=======================+========================================================
                                  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, 1996

                                       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: None

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

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

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. ( )

The  aggregate  market value of the voting stock held by  non-affiliates  of the
Registrant was  approximately  $10,054,000  based upon the closing sale price of
the  Company's  common stock on the NASDAQ  National  Market System on March 19,
1997.

As of March 19, 1997 there were outstanding 1,883,857 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   22,   1997   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, 1996, the Company's wholly and majority owned telephone
subsidiaries  (generally  referred to as "local  exchange  carriers"  or "LECs")
served  approximately  32,000 access lines and provided  telephone service to 34
rural communities in Minnesota,  Wisconsin,  South Dakota and Iowa. In addition,
at such date, through its cable television  subsidiaries and one LEC subsidiary,
the  Company   provided  cable  television   services  to  approximately   8,100
subscribers  in Minnesota,  South Dakota and  Wisconsin.  The Company is also an
investor in partnerships and corporations providing cellular telephone and other
telecommunications related services.

       Since  becoming  a  publicly-held  company  in 1990,  HCC has  owned  and
operated five wholly  owned-owned  local  exchange  company  subsidiaries  which
served 6,331 access lines at December 31, 1995. 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.  In addition to
the Company's 68% ownership  position,  the remaining  interests in Alliance are
owned by Golden West Telecommunications Cooperative, Inc. of Wall, South Dakota,
and Split Rock Telecom  Cooperative,  Inc. of Garretson,  South Dakota.  Further
information  with regard to the  acquisition  of Ollig  through  Alliance can be
obtained by reference to the  Company's  Form 8-K report for April 25, 1996,  as
amended by a Form 8 amendment filed July 9, 1996.


[b]    FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS

       The  Company  operates  in two  business  segments,  operation  of  local
exchange  telephone  companies  and  cable  television.   Information  regarding
industry segments is provided in Note 10 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
approvals, where required, will be received.




                                       2
<PAGE>



(2)    Telephone Operations

       The Company provides  modern,  high-quality  local telephone  service and
access to long distance telephone service through its five wholly owned and four
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  wholly owned LEC subsidiaries at December 31, 1996, 1995 and 1994 and
by the LEC subsidiaries of Alliance at December 31, 1996:
<TABLE>
<CAPTION>

Telephone Company                                                               Access Lines*
                                                                                 December 31
                                                                   1996               1995                1994
                                                              -----------         -----------        ---------
<S>                                                              <C>                 <C>                 <C>
Arrowhead Communications Corporation                                748                738                 716
Eagle Valley Telephone Company                                      678                659                 658
Granada Telephone Company                                           276                263                 264
Pine Island Telephone Company                                     2,775              2,663               2,590
Indianhead Telephone Company                                      2,057              2,008               2,010
Alliance Telecommunications Corporation:
       Loretel Systems, Inc.                                     11,852
       Sleepy Eye Telephone Company                               5,814
       Sioux Valley Telephone Company                             5,355
       Hills Telephone Company                                    2,465
                                                              ---------           ----------         ---------
                                                                 32,020              6,331               6,238
                                                              ==========          ==========         =========
</TABLE>


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

       It is the  Company's  policy,  insofar as  possible,  to  maintain  local
management  in each of its local  exchange  carrier  subsidiaries.  The  Company
provides its wholly owned 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  Company's LEC  subsidiaries  are subject to regulation by Minnesota,
South Dakota, Iowa and Wisconsin  regulatory agencies with respect to intrastate
toll rates,  intrastate access charges billed to intrastate IXCs, service areas,
service standards,  accounting and related matters.  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.

       A  bill  passed  by  the  1995  Minnesota  legislature  allows  telephone
companies  serving  fewer than 50,000  access lines to elect to provide  service
under an alternate form of regulation. Companies choosing alternative regulation
agree  not to  increase  rates  for  two  years  (other  than  in  extraordinary
circumstances)  and are not  subject  to rate of  return  review  by the  Public
Utilities  Commission for the same period. All of the Company's  Minnesota based
LEC subsidiaries  elected to be covered by alternative rate regulation  election
effective January 1, 1996.

                                       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.  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.   The  Company's
Wisconsin  based  LEC  subsidiary  implemented  a local  service  rate  increase
December 1, 1995 to compensate for changes in Wisconsin's support structure.

Construction and Development Program

       The  Company's  policy is to  upgrade  plant and  equipment  of its local
exchange  carrier  subsidiaries  to  maintain  modern,  high  quality  telephone
service.  The  Company  makes  plant  additions  to upgrade  service and replace
existing  facilities and provides for routine 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.  The  Company  has  converted  100% of its  access  lines  to  digital
switching   technology  and  is  installing   high-capacity  fiber  optic  cable
facilities  where  appropriate.  The Company  expects to finance  its  telephone
construction program with internally  generated cash,  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 local exchange carrier
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 Company's local exchange carrier  subsidiaries is limited by certain
financial covenants set forth in the mortgages.

         At December 31, 1996, the Company's local exchange carrier subsidiaries
had  unadvanced  loan  commitments  under the RUS and RTB  programs  aggregating
approximately  $4,616,000 to finance specific construction  activities in future
years. The Company's LEC subsidiaries have applied for additional loans from RUS
and RTB for their  respective five year capital  requirements  and have received
preliminary approvals on some of the loans.  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. Face amount of the loan was $55,250,000.
The Company has fixed  interest  rates on  $30,000,000  on this loan for periods
ranging from five to seven years at rates of  approximately  7.6%.  The interest
rate on the balance of the loan floats at St. Paul Bank's cost of money plus 130
basis points, and was 6.71% at December 31, 1996. The Company made only interest
payments on the loan in 1996.  Principal payments began in January 1997 and will
continue until March, 2011.

         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.  Face amount of the loan was $6,000,000,
payable March 31, 1997. Interest rate on the loan, which varies according to St.
Paul Bank's cost of money, was 7.4% at December 31, 1996. The loan is secured by
a pledge of the assets of North  American and the stock of one of the  Company's
telephone subsidiaries.

         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,  1996 was
$1,614,000. 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 1996
patronage  refund from St. Paul Bank was $221,000,  $66,000 was received in cash
and  $155,000 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
cannot predict what patronage refunds will be in future years.

       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. 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 are callable under certain  circumstances and include restrictions on
payment  of  dividends  to  the  Company's  shareholders.   The  debentures  are
subordinated  to  $4,000,000 of senior  indebtedness  owed by the Company to St.
Paul Bank. Total value of the offering was $12,650,000. Proceeds to the Company,
after   underwriting,   accounting   and  legal   expenses  were   approximately
$11,300,000.  The underwriters also received warrants to purchase 123,750 shares
of the  Company's  common stock at a price of $8.70 per share.  The warrants are
exercisable  beginning  February  15, 1996 and expire  February  15,  2000.  The
offering  proceeds were used to pay down debt associated  with cable  television
acquisitions,  finance cable  television plant  additions,  purchase  additional
cable  television  systems  and as a portion  of HCC's  equity  contribution  to
Alliance to acquire Ollig Utilities Company.


Competition

         In   February   1996,   President   Clinton   signed   into   law   the
Telecommunications  Act of 1996.  The new law  represents  the biggest change in
legislation  governing local service since Congress  imposed federal  regulation
and  established the FCC in 1934.  Under its  provisions,  the monopoly on local
service enjoyed by LECs is eliminated and LECs must allow competitors  access to
the local  network  facilities.  Among other  provisions,  the new law  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 for some time until new rule  making by the FCC
and  state   regulatory   agencies  is  complete.   The  Company  is  monitoring
developments  regarding  the new  regulatory  climate  closely,  and expects its
operations will be materially affected by the new rules, but cannot predict what
effect the new law and regulations  adopted pursuant to the new 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 in the new  regulatory  environment
created  by  the  new  telecommunications  law.  Technological  developments  in
competing  technologies such as cellular 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  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  which  allow  users to divert  their
traffic from the LEC's usage sensitive services to flat-rate services. Users may
also  choose to use  cellular  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.

         The new  telecommunications  law  and  recent  FCC  rulings  which  are
intended 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 new 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.

Cellular 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 has  established  733  cellular  service  areas  in the  United
States,  consisting of 305 Metropolitan Statistical Areas ("MSAs") and 428 Rural
Service  Areas  ("RSAs").  The FCC has 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,  1996,  the  Company was an investor in four  ventures
which provide cellular  telephone  service in ten RSAs in Minnesota,  one RSA in
North  Dakota and the Sioux  Falls,  South  Dakota  MSA and serve  approximately
65,000  customers.  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, 1996.
<TABLE>
<CAPTION>

                                                              Total                                   Company's
                                                           Population            Percent              Share of
Name of Venture                  Service Area            Equivalents(1)         Ownership            Total POPs

<S>                              <C>                          <C>                 <C>                   <C>   
Rural Cellular Corporation       MN RSAs 1, 2, 3,             610,000              4.19%                25,559
                                 5 and 6

Midwest Wireless                 MN RSAs  7, 8, 9,            928,000              9.75%                90,480
  Communications, LLC            10 and 11

Sioux Falls Cellular, Ltd.       Sioux Falls, SD MSA          120,000             12.25%                14,700

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 February,  1996,  Rural  Cellular  Corporation  completed an initial
offering of its common stock to the public.  As part of the  offering,  HCC sold
61,133  shares of Rural  Cellular  Corporation  and  recorded  a gain on sale of
$485,000.

         In addition to competition  between the two cellular  licensees in each
territory,  competition for cellular 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.

         There are a number of recent technological developments in the cellular
industry.   Currently  most  cellular  telephone  systems  use  equipment  which
processes  information digitally but does radio transmission 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  is expected to be an
industry wide process that will take a number of years.

         The cellular  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.  Cellular 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  cellular  system
capacity can normally be added in increments  that closely match demand and cost
proportionately less than the initial fixed costs.

         The Company recorded income on its cellular partnership  investments of
$502,000,  $126,000 and $54,000 in 1996, 1995 and 1994,  respectively.  In 1994,
the Company recognized a gain of $2,188,000 on the sale of its investment in the
cellular system serving the Rochester, MN MSA. The Company cannot predict if its
cellular properties will require additional cash investments.

                                       7
<PAGE>

         The licensing (including renewal of licenses), construction, operation,
sale,  interconnection  arrangements  and  acquisition  of cellular  systems are
regulated by the FCC and various state public  utility  commissions.  Changes in
the  regulation of cellular  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 cellular operations.


Other Telecommunications Investments
         The Company also has  investments  in several other  telecommunications
related businesses, including a 12% 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  who  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 owns a subsidiary,  MEANS Telcom, which provides long-distance
telecommunications  services  to business  and  residential  customers  in rural
Minnesota.  These services  include (i) toll-free  telephone  numbers  providing
access from  anywhere in the Unites States and Canada,  (ii) cellular  telephone
service, (iii) prepaid calling cards and (iv) video conferencing.

         The Company is also an investor in four limited partnerships which have
acquired licenses to provide personal communications services (PCS) in Minnesota
and North Dakota.  These PCS companies are in the process of obtaining financing
and constructing PCS systems and are not yet providing service to customers.



