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                                  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, 1999

                                       OR

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

                         Commission File Number: 0-18587

                        HECTOR COMMUNICATIONS CORPORATION

             (Exact name of registrant as specified in its charter)

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

                              211 South Main Street

                                Hector, MN 55342

              (Address of principal executive offices and zip code)

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

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

                               Title of each class

                          Common Stock, $.01 par value

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

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the  preceding 12 months (or for such  shorter  period that the  registrant  was
required  to file  such  reports),  and  (2) has  been  subject  to such  filing
requirements for the past 90 days.

                                    YES X NO

                                    ---     ---

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

The  aggregate  market value of the voting stock held by  non-affiliates  of the
Registrant was  approximately  $40,992,000  based upon the closing sale price of
the Company's common stock on the American Stock Exchange on March 17, 2000.

As of March 17, 2000 there were outstanding 3,555,454 shares of the Registrant's
common stock.

Documents  Incorporated  by  Reference:  The Company's  Proxy  Statement for its
Annual Meeting of  Shareholders  to be held on May 18, 2000 is  incorporated  by
reference into Part III of this Form 10-K.

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


<PAGE>

                                TABLE OF CONTENTS

     Item                                                              Page

                                     PART I

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



                                     PART II

5.       Market for Company's Common Equity and Related
           Stockholder Matters                                          15
6.       Selected Financial Data                                        16
7.       Management's Discussion and Analysis of Financial
           Condition and Results of Operations                          17
8.       Financial Statements and Supplementary Data                    26
9.       Changes in and Disagreements with Accountants on
           Accounting and Financial Disclosure                          42



                                    PART III

10.      Directors and Executive Officers of the Registrant             43
11.      Executive Compensation                                         43
12.      Security Ownership of Certain Beneficial
            Owners and Management                                       43
13.      Certain Relationships and Related Transactions                 43



                                     PART IV

14.      Exhibits, Financial Statement Schedule and

            Reports on Form 8-K                                         44




                                        2

<PAGE>

                                     PART I.

ITEM 1.  BUSINESS

[a]    GENERAL DEVELOPMENT OF BUSINESS

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

       HCC  operates  five  wholly-owned  local  exchange  company  subsidiaries
(generally  referred to as "local  exchange  carriers"  or "LECs")  which served
7,200 access lines in 9 rural communities in Minnesota and Wisconsin at December
31, 1999. HCC, through its subsidiaries,  also provides cable television service
to 4,900 subscribers in Minnesota and Wisconsin.

       HCC's 68% owned subsidiary, Alliance Telecommunications Corporation, owns
and operates five additional LEC  subsidiaries  which served 28,600 access lines
in 26 rural  communities  in Minnesota,  Iowa,  North Dakota and South Dakota at
December 31, 1999. Alliance,  through its subsidiaries,  also served 8,200 cable
television subscribers in Minnesota,  North Dakota and South Dakota. Golden West
Telecommunications  Cooperative,  Inc.  of Wall,  South  Dakota,  and Split Rock
Telecom Cooperative, Inc. of Garretson, South Dakota own the remaining interests
in Alliance.

[b]    FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS

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

[c]    NARRATIVE DESCRIPTION OF BUSINESS

(1)    Telephone

       The Company's LEC subsidiaries  provide basic local telephone services to
35,867 residential and business customers in Minnesota, Wisconsin, South Dakota,
North Dakota and Iowa.  Basic local service  enables  customers to originate and
receive telephone calls within a defined exchange area. Approximately 81% of the
Company's  customers are residential and approximately 19% are businesses.  Most
customers pay a fixed monthly fee for service.

       The  following  chart  presents  the number of access lines served by the
Company's LEC subsidiaries at December 31, 1999, 1998 and 1997:

                                        3

<PAGE>
<TABLE>
<CAPTION>

                                                                                Access Lines*
                                                              --------------------------------------------------
                                                                                 December 31
                                                              --------------------------------------------------
                                                                   1999               1998                1997
                                                              -----------         ----------        ------------
Hector Communications Corporation:
<S>                                                              <C>                <C>                 <C>
       Arrowhead Communications Corporation                         817                780                 749
       Eagle Valley Telephone Company                               734                676                 685
       Granada Telephone Company                                    289                274                 275
       Pine Island Telephone Company                              3,154              3,019               2,919
       Indianhead Telephone Company                               2,234              2,109               2,076
Alliance Telecommunications Corporation:
       Loretel Systems, Inc.                                     12,967             12,675              12,023
       Sleepy Eye Telephone Company                               6,467              6,197               5,998
       Sioux Valley Telephone Company                             5,756              5,679               5,457
       Hills Telephone Company                                    2,706              2,618               2,545
       Felton Telephone Company                                     743                735
                                                              -----------         ----------          ----------
                                                                 35,867             34,762              32,727
                                                              ===========         ==========          ==========
</TABLE>

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

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

       The Company's LEC  subsidiaries  also provide  network  access  services,
which allow  customers to originate and  terminate  long  distance  calls.  Long
distance calls typically  involve more than one company in providing  service on
an  end-to-end  basis.  Because long  distance  calls  usually are billed to the
customer  originating  the call,  mechanisms  are  required to  compensate  each
company  providing  services to  complete  the call.  In the case of  interstate
calls,  access  revenues are  determined  according to rules  promulgated by the
Federal  Communications  Commission  ("FCC") and  administered  by the  National
Exchange Carriers Association ("NECA"), a not-for-profit  membership corporation
of local exchange  carriers.  Interstate access revenues are received from NECA,
which collects  payments from long distance service  providers (also referred to
as  interexchange  carriers  or "IXCs") and  distributes  payments to the member
LECs. In the case of intrastate  calls,  access revenues are determined by state
regulatory agencies. A portion of the Company's access revenues is received from
universal  service funds based upon the high cost of providing  service to rural
areas.  Interstate  universal  service fund support  accounted  for  $1,040,000,
$951,000 and $656,000 of the Company's network access revenues in 1999, 1998 and
1997,  respectively.  A small  portion  of  access  revenues  are  derived  from
subscriber line fees determined by the FCC and billed directly to customers.

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

                                        4

<PAGE>

(2)    Cable Television

       The Company, through its cable television and LEC subsidiaries,  owns and
operates 46 cable  television  systems serving 13,100  subscribers in Minnesota,
North Dakota, South Dakota and Wisconsin.  Cable television revenues are derived
almost exclusively from monthly fees for basic and premium programming. Fees for
basic  services range from $14.95 to $26.28 per month.  Basic service  generally
includes the major television networks, non-network independent stations, sports
programming,  news  services  and  automated  information  channels,  children's
programming,  access channels for public,  governmental,  educational and leased
use, senior citizens' programming and religious programming. Premium programming
services,  such  as  the  HBO  or  ShowTime  movie  services,  are  provided  to
subscribers  for an  additional  fee of $6.95 to $10.95  per month per  channel.
Approximately one-third of the Company's cable television customers subscribe to
a premium  channel.  Premium  programming  is obtained from suppliers for a flat
monthly  fee  per  subscriber  and/or  a fee  based  on the  monthly  charge  to
subscribers for the service.

