       -----------------

Operating expenses:
     Operations and maintenance                             10,054,893               8,464,911
     Cost of equipment sold                                  3,897,151               2,988,131
     Depreciation                                            4,707,905               3,068,687
     Amortization                                              481,392                 448,864
     Selling, general and administrative                    11,024,317               9,517,110
     Home roamer costs                                       1,353,930                 804,709
                                                     -----------------       -----------------

                                                            31,519,588              25,292,412
                                                     -----------------       -----------------

          Operating income                                  17,599,445              14,991,647
                                                     -----------------       -----------------

Other income (expense):
     Equity loss on Switch 2000                               (710,330)               (482,459)
     Interest expense                                         (890,930)             (1,106,380)
     Interest and dividend income                              711,388                 220,628
     Other                                                     262,375                       -
                                                     -----------------       -----------------

                                                              (627,497)             (1,368,211)
                                                      ----------------       -----------------

Net income                                            $     16,971,948        $     13,623,436
                                                     =================       =================

         The accompanying notes are an integral part of the financial statements.
</TABLE>


                                       51
<PAGE>

Midwest Wireless Communications L.L.C.
Consolidated Statements of Changes in Members' Equity
for the years ended December 31, 1998 and 1997

<TABLE>
<CAPTION>

                                                                                                       Total
                                                    Capital                 Accumulated               Members'
                                                 Contributions                 Income                  Equity


<S>                                             <C>                       <C>                     <C>             
Balance, December 31, 1996                      $     15,750,840          $      4,011,550        $     19,762,390

Redemption of units                                       (2,646)                  (24,468)                (27,114)

Distributions to members                                       -                (3,755,470)             (3,755,470)

Net income                                                     -                13,623,436              13,623,436
                                                -----------------         -----------------       -----------------

Balance, December 31, 1997                            15,748,194                13,855,048              29,603,242

Redemption of units                                      (11,416)                 (119,438)               (130,854)

Distributions to members                                       -                (8,605,964)             (8,605,964)

Net income                                                     -                16,971,948              16,971,948
                                                -----------------         -----------------       -----------------

Balance, December 31, 1998                      $     15,736,778          $     22,101,594        $     37,838,372
                                                =================         =================       =================


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


</TABLE>

                                       52
<PAGE>


Midwest Wireless Communications L.L.C.
Consolidated Statements of Cash Flows
for the years ended December 31, 1998 and 1997
<TABLE>
<CAPTION>


                                                                                         1998                    1997

Cash flows from operating activities:
<S>                                                                                <C>                     <C>             
     Net income                                                                    $       16,971,948      $     13,623,436
     Adjustments to  reconcile  net  income to net cash  provided
       by operating activities:
          Provision for bad debts                                                             266,901               769,330
          Depreciation                                                                      4,707,905             3,068,687
          Amortization                                                                        481,392               448,864
          Equity loss on investments in Switch 2000                                           710,330               482,459
          Appreciation rights                                                                 322,244               195,247
          Accretion of discount                                                              (210,403)             (106,506)
          Changes in assets and liabilities:
               Accounts receivable                                                             53,732            (1,178,753)
               Inventories                                                                   (853,409)             (345,351)
               Accounts payable                                                              (994,241)            1,166,996
               Accrued liabilities                                                            761,884             1,321,436
               Other                                                                          (25,207)                  689
                                                                                   -------------------     -----------------

          Net cash provided by operating activities                                        22,193,076            19,446,534
                                                                                   -------------------     -----------------

Cash flows from investing activities:
     Payments for property, cellular plant and equipment                                  (11,514,175)           (7,893,976)
     Purchases of marketable securities                                                   (12,794,926)          (10,805,365)
     Proceeds received upon maturity of marketable securities                              14,970,930             5,000,000
     Purchase of Switch 2000 interests                                                       (383,330)                    -
     Purchase of FCC licenses                                                                (385,696)                    -
     Purchases of investments                                                              (1,150,092)             (173,427)
     Other                                                                                   (125,000)                    -
                                                                                   -------------------     -----------------

          Net cash used in investing activities                                           (11,382,289)          (13,872,768)
                                                                                   -------------------     -----------------

Cash flows from financing activities:
     Proceeds on long-term debt borrowings                                                 16,372,239                     -
     Payments on long-term debt                                                           (17,361,509)           (1,046,000)
     Distributions to members                                                              (8,605,964)           (3,755,470)
     Redemption of units                                                                     (130,854)              (27,114)
                                                                                   -------------------     -----------------

          Net cash used in financing activities                                            (9,726,088)           (4,828,584)
                                                                                   -------------------     -----------------

Net change in cash and cash equivalents                                                     1,084,699               745,182

Cash and cash equivalents, beginning of year                                                2,063,280             1,318,098
                                                                                   -------------------     -----------------