(3)    Cable Television Operations


       The Company,  through its cable  television  and local  exchange  carrier
subsidiaries,   owns  and   operates  33  cable   television   systems   serving
approximately 8,100 subscribers in 50 communities in Minnesota, South Dakota and
Wisconsin.  All of its cable  television  systems  offer one or more channels of
premium  programming,  typically  feature  motion  pictures  which are 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 $9.75 to $22.50 per month.  Basic service  generally
includes the major television networks, non-network independent stations, sports
programming,  news  services  and  automated  information  channels,  children's
programming,  access channels for public,  governmental,  educational and leased
use, senior citizens' programming and religious programming. Premium programming
services are provided to  subscribers  for an additional  fee of $4.95 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  Company's  cable  television  systems are  regulated by the FCC. 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.

       The Company's  basic service rates were frozen by the FCC from 1992 until
May 15, 1994 when FCC rules were issued exempting cable systems like those owned
by the Company from rate  regulation.  Under  provisions of the Cable Television
Consumer Protection Act of 1992, the Company's systems could have become subject
to local  rate  regulation  if the  franchising  city went  though a  certifying
process with the FCC. It is the Company's understanding that the recently passed
Telecommunications   Act  of  1996  has  substantially   eliminated  local  rate
regulation for small cable systems.

       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, 1997, the Company had 130  employees,  of which 113 employees
work  in the  telephone  operations,  12  work in  cable  television  and 5 hold
administrative  positions. 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, 1997
were as follows:

 Name                           Age                 Position

 Curtis A. Sampson               63        Chairman of the Board and Chief
                                           Executive Officer

 Steven H. Sjogren               54        President and Chief Operating Officer

 Paul N. Hanson                  50        Vice President and Treasurer

 Charles A. Braun                39        Chief Financial Officer


       Executive  officers  serve at the pleasure of the Board of Directors  and
are elected annually for one year terms.

     Curtis A.  Sampson  has been  Chairman  of the  Board  and Chief  Executive
Officer of the  Company  since  1990.  Mr.  Sampson is  principally  employed as
Chairman and Chief Executive Officer of Communications Systems, Inc. ("CSI") and
serves as the Chairman of the Board of Canterbury  Park Holding  Corporation,  a
Shakopee,  Minnesota  based  corporation  which owns and operates the Canterbury
Downs  racetrack.  Mr. Sampson is also a director of the Rural  Telephone  Bank,
Minnesota  Independent  Interexchange  Corp.,  a director and Vice  President of
National  Rural  Telecom  Association  and a member of the Finance and Audit and
Compensation  Committees  of  Minnesota  Equal  Access  Network  Services,  Inc.
("MEANS"), of which Mr. Sampson was a director from 1989 to 1991.

       Steven H. Sjogren has been the President,  Chief Operating  Officer and a
director of the Company since 1990. From 1979 to 1990, Mr. Sjogren was the Chief
Operating  Officer  of CSI's  telephone  companies.  Mr.  Sjogren  serves on the
Industry  Planning  Committee of the  Minnesota  Telephone  Association  and the
Network Committee of MEANS and serves the industry in other capacities.

       Paul N. Hanson has been Vice  President,  Treasurer and a director of the
Company  since  1990.  Mr.  Hanson is also the  Chief  Financial  Officer,  Vice
President of Finance and Treasurer of CSI, in which position he has served since
1982.

       Charles A.  Braun has been the Chief  Financial  Officer  of the  Company
since 1990. Since 1980, Mr. Braun has also served in several  capacities of CSI,
of which he is currently Controller.  From 1986 to 1988, Mr. Braun was treasurer
of North American  Communications,  a cable television  operating  company that,
prior to 1986, was a subsidiary of CSI.

     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 CSI.

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

       Not Applicable.


                                       10
<PAGE>



ITEM 2.   PROPERTIES

       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 2% of the Company's  telephone
property.  The lines,  which connect  customers'  premises with central offices,
constitute  approximately  58% 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 32% of the
Company's  telephone  property in  service.  Buildings,  land and  miscellaneous
property  constitute  the remaining 8%. 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 5 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 in 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 NASDAQ.
<TABLE>
<CAPTION>

                         ______1996______                   ______1995______
Quarter                High              Low             High               Low

<S>                   <C>              <C>              <C>               <C>  
First                 $8.75            $6.38            $8.75             $6.25
Second                 8.50             6.00             8.50              6.38
Third                  8.38             6.88             7.75              5.63
Fourth                 8.00             7.00             7.25              5.75
</TABLE>

[b]    HOLDERS

         At March 1, 1997  there  were  approximately  530  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.  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.  The
financing agreements between HCC's subsidiaries and their lenders restrict their
ability to pay dividends to HCC, thereby limiting HCC's ability to pay dividends
to its  shareholders.  See  Management's  Discussion  and  Analysis of Financial
Condition  and  Results  of  Operations.  See  also  Note 5 to the  Consolidated
Financial  Statements  under Item 8 herein for a description of  restrictions on
dividends.


                                       12
<PAGE>



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

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

                                                                                       Year Ended December 31
                                                                     -----------------------------------------------------------
                                                                           1996        1995        1994        1993        1992
--------------------------------------------------------------------------------------------------------------------------------

Selected Income Statement Information

<S>                                                                     <C>          <C>         <C>         <C>         <C>   
Revenues                                                                $20,658      $5,844      $5,740      $5,354      $4,674

Costs and Expenses                                                       14,066       4,992       4,175       4,037       3,453
--------------------------------------------------------------------------------------------------------------------------------

Operating Income                                                          6,592         852       1,565       1,317       1,221

Other Income (Expenses), net                                             (3,518)       (980)      2,055        (394)       (340)
--------------------------------------------------------------------------------------------------------------------------------

Income (Loss) Before Income Taxes                                         3,074        (128)      3,620         923         881

Income Tax Expense (Benefit)                                              1,540         (51)      1,415         354         320
--------------------------------------------------------------------------------------------------------------------------------

Income (Loss) Before Minority Interest                                    1,534         (77)      2,205         569         561

Minority Interest in Earnings of Alliance
  Telecommunications Corporation                                            325
--------------------------------------------------------------------------------------------------------------------------------

Income (Loss) Before Cumulative Effect of
  Change in Accounting Principle                                          1,209         (77)      2,205         569         561

Cumulative Effect of Change
  in Accounting Principle                                                                                        51
--------------------------------------------------------------------------------------------------------------------------------

Net Income (Loss)                                                        $1,209        ($77)     $2,205        $620        $561
--------------------------------------------------------------------------------------------------------------------------------

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

Net Income (Loss) Per Common and Common Equivalent Share:
  Before Cumulative Effect of Change
    in Accounting Principle                                                $.53       ($.04)       $.97        $.25        $.25
  Cumulative Effect of Change in
    Accounting Principle                                                                                        .02
--------------------------------------------------------------------------------------------------------------------------------
       Net Income (Loss) Per Share                                         $.53       ($.04)       $.97        $.27        $.25
--------------------------------------------------------------------------------------------------------------------------------

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

Average Common and Common Equivalent
  Shares Outstanding                                                      2,271       1,866       2,265       2,268       2,258
--------------------------------------------------------------------------------------------------------------------------------

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

Selected Balance Sheet Information

Working Capital                                                          $1,307      $9,679      $4,740      $2,202      $1,157

Property, Plant and Equipment, net                                       47,039      14,609      13,019      12,894      12,371

Excess of Cost Over Net Assets Acquired, net                             52,510         907         839         723         782

Total Assets                                                            137,348      33,518      22,749      21,173      18,158

Long-Term Debt                                                           96,127      22,096      10,528      10,797       9,957

Stockholders' Equity                                                      9,946       8,134       8,230       6,006       5,328
--------------------------------------------------------------------------------------------------------------------------------
</TABLE>

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

     All common  stock  equivalents  and  potentially  dilutive  securities  are
anti-dilutive for 1995 and are excluded from calculation of earnings per share


                                       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.  Effective
April  25,  1996,  a  new  68%  owned   subsidiary  of  the  Company,   Alliance
Telecommunications   Corporation,   acquired   Ollig   Utilities   Company   for
$80,000,000.  The  acquisition  represents  a huge  expansion  of the  Company's
operations.  At December  31, 1996,  the  Company's  wholly and  majority  owned
subsidiaries  provided  telephone  service  to 32,000  access  lines in 34 rural
communities in Minnesota, Wisconsin, South Dakota and Iowa. Its cable television
operations provided cable television services to approximately 8,100 subscribers
in  Minnesota,  South Dakota and  Wisconsin.  The Company is also an investor in
partnerships   and   corporations   providing   cellular   telephone  and  other
telecommunications related services.

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  which  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.

       The  Company's  LECs  also  sell and  lease  customer  premise  telephone
equipment,  provide inside wiring services and custom calling  features and sell
and lease other  facilities for private line,  teletype,  data  transmission and
other  communications  services.  The  Company's  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.

       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:

                                       14
<PAGE>

<TABLE>
<CAPTION>


                                                                Year Ended December 31
                                                   ------------------------------------------------
                                                       1996               1995                 1994
                                                   -----------        ----------          ---------
<S>                                                   <C>                <C>                  <C>  
Local network                                          17.8  %            18.4%                17.0%
Network access                                         55.8               59.5                 64.1
Nonregulated telephone activities                      13.0                4.9                  5.4
Billing and collecting                                  4.3                3.9                  4.6
Cable television                                        9.1               13.3                  8.9
                                                   -----------       -----------          ---------
                                                      100.0  %           100.0%               100.0%
                                                   ===========       ==========           ==========
</TABLE>


1996 Compared to 1995

       Effective  April 25, 1996, the Company's 68% owned  subsidiary,  Alliance
Telecommunications  Corporation  ("Alliance")  purchased Ollig Utilities Company
("Ollig"),   a  privately   owned   telecommunications   company   which  served
approximately 25,000 telephone access lines and 3,400 cable television customers
in Minnesota, Iowa, North Dakota and South Dakota for $80,000,000.  Prior to the
acquisition, the Company served approximately 6,300 access lines and 4,200 cable
television  customers.  The operations of Ollig, which were substantially larger
than those of the  Company  prior to the  acquisition,  had a huge impact on the
Company's  operating  results  over the  last  eight  months  of the  year.  The
Company's  consolidated  revenues  increased  $14,813,000 in 1996. The following
table shows revenues from Ollig's operations separate from those of the Company.
<TABLE>
<CAPTION>

                                        Ollig Utilities             Hector Communications Corp.
                                        8 Months Ended            Twelve Months Ended December 31
                                       December 31,1996               1996                 1995
                                     -------------------    ------------------    ------------------
<S>                                  <C>                   <C>                   <C>               
Local network                        $        2,207,217    $        1,474,912    $        1,076,801
Network access                                7,817,153             3,717,729             3,474,738
Billing and collection                          656,706               224,908               228,038
Nonregulated activities                       2,386,360               303,895               285,355
Cable television                                628,988             1,239,653               779,391
                                      ------------------    ------------------    ------------------
              Total                  $       13,696,424    $        6,961,097    $        5,844,323
                                      ==================    ==================    ==================
</TABLE>

         Revenues from the Company's existing operations increased $1,117,000 or
19%. Local network revenues  increased  $398,000 or 37%. The increase was due to
local  service  rate  increases  imposed in the  Company's  Wisconsin  telephone
exchanges in  December,  1995 to offset  revenue lost to the extended  community
calling (ECC) program.  Network access revenues  increased $243,000 or 7% due to
increased  interstate  settlements from NECA. Cable television revenue increased
$460,000 or 59%, reflecting the full year impact of the August, 1995 acquisition
of cable systems from Lake Cable Partnerships.