(3)    Investments

Wireless Telephone Services

       The   Company   is  the   largest   shareholder   of   Midwest   Wireless
Communications, LLC, with a 10.69% ownership stake. Midwest Wireless serves five
rural service  areas and one  metropolitan  service area in southern  Minnesota.
Population of the service area is approximately 950,000. Midwest Wireless offers
complete wireless service, including custom calling features, facsimile and data
transmission and presently serves more than 100,000 customers.  Midwest Wireless
is  acquiring  additional  wireless  operations  in  Wisconsin  and  Iowa.  When
completed,  these  acquisitions would  significantly  increase Midwest Wireless'
service  area,  but would  reduce  the  Company's  percentage  ownership  of the
operation. The Company accounts for its investment in Midwest Wireless using the
equity method. Income recognized was $1,481,000,  $1,508,000,  and $1,210,000 in
1999, 1998 and 1997, respectively.

         The Company  owns 13.36% of Wireless  North,  which  provides  personal
communications  services ("PCS") to parts of Minnesota,  Wisconsin,  Iowa, North
Dakota and South Dakota.  Wireless North has secured FCC licenses to provide PCS
services in 13 basic trading areas in these states,  encompassing 110,000 square
miles and a population of 2.4 million.  Wireless North is in its start-up phase,
and is building  infrastructure in four markets, where it presently serves 7,800
customers.  Its operations have not been profitable to date.  Losses recorded by
the Company on this investment were $1,597,000, $1,066,000 and $435,000 in 1999,
1998 and 1997,  respectively.  At December  31,  1999,  the Company had invested
$2,303,000 of cash and had outstanding loan guarantees of $1,373,000 in Wireless
North.

         The  Company  has  had  a  significant  investment  in  Rural  Cellular
Corporation  ("RCC"),  a publicly traded company  providing  cellular  telephone
services in Minnesota and New England.  The Company  obtained its  investment in
RCC through its ownership  interests in the RSAs serving northern  Minnesota and
through  the  acquisitions  of Ollig  Utilities  Company  and  Felton  Telephone
Company.  Company sales of RCC stock were 326,707  shares,  40,000  shares,  and
161,469  shares in 1999,  1998 and 1997,  respectively.  Gains on sales of these
securities were  $11,600,000,  $179,000,  and $1,464,000 in 1999, 1998 and 1997,
respectively.  At December  31, 1999,  the Company  owned  approximately  10,700
shares of RCC's common stock.

         In  December,  1998,  an  Alliance  subsidiary  sold its  interest in a
cellular  telephone  partnership  serving  the Sioux  Falls,  South  Dakota MSA.
Proceeds from the sale were $6,725,000. Gain on the sale was $4,817,000.  Income
recognized  from the Company's  investment in this  partnership was $334,000 and
$377,000 in 1998 and 1997, respectively.

                                        5

<PAGE>

Onvoy, Inc.

         The Company has a $1,276,000  investment  in the common stock of Onvoy,
Inc. (formerly MEANS, or Minnesota Equal Access Network Services).  Onvoy, Inc.,
a privately held company,  is a competing local exchange  carrier  ("CLEC") that
provides  integrated  voice,  data, and network services through its fiber optic
communications network linking communities  throughout Minnesota,  including all
major  metropolitan  areas.  Onvoy,  Inc. is also  Minnesota's  largest Internet
service provider and is a leading provider of long distance, video- conferencing
and   high-speed   data   networking   services.   It  serves  the  majority  of
small-to-medium sized businesses and Minnesota based Fortune 500 companies, most
of the state's  higher  education  institutions,  nearly all of the state's K-12
schools, public libraries,  state and county governments,  more than 70 regional
Internet service  providers and more than two-thirds of the state's  independent
local telephone companies.

Fiber Optic Transport Facilities

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

Marketable Securities

       Through its acquisitions of Ollig Utilities  Company and Felton Telephone
Company,   and   due  to  the   success   of  the   Company's   investments   in
telecommunications ventures that were ultimately sold to the public, the Company
has acquired a portfolio of marketable  securities.  In addition to its holdings
in Rural Cellular Corporation, the Company presently has significant investments
in mutual funds, USWest Communications and Illuminet Holdings, Inc.

Bank Stocks

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

Other Investments

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

(4)    Competition

Telephone

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

   -  Facilities-based competition from providers with their own local service
       network;
   -   Resale  competition from resale  interconnection  (providers who purchase
       local services from the LEC at wholesale rates and resell the services to
       their customers);

   -   Competition from unbundled network element interconnection (providers who
       lease some of the network elements from the LEC) - Wireless providers who
       may  charge a  competitive  fee for  services  that  could  compete  with
       wireline based local service.

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

                                        6

<PAGE>

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

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

Cable Television

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

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

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

(5)    Regulation

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

Federal Regulations

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

Regulation of Cost Recovery and Nonregulated Revenue Allocation

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

                                        7

<PAGE>

Costs are recovered through:

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

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

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

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

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

 Interstate End-User Rates

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

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

Interstate Access Rates

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

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

       Individual  LECs are likely to have  service  costs that  differ from the
revenues generated by applying the overall NECA tariff rates. To allow for this,
revenues  generated by  participating  LECs are pooled and  redistributed on the
basis of each individual  company's costs. This process eliminates the burden of
individual  tariff  filing and  produces a system in which small  companies  can
share and spread risk. For example, if a small local exchange carrier filed its

                                        8

<PAGE>

own tariff and  subsequently  suffered the loss of major  customers that utilize
interstate access service,  the local exchange carrier could suffer  significant
under-recovery  of its costs. In the NECA pool  environment,  the impact of this
loss is reduced because it is spread over all of the pool participants.

       NECA  operates  separate  pools for traffic  sensitive  costs  (primarily
switching costs) and non-traffic  sensitive costs  (primarily loop costs).  LECs
can choose to develop and administer their own interstate access charges and not
participate  in the NECA pools.  All but one of HCC's LECs  participates  in the
traffic  sensitive NECA pools.  All of HCC's LECs participate in the non-traffic
sensitive NECA pools.

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

The Telecommunications Act

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

   -   Promotion of Local Service Competition and the Rural Exemptions

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

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

      -  Offer reasonable and nondiscriminatory resale of their
          telecommunications services,

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

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

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

      - Compensate competitors for the costs of terminating traffic.

       The   Telecommunications  Act  also  requires  incumbent  local  exchange
carriers to:

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

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

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

      - Offer resale interconnection at wholesale rates,

                                        9

<PAGE>

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

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

       In  order  to  implement  interconnection  requirements,  local  exchange
carriers  generally  enter into  negotiated  interconnection  arrangements  with
competing  carriers.  Local  exchange  carriers  may also offer  interconnection
tariffs, available to all competitors.