Cash and cash equivalents, end of year                                             $        3,147,979      $      2,063,280
                                                                                   ===================     =================

Supplemental disclosure:
     Cash paid during the year for interest                                        $        1,015,834      $      1,116,505
                                                                                   ===================     =================

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

</TABLE>

                                       53
<PAGE>


Midwest Wireless Communications L.L.C.
Notes to Consolidated Financial Statements


1.   Organization and Significant Accounting Policies:

     Organization and Basis of Consolidation:

     Midwest Wireless  Communications L.L.C. (the Company) is a Delaware limited
     liability company organized to provide cellular  communications services in
     certain  service areas within the State of  Minnesota.  The latest date the
     Company may be dissolved is December 31, 2034.

     The   consolidated   financial   statements  of  the  Company  include  its
     subsidiary,  Switch 2000 L.L.C.  (Switch  2000) as of December 31, 1998 and
     for the  period  October  1, 1998 to  December  31,  1998 (see Note 2). All
     intercompany  transactions  have  been  eliminated  from  the  consolidated
     financial statements.

     Estimates:

     The Company prepares its financial  statements in conformity with generally
     accepted accounting principles,  which require management to make estimates
     and assumptions  that affect the reported  amounts of assets,  liabilities,
     revenues and  expenses  during the period  presented.  They also affect the
     disclosure  of  contingencies.  Actual  results  could  differ  from  those
     estimates.

     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.

     Marketable Securities:

     Marketable securities which the Company has the positive intent and ability
     to hold to maturity are stated at cost  adjusted for accretion of discounts
     computed  under a  method  which  approximates  the  interest  method.  The
     marketable  securities  have maturity dates ranging from March 1999 to June
     1999. The market value approximated amortized cost at December 31, 1998.
     Unrealized gains and losses were not significant.

     Cellular Telephone Inventories:

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




                                       54
<PAGE>


Midwest Wireless Communications L.L.C.
Notes to Consolidated Financial Statements, Continued


1.   Organization and Significant Accounting Policies, continued:

     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  three to
     fifteen  years.  Property,  cellular  plant and  equipment  consists of the
     following:

                                                      1998                1997


          Land                                $    1,442,308     $    1,212,608
          Plant in service                        49,641,677         29,184,958
          Plant under construction                 3,112,679          1,273,872
                                              --------------     --------------

                                                  54,196,664         31,671,438
          Less accumulated depreciation          (20,117,922)       (10,639,068)
                                              --------------     --------------

                                              $   34,078,742     $   21,032,370
                                              ==============     ==============

     At December 31, 1998 and 1997,  accounts  payable  includes  $5,100,282 and
     $418,396, respectively, related to the purchase of property, cellular plant
     and equipment.  The Company capitalized  interest in the amount of $248,377
     and $151,361 for the years ended December 31, 1998 and 1997, respectively.

     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
     $1,412,628  and  $1,049,000 for the years ended December 31, 1998 and 1997,
     respectively.




                                       55
<PAGE>


Midwest Wireless Communications L.L.C.
Notes to Consolidated Financial Statements, Continued


1.   Organization and Significant Accounting Policies, continued:

     Federal Communications Commission (FCC) Licenses:

     The  Company  acquired a FCC  license to  provide  cellular  service in FCC
     market NO. 288B in conjunction  with the purchase of the Rochester  service
     area on June 28,  1996.  This license was recorded at fair market value and
     is being amortized on a straight-line basis over 39 years.

     During 1998,  the Company  acquired  FCC licenses to provide LMDS  services
     within the  Company's  service  area.  The licenses  were  recorded at fair
     market  value and are being  amortized  on a  straight-line  basis  over 10
     years. FCC licenses consist of the following:

                                                      1998                1997


          Cellular license                    $   17,505,700     $   17,505,700
          LMDS licenses                              357,696              -
          Other                                       28,000              -
                                              --------------     --------------

                                                  17,891,396         17,505,700
          Less accumulated amortization           (1,154,868)          (673,476)
                                              --------------     --------------

                                              $   16,736,528     $   16,832,224
                                              ==============     ==============

2.   Investment in Switch 2000:

     Switch 2000 provides switching and interconnection services to the Company.
     During 1997, and for the period January 1, 1998 through September 30, 1998,
     the Company had ownership and voting interests in Switch 2000 of 54.93% and
     45.55%, respectively.  Accordingly, during this period, this investment was
     accounted for using the equity method of accounting.

     During  September and October of 1998,  the Company  gained 100%  ownership
     interest in Switch  2000 by  acquiring  the  remaining  equity  interest in
     Switch 2000 for a purchase  price of $383,330 in cash and equipment  with a
     fair market value of $700,277,  The acquisition was accounted for under the
     purchase method of accounting;  accordingly,  the assets and liabilities of
     Switch 2000,  principally  cellular plant and  equipment,  were recorded at
     fair value. The cellular plant and equipment  acquired is being depreciated
     over a period of two years.