       Operating cost and administrative  expenses increased  $9,074,000 or 182%
over 1995. Operating costs and administrative  expenses for Ollig operations and
existing company operations were as follows:
<TABLE>
<CAPTION>

                                           Ollig Utilities            Hector Communications Corp.
                                           8 Months Ended          Twelve Months Ended December 31
                                          December 31,1996               1996                 1995
                                        ------------------   -------------------   ------------------
<S>                                    <C>                   <C>                   <C>               
Plant operations                       $        1,869,098    $          838,787    $          825,263
Depreciation and amortization                   3,493,668             1,934,117             1,706,495
Customer operations                               945,664               245,277               287,185
General and administrative                      1,274,010             1,489,197             1,520,370
Nonregulated and miscellaneous                  1,069,148               906,902               652,609
                                        ------------------    ------------------    ------------------
              Total                    $        8,651,588    $        5,414,280    $        4,991,922
                                        ==================    ==================    ==================

</TABLE>

                                       15
<PAGE>



       Operating costs and expenses for existing  operations  increased $422,000
or 8%. Expense increases were due primarily to increased  operating expenses and
depreciation  and  amortization  associated  with  the Lake  Cable  acquisition.
Consolidated  operating  income  increased  $5,739,000.  Operating  income  from
existing operations increased $694,000 or 81%.

       Consolidated   interest  expense,  net  of  investment  income  increased
$3,800,000. Net interest expense for HCC increased $775,000, reflecting interest
on $6,000,000 of short-term borrowing from St. Paul Bank used in the acquisition
of Ollig, the full year effect on interest expense of the convertible debentures
issued  in  1995,  and  reduced  income  due to  decreased  cash  available  for
investment.  Interest  expense  on  Alliance  consists  mainly of a  $55,250,000
acquisition  loan  from St.  Paul  Bank  for  Cooperatives  associated  with the
purchase of Ollig Utilities Company,  and interest on RUS and RTB loans existing
prior to the acquisition.  HCC's investment income benefited from gains on sales
of  marketable  securities  of $687,000  made during the first  quarter of 1996.
Income from investments in cellular telephone partnerships increased $377,000 or
299%, due to the Company's increased  ownership  percentages of these operations
from the Ollig acquisition and also due to the increasing profitability of these
operations.

       Consolidated income before income taxes was $3,074,000 compared to a loss
of $128,000 in 1995. HCC's income before income taxes,  excluding Alliance,  was
$885,000 in 1996.  Income tax expense  was  $1,540,000  compared to a benefit of
$51,000 in 1995.  The  Company's  effective  tax rate of 50.1% in 1996 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 ($836,000 in
1996)  are not  tax  deductible.  The 32%  minority  shareholders'  interest  in
earnings of Alliance was $325,000 in 1996. Net income was $1,209,000 compared to
a loss of $77,000 in 1995.

1995 Compared to 1994

       Consolidated  revenues increased $105,000, or 2% over 1994. Local service
revenues  increased  $102,000 or 10%.  The number of access  lines served by the
Company  increased 1% to 6,331.  Local service  increased due to local  revenues
generated  by extended  community  calling  ("ECC") in the  Company's  Wisconsin
exchanges and the addition of EAS service to Duluth from the  Company's  Cotton,
Minnesota  exchange.  However,  these  service  changes  reduced  the  number of
intrastate  long  distance  calls  handled by the Company,  reducing  intrastate
access revenues,  which declined $250,000. In addition to the loss of toll calls
to ECC and EAS services, the Company's intrastate access rates in Minnesota were
reduced  effective  January 1,  1995,  causing an  additional  revenue  decline.
Intrastate access rates were reduced again effective  January 1, 1996.  Revenues
from interstate access increased $42,000 or 2% due to increased settlements from
NECA.  Revenues from billing and collection  services  provided to long distance
carriers declined  $35,000,  or 13% due to the reduced volume of intrastate toll
calls discussed above.  Revenues from nonregulated  telephone  services declined
$25,000, or 8%.

       Cable television  revenues increased $270,000,  or 53%. In August,  1995,
the Company  acquired  22 rural  Minnesota  cable  television  systems,  serving
approximately  2,000  subscribers,  from Lake  Cable  Partnerships,  effectively
doubling  the  size  of the  Company's  cable  operations.  The  Company  served
approximately 4,200 cable customers at December 31, 1995.

       Operating  costs  and  expenses  increased  $817,000  or 20%  over  1994.
Telephone operating costs and administration expenses increased $229,000, or 7%,
due to  increased  corporate  administration  expenses,  increased  depreciation
expenses and the write-off of costs  associated with the Company's  unsuccessful
attempt  to  purchase  additional  telephone  exchanges  from U.S.  West.  Cable
television  operating  expenses  increased  $487,000,  or 77%  due to  increased
operating costs and depreciation expenses associated with the acquisition of the
Lake Cable  systems  and  $171,000 in  write-off  expenses  associated  with the
unsuccessful development of a proposed cable system and plant retirements in the
one cable system which is being rebuilt.  Operating income declined $712,000, or
46%.

       Interest expense,  net of investment  income,  increased  $492,000 due to
interest and amortization  expenses  associated with the Company's February 1995
public  offering of  $12,650,000  in 8.5%  convertible  debentures.  Income from
cellular  telephone  partnerships  increased  $72,000.  Unrealized losses on the
Company's  marketable  securities  portfolio were $198,000 in 1995,  compared to
$86,000 in 1994,  due to reduced market  valuation of the Company's  holdings in
Telephone and Data Systems ("TDS").  The Company sold its TDS stock in the first
quarter of 1996.  1994 income also included a $2,188,000  pretax gain on sale of
the Company's  investment in a cellular  telephone  system and  recognition of a
deferred $315,000 gain on marketable securities.

                                       16
<PAGE>

       The  Company  recorded a loss  before  income  taxes of $128,000 in 1995,
compared to income of  $3,620,000 in 1994.  The Company's  income tax benefit of
$51,000 was due primarily to  amortization  of deferred  investment tax credits.
Net loss for 1995 was $77,000  compared to net income of  $2,205,000 in 1994. In
1994, net income included $1,450,000, after income taxes, in gains on marketable
securities transactions and sale of the cellular telephone interest.

Liquidity and Capital Resources

       On April 25,  1996, a newly formed  subsidiary  of the Company,  Alliance
Telecommunications  Corporation ("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 $55,250,000 of long-term debt financing  provided by St.
Paul Bank for  Cooperatives  ("St.  Paul  Bank").  The Company has locked in the
interest  rates on  $30,000,000 of this debt for periods of 5 - 7 years at rates
of 7.61% - 7.67%.  Interest  on the  remaining  $25,250,000  floats at St.  Paul
Bank's cost of money plus 130 basis points (6.71% at December 31, 1996).

       The Company's investment in Alliance is approximately $16,903,000,  which
includes  $6,000,000 of short term  borrowing by the Company from St. Paul Bank,
purchase  price deposits made by the Company in 1995, and $73,000 of acquisition
costs.  The  Company  is  exploring  alternatives  to  repay  or  refinance  the
$6,000,000  of  short-term  financing.  These  alternatives  could include asset
sales, new debt borrowings if feasible, or pubic equity offerings.

       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, 1996 was $1,614,000.
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 1996 patronage
refund  from St.  Paul  Bank was  $221,000,  $66,000  was  received  in cash and
$155,000 in stock of St. Paul Bank.  The Company  cannot  predict what patronage
refunds will be in future years.

       The  Company's LEC  subsidiaries  serve its  telephone  customers  with a
100%-digital  switching network and almost 100% buried outside plant.  Telephone
plant additions in 1996, 1995 and 1994 were  $4,669,000,  $869,000 and $976,000,
respectively.   Telephone  plant  additions  for  1997  are  expected  to  total
$4,100,000  and  will  provide  customers  with  additional  advanced  switching
services as well as expand the Company's  use of high  capacity  fiber optics in
its telephone  network.  Investments  in cellular  telephone  partnerships  were
$162,000 and $264,000 in 1995 and 1994, respectively.

       The Company has financed its telephone  asset  additions from  internally
generated  funds and  drawdowns  of Rural  Utilities  Service  ("RUS") and Rural
Telephone  Bank ("RTB") loan funds.  Proceeds from  long-term  borrowings by the
telephone  companies were  $411,000,  $414,000,  and $497,000 in 1996,  1995 and
1994,  respectively.  The Company's average interest rate on outstanding RUS and
RTB loans is 5.6%.  Substantially  all of the  Company's  telephone  assets  are
pledged or are subject to mortgages to secure obligations of its LECs to the RUS
and RTB. In  addition,  the amount of dividends on common stock that may be paid
by the Company's LEC subsidiaries is limited by covenants in the mortgages.  The
Company is  currently  applying to the RUS and RTB for new loans,  some of which
have  received  preliminary  approval.  At December  31, 1996,  unadvanced  loan
commitments from the RUS and RTB totaled $4,616,000.

       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. The debentures are  convertible  into common stock of
the  Company at a rate of 112.5  common  shares per $1,000 par value  bond.  The
bonds are callable  under  certain  circumstances  and include  restrictions  on
payment  of  dividends  to  the  Company's  shareholders.   The  debentures  are
subordinated  to $4,000,000 of the  Company's  short-term  debt owed to St. Paul
Bank.  Total value of the  offering  was  $12,650,000.  Proceeds to the Company,
after   underwriting,   accounting   and  legal   expenses  were   approximately
$11,300,000.  The underwriters also received warrants to purchase 123,750 shares
of the  Company's  common stock at a price of $8.70 per share.  The warrants are
exercisable  beginning  February  15, 1996 and expire  February  15,  2000.  The
Company  utilized  the bond  funds to pay down  debt  associated  with its cable
television  operation,  finance  cable  television  plant  additions,   purchase
additional cable television systems and acquire Ollig Utilities Company.

                                       17
<PAGE>

       In 1994, the Wisconsin public service commission  ("WPSC")  implemented a
rule for interexchange  calls to nearby communities  (Extended Community Calling
or "ECC") which significantly  reduced the Company's  intrastate access revenues
in  Wisconsin.  Revenues  from long  distance  and  access  services  in 1995 in
Wisconsin  declined  $188,000 from 1994 levels.  To  compensate  for the revenue
loss, the Company applied for and received a local service rate increase for its
Wisconsin exchanges, which went into effect in December, 1995.