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

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

       - Promotion of Universal Service

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

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

      -  Requiring the FCC to make implicit subsidies explicit,

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

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

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

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

                                       10

<PAGE>

from the federal  Universal  Service  Fund.  Such a reduction  could  materially
adversely  affect HCC's  ability to achieve a  reasonable  rate of return on the
capital invested in its network.

       In May 1997,  the FCC  implemented  new rules  for  interstate  universal
service support.  The new rules provide for separate federal  Universal  Service
Fund programs for rural and  non-rural  telephone  companies.  The new rules for
non-rural companies base support upon "forward-looking  costs" derived from cost
proxy models.  It is uncertain  whether these models will fully compensate local
exchange  carriers for the cost of providing  local service in high-cost  areas.
The FCC set the implementation date for the new system as January 1, 1999, which
was postponed to January 1, 2000 for non-rural telephone companies.  The FCC has
established a Rural Task Force,  which will  investigate  how to adapt the proxy
cost models approved for larger carriers for rural telephone companies.  The FCC
has indicated  that it will not implement a new system for  application to rural
telephone  companies  for  an  additional  three  years  after  the  first  step
implementation,  or at least  until  January 1, 2001.  In the  interim,  support
mechanisms for rural carriers remain unchanged.  The FCC continues to refine the
cost proxy models to be applied to non-rural telephone companies.

State Regulation of Rural LECs

       HCC's LEC  subsidiaries  are subject to regulation  by  Minnesota,  South
Dakota, Iowa and Wisconsin regulatory agencies with respect to:

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

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

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

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

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

Cable Television System Regulation

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

                                       11

<PAGE>

   -  "Must carry" rules  regarding  the  broadcast  television  and  translator
      signals that must be included in channel offerings to subscribers,

   -  Exclusivity  provisions which require 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.

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

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

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

(6)      Business Strategy

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

   -  Expand  its  existing   operations   through   internal  growth  -  Pursue
   acquisitions of attractive properties, particularly the

        acquisition  of  additional   rural   telephone   exchanges  and  cable
        television properties.
   -   Participate in opportunities afforded by new telecommunications
        technologies

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

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

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

(7)    Employees

       At March 1, 2000, the Company had 159 full-time and part-time  employees,
of which 108  employees  work in the Alliance  operations  and 51 work in Hector
operations.  None of the Company's  employees are represented  under  collective
bargaining agreements. HCC believes its employee relations to be good.

                                       12

<PAGE>

(8)    Executive Officers of Registrant

       The  executive  officers  of the  Company and their ages at March 1, 2000
were as follows:

       Name                       Age                 Position

       Curtis A. Sampson           66      Chairman of the Board and Chief
                                             Executive Officer

       Steven H. Sjogren           57      President and Chief Operating Officer

       Paul N. Hanson              53      Vice President and Treasurer

       Charles A. Braun            42      Chief Financial Officer


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

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

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

       Not Applicable.





                                       13

<PAGE>

ITEM 2.   PROPERTIES

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

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

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

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

ITEM 3.  LEGAL PROCEEDINGS

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

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

       Not applicable.



                                       14

<PAGE>

                                     PART II

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

[a]    MARKET INFORMATION

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

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

                               1999                               1998
                    ------------------------          --------------------------
Quarter                High              Low              High               Low

First               $  9.63          $  8.06           $ 12.63           $  9.00
Second                11.13             8.00             12.25             10.50
Third                 14.88            10.00             11.25              7.75
Fourth                17.25            12.00              9.00              7.38

[b]    HOLDERS

         At  March  1,  2000  there  were  565   holders  of  record  of  Hector
Communications Corporation common stock.

[c]    DIVIDENDS

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

                                       15

<PAGE>

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

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

                                                                                      Year Ended December 31
                                                                    ------------------------------------------------------------
                                                                           1999        1998        1997        1996        1995
--------------------------------------------------------------------------------------------------------------------------------

Selected Income Statement Information

<S>                                                                    <C>         <C>         <C>         <C>          <C>
Revenues                                                               $ 34,117    $ 31,839    $ 28,866    $ 20,658     $ 5,844
Costs and Expenses                                                       23,063      21,192      19,113      14,066       4,992
--------------------------------------------------------------------------------------------------------------------------------
Operating Income                                                         11,054      10,647       9,753       6,592         852
Other Income (Expenses), net                                              7,401         (40)     (3,367)     (3,518)       (980)
--------------------------------------------------------------------------------------------------------------------------------
Income (Loss) Before Income Taxes                                        18,455      10,606       6,386       3,074        (128)
Income Tax Expense (Benefit)                                              7,513       4,949       2,867       1,540         (51)
--------------------------------------------------------------------------------------------------------------------------------
Income (Loss) Before Minority Interest                                   10,942       5,657       3,519       1,534         (77)
Minority Interest in Earnings of Alliance
  Telecommunications Corporation                                          3,463       1,747         798         325
--------------------------------------------------------------------------------------------------------------------------------
Net Income (Loss)                                                      $  7,479    $  3,910    $  2,721    $  1,209     $   (77)
================================================================================================================================

Basic Net Income (Loss) Per Common Share                               $   2.42    $   1.63    $   1.44    $    .65     $  (.04)
Diluted Net Income (Loss) Per Common Share                             $   1.96    $   1.15    $    .93    $    .53     $  (.04)

Average Shares Outstanding:
  Common shares only                                                      3,095       2,403       1,893       1,870       1,866
  Common and potential common shares                                      3,945       3,937       3,732       3,694       1,866
================================================================================================================================

Selected Balance Sheet Information

Working Capital                                                        $ 18,736    $  6,554    $  8,504    $  1,307     $ 9,679
Property, Plant and Equipment, net                                       51,410      50,810      45,927      47,039      14,609
Excess of Cost Over Net Assets Acquired, net                             51,405      53,004      51,170      52,510         907
Total Assets                                                            166,797     150,680     139,291     137,348      33,518
Long-Term Debt                                                           86,282      94,232      97,793      96,127      22,096
Stockholders' Equity                                                     39,982      22,720      14,447       9,946       8,134
--------------------------------------------------------------------------------------------------------------------------------

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

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

</TABLE>

                                       16

<PAGE>

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

       Hector  Communications  Corporation  ("HCC") owns a 100% interest in five
LEC  subsidiaries  and one cable  television  subsidiary.  At December 31, 1999,
these  subsidiaries  provided  telephone  service to 7,228  customers in 9 rural
communities in Minnesota and Wisconsin. They also owned cable television systems
serving  4,934   customers  in  Minnesota  and   Wisconsin.   HCC's   100%-owned
subsidiaries  also  have  substantial  investments  in other  telecommunications
ventures,  including,  Midwest Wireless Communications,  LLC, Wireless North LLC
and Onvoy, Inc..