                                       56
<PAGE>


Midwest Wireless Communications L.L.C.
Notes to Consolidated Financial Statements, Continued


2.   Investment in Switch 2000, continued:

     Effective  June 30,  1997,  Switch  2000  and the  Company  entered  into a
     Management  Agreement  which  expired on  December  3l,  1997.  The Company
     continued to provide  management  services to Switch 2000 through September
     30, 1998. Under the terms of the Management Agreement, Switch 2000 retained
     the  services  of the  Company to manage  the  operations  of Switch  2000,
     including  administration  of transport  and  switching  services and other
     general business  operations.  Switch 2000 was required to pay a management
     fee  equal to the  total  costs  incurred  by the  Company  related  to the
     management of Switch 2000. Total management fees paid to the Company during
     1998 and 1997 were $196,000 and $119,000, respectively.

     Switch 2000, in turn, allocated management fees and certain other expenses,
     primarily network costs, to its owners, which included the Company. Amounts
     billed to the Company totaled approximately  $l,802,000 for the period from
     January 1, 1998 to  September  30, 1998 and  $2,879,000  for the year ended
     December 31, 1997. The Company had an amount due to Switch 2000 of $227,000
     at December 31, 1997.

     Switch  2000 had  assets of  $3,376,866  and  liabilities  of  $708,893  at
     December 31, 1997.


3.   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.

     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 as defined in the Agreement.


4.   Debt:

     Effective  July 29,  1998,  the  Company  entered  into an  agreement  (the
     Agreement) with the Rural Telephone  Finance  Cooperative (the Cooperative)
     to refinance  the  indebtedness  of the Company.  Proceeds in the amount of
     $16,372,239  received  under  the  agreement  were  used to pay the  entire
     outstanding principal balance on the previous debt.


                                       57
<PAGE>



Midwest Wireless Communications L.L.C.
Notes to Consolidated Financial Statements, Continued


4.   Debt, continued:

     The Agreement  includes a term note with principal and interest  payable in
     quarterly  installments  beginning October 31, 1998, with final maturity in
     2008.  The  Agreement  provides  the Company the option to fix the interest
     rate on borrowings  (or portions  thereof)  through the maturity  date. The
     variable rate is based on the Cooperative's cost of capital and is adjusted
     monthly.  This rate was 6.1% as of December  31,  1998.  As of December 31,
     1998,  the Company  had  borrowings  of  $8,087,356  outstanding  under the
     variable rate and $8,839,784 at a fixed rate of 5.75%.

     The  Agreement  provides  for an  acquisition  note  of up to  $36,842,105.
     Advances under the acquisition  note are subject to the lender's review and
     of the Company's  acquisition plan and any regulatory  approval required to
     accomplish the contemplated  acquisition.  Borrowings under the acquisition
     are  subject  to the  same  interest  rate  terms  as the  term  note.  The
     acquisition  note  becomes  due ten  years  after  the date of the  initial
     borrowing, at which time the outstanding principal and interest are due. As
     of December 31, 1998,  no amounts were  outstanding  under the  acquisition
     note.

     The  Agreement  also  provides for a revolving  loan of up to  $10,000,000.
     Borrowings  under the  revolving  loan bear interest at the prime rate plus
     one and one-half  percent.  The  revolving  loan expires July 29, 2003,  at
     which time the outstanding  principal and interest are due. The Company had
     no amounts outstanding under the revolving loan as of December 31, 1998.

     The  Agreement  requires  the  Company to  maintain  an  investment  in the
     Cooperative in the amount of at least 5% of the  outstanding  debt balance.
     The  Agreement  also contains  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:

                     1999                     $    1,279,048
                     2000                          1,366,249
                     2001                          1,459,395
                     2002                          1,558,892
                     2003                          1,665,173
                     Thereafter                    9,598,383
                                              --------------

                                              $   16,927,140
                                              ==============


                                       58
<PAGE>


Midwest Wireless Communications L.L.C.
Notes to Consolidated Financial Statements, Continued


5.   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, 1998, are as follows:

                     1999                     $      353,091
                     2000                            181,245
                     2001                            120,628
                     2002                            117,378
                     2003                            112,878
                     Thereafter                    1,668,436
                                              --------------

                                              $    2,553,656
                                              ==============

     Rental  expense was $433,550  and $424,554 for the year ended  December 31,
     1998 and 1997, respectively.