       In August 1995, the Company  acquired 22 rural  Minnesota  cable systems,
serving  approximately  2,000  customers,  from Lake Cable  Partnership for $2.2
million.  In September,  1996, the Company acquired two additional cable systems
serving 320  subscribers  for $319,000.  Other capital  additions to support the
Company's cable systems totaled $270,000,  $263,000,  and $486,000 in 1996, 1995
and 1994,  respectively.  Total cable television  capital additions for 1997 are
estimated at $175,000.

       Operating  income from the Company's cable television  operations  neared
breakeven  in 1996 after being  unprofitable  in earlier  years.  The  operating
improvements  have  been due to the  cable  acquisitions  made in 1995 and 1996,
which have  allowed  the  Company  to spread  its costs over a larger  number of
subscribers.  1995 operating  results were adversely  affected by write-downs on
some  cable  plant  due to the  necessary  replacement  of  obsolete  cable  and
electronics and the write-off of development  expenses associated with a plan to
build a cable system in Garrison, MN. The Company's cable operations continue to
suffer from a lack of scale economies in all its systems,  which  necessitates a
higher  than  industry  average  ratio of  employees  to  customers.  Continuing
improvement  of cable  operating  results  depends on  increasing  the Company's
subscriber base,  achieving lower operating expense ratios and increasing system
revenues.

       The Company's  investment income has been derived almost exclusively from
interest earned on its cash and cash equivalents.  Interest income earned by the
Company has fluctuated in relation to changes in interest rates and availability
of cash for  investment.  In the first  quarter of 1996,  the  Company  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. The
Company also sold 61,133 shares of Rural Cellular  Corporation in that company's
initial public offering of its common stock in February,  1996.  Proceeds to the
Company  after  selling  expenses  were  $554,000.  At December  31,  1996,  the
Company's  marketable  securities portfolio consisted primarily of the remaining
shares of Rural Cellular Corp. (Nasdaq National Market:  RCCC) which the Company
received in exchange for its  investment  in the cellular  RSA  partnerships  in
northern Minnesota and shares of Rural Cellular Corp., U.S. West Communications,
Inc. and U.S. West Media,  Inc.  owned by Ollig  Utilities  Company prior to the
acquisition.

       The  Company  produced  cash from  operating  activities  of  $6,847,000,
$2,103,000 and $2,151,000 in 1996, 1995, and 1994, respectively. At December 31,
1996, the Company's  cash,  cash  equivalents,  temporary cash  investments  and
marketable securities totaled $16,110,000.  Working capital at December 31, 1996
was just  $1,307,000 due to the Company's need to refinance its short-term  debt
with St. Paul Bank.  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

                                       18
<PAGE>



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.

       At  December  31,  1996,  approximately   $25,200,000  of  the  Company's
acquisition  loan for the purchase of Ollig Utilities  Company was on a floating
interest  rate based on St. Paul Bank's cost of money.  Should  inflation  rates
significantly exceed the Company's expectations it could increase interest rates
and the Company's debt service  expenses  beyond  acceptable  limits or make St.
Paul Bank unwilling to continue extending credit to the Company.

Regulation

       The  Minnesota  legislature  passed a law in 1995 which allows  telephone
companies serving fewer than 50,000 access lines to elect an alternative form of
regulation. A company electing alternative regulation would no longer be subject
to rate of return  review by state  regulators,  but instead would be subject to
review of pricing of services.  All of the Company's Minnesota subsidiaries have
elected  alternative  regulation  as of January 1, 1996.  A  requirement  of the
election  was a  commitment  that local  service  rates  would be frozen for two
years, other than in extraordinary circumstances.

Competition

       In   February   1996,    President    Clinton   signed   into   law   the
Telecommunications Act of 1996. The new law represents the biggest change in the
rules  governing  local service since Congress  imposed  federal  regulation and
established the FCC in 1934. Under its provisions, the monopoly on local service
enjoyed  by LECs is  eliminated  and LECs must allow  competitors  access to the
local  network  facilities.  The Company does not know to what extent it will be
subject to local  competition in the markets it serves under the new rules.  The
final results of the changes made by the new law will not be known for some time
until new rule making by the FCC and state regulatory agencies is complete.  The
Company is monitoring developments regarding the new regulatory climate closely,
and expects its  operations  will be materially  affected by the new rules,  but
cannot predict what effect the new rules will have on its business.

       The Company is presently the only provider of local telephone  service in
the areas it serves.  Technological  developments in competing technologies such
as cellular telephone,  digital microwave, coaxial cable, fiber optics and other
wireless and wired  technologies  may result in new 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 small  communities  and rural areas served by the
Company's telephone subsidiaries.

       All of the Company's cable television  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.

                                       19
<PAGE>



Changes in Accounting Standards

       Effective January 1, 1996, the Company has adopted Statement of Financial
Accounting  Standards  No. 121,  "Accounting  for the  Impairment  of Long-Lived
Assets and for Long-Lived  Assets to be Disposed Of" (SFAS 121).  This statement
requires  that assets to be held and used be reviewed  for  impairment  whenever
events or changes in circumstances  indicate that the carrying value of an asset
may not be  recoverable.  An  impairment  loss  should  be  recognized  when the
estimated  future cash flows from the asset are less than the carrying  value of
the asset.  Assets to be  disposed  of should be  reported at the lower of their
carrying amount of fair value less cost to sell.  Adoption of this statement did
not have a material  effect on the Company's  results of operations or financial
position.

       Effective  January 1, 1996, the Company adopted the pro forma  disclosure
provisions of SFAS No. 123,  "Accounting  for  Stock-Based  Compensation".  This
statement  requires  the  Company  to  disclose  the fair  value of  stock-based
compensation  to  employees.  The  Company  has elected to continue to apply APB
Opinion No. 25,  "Accounting  for Stock Issued to Employees" for measurement and
recognition of stock-based transactions with its employees.

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,  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.

                                       20
<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, 1996 and 1995 and
the related  consolidated  statements of operations,  stockholders'  equity, and
cash flows for each of the three years in the period  ended  December  31, 1996.
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, 1996 and 1995 and
the results of their operations and their cash flows for each of the three years
in the period ended  December 31, 1996 in  conformity  with  generally  accepted
accounting principles.

As  discussed  in  Note  3 to  the  consolidated  financial  statements,  Hector
Communications  Corporation adopted Statement of Financial  Accounting Standards
No. 115,  "Accounting for Certain  Investments in Debt and Equity Securities" in
1994.

/s/ Olsen Thielen & Co., Ltd.
Olsen Thielen & Co., Ltd.
February 20, 1997
St. Paul, Minnesota



                                       21
<PAGE>



                              REPORT OF MANAGEMENT

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

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

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


                                          /s/ Curtis A. Sampson
                                          Curtis A. Sampson
                                          President and Chief Executive Officer


                                          /s/ Charles A. Braun
                                          Charles A. Braun
March 18, 1997                            Chief Financial Officer



                                       22
<PAGE>
<TABLE>
<CAPTION>
                                     HECTOR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
                                                CONSOLIDATED BALANCE SHEETS

                                                          ASSETS
                                                                                                     December 31
                                                                                         __________________________________
                                                                                                   1996                1995
                                                                                         ______________      ______________
CURRENT ASSETS:
<S>                                                                                      <C>                 <C>           
  Cash and cash equivalents                                                              $    9,571,879      $    9,040,138
  Temporary cash investments                                                                  1,079,900
  Marketable securities (Note 3)                                                                                  1,459,266
  Construction fund (Note 5)                                                                     74,337             108,828
  Accounts receivable                                                                         3,965,754             723,081
  Materials, supplies and inventories, at average cost                                          512,114             120,641
  Prepaid expenses                                                                              160,291              35,992
                                                                                         ______________      ______________
      TOTAL CURRENT ASSETS                                                                   15,364,275          11,487,946

PROPERTY, PLANT AND EQUIPMENT,net  (Notes 1 and 4)                                           47,038,952          14,608,876

OTHER ASSETS:
  Excess of cost over net assets acquired, less amortization
    of $1,989,000 and $1,027,000 (Note 1)                                                    52,510,459             906,950
  Acquisition costs - Ollig Utilities (Note 2)                                                                    2,790,236
  Marketable securities (Note 3)                                                              5,458,400
  Cellular telephone investments (Note 1)                                                     9,777,801           1,260,448
  Other investments (Notes 1 and 5)                                                           5,693,906           1,038,545
  Deferred debenture issue costs (Note 5)                                                       969,201           1,158,313
  Other assets (Note 1)                                                                         535,019             267,130
                                                                                         ______________      ______________
      TOTAL OTHER ASSETS                                                                     74,944,786           7,421,622
                                                                                         ______________      ______________

TOTAL ASSETS                                                                             $  137,348,013     $    33,518,444
                                                                                         ______________      ______________
                                                                                         ______________      ______________

                                           LIABILITIES AND STOCKHOLDERS' EQUITY


CURRENT LIABILITIES:
  Notes payable and current portion of long-term debt (Note 5)                           $   10,047,000     $       492,900
  Accounts payable (Note 9)                                                                   1,860,579             530,248
  Accrued expenses                                                                            2,090,639             653,681
  Income taxes payable                                                                           59,015             132,522
                                                                                         ______________      ______________
    TOTAL CURRENT LIABILITES                                                                 14,057,233           1,809,351

LONG-TERM DEBT, less current portion (Note 5)                                                96,127,379          22,096,419

DEFERRED INVESTMENT TAX CREDITS (Note 6)                                                        526,347             128,339

DEFERRED INCOME TAXES (Note 6)                                                                7,457,907           1,349,988

DEFERRED COMPENSATION (Note 8)                                                                  987,944

MINORITY INTEREST IN ALLIANCE TELECOMMUNICATIONS, CORP.                                       8,245,365

STOCKHOLDERS' EQUITY: (Notes 1, 5 and 7)
  Preferred stock, par value $1.00 per share; 3,000,000 shares authorized:
    Convertible Series A, 389,487 shares issued and outstanding                                 389,487             389,487
  Common stock, par value $.01 per share; 10,000,000 shares authorized;
    1,883,857 and 1,880,294 shares issued and outstanding                                        18,839              18,803
  Additional paid-in capital                                                                    102,003              74,215
  Retained earnings                                                                           9,005,768           7,797,098
                                                                                         ______________      ______________
                                                                                              9,516,097           8,279,603
  Unearned employee stock ownership shares                                                     (101,312)           (145,256)
  Unrealized gains on marketable securities (Note 3)                                            531,053
                                                                                         ______________      ______________
    TOTAL STOCKHOLDERS' EQUITY                                                                9,945,838           8,134,347
                                                                                         ______________      ______________

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                                               $  137,348,013      $   33,518,444
                                                                                         ______________      ______________
                                                                                         ______________      ______________

                                      See notes to consolidated financial statements.