       HCC also owns a 68% interest in Alliance  Telecommunications  Corporation
("Alliance"). At December 31, 1999, Alliance, through its five LEC subsidiaries,
provided  telephone  service  to 28,639  customers  in 26 rural  communities  in
Minnesota,  South Dakota and Iowa.  Alliance's  subsidiaries also provided cable
television  services to 8,186  subscribers in Minnesota,  South Dakota and North
Dakota.  Alliance's  subsidiaries  also own  substantial  investments in Midwest
Wireless Communications, LLC, Wireless North LLC and Onvoy, Inc., own marketable
securities portfolios with investments in telecommunications providers like U.S.
West  Communications,   Inc.,  Illuminet  Holdings,   Inc.  and  Rural  Cellular
Corporation,  and have other  investments.  The minority interest in Alliance is
owned by Golden  West  Telecommunications  Cooperative  and Split  Rock  Telecom
Cooperative.

Results of Operations

General

       The Company's  telephone revenues are principally  derived from the local
service and access  revenues  received  by its local  exchange  carrier  ("LEC")
subsidiaries.  Local  service  revenues are earned by providing  customers  with
local service to connecting points within the local exchange  boundaries and, in
certain cases,  to nearby local  exchanges  under extended area service  ("EAS")
plans that eliminate long distance charges to the neighboring exchanges. Monthly
rates for telephone  service  differ among the LECs  depending  upon the cost of
providing  service,  the type and grade of service,  the number of customers and
calling patterns within the toll free calling area and other factors.

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

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

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

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

                                       17

<PAGE>

       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:

<TABLE>
<CAPTION>

                                                                       Year Ended December 31
                                                          ------------------------------------------------
                                                              1999               1998                 1997
                                                          -----------        ----------          ---------
<S>                                                          <C>                <C>                  <C>
       Local network                                          17.3%              16.6%                16.9%
       Network access                                         56.9               55.6                 58.0
       Nonregulated telephone activities                      12.3               15.0                 13.3
       Billing and collecting                                  2.4                2.7                  3.5
       Cable television                                       11.1               10.1                  8.3
                                                          -----------       -----------          ---------
                                                             100.0  %           100.0%               100.0%
                                                          ===========       ==========           ==========
</TABLE>

1999 Compared to 1998

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

<TABLE>
<CAPTION>

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

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

-  Addition of extended area service to Sioux Falls from Alliance's South Dakota
   telephone exchanges

-  Increased demand for telephone lines to provide  advanced  telecommunications
   services such as Internet services

- Increased  development  within the LECs'  service  areas,  and - The full year
effect of Alliance's acquisition of Felton Telephone Company

   ("Felton").

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

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

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

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

                                       18

<PAGE>

<TABLE>
<CAPTION>

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

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

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

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

       In 1999, the Company had a  consolidated  loss from  partnership  and LLC
investments of $336,000 compared to consolidated income of $883,000 in 1998. The
Company's share of loss from its Wireless North PCS investment was $1,597,000 in
1999  compared  to  $1,066,000  in  1998.  The  Company  and  its  partners  are
negotiating with potential new investors to inject more investment  capital into
Wireless  North's  operations  in order make the  operations  large enough to be
financially viable. Income from Midwest Wireless  Communications,  LLC decreased
from  $1,508,000 in 1998 to  $1,481,000,in  1999.  The decrease was due to price
competition  from other wireless  service  providers.  The Company had income in
1998 from the Sioux Falls,  South Dakota MSA, prior to its sale by Alliance,  of
$334,000 in 1998 compared to no income in 1999.

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

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

                                       19

<PAGE>

1998 Compared to 1997

       Consolidated   revenues   increased  10%  from  $28,866,000  in  1997  to
$31,839,000 in 1998. The following  table shows revenues by operating  group for
1998 compared to 1997:

<TABLE>
<CAPTION>

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

       Consolidated  local  service  revenues  grew from  $4,866,000  in 1997 to
$5,291,000 in 1998, an increase of $425,000 or 9%. Revenue growth was due to:

- Alliance's  acquisition  of Felton  Telephone  Company  ("Felton") - Increased
development within the LECs' service areas, and - Increased demand for telephone
lines to provide advanced telecommunications services such as Internet services.

The  number  of access  lines  served by the LECs  increased  6% from  32,727 to
34,762.

     Network  access  revenues rose from  $16,738,000  in 1997 to $17,710,000 in
1998, an increase of $972,000 or 6%.  Excluding  Felton's  revenues  reduces the
increase to $581,000 or 3%. The increase was chiefly due to increased use of the
telephone  network by customers and increased  universal  service support funds.
Access  revenues in 1997 were  higher than normal due to a one-time  retroactive
tariff settlement received by an Alliance subsidiary.

       Nonregulated revenues grew from $3,838,000 in 1997 to $4,773,000 in 1998,
an increase of $935,000 or 24%. Revenue  increases in 1998 were due to increased
Internet revenues,  commissions on sales of long distance services and leases of
fiber-optic transport facilities. Cable television revenues rose from $2,393,000
in 1997 to  $3,199,000  in  1998,  an  increase  of  $806,000  or 34% due to the
acquisition  by Alliance of additional  cable systems from Spectrum  Cablevision
Limited Partnership. Billing and collection revenues declined from $1,030,000 in
1997 to $866,000 in 1998,  a decrease of $164,000 or 16% as IXCs  continued  the
trend toward self-billing of customers.

       Consolidated  operating costs and expenses grew from  $19,113,000 in 1997
to  $21,192,000  in 1998, an increase of $2,079,000 or 11%. The following  table
shows costs and expenses by operating group for 1998 compared to 1997:

<TABLE>
<CAPTION>

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

       Consolidated plant operations  expenses increased from $3,631,000 in 1997
to  $3,755,000  in 1998,  an  increase  of  $124,000  or 3%,  due  primarily  to
Alliance's  acquisition of Felton.  Depreciation and amortization increased from
$7,310,000  in 1997 to  $7,781,000 in 1998, an increase of $471,000 or 6% due to
Alliance's acquisition of Felton and a group of cable television systems from

                                       20

<PAGE>

Spectrum  Cablevision  ("Spectrum").  Customer  operations expenses increased 7%
from  $1,674,000  in 1997 to  $1,804,000  in 1998 due  largely  to growth in the
number of customers served.  General and administrative  expenses increased from
$3,593,000  in 1997 to $3,951,000 in 1998, an increase of $358,000 or 10% due to
the Company's expanded  operations.  Other operating expenses increased $995,000
or 34% due mainly to  increased  cable  television  expenses  from the  Spectrum
systems.

       Consolidated operating income increased $894,000 or 9% from $9,753,000 in
1997 to $10,647,000 in 1998.