6.   Cell Site Sharing Agreements:

     The  Company is  subject  to an  agreement  with a  partnership  located in
     Wisconsin, to jointly operate common cellular base station facilities (Cell
     Sites) in Nelson,  Wisconsin and Red Wing, Minnesota.  Under the agreement,
     both  parties  agreed to  share:  the costs to  construct  the Cell  Sites,
     selected ongoing costs of operation and roamer revenues attributable to the
     Cell Sites.

     The  Company  has   included  its   proportionate   share  of  the  assets,
     liabilities,  revenues  and  expenses of the Cell Sites in these  financial
     statements.   As  of  December  3l,  1998  and  1997,   these  assets  were
     approximately $769,000 and $766,000 and liabilities were approximately $800
     and $2,700,  respectively.  For the years ended December 31, 1998 and 1997,
     revenues were  approximately  $573,000 and $521,000 and operating  expenses
     were $275,000 and $165,000, respectively.


7.   Concentration of Credit Risk:

     The Company provides  cellular  service and sells 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. Credit
     losses related to customers have been within management's expectations.



                                       59
<PAGE>



Midwest Wireless Communications L.L.C.
Notes to Consolidated Financial Statements, Continued


8.   Employee Benefits:

     The Company established the Midwest Wireless  Communications  L.L.C. 401(k)
     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 $128,219
     and $91,968 for the years ended  December 31, 1998 and 1997,  respectively.
     Profit sharing  contributions  are 100% vested after five years employment.
     Profit  sharing  contribution  expenses  were $155,286 and $118,411 for the
     years ended December 31, 1998 and 1997, respectively.

     Effective  January 1, 1997, the Company  established  the Midwest  Wireless
     Communications  L.L.C.  Appreciation Rights Plan (the Plan) for certain key
     employees.  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 the change
     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.  The
     Company recognized $322,244 and $195,247 in compensation expense related to
     the Plan for the years ended December 31, 1998 and 1997, respectively.



                                       60
<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, 1998



                                    EXHIBITS





                                       61
<PAGE>

               HECTOR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
                                Exhibit Index To
                 Form 10-K for the Year Ended December 31, 1998

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.

   11      Calculation of Earnings          Filed herewith at page 63.
           Per Share          

   21      Subsidiaries of the Registrant   Filed herewith at page 64.

   23      Independent Auditors' Consent    Filed herewith at page 65.

   24      Power of Attorney                Included in signatures at page 41.

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.

                                       62
<PAGE>

<TABLE>
<CAPTION>


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

                                                                          Year Ended December 31
                                                               ---------------------------------------------
Basic:                                                              1998             1997             1996
-------                                                        -----------      -----------      -----------

<S>                                                            <C>              <C>              <C>        
Net income                                                     $ 3,910,243      $ 2,720,753      $ 1,208,670
                                                               ===========      ===========      ==========

Common shares:

  Weighted average number of common shares outstanding           2,402,794        1,901,508        1,881,472
  Number of unallocated shares held by ESOP                              0           (8,930)          (11,817)
                                                               -----------      -----------      -----------
                                                                 2,402,794        1,892,578        1,869,655
                                                               ===========      ===========      ===========

Net income per common share                                    $      1.63      $      1.44      $       .65
                                                               ===========      ===========      ===========

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

Net income                                                     $ 3,910,243      $ 2,720,753      $ 1,208,670
Interest on convertible debentures, net of tax                     620,594          758,616          758,616
                                                               -----------      -----------      -----------
  Adjusted net income                                          $ 4,530,837      $ 3,479,369      $ 1,967,286
                                                               ===========      ===========      ===========

Common and common equivalent shares:

  Weighted average number of common shares outstanding           2,402,794        1,901,508        1,881,472
  Assumed conversion of convertible
    debentures into common stock                                 1,119,683        1,423,125        1,423,125
  Dilutive effect of convertible preferred shares outstanding      352,867          378,100          389,487
  Dilutive effect of stock options outstanding after
     application of treasury stock method                           45,441           36,130           11,649
  Dilutive effect of Employee Stock
    Purchase Plan shares subscribed                                  4,664            2,455              577
  Dilutive effect of warrants outstanding                           11,623
  Weighted average number of
    unallocated shares held by ESOP                                      0           (8,930)         (11,817)
                                                               -----------      -----------      -----------
                                                                 3,937,072        3,732,388        3,694,493
                                                               ===========      ===========      ===========

Diluted net income per share                                   $      1.15      $       .93      $       .53
                                                               ===========      ===========      ===========
</TABLE>

                                       63
<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

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, 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.



                                       64
<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  and  333-45975  of Hector
Communications  Corporation of our report dated February 17, 1999,  appearing in
this Annual  Report on Form 10-K of Hector  Communications  Corporation  and its
subsidiaries for the year ended December 31, 1998.


/s/ Olsen Thielen and Co., Ltd.
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Olsen Thielen and Co., Ltd.
March 29, 1999
St. Paul, Minnesota