</TABLE>

                                       23
<PAGE>
<TABLE>
<CAPTION>

                                      HECTOR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
                                               CONSOLIDATED STATEMENTS OF INCOME

                                                                              Year Ended December 31
                                                              _____________________________________________________
                                                                     1996                1995               1994
                                                              _____________       _____________       _____________
REVENUES:
<S>                                                          <C>                 <C>                 <C>              
  Local network                                              $   3,682,129       $   1,076,801       $    974,650
  Network access                                                11,534,882           3,474,738          3,682,260
  Billing and collection                                           881,614             228,038            263,492
  Nonregulated activities                                        2,690,255             285,355            309,882
  Cable television revenues                                      1,868,641             779,391            509,244
                                                              _____________       _____________       _____________
    TOTAL REVENUES                                              20,657,521           5,844,323           5,739,528

COSTS AND EXPENSES:
  Plant operations                                               2,707,885             825,263             863,927
  Depreciation and amortization                                  5,427,785           1,706,495           1,408,145
  Customer operations                                            1,190,941             287,185             350,341
  General and administrative                                     2,763,207           1,520,370           1,069,184
  Other operating expenses                                       1,976,050             652,609             483,265
                                                              _____________       _____________       _____________
    TOTAL COSTS AND EXPENSES                                    14,065,868           4,991,922           4,174,862
                                                              _____________       _____________       _____________

OPERATING INCOME                                                 6,591,653             852,401           1,564,666

OTHER INCOME (EXPENSES):
  Interest expense                                              (5,399,617)         (1,554,042)           (586,517)
  Partnership and LLC income                                       502,837             125,924              53,771
  Investment income                                                691,215             645,781             170,530
  Gain on sale of marketable securities (Note 3)                   687,947                                 315,000
  Gain on sale of cellular partnership interest (Note 3)                                                 2,188,355
  Unrealized loss on holding marketable securities (Note 3)                           (197,603)            (86,227)
                                                              _____________       _____________       _____________
    OTHER INCOME (EXPENSES), net                                (3,517,618)           (979,940)          2,054,912
                                                              _____________       _____________       _____________
INCOME (LOSS) BEFORE INCOME TAXES                                3,074,035            (127,539)          3,619,578

INCOME TAX EXPENSE (BENEFIT) (Note 6)                            1,540,000             (51,000)          1,415,000
                                                              _____________       _____________       _____________

INCOME (LOSS) BEFORE MINORITY INTEREST                           1,534,035             (76,539)          2,204,578

MINORITY INTEREST IN EARNINGS OF
  ALLIANCE TELECOMMUNICATIONS CORPORATION                          325,365
                                                              _____________       _____________       _____________

NET INCOME (LOSS)                                            $   1,208,670        $    (76,539)       $  2,204,578
                                                              _____________       _____________       _____________
                                                              _____________       _____________       _____________
NET INCOME (LOSS) PER COMMON AND COMMON
  EQUIVALENT SHARE (Note 1):                                 $         .53        $       (.04)       $        .97
                                                              _____________       _____________       _____________
                                                              _____________       _____________       _____________

NET INCOME (LOSS) PER COMMON SHARE - ASSUMING
  FULL DILUTION (Note 1):                                    $         .53        $       (.04)       $        .97
                                                              _____________       _____________       _____________
                                                              _____________       _____________       _____________

AVERAGE SHARES OUTSTANDING (Notes 1 and 7):
  Common and Common Equivalent                                    2,271,000           1,866,000          2,265,000
  Assuming Full Dilution                                          3,694,000           1,866,000          2,265,000

                                        See notes to consolidated financial statements.

</TABLE>


                                       24
<PAGE>
<TABLE>
<CAPTION>

                                   HECTOR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
                                          CONSOLIDATED STATEMENTS OF CASH FLOWS

                                                                                        Year Ended December 31
                                                                           ________________________________________________
                                                                                   1996             1995             1994
                                                                           _____________    ______________    _____________
CASH FLOWS FROM OPERATING ACTIVITIES:
<S>                                                                       <C>               <C>              <C>          
  Net Income (loss)                                                       $   1,208,670     $     (76,539)   $   2,204,578
  Adjustments to reconcile net income (loss) to net cash
    provided by operating activities:
      Depreciation and amortization                                           5,617,722         1,871,969        1,408,145
      Minority stockholders' interest in earnings
         of Alliance Telecommunications Corporation                             325,365
      Gain on sale of cellular telephone investment                                                             (2,188,355)
      Gain on sales of marketable securities                                   (687,947)                          (315,000)
      Income from partnership and LLC investments                              (502,837)         (125,924)         (53,771)
      Unrealized losses on investments                                                            231,830           86,227
      Changes in assets and liabilities net of effects from
        the purchase of Ollig Utilities, Inc.:
        Decrease in marketable securities                                     1,499,072           437,521          679,627
        Decrease (increase) in accounts receivable                             (408,601)          211,145         (255,931)
        Decrease (increase) in materials, supplies and inventories               75,557           (23,854)          (2,041)
        Decrease (increase) in prepaid expenses                                  (6,057)            6,365           (6,185)
        Increase (decrease) in accounts payable                                (585,734)           55,000         (570,233)
        Increase in accrued expenses                                            708,528           358,231           15,143
        Increase (decrease) in income taxes payable                            (615,843)         (560,331)         583,451
        Decrease in deferred investment tax credits                            (129,000)          (39,000)         (40,000)
        Increase (decrease) in deferred income taxes                            380,000          (243,000)         605,000
        Decrease in deferred compensation                                       (31,679)
                                                                           _____________     _____________    _____________
          Net cash provided by operating activities                           6,847,216         2,103,413        2,150,655

CASH FLOWS FROM INVESTING ACTIVITIES:
  Purchases of property, plant and equipment                                 (5,168,997)       (3,123,547)      (1,118,105)
  Sales of temporary cash investments                                            94,806
  Sales of marketable securities                                                553,645
  Proceeds from (investments in) cellular telephone partnerships                437,371          (161,638)        (263,504)
  Decrease in construction fund                                                 100,393            39,336           46,878
  Purchases of other investments                                             (1,745,105)         (457,250)         (53,646)
  Proceeds from other investments                                                29,911            17,057           35,182
  Increase in excess of cost over net assets acquired                           (88,517)         (141,453)         (70,000)
  Decrease (increase) in other assets                                           107,198           (51,938)         (85,545)
  Decrease (increase) in restricted investment funds,
    net of investment fund obligations                                                                             349,220
  Payment for purchase of Ollig Utilities Company, net of cash acquired     (69,189,692)       (2,790,236)
                                                                           _____________     _____________    _____________
         Net cash used in investing activities                              (74,868,987)       (6,669,669)      (1,159,520)

CASH FLOWS FROM FINANCING ACTIVITIES:
  Repayment of notes payable and long-term debt                              (2,607,031)       (1,769,634)        (723,697)
  Proceeds from issuance of notes payable and long-term debt                 63,168,775        13,064,150          496,563
  Minority interest in Alliance Telecommunications Corporation                7,920,000
  Convertible bond issue costs                                                                 (1,323,787)
  Purchase of Hector Communications Corporation
    common stock                                                                                  (30,272)
  Issuance of common stock                                                       21,768            22,872           39,214
  ESOP shares allocated (purchased), net                                         50,000           (11,683)         (20,000)
                                                                           _____________     _____________    _____________
         Net cash provided by (used in) financing activities                 68,553,512         9,951,646         (207,920)
                                                                           _____________     _____________    _____________

NET INCREASE IN CASH AND CASH EQUIVALENTS                                       531,741         5,385,390          783,215

CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR                                9,040,138         3,654,748        2,871,533
                                                                           _____________     _____________    _____________

CASH AND CASH EQUIVALENTS AT END OF YEAR                                  $   9,571,879      $  9,040,138    $   3,654,748
                                                                           _____________     _____________    _____________
                                                                           _____________     _____________    _____________

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
  Interest paid                                                           $   4,753,594      $  1,023,041    $     564,113
  Income taxes paid                                                           1,890,825           791,331          266,549

                                     See notes to consolidated financial statements.
</TABLE>


                                       25
<PAGE>

<TABLE>
<CAPTION>

                                                      HECTOR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
                                                        CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

                                                                                                                      
                                                                                                   Unearned   Unrealized           
                                     Preferred Stock      Common Stock     Additional              Employee    Gains On 
                                   ---------------------------------------   Paid-in   Retained  Stock Owner- Marketable 
                                    Shares     Amount   Shares     Amount    Capital   Earnings  ship Shares  Securities     Total
                                  _________ _________ _________  _________ _________  __________  __________  __________ ___________
<S>                 <C> <C>        <C>      <C>       <C>        <C>       <C>       <C>          <C>         <C>        <C>       
BALANCE AT DECEMBER 31, 1993       393,187  $ 393,187 1,870,498  $ 18,705  $  7,960  $ 5,699,125  $(112,800)             $6,006,177
  Net income                                                                           2,204,578                          2,204,578
  Issuance of common stock under
    Employee Stock Purchase Plan                          3,652        36    20,528                                          20,564
  Issuance of common stock under
    Employee Stock Option Plan                            2,800        28    18,622                                          18,650
  Issuance of common stock in
    exchange for preferred stock      (900)      (900)      900         9       891                                               0
  ESOP Shares Purchased,
    net of shares allocated                                                                         (20,000)                (20,000)
                                  _________ _________ _________  _________ _________  __________  __________  __________ ___________
BALANCE AT DECEMBER 31, 1994       392,287    392,287 1,877,850     18,778   48,001    7,903,703   (132,800)              8,229,969
  Net loss                                                                               (76,539)                           (76,539)
  Issuance of common stock under
    Employee Stock Purchase Plan                          3,844         39   22,833                                          22,872
  Purchase of common stock                               (4,200)       (42)    (164)     (30,066)                           (30,272)
  Issuance of common stock in
    exchange for preferred stock    (2,800)    (2,800)    2,800         28    2,772                                               0
  ESOP Shares Purchased,
    net of shares allocated                                                     773                 (12,456)                (11,683)
                                  _________ _________ _________  _________ _________  __________  __________  __________ ___________
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
  Unrealized gains on marketable
    securities                                                                                                $ 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
                                  _________ _________ _________  _________ _________  __________  __________  __________ ___________
                                  _________ _________ _________  _________ _________  __________  __________  __________ ___________
                                                                 

                                                        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 four local exchange  telephone  companies,
two cable companies,  an engineering  company,  and a credit card communications
company.  At  December  31,  1996,  the  Company's  wholly  and  majority  owned
subsidiaries  provided  telephone  service  to 32,000  access  lines in 34 rural
communities in Minnesota, Wisconsin, South Dakota and Iowa. Its cable television
operations provided cable television services to approximately 8,100 subscribers
in  Minnesota,  South Dakota and  Wisconsin.  The Company is also an investor in
partnerships   and   corporations   providing   cellular   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).
As part of the rate-making process, regulators may require recording of an asset
or liability  that would not be recognized in an unregulated  enterprise.  These
costs are recovered  through rates  authorized in the rate-making  process.  The
Company's   financial   statements  are  also  affected  by  depreciation  rates
prescribed by regulators,  which may result in different depreciation rates than
in an unregulated enterprise.

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. Actual results
could differ from those estimates.

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  $4,305,212,  $1,533,240  and
$1,246,695 for 1996,  1995 and 1994,  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.

Other  assets:  The excess of cost over net assets of  subsidiaries  acquired in
purchase transactions is being amortized on the straight-line method principally
over forty years.  Amortization  included in costs and  expenses  was  $961,981,
$73,865 and $66,088 in 1996, 1995 and 1994, respectively.