       Consolidated interest expenses increased $518,000 from $6,797,000 in 1997
to $7,315,000 in 1998. The biggest factor in the interest  expense  increase was
the  lack  of  patronage  dividends  on  interest  paid  to St.  Paul  Bank  for
Cooperatives  ("St. Paul Bank").  This dividend was $694,000 in 1997 compared to
no  dividend  in 1998.  St.  Paul Bank has  substantial  loan  exposures  in the
agricultural  economy, and poor performance by that economy during the third and
fourth  quarters  of 1998  prevented  the  payment  of  patronage  dividends  at
anticipated  rates.  The Company also had interest  expense on new borrowings to
finance the acquisitions of Felton and Spectrum.  This was offset to some degree
by interest reductions on convertible  debentures that were retired or converted
into common stock in the second and third quarters of 1998.

       Consolidated  income  from  partnership  and  LLC  investments  decreased
$425,000  from  $1,308,000  in 1997 to  $883,000 in 1998.  Income  from  Midwest
Wireless  Communications,  LLC  increased  $298,000  from  $1,210,000 in 1997 to
$1,508,000 in 1998.  The increase was due to continuing  growth in the number of
customers using cellular services. Income from the Sioux Falls, South Dakota MSA
prior to its sale by Alliance was $334,000 in 1998  compared to $377,000 for all
of 1997.  Losses  from the  Company's  Wireless  North  PCS  investment  totaled
$1,066,000 in 1998 compared to $435,000 in 1997.  While the Company  anticipated
substantial  losses from this  operation's  start-up phase, it is concerned that
anticipated  future capital  investments  may be inadequate to finance  Wireless
North's expansion plans.  Accordingly,  the Company and its fellow investors are
reviewing  Wireless North's  business plans with the goal of reducing  operating
losses and attracting more investment capital to the operation.

       Consolidated  investment income declined $17,000 from $626,000 in 1997 to
$609,000 in 1998. Alliance had gains on sales of marketable  securities totaling
$965,000  in  1998.  Alliance  continues  to  hold a  significant  portfolio  of
marketable securities. In December, 1998, Alliance sold its 12.25% interest in a
cellular  telephone  partnership  serving the Sioux  Falls,  South Dakota MSA to
CommNet Cellular, Inc. for $6,725,000. Alliance's gain on the sale before income
taxes  was  $4,817,000.  Hector  had  gains on  marketable  securities  sales of
$1,496,000 in 1997.

       Consolidated income before income taxes increased 66% to $10,606,000. The
Company's  effective  income tax rate of 46.7% is higher than the standard  U.S.
tax rate  due to state  income  taxes  and  because  the  goodwill  amortization
expenses from the  acquisition  of Ollig  Utilities  cannot be deducted.  Income
before  the  minority  interest  in  Alliance's   earnings  increased  61%  from
$3,519,000  in 1997 to  $5,657,000  in 1998.  Minority  interest  on earnings of
Alliance  were  $1,747,000  in 1998  compared to  $798,000  in 1997.  Net income
increased 44% to $3,910,000 in 1998 compared to $2,721,000 in 1997.

Liquidity and Capital Resources

       Operations

       Cash  flows  from  consolidated  operating  activities  were  $6,693,000,
$9,623,000 and $8,365,000 in 1999, 1998, and 1997, respectively. The decrease in
cash flows from  operations in 1999 was due to income tax payments on gains from
sales of marketable  securities.  At December 31, 1999, the Company's cash, cash
equivalents  and  marketable   securities   totaled   $39,274,000   compared  to
$23,241,000  at  December  31,  1998.   Alliance's   cash  and  securities  were
$33,027,000 of this total at December 31, 1999.  Working capital at December 31,
1999 was  $18,736,000  compared to $6,554,000 at December 31, 1998.  The current
ratio was 2.3 to 1 at  December  31, 1999  compared to 1.5 to 1 at December  31,
1998.

                                       21

<PAGE>

        The Company makes  periodic  improvements  to its  facilities to provide
up-to-date  services to its telephone and cable television  customers.  Hector's
plant  additions  in  1999,  1998  and  1997  were  $2,902,000,  $2,652,000  and
$2,316,000,  respectively.  Alliance's  plant additions in 1999, 1998 (excluding
the  acquisitions of Felton and Spectrum) and 1997 were  $4,640,000,  $5,163,000
and $2,379,000,  respectively.  Plant additions for 2000 for Hector and Alliance
are  expected to total  $1,894,000  and  $5,500,000,  respectively.  These plant
additions will provide  customers with  additional  advanced  telecommunications
services  and  expand  usage of high  capacity  fiber  optics  in the  telephone
network.

       Investments

     Investment income has been derived almost  exclusively from interest earned
on the Company's cash and cash  equivalents.  Interest  income has fluctuated in
relation to changes in interest rates and  availability  of cash for investment.
In 1999,  Alliance  received  $18,920,000  from sales of marketable  securities,
principally Rural Cellular  Corporation common stock. In 1998, Alliance received
$1,820,000  from sales of  interests  in Rural  Cellular  Corporation,  MediaOne
Group, Inc., Comnet Cellular,  Inc. and Illuminet Holdings, Inc. In 1997, Hector
sold 161,469 shares of Rural Cellular  Corporation for  $1,728,000.  At December
31, 1999,  Alliance  continued to maintain a significant  marketable  securities
portfolio consisting primarily of shares of Illuminet Holdings,  Inc., U.S. West
Communications, Inc. and Rural Cellular Corporation.

       The Company is an investor  in  Wireless  North LLC, a limited  liability
corporation that has licenses to operate PCS systems in 13 markets in Minnesota,
Wisconsin,  North  Dakota  and  South  Dakota.  The  Company  invested  cash  of
$1,032,000  and  $761,000  in  Wireless  North in 1999 and  1998,  respectively.
Investments  in Wireless  North prior to 1998  consisted of $510,000 of cash and
debt  guarantees  of  $1,373,000.  The PCS systems are in start-up mode and have
incurred  significant  losses  to date.  The  Company  cannot  predict  how much
additional capital might be required beyond amounts already invested.

        The Company  continued  to maintain its  ownership  in Midwest  Wireless
Communications,  LLC through  acquisition of additional  partnership  interests.
Cash expended to purchase  Midwest  Wireless  Communications,  LLC interests was
$380,000 in 1998. At December 31, 1999, the Company's  ownership  percentage was
10.69%.  In December,  1998, the Company sold its 12.25% interest in Sioux Falls
Cellular, Ltd., which provides cellular service in the Sioux Falls, South Dakota
MSA to CommNet Cellular, Inc. for $6,725,000.

       Debt and Loan Commitments

       As part of financing its 68% ownership interest in Alliance,  the Company
borrowed  $6,000,000 from CoBank (St. Paul Bank for Cooperatives before its 1999
merger with CoBank).  In 1997, the Company repaid principal of $2,000,000 on the
loan and converted the  remaining  balance into a five-year  term loan. In 1998,
the  Company  replaced  the loan with a 15-year  term loan from Rural  Telephone
Finance Cooperative ("RTFC").  The interest rate on the loan varies according to
the rate RTFC charges for similar loans. The interest rate was 6.95% at December
31, 1999.

       The  Company  carries  a  significant  amount  of debt due to  Alliance`s
borrowing to finance the acquisition of Ollig Utilities Company.  Interest rates
on Alliance's  acquisition  loan from CoBank have been locked for periods of one
to ten years at rates averaging  7.5%. The  outstanding  balance on this loan at
December 31, 1999 was $47,580,800. CoBank is a cooperative, owned and controlled
by its customers.  Each customer  borrowing  from the bank on a patronage  basis
shares in the bank's net income  through  payment  of  patronage  refunds.  As a
condition of maintaining the loan,  Alliance  invested  $344,000 and $509,000 of
cash in the bank in 1999 and 1998, respectively.  The Company recorded a loss of
$200,000 in 1999 due to  writedown of the value of this bank stock in the merger
between CoBank and St. Paul Bank for Cooperatives.

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

                                       22

<PAGE>

       The Company's LEC  subsidiaries  borrow from the Rural Utilities  Service
("RUS") and the Rural  Telephone  Bank ("RTB") to help finance asset  additions.
Proceeds from long-term  borrowings from RUS and RTB were $6,156,000,  $737,000,
and $2,026,000 in 1999, 1998 and 1997,  respectively.  The average interest rate
on outstanding  RUS and RTB loans is 5.6%. At December 31, 1999  unadvanced loan
commitments  from the RUS and RTB to Hector's and  Alliance's  LEC  subsidiaries
totaled $11,655,000.

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

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

       Acquisitions

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

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

       The Company is always looking to acquire properties that advance its plan
to be a provider of top quality telecommunications  services to rural customers.
In  1998,  the  Company  acquired  Felton  Telephone  Company  and  eight  cable
television systems from Spectrum Cablevision Limited Partnership.

In 1999, the Company was a member of investor groups that sought  unsuccessfully
to acquire  rural  telephone  properties  offered for sale by GTE and U.S.  West
Communications. The Company cannot predict if it will be successful in acquiring
additional  properties and does not currently  have financing  plans in place to
pay for possible acquisitions.

Effects of Inflation

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

Year 2000

         In 1999 the Company contracted with Nortel, Inc. to upgrade its central
office  switching  equipment to Year 2000  compliance.  Cost of the upgrades was
$658,000. The Company completed installation and testing of the new equipment in
November 1999. The Company is not aware of any disruptions of telephone  service
to its customers due to Year 2000 problems.

                                       23

<PAGE>

New Accounting Standards

         In June 1998, the Financial Accounting Standards Board issued Statement
of Financial  Accounting  Standards  (SFAS) No. 133,  "Accounting for Derivative
Instruments and Hedging  Activities"  which was to be effective January 1, 2000.
SFAS 133 requires companies to record derivatives on the balance sheet as assets
or liabilities,  measured at fair value.  Gains or losses resulting from changes
in the values of those  derivatives  would be accounted for depending on the use
of the derivative and whether it qualifies for hedge  accounting.  SFAS No. 137,
an  amendment  of SFAS  No.  133,  was  issued  in June of 1999 and  defers  the
effective  date of SFAS No. 133 to fiscal years  beginning  after June 15, 2000.
The  Company  has not yet  determined  the impact of this  pronouncement  on its
financial statements.

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

Factors Affecting Future Performance

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

                                       24

<PAGE>

                              REPORT OF MANAGEMENT

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

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

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

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

                                           /s/ Charles A. Braun
                                           ------------------------------------
                                           Charles A. Braun
March 28, 2000                             Chief Financial Officer

                                       25

<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, 1999 and 1998 and
the  related  consolidated   statements  of  income  and  comprehensive  income,
stockholders'  equity,  and cash flows for each of the three years in the period
ended December 31, 1999. 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, 1999 and 1998 and
the results of their operations and their cash flows for each of the three years
in the period ended  December 31, 1999 in  conformity  with  generally  accepted
accounting principles.

/s/ Olsen Thielen & Co., Ltd.
Olsen Thielen & Co., Ltd.

February 16, 2000
St. Paul, Minnesota


                                       26

<PAGE>
<TABLE>
<CAPTION>

                                       HECTOR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
                                                   CONSOLIDATED BALANCE SHEETS

                                                                          ASSETS

                                                                                                           December 31
                                                                                              -----------------------------------
                                                                                                        1999                 1998
                                                                                              --------------       --------------
CURRENT ASSETS:
<S>                                                                                             <C>                  <C>
  Cash and cash equivalents                                                                    $  27,055,772        $  14,686,034
  Construction fund (Note 6)                                                                         283,604              200,491
  Accounts receivable (net of allowance for doubtful accounts of
    $447,000 and $234,000, respectively)                                                           4,854,365            4,140,992
  Materials, supplies and inventories, at average cost                                               616,985              528,839
  Prepaid expenses                                                                                   171,432              180,134
                                                                                              --------------       --------------
      TOTAL CURRENT ASSETS                                                                        32,982,158           19,736,490

PROPERTY, PLANT AND EQUIPMENT,net  (Notes 1 and 5)                                                51,410,033           50,810,464

OTHER ASSETS:
  Excess of cost over net assets acquired, less amortization
    of $6,473,000 and $4,890,000 (Note 1)                                                         51,405,010           53,003,560
  Marketable securities (Note 3)                                                                  12,218,303            8,555,336
  Wireless telephone investments (Note 4)                                                          9,688,981            9,482,902
  Other investments (Notes 1 and 6)                                                                8,768,797            8,259,419
  Deferred debenture issue costs (Note 6)                                                                                 371,311
  Other assets (Note 1)                                                                              323,405              460,305
                                                                                              --------------       --------------
      TOTAL OTHER ASSETS                                                                          82,404,496           80,132,833
                                                                                              --------------       --------------

TOTAL ASSETS                                                                                   $ 166,796,687        $ 150,679,787
                                                                                              ==============       ==============

                                              LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
  Notes payable and current portion of long-term debt (Note 6)                                 $   5,607,100        $   6,808,500
  Accounts payable (Note 10)                                                                       2,481,507            2,473,526
  Accrued expenses                                                                                 2,184,626            1,945,687
  Income taxes payable                                                                             3,973,019            1,955,153
                                                                                              --------------       --------------
     TOTAL CURRENT LIABILITES                                                                     14,246,252           13,182,866

LONG-TERM DEBT, less current portion (Note 6)                                                     86,281,656           94,232,389

DEFERRED INVESTMENT TAX CREDITS (Note 7)                                                             140,386              252,601