Investments in cellular 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, 1996,
the Company owned 9.75% of Midwest Wireless Communications LLC, which is made up
of the former RSA  partnerships  which served  southern  Minnesota and 12.25% of
Sioux Falls Cellular,  Ltd., which serves the Sioux Falls,  South Dakota MSA. At
December  31,  1996,  the  Company's  cumulative  share of income from  cellular
investments  was $738,000,  of which $478,000 was  undistributed.  The excess of
cost over the Company's  share of equity in the cellular  partnerships  is being
amortized on the straight  line method over forty  years.  Amortization  expense
(included as an offset to partnership and LLC income) in 1996 was $117,280.  The
Company also owns 4.2% of Rural Cellular  Corporation,  (Nasdaq National Market:
RCCC) which is comprised of the former RSA  partnerships  which served  northern
Minnesota.  Investments  in Rural  Cellular  Corporation  are recorded at market
value in 1996 and at cost in 1995 (Note 3).

                                       27
<PAGE>

Deferred  bond  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 bond issue costs are being amortized
over the seven year life of the bonds (Note 5).  Amortization  cost  included in
interest  expense for 1996 and 1995 was  $189,112  and  $165,474,  respectively.
Accumulated  amortization  was  $354,586  and  $165,474 at December 31, 1996 and
1995, respectively.

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,  deferred
retirements and other deferred  charges.  Amortization  included in expenses was
$161,417, $91,530 and $91,530 for 1996, 1995 and 1994, 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
$29,574,000  and  $8,673,000 at December 31, 1996 and 1995,  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: Net income per share is computed by dividing net income by
the weighted average number of common shares,  dilutive common stock equivalents
(convertible  preferred  stock,  stock  options and  warrants)  and  potentially
dilutive  securities  (convertible  debentures)  outstanding  during the period.
Earnings per share for 1995 is based on common stock  outstanding  as all common
stock  equivalents and potentially  dilutive  securities were  anti-dilutive for
that period.  The income used for 1996 fully diluted earnings per share has been
adjusted for interest on convertible debentures, net of related income taxes.



                                       28
<PAGE>



Statement of cash flows: The Company  considers  temporary cash investments with
an original maturity of three months or less to be cash equivalents.

Effective  April  25,  1996,  the  Company's  68%  owned  subsidiary,   Alliance
Telecommunications  Corporation,  purchased  all of the  capital  stock of Ollig
Utilities  Company.  In the acquisition,  the following assets were acquired and
liabilities assumed:
<TABLE>
<CAPTION>

<S>                                                            <C>             
Property, plant and equipment                                  $     31,566,292
Excess of cost over net assets acquired                              52,404,243
Cellular 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
                                                              ==================
</TABLE>

Change  of  presentation:  Certain  amounts  in  the  1994  and  1995  financial
statements have been  reclassified to conform with the 1996 financial  statement
presentation.   These   reclassifications   had  no  effect  on  net  income  or
stockholders' equity as previously reported.

NOTE 2 - ACQUISITION OF OLLIG UTILITIES COMPANY, INC.

On  April  25,  1996,  a  newly  formed  subsidiary  of  the  Company,  Alliance
Telecommunications  Corporation ("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  investment  in  Alliance  is
approximately $16,903,000,  which includes $6,000,000 of short term borrowing by
the Company from St. Paul Bank,  purchase  price deposits made by the Company in
1995, and $73,000 of acquisition costs.

The  acquisition is being  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 cellular  telephone  partnerships)  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.
Unaudited  consolidated  results of  operations  on a pro forma  basis as though
Ollig was acquired January 1, 1995 are as follows:
<TABLE>
<CAPTION>

                                                    Year Ended December 31
                                            ------------------------------------
                                                     1996               1995
                                            ---------------     ----------------
<S>                                         <C>                 <C>            
Revenues                                    $   27,260,512      $    24,766,580
Income (loss) before minority interest           1,446,644             (473,419)
Net income (loss)                                1,097,805             (510,374)
Net income (loss) per share                 $          .48      $         (.27)

</TABLE>

Pro forma financial information is not necessarily  indicative of the results of
operations  had  the  acquisition  occurred  at the  beginning  of  the  periods
presented,  nor  are  they  necessarily  indicative  of the  results  of  future
operations.


                                       29
<PAGE>



NOTE 3 - MARKETABLE SECURITIES AND GAINS ON SALES OF INVESTMENTS

Marketable  securities consist  principally of equity securities obtained by the
Company in sales of its  investments  in  cellular  telephone  partnerships  and
equity  securities  of  other   telecommunications   companies.   The  Company's
marketable  securities portfolio is classified as available-for-sale at December
31, 1996. The Company's marketable securities were classified as trading in 1995
and  1994.  Those  securities  were  sold in 1996.  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>           <C>          <C>        
December 31, 1996     $4,680,892   $1,390,273    $(612,765)   $ 5,458,400

</TABLE>

Stockholders'  equity at December  31, 1996  includes a change of $777,508  less
deferred taxes of $246,455 for net unrealized holding gain on investments. These
amounts have no cash effect and are not included in the statement of cash flows.
Net income includes  unrealized holding losses on trading marketable  securities
of $197,603 and $86,227 in 1995 and 1994, respectively.

In February,  1996,  Rural  Cellular  Corporation  ("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.  Gross  proceeds from the sale were $554,000 and gain
on the sale was $485,000.

Effective  January  3, 1994 the  Company  sold its  investment  in the  cellular
telephone system serving the Rochester,  Minnesota Metropolitan Statistical Area
("MSA")  to  Telephone  and  Data  Systems,  Inc.  ("TDS").  Book  value  of the
investment  was  $220,576.  HCC received  47,802  shares of TDS common stock and
recorded  a gain on sale of the  investment  of  $2,188,355  ($1,313,000  net of
income taxes).  The Company sold a portion of the TDS shares it received in 1993
as a hedge against the value of the  transaction.  The balance of the TDS shares
were sold in 1996.  Gross proceeds from the 1996 sales were $1,499,000 and gains
on the sales were $203,000.

In 1992, the Company exchanged its partnership  interest in Wisconsin RSA #2 for
14,584 shares of Pacific Telecom, Inc. (PTI) common stock. The transaction was a
tax free exchange and the stock acquired was restricted from sale for two years.
At the time of the exchange, the $350,000 market value of the stock received was
recognized as an asset and a deferred  gain of $315,000 was  recorded.  In 1994,
the  restrictions  on sale of the stock were removed and the  deferred  gain was
recorded in income. The Company sold the stock in 1995.

NOTE 4 - PROPERTY, PLANT AND EQUIPMENT

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

                                                         December 31
                            Estimated      ------------------------------------
                           useful life             1996                 1995
                       ------------------  ----------------       -------------
<S>                        <C>              <C>                   <C>          
Land                                        $       546,673       $     157,084
Buildings                   5-40 years            5,207,150           1,456,438
Machinery and equipment     3-15 years            1,864,666             987,206
Furniture and fixtures      5-10 years              388,466             154,662
Telephone plant             5-33 years           47,591,324          16,742,295
Cable television plant     10-15 years            5,869,575           4,621,922
Construction in progress                            232,923             527,646
                                            ---------------       -------------
                                                 61,700,777          24,647,253
 Less accumulated depreciation                   14,661,825          10,038,377
                                            ---------------       -------------
                                             $   47,038,952       $  14,608,876
                                            ===============       =============

</TABLE>


                                       30
<PAGE>



NOTE 5 - NOTES PAYABLE AND LONG-TERM DEBT
<TABLE>
<CAPTION>

                                                                            December 31
                                                              --------------------------------------
                                                                      1996                  1995
                                                              ----------------        ---------------
<S>                                                          <C>                      <C>
Notes payable to St. Paul Bank for Cooperatives,
  payable by Alliance Telecommunications Corporation
  in monthly installments, secured by stock of Alliance, 
  average rate of 7.2%, due 1997 to 2011                      $   55,250,000
Note payable to St. Paul Bank for Cooperatives,
  payable by cable television subsidiary, interest rate
  of 7.4%, due 1997                                                6,000,000
Rural Utilities Service ("RUS") and Rural Telephone Bank
 ("RTB") mortgage notes, payable by telephone company
  subsidiaries in monthly and quarterly installments, 
  average rate of 5.6%, due 1997 to 2026                           32,005,604         $   9,939,319
Convertible subordinated debentures, payable to
  bondholders, interest rate of 8.5%, due 2002                     12,650,000            12,650,000
Notes payable to former cable television system owners,
  payable annually by cable television subsidiary,
  interest rate of 6%, due 1997 to 1998                               268,775
                                                              ----------------        --------------
                                                                  106,174,379            22,589,319
Less current portion                                               10,047,000               492,900
                                                              ----------------        --------------
                                                              $    96,127,379         $  22,096,419
                                                              ================        ==============
</TABLE>

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.  Face  amount of the loan was  $55,250,000.  The Company has
fixed interest  rates on $30,000,000 on this loan for periods  ranging from five
to seven years at rates of  approximately  7.6%.  Interest on the balance of the
loan floats at St. Paul  Bank's  cost of money plus 130 basis  points  (6.71% at
December 31, 1996). The Company made only interest payments on the loan in 1996.
Principal payments began in January 1997 and will continue until March, 2011.

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.  Face amount of the loan was  $6,000,000,  payable
March 31, 1997.  Interest rate on the loan,  which varies  according to St. Paul
Bank's cost of money,  was 7.4% at December 31,  1996.  The loan is secured by a
pledge of the  assets of North  American  and the stock of one of the  Company's
telephone subsidiaries.

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, 1996 was $1,614,000.
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 1996 patronage
refund  from St.  Paul  Bank was  $221,000,  $66,000  was  received  in cash and
$155,000  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
cannot predict what patronage refunds will be in future years.

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 various  restrictions on distributions of capital to the
parent company relative to their outstanding indebtedness.

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. The bonds are callable under certain circumstances and
include restrictions on payment of dividends to the Company's shareholders.  The
debentures are  subordinated  to $4,000,000 of senior  indebtedness  owed by the
Company to St. Paul Bank. Total value of the offering was $12,650,000.  Proceeds
to  the  Company,  after  underwriting,   accounting  and  legal  expenses  were
approximately $11,300,000.


                                       31
<PAGE>



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

                   1997                  $10,047,000
                   1998                    4,086,000
                   1999                    4,180,000
                   2000                    4,428,000
                   2001                    4,706,000

The Company is continuing its construction program to upgrade the central office
equipment and outside plant of its telephone subsidiaries.  Planned expenditures
for telephone plant additions in 1997 are $4,100,000. 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 of
$4,616,000  and is in the  process  of  applying  for new loans.  Planned  cable
television plant additions and improvements for 1997 are $175,000.

NOTE 6 - 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
                                                          --------------------------------------------------------
                                                                   1996                1995              1994
                                                          -----------------  ------------------  -----------------
Currently payable taxes:
<S>                                                       <C>                <C>                 <C>              
     Federal                                              $         964,000  $          141,000  $         674,000
     State                                                          325,000              90,000            176,000
                                                          -----------------  ------------------  -----------------
                                                                  1,289,000             231,000            850,000

Deferred income taxes (benefit)                                     380,000            (243,000)           605,000
Deferred investment tax credits                                    (129,000)            (39,000)           (40,000)
                                                          ------------------ ------------------- ------------------
                                                          $       1,540,000  $          (51,000) $       1,415,000
                                                          =================  =================== =================
</TABLE>

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

                                                    1996               1995
                                          -----------------  ------------------
<S>                                      <C>                <C>                
Accelerated depreciation                 $      (6,410,907) $       (1,693,988)
Alternative minimum tax credits                    237,000             173,000
Marketable securities                           (1,724,000)            143,000
Deferred compensation                              400,000
Other                                               40,000              28,000
                                          -----------------  ------------------
                                         $      (7,457,907) $       (1,349,988)
                                         ================== ===================
</TABLE>

The  provision  for income taxes varied from the federal  statutory  tax rate as
follows:
<TABLE>
<CAPTION>

                                                                           Year Ended December 31
                                                          ------------------------------------------------------
                                                                   1996                1995              1994
                                                          -----------------  ------------------  ---------------
<S>                                                                  <C>                <C>                <C>  
Tax (benefit) 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                            7.5                11.4               5.9
Excess of cost over net assets acquired                              12.1                15.6                .5
Investment tax credits                                               (4.2)              (29.5)             (1.1)
Other                                                                  .7                (3.5)              (.2)
                                                          -----------------  ------------------  ---------------
Effective tax (benefit) rate                                         50.1%              (40.0)%            39.1%
                                                          =================  ==================  ===============


</TABLE>


                                       32
<PAGE>



NOTE 7 - 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 250,000 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 500 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.

A summary of changes in  outstanding  employee and director stock options during
the three years ended December 31, 1996 is as follows:
<TABLE>
<CAPTION>
                                                                     Average
                                                      Number of  exercise price
                                                         shares      per share
                                               ----------------- -------------
<S>                                                     <C>      <C>          
Outstanding at December 31, 1993                        117,100  $        7.09
                  Granted                                44,600           7.67
                  Exercised                              (2,800)          6.66
                                               ----------------- -------------
Outstanding at December 31, 1994                        158,900           7.15
                  Granted                                46,150           7.02
                  Canceled                               (3,700)          7.17
                                               ----------------- -------------
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
                                               ================  =============
</TABLE>

Exercise  prices of  outstanding  stock  options  range  from $6.50 to $8.25 per
share.  The weighted  average  remaining  life of  outstanding  stock options at
December 31, 1996 was 2.74 years.  Options  exercisable at December 31, 1996 are
167,242.

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,
participating  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 3,563,  3,844 and 3,652 for the plan years ended  August 31, 1996,
1995 and 1994,  respectively.  At December 31, 1996  employees had subscribed to
purchase an additional  3,703 shares in the current plan cycle ending August 31,
1997.

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:

                                       33
<PAGE>



<PAGE>

<TABLE>
<CAPTION>

                                           Year Ended December 31
                                       ----------------------------
                                             1996            1995
                                       ------------- --------------
<S>                                    <C>           <C>           
Net Income (Loss)                      $  1,139,265  $    (115,710)
Net Income (Loss) Per Share            $        .50  $        (.06)
</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 with the following  assumptions for 1996 and 1995: expected
volatility of 21.2%,  a risk free  interest  rate of 6.8%,  an expected  holding
period of four  years for key  employee  options  and seven  years for  director
options,  and no dividend yield.  Pro forma  stock-based  compensation  cost was
$69,405 and $39,171 in 1996 and 1995, respectively.

In February 1995 the Company  completed a public  offering of  $12,650,000  (par
value)  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 bond. If all the outstanding  bonds were converted into common stock, they
would  represent  an  additional   1,423,175   common  shares.   The  offering's
underwriters  also received warrants to purchase 123,750 shares of the Company's
common  stock  at a price of $8.70  per  share.  The  warrants  are  exercisable
beginning February 15, 1996 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.  During 1995 and 1994, the Company advanced $62,000 and
$70,000, respectively, to the ESOP to purchase the Company's common stock on the
open  market.  Advances  bear  interest  at 85% of prime and are repaid  through
contributions  to the plan.  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 $50,000  for each of the last three  years.  At
December 31, 1996, the ESOP held 56,098 shares of the Company's common stock, of
which  44,271  shares  had  been  allocated  to the  accounts  of  participating
employees.  All eligible employees of the Company  participate in the plan after
completing one year of service.  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. At December 31,
1996, the cost of unallocated ESOP assets was $101,312,  which approximates fair
value.


NOTE 8 - 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 1996, 1995 and 1994
were approximately $85,700, $21,800 and $19,100, 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 1996 were $128,900.

Ollig Utilities  Company had a deferred  compensation  agreement with two of its
former officers which the Company has assumed. Under the agreement, the salaries
of these officers was continued after their retirement based on a formula stated
in the agreement.  The Company incurred no expense under this agreement in 1996.
Payments made under the agreement in 1996 were $31,700.

                                       34
<PAGE>



NOTE 9 - 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
$258,000, $279,000 and $267,000 in 1996, 1995 and 1994, respectively.

Since 1995, employees of Hector Communications  Corporation and its wholly owned
subsidiaries have participated in a joint self-funded  medical insurance program
with employees of CSI. Costs paid by the Company into this program were $157,000
and $140,000 in 1996 and 1995, 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
$307,000 and $209,000 at December 31, 1996 and 1995, respectively.

NOTE 10 - SEGMENT INFORMATION

The  Company  operates  in  two  business  segments:  local  exchange  telephone
companies and cable television. Industry segment information is as follows:
<TABLE>
<CAPTION>

                                                     Year Ended December 31
                                     --------------------------------------------------------
                                                1996                1995              1994
                                     -----------------  ------------------  -----------------
Revenues:
<S>                                  <C>                <C>                 <C>              
     Telephone                       $      18,529,701  $        5,057,777  $       5,223,104
     Cable television                        1,868,641             779,391            509,244
     Corporate                                 259,179               7,155              7,180
                                     -----------------  ------------------  -----------------
                                     $      20,657,521  $        5,844,323  $       5,739,528
                                     =================  ==================  =================
Operating income (loss):
     Telephone                       $       6,644,455  $        1,314,828  $       1,709,415
     Cable television                           (3,357)           (335,447)          (118,858)
     Corporate                                 (49,445)           (126,980)           (25,891)
                                     ------------------ ------------------- ------------------
                                     $       6,591,653  $          852,401  $       1,564,666
                                     ================== =================== ==================
Identifiable assets:
     Telephone                       $     126,596,360  $       22,298,933  $      19,974,320
     Cable television                        5,747,246           4,329,023          2,176,164
     Corporate                               5,004,407           6,890,488            598,166
                                     ------------------ -------------------  -----------------
                                     $     137,348,013  $       33,518,444  $      22,748,650
                                     ==================  ==================  =================
Depreciation and amortization:
     Telephone                       $       4,744,780  $        1,204,614  $       1,135,093
     Cable television                          679,473             455,130            222,817
     Corporate                                 193,469             212,225             50,235
                                     -----------------  -------------------  -----------------
                                     $       5,617,722  $        1,871,969  $       1,408,145
                                     =================  ===================  =================
Capital expenditures:
     Telephone                       $       4,669,171  $          869,243  $         976,212
     Cable television                          499,826           2,230,637            106,698
     Corporate                                                      23,667             35,195
                                     -----------------  ------------------   -----------------
                                     $       5,168,997  $        3,123,547  $       1,118,105
                                     =================  ===================  =================

</TABLE>

                                       35
<PAGE>



NOTE 11 - ACQUISITION OF CABLE PROPERTIES

Effective  August 15,  1995,  the  Company  acquired  22 rural  Minnesota  cable
systems, serving approximately 2,000 subscribers, from Lake Cable Partnership of
Arlington,  Virginia.  The  acquisition  was accounted for as a purchase and the
purchase  price of $2,215,000  was allocated to the assets  acquired.  Excess of
cost over net assets  acquired was $141,000,  which is being  amortized  over 15
years on a straight line basis. Results of the systems acquired were included in
Company  operations  beginning August 15, 1995. In 1996, the Company purchased 2
small cable systems for $319,000




 (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
-----------------------------------------------------------------------------------------------
                           1996
<S>                                         <C>          <C>          <C>             <C>     
Revenues                                    $   1,666    $   5,165    $   7,218       $  6,609
Operating income                                  373        1,597        2,497          2,125
Net income                                        494          110          293            312
Net income per share                        $     .21    $     .05    $     .13       $    .14


                           1995
Revenues                                    $   1,334    $   1,410    $   1,438       $  1,662
Operating income                                  270          206          297             79
Net income (loss)                                 (77)         (18)         115            (97)
Net income (loss) per share                 $    (.03)   $    (.01)   $     .05       $   (.05)

</TABLE>


                                       36
<PAGE>



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

Not applicable.


                                                      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 22, 1997 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 22, 1997 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 22, 1997 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 22, 1997 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.



                                       37
<PAGE>



                                     PART IV

ITEM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES, 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 21 to 36 herein:

         Independent Auditors' Report for the years ended
          December 31, 1996, 1995 and 1994

         Consolidated Balance Sheets as of December 31, 1996 and 1995

         Consolidated Statements of Operations for the years ended
          December 31, 1996, 1995 and 1994

         Consolidated Statements of Stockholders' Equity for the years ended
          December 31, 1996, 1995 and 1994

         Consolidated Statements of Cash Flows for the years ended
          December 31, 1996, 1995 and 1994

         Notes to Consolidated Financial Statements

(a)  (2) Consolidated 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 schedules for the years ended 
          December 31, 1996, 1995 and 1994                                41

         Schedule I - Condensed Financial Information of Registrant     42-44

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

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

(b)  REPORTS ON FORM 8-K FILED DURING THE THREE MONTHS ENDED DECEMBER 31, 1996

         Not Applicable.