DEFERRED INCOME TAXES (Note 7)                                                                     9,435,515            8,510,637

DEFERRED COMPENSATION (Note 9)                                                                       897,113              990,155

COMMITMENTS AND CONTINGENCIES (Note 4)

MINORITY INTEREST IN ALLIANCE TELECOMMUNICATIONS, CORP.                                           15,813,847           10,790,818

STOCKHOLDERS' EQUITY: (Notes 1, 6 and 8)
  Preferred stock, par value $1.00 per share; 3,000,000 shares authorized:

    Convertible Series A, 229,300 and 342,800 shares issued and outstanding                          229,300              342,800
  Common stock, par value $.01 per share; 10,000,000 shares authorized;
    3,574,712 and 2,661,062 shares issued and outstanding                                             35,747               26,611
  Additional paid-in capital                                                                      13,274,444            6,326,441
  Retained earnings                                                                               23,115,945           15,636,764
                                                                                              --------------       --------------
                                                                                                  36,655,436           22,332,616
  Accumulated other comprehensive income (Note 3)                                                  3,326,482              387,705
                                                                                              --------------       --------------
     TOTAL STOCKHOLDERS' EQUITY                                                                   39,981,918           22,720,321
                                                                                              --------------       --------------

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                                                     $ 166,796,687        $ 150,679,787
                                                                                              ==============       ==============

                                         See  notes  to  consolidated  financial
statements.

</TABLE>

                                       27

<PAGE>
<TABLE>
<CAPTION>

                                    HECTOR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
                                CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

                                                                             Year Ended December 31
                                                                 ------------------------------------------------
                                                                          1999             1998              1997
                                                                 -------------    -------------     -------------
REVENUES:
<S>                                                               <C>              <C>               <C>
  Local network                                                   $  5,914,678     $  5,290,811      $  4,866,247
  Network access                                                    19,418,961       17,709,921        16,738,108
  Billing and collection                                               824,539          865,767         1,030,182
  Nonregulated activities                                            4,175,060        4,773,367         3,838,422
  Cable television revenues                                          3,784,078        3,198,828         2,393,406
                                                                 -------------    -------------     -------------
    TOTAL REVENUES                                                  34,117,316       31,838,694        28,866,365

COSTS AND EXPENSES:
  Plant operations                                                   4,086,923        3,755,312         3,630,830
  Depreciation and amortization                                      8,547,619        7,781,210         7,309,730
  Customer operations                                                1,912,518        1,803,668         1,674,111
  General and administrative                                         4,694,588        3,951,169         3,593,121
  Other operating expenses                                           3,821,432        3,900,448         2,905,165
                                                                 -------------    -------------     -------------
    TOTAL COSTS AND EXPENSES                                        23,063,080       21,191,807        19,112,957
                                                                 -------------    -------------     -------------

OPERATING INCOME                                                    11,054,236       10,646,887         9,753,408

OTHER INCOME (EXPENSES):
  Interest expense                                                  (6,582,536)      (7,315,153)       (6,797,354)
  Partnership and LLC income (loss) (Note 4)                          (335,537)         883,096         1,308,346
  Interest and dividend income                                       1,116,098          609,071           625,582
  Gain on sale of marketable securities (Note 3)                    13,203,062          965,069         1,495,999
  Gain on sale of cellular partnership (Note 4)                                       4,817,498
                                                                 -------------    -------------     -------------
    OTHER INCOME (EXPENSES), net                                     7,401,087          (40,419)       (3,367,427)
                                                                 -------------    -------------     -------------

INCOME BEFORE INCOME TAXES                                          18,455,323       10,606,468         6,385,981

INCOME TAX EXPENSE (Note 7)                                          7,513,000        4,949,000         2,867,000
                                                                 -------------    -------------     -------------

INCOME BEFORE MINORITY INTEREST                                     10,942,323        5,657,468         3,518,981

MINORITY INTEREST IN EARNINGS OF
  ALLIANCE TELECOMMUNICATIONS CORPORATION                            3,463,142        1,747,225           798,228
                                                                 -------------    -------------     -------------

NET INCOME                                                           7,479,181        3,910,243         2,720,753
                                                                 -------------    -------------     -------------

OTHER COMPREHENSIVE INCOME:
  Unrealized holding gains on marketable securities                 20,784,075          492,287         1,754,213
  Reclassification adjustment for gains included in net income     (13,203,062)        (965,069)       (1,495,999)
                                                                 -------------    -------------     -------------
OTHER COMPREHENSIVE INCOME (LOSS) BEFORE
  INCOME TAXES                                                       7,581,013         (472,782)          258,214
                                                                 -------------    -------------     -------------
Income tax expense related to unrealized holding gains
  on marketable securities                                           8,450,555          189,519           752,667
Income tax benefit related to reclassification adjustment for
  gains included in net income                                      (5,368,207)        (371,529)         (641,877)
                                                                 -------------    -------------     -------------
Income tax expense (benefit) related to items of other
  comprehensive income                                               3,082,348         (182,010)          110,790
Minority interest in other comprehensive income of
  Alliance Telecommunications Corporation                            1,559,887
                                                                 -------------    -------------     -------------
Other Comprehensive Income (Loss)                                    2,938,778         (290,772)          147,424
                                                                 -------------    -------------     -------------

COMPREHENSIVE INCOME                                              $ 10,417,959     $  3,619,471      $  2,868,177
                                                                 =============    =============     =============

BASIC NET INCOME PER COMMON SHARE (Note 1)                        $       2.42     $       1.63      $       1.44
                                                                 =============    =============     =============
DILUTED NET INCOME PER COMMON SHARE (Note 1)                      $       1.96     $       1.15      $        .93
                                                                 =============    =============     =============

AVERAGE SHARES OUTSTANDING (Notes 1 and 8):

  Common shares only                                                 3,095,000        2,403,000         1,893,000
  Common and potential common shares                                 3,945,000        3,937,000         3,732,000

                                        See  notes  to  consolidated   financial
statements.