                                       38
<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 27, 1997                  /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 27, 1997
--------------------------   Chief Executive Officer and Director
Curtis A. Sampson           

/s/ Steven H. Sjogren        President, Chief Operating Officer,  March 27, 1997
--------------------------   and Director
Steven H. Sjogren           

/s/ Paul N. Hanson           Vice President, Treasurer and        March 27, 1997
--------------------------   Director
Paul N. Hanson                              

/s/ Charles A. Braun         Chief Financial Officer and          March 27, 1997
--------------------------   Principal Accounting Officer
Charles A. Braun                            

--------------------------   Director                             March 27, 1997
Charles R. Dickman

/s/ James O. Ericson         Director                             March 27, 1997
--------------------------
James O. Ericson

--------------------------   Director                             March 27, 1997
Paul A. Hoff

/s/ Wayne E. Sampson         Director                             March 27, 1997
--------------------------
Wayne E. Sampson

/s/ Edward E. Strickland     Director                             March 27, 1997
--------------------------
Edward E. Strickland



                                       39
<PAGE>







================================================================================
                       SECURITIES AND EXCHANGE COMMISSION

                             Washington, D.C. 20549

                  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, 1996


                  --------------------------------------------
                          FINANCIAL STATEMENT SCHEDULE


================================================================================


                                       40
<PAGE>

          INDEPENDENT AUDITORS' REPORT ON FINANCIAL STATEMENT SCHEDULES


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 20, 1997,
included the related financial  statement schedules as listed in item 14(a)2. In
our opinion, these financial statement schedules, 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 20, 1997



                                       41
<PAGE>

<TABLE>
<CAPTION>

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

                                       BALANCE SHEET
                                                                      December 31
                                                           ________________________________
                                                                     1996              1995
                                                            _____________     _____________
Assets:
<S>                                                      <C>                 <C>           
  Cash                                                   $         57,965    $    5,017,799
  Investment in subsidiaries                                   24,533,032         8,040,292
  Other current assets                                            255,922            77,289
  Property, plant and equipment, net                              126,265           162,949
  Accounts with subsidiaries                                    2,445,201         3,932,429
  Other investments                                             1,636,049           503,583
  Deferred acquisition costs                                                      2,790,236
  Deferred bond issue costs                                       969,201         1,158,313
  Other deferred charges
                                                            _____________     _____________
Total Assets                                               $   30,023,635    $   21,682,890
                                                            _____________     _____________
                                                            _____________     _____________

Liabilities and Stockholders' Equity:
  Accounts payable                                        $       166,155   $       183,182
  Other current liabilities                                       716,238           715,361
  Notes payable                                                 6,000,000
  Long-term debt                                               12,650,000        12,650,000
  Deferred income taxes                                           545,404
  Stockholders' equity:
    Preferred stock, par value $1.00 per share;
    3,000,000 shares authorized:
      Convertible Series A, 389,487 shares issued
        and outstanding                                           389,487           389,487
    Common stock, par value $.01 per share;
      10,000,000 shares authorized; 1,883,857 and
      1,880,294 shares issued and outstanding,
      respectively                                                 18,839            18,803
    Additional paid-in capital                                    102,003            74,215
    Retained earnings                                           9,005,768         7,797,098
    Unearned employee stock ownership shares                     (101,312)         (145,256)
    Unrealized gains on marketable securities                     531,053
                                                            _____________     _____________
Total Liabilities and Stockholders' Equity                 $   30,023,635    $   21,682,890
                                                            _____________     _____________
                                                            _____________     _____________

</TABLE>

                                       42
<PAGE>
<TABLE>
<CAPTION>
  
                                     HECTOR COMMUNICATIONS CORPORATION
                          SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
                              HECTOR COMMUNICATIONS CORPORATION (PARENT COMPANY)

                                             STATEMENT OF INCOME

                                                                        Year Ended December 31
                                                        ______________________________________________________
                                                                     1996              1995               1994
                                                            _____________     _____________      _____________
Revenues:
<S>                                                       <C>              <C>                <C>             
  Sales                                                   $       285,799  $         49,345   $         45,451

Expenses:
  Operating expenses                                               80,716           176,325             71,342
  Amortization of goodwill                                         51,519            50,307             50,307
  Gain on sale of marketable securities                          (484,553)
  Interest expense (income), net                                1,396,393           641,363             (9,461)
  Income tax benefit                                             (272,257)         (302,437)           (34,309)
                                                            _____________     _____________      _____________
    Total expenses                                                771,818           565,558             77,879

Loss before equity in earnings of
  subsidiaries                                                   (486,019)         (516,213)           (32,428)

Equity in earnings of subsidiaries                              1,694,689           439,674          2,237,006
                                                            _____________     _____________      _____________
Net income (loss)                                          $    1,208,670  $        (76,539)    $    2,204,578
                                                            _____________     _____________      _____________
                                                            _____________     _____________      _____________


</TABLE>

                                       43
<PAGE>
<TABLE>
<CAPTION>

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

                                           STATEMENT OF CASH FLOWS

                                                                        Year Ended December 31
                                                           ____________________________________________________
                                                                     1996              1995               1994
                                                            _____________     _____________      _____________
Cash flows from operating activities:
<S>                                                        <C>             <C>                  <C>           
 Net income                                                $    1,208,670  $        (76,539)    $    2,204,578
  Adjustments to reconcile net
   income to net cash provided by
   operating activities:
    Gain on sale of marketable securities                        (484,553)
    Equity in earnings of subsidiaries                         (1,694,689)         (439,674)        (2,237,006)
    Dividends from subsidiaries
    Depreciation and amortization                                 293,601           266,923            100,542
    Changes in assets and liabilities:
     Decrease (increase) in other current assets                 (178,633)           85,932           (101,070)
     Decrease (increase) in accounts with subsidiaries          1,487,228           436,296           (136,277)
     Decrease in notes and advances
      payable to Communications Systems, Inc.                                                         (245,499)
     Increase (decrease) in accounts payable                      (17,027)          151,486             31,696
     Increase (decrease) in other current liabilities                 877          (140,791)           590,919
                                                            _____________     _____________      _____________
 Net cash provided by operating activities                        615,474           283,633            207,883

Cash flows from investing activities:
  Purchases of property, plant and equipment                      (16,286)          (23,666)           (35,192)
  Acquisition costs of stock of affiliate                     (12,346,388)       (2,790,236)
  Advance to subsidiaries                                                        (3,500,000)
  Purchases of other investments                                                   (503,583)
  Cash proceeds from other investments                            715,598
  Decrease (increase) in other deferred charges                                      82,092            (82,092)
                                                            _____________     _____________      _____________
 Net cash used in investing activities                        (11,647,076)       (6,735,393)          (117,284)

Cash flows from financing activities:
  Issuance of notes payable                                     6,000,000
  Issuance of long-term debt                                                     12,650,000
  Deferred bond issue costs                                                      (1,323,787)
  Purchase of common stock                                                          (30,272)
  Issuance of common stock                                         21,768            22,872             39,214
  Payments from (contributions to) employee
   stock ownership plan, net                                       50,000           (11,683)           (20,000)
                                                            _____________     _____________      _____________
 Net cash provided by financing activities                      6,071,768        11,307,130             19,214
                                                            _____________     _____________      _____________

Net increase (decrease) in cash and cash equivalents           (4,959,834)        4,855,370            109,813

Beginning cash and cash equivalents                             5,017,799           162,429             52,616
                                                            _____________     _____________      _____________
Ending cash and cash equivalents                         $         57,965    $    5,017,799    $       162,429
                                                            _____________     _____________      _____________
                                                            _____________     _____________      _____________

Supplemental disclosures of cash flow information:
  Interest paid                                            $    1,248,308   $       516,906    $            -
  Income taxes paid                                               300,000           773,307            236,000

</TABLE>

                                       44
<PAGE>


================================================================================

                       SECURITIES AND EXCHANGE COMMISSION

                             Washington, D.C. 20549

                                    FORM 10-K


                  ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d)

                     OF THE SECURITIES EXCHANGE ACT OF 1934

                                       OF

                        HECTOR COMMUNICATIONS CORPORATION

                                       FOR

                          YEAR ENDED DECEMBER 31, 1996



                                    EXHIBITS


================================================================================


                                       45
<PAGE>

               HECTOR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
                                Exhibit Index To
                 Form 10-K for the Year Ended December 31, 1996

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 46.
           Per Share          

   21      Subsidiaries of the Registrant   Filed herewith at page 47.

   23      Independent Auditors' Consent    Filed herewith at page 48.

   24      Power of Attorney                Included in signatures at page 38.

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.


                                       46
<PAGE>
<TABLE>
<CAPTION>

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

                                                                         Year Ended December 31
                                                         --------------------------------------------------------
Primary:                                                               1996              1995               1994
_______                                                       _____________     _____________      _____________

<S>                                                           <C>              <C>                 <C>          
Net income (loss)                                             $   1,208,670    $      (76,539)     $   2,204,578
                                                              _____________     _____________      _____________
                                                              _____________     _____________      _____________

Common and common equivalent shares:

  Weighted average number of common
  shares outstanding                                              1,881,472         1,879,083          1,874,094

  Dilutive effect of convertible preferred
  shares outstanding                                                389,487                              392,963

  Dilutive effect of stock options outstanding after
  application of treasury stock method                               11,858                                8,943

  Weighted average number of unallocated shares
  held by the employee stock ownership plan                         (11,817)          (13,083)           (11,000)
                                                              _____________     _____________      _____________
                                                                  2,271,000         1,866,000          2,265,000
                                                              _____________     _____________      _____________
                                                              _____________     _____________      _____________

Primary net income per common
and common equivalent share:                                  $         .53     $        (.04)     $         .97
                                                              _____________     _____________      _____________
                                                              _____________     _____________      _____________

Fully Diluted:
_____________

Net income                                                    $   1,208,670     $     (76,539)     $   2,204,578
Interest on convertible debentures, net of tax                      758,617
                                                              _____________     _____________      _____________
Fully diluted income                                          $   1,967,287     $     (76,539)     $   2,204,578
                                                              _____________     _____________      _____________
                                                              _____________     _____________      _____________

Common and common equivalent shares:

  Weighted average number of common
  shares outstanding                                              1,881,472         1,879,083          1,874,094

  Dilutive effect of convertible preferred
  shares outstanding                                                389,487                              392,963

  Dilutive effect of stock options outstanding after
  application of treasury stock method                               11,858                                8,943

  Dilutive effect of outstanding convertible
  debentures                                                      1,423,125

  Weighted average number of unallocated shares
  held by the employee stock ownership plan                         (11,817)          (13,083)           (11,000)
                                                              _____________     _____________      _____________
                                                                  3,694,125         1,866,000          2,265,000
                                                              _____________     _____________      _____________
                                                              _____________     _____________      _____________

Fully diluted net income per common
and common equivalent share:                                  $         .53     $        (.04)     $         .97
                                                              _____________     _____________      _____________
                                                              _____________     _____________      _____________

All common stock equivalents and potentially dilutive securities are anti-dilutive for 1995 and are
excluded from the calculation of earnings per share.  Primary and fully diluted earnings per share
are substantially the same.

</TABLE>

                                       47
<PAGE>


<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
Alliance Telecommunications Corporation                    Minnesota
    Ollig Utilities 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 T.V., 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   and   North   American
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  ("ATC")  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, Sioux Valley Telephone Company, Hills Telephone Company, OU Connection,
Inc.,  Aurora  Cable  T.V.,  Inc.,  Loretel  Financial  Systems,   Inc.,  Hastad
Engineering  Co. and Valley  Cablevision  of SD, Inc. are 100% owned by Alliance
Telecommunications  Corporation  (which is 68%  owned by  Hector  Communications
Corporation).

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


                                       48
<PAGE>



                                   EXHIBIT 23

                          INDEPENDENT AUDITORS' CONSENT

We consent to the  incorporation  by reference in  Registration  Statements  No.
33-39865,  33-39866 and  33-65176 of Hector  Communications  Corporation  of our
report dated February 20, 1997,  appearing in this Annual Report on Form 10-K of
Hector  Communications  Corporation  and its  subsidiaries  for the  year  ended
December 31, 1996.


/s/ Olsen Thielen and Co., Ltd.
Olsen Thielen and Co., Ltd.
March 27, 1997
St. Paul, Minnesota


                                       49
<PAGE>