</TABLE>

                                       28

<PAGE>
<TABLE>
<CAPTION>

                                        HECTOR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
                                         CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

                                                                                                  Unearned    Accumulated
                                                                                                  Employee

                                                                        Additional                   Stock       Other
                                   Preferred Stock       Common Stock      Paid-in     Retained  Ownership Comprehensive
                                   Shares    Amount     Shares  Amount     Capital     Earnings     Shares     Income         Total
                                  -------  --------  --------- ------- -----------  ----------- ----------  ----------  -----------
<S>                               <C>      <C>       <C>       <C>     <C>          <C>         <C>         <C>         <C>
BALANCE AT DECEMBER 31, 1996      389,487  $389,487  1,883,857 $18,839 $   102,003  $ 9,005,768 $(101,312)  $  531,053  $ 9,945,838
Net income                                                                            2,720,753                           2,720,753
Issuance of common stock                               171,425   1,714   1,488,255                                        1,489,969
Issuance of common stock under
 Employee Stock Purchase Plan                            3,695      37      23,126                                           23,163
Issuance of common stock under
 Employee Stock Option Plan                              9,000      90      61,885                                           61,975
Issuance of common stock in
 exchange for preferred stock     (11,387)  (11,387)    11,387     114      11,273                                                0
ESOP Shares Allocated                                                       26,412                  31,588                   58,000
Change in unrealized gains on
 marketable securities, net
 of deferred taxes                                                                                             147,424      147,424
                                  -------   -------  --------- ------- -----------  ----------- ----------  ----------  -----------
BALANCE AT DECEMBER 31, 1997      378,100   378,100  2,079,364  20,794   1,712,954   11,726,521    (69,724)    678,477   14,447,122
Net income                                                                            3,910,243                           3,910,243
Issuance of common stock under
 Employee Stock Purchase Plan                           10,753     107      73,013                                           73,120
Issuance of common stock under
 Employee Stock Option Plan                             48,200     482     354,931                                          355,413
Issuance of common stock in
 exchange for preferred stock     (35,300)  (35,300)    35,300     353      34,947                                                0
Issuance of common stock from
 exercise of outstanding warrants                        7,876      79      61,091                                           61,170
Conversion of convertible

 debentures into common stock                          479,569   4,796   4,096,134                                        4,100,930
ESOP Shares Allocated                                                       (6,629)                 69,724                   63,095
Change in unrealized gains on
 marketable securities, net of
 deferred taxes                                                                                               (290,772)    (290,772)
                                  -------  --------  --------- ------- -----------  ----------- ----------  ----------  -----------
BALANCE AT DECEMBER 31, 1998      342,800   342,800  2,661,062 $26,611   6,326,441   15,636,764         -      387,705   22,720,321
Net income                                                                            7,479,181                           7,479,181
Issuance of common stock under
 Employee Stock Purchase Plan                           14,890     149     104,267                                          104,416
Issuance of common stock under
 Employee Stock Option Plan                             43,675     437     361,475                                          361,912
Issuance of common stock in
 exchange for preferred stock    (113,500) (113,500)   113,500   1,135     112,365                                                0
Issuance of common stock from
 exercise of outstanding warrants                        8,742      87         (87)                                               0
Conversion of convertible

 debenturex into common stock                          730,438   7,304   6,350,007                                        6,357,311
Issuance of common stock to ESOP                         2,405      24      19,976                                           20,000
Change in unrealized gains on
 marketable securities, net of
 deferred taxes                                                                                              2,938,777    2,938,777
                                  -------  --------  --------- ------- -----------  ----------- ----------  ----------  -----------
BALANCE AT DECEMBER 31, 1999      229,300  $229,300  3,574,712 $35,747 $13,274,444  $23,115,945 $       -   $3,326,482  $39,981,918
                                  =======  ========  ========= ======= ===========  =========== ==========  ==========  ===========


                                              See    notes    to    consolidated
financial statements.

</TABLE>

                                       29

<PAGE>

<TABLE>
<CAPTION>

                                    HECTOR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
                                          CONSOLIDATED STATEMENTS OF CASH FLOWS

                                                                                     Year Ended December 31
                                                                        ------------------------------------------------
                                                                                1999             1998             1997
                                                                        --------------    -------------    -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S>                                                                      <C>              <C>              <C>
  Net Income                                                             $  7,479,181     $  3,910,243     $  2,720,753
  Adjustments to reconcile net income to net cash
    provided by operating activities:
      Depreciation and amortization                                         8,663,181        7,957,527        7,500,078
      Minority stockholders' interest in earnings
         of Alliance Telecommunications Corporation                         3,463,142        1,747,225          798,228
      Gain on sales of marketable securities                              (13,203,062)        (965,069)      (1,495,999)
      Gain on sale of wireless partnership investment                                       (4,817,498)
      Loss (income) from partnership and LLC investments                      335,537         (883,096)      (1,308,346)
      Proceeds from wireless telephone investments                            709,668        1,206,505          792,622
      Noncash patronage refunds                                               (12,569)                         (661,923)
      Changes in assets and liabilities net of effects from
        the purchase of Felton Telephone Company:
        Increase in accounts receivable                                      (727,508)         (37,845)         (37,430)
        Decrease (increase) in materials, supplies and inventories            (88,146)          21,188          (30,567)
        Decrease (increase) in prepaid expenses                                 8,702           46,455          (56,060)
        Increase (decrease) in accounts payable                                 7,981          866,321         (269,033)
        Increase (decrease) in accrued expenses                               477,147         (193,287)         157,333
        Increase in income taxes payable                                    1,942,370        1,455,010          422,816
        Decrease in deferred investment tax credits                          (112,215)        (136,016)        (145,167)
        Increase (decrease) in deferred income taxes                       (2,157,467)        (604,706)          25,394
        Increase (decrease) in deferred compensation                          (93,042)          49,730          (47,519)
                                                                        -------------     -------------    -------------
          Net cash provided by operating activities                         6,692,900        9,622,687        8,365,180

CASH FLOWS FROM INVESTING ACTIVITIES:
  Purchases of property, plant and equipment                               (7,541,926)      (9,716,135)      (4,695,301)
  Sales of temporary cash investments                                                           300,000          779,900
  Sales of marketable securities                                           18,920,352        1,819,653        1,728,115
  Purchases of marketable securities                                       (1,768,648)
  Purchases of wireless telephone investments                              (1,031,587)      (1,140,457)         (98,933)
  Increase in construction fund                                               (83,113)        (122,801)          (3,353)
  Purchases of other investments                                           (1,052,230)      (1,083,592)      (1,193,105)
  Proceeds from other investments                                             463,734          114,536           27,667
  Proceeds from sale of wireless partnership investment                                      6,725,140
  Decrease (increase) in excess of cost over net assets acquired               15,170       (2,797,123)         (61,107)
  Decrease (increase) in other assets                                         (52,109)         (62,012)          12,534
  Increase in cash from purchase of Felton Telephone Company                                   196,500
                                                                        -------------     -------------    -------------
         Net cash provided by (used in) investing activities                7,869,643       (5,766,291)      (3,503,583)

CASH FLOWS FROM FINANCING ACTIVITIES:
  Repayment of notes payable and long-term debt                            (8,815,220)      (8,911,738)      (5,637,184)
  Proceeds from issuance of notes payable and long-term debt                6,156,087        6,733,179        2,026,000
  Issuance of common stock                                                    466,328          489,703        1,575,107
  ESOP shares allocated                                                                         63,095           58,000
                                                                        -------------     -------------    -------------
         Net cash used in financing activities                             (2,192,805)      (1,625,761)      (1,978,077)
                                                                        -------------     -------------    -------------

NET INCREASE IN CASH AND CASH EQUIVALENTS                                  12,369,738        2,230,635        2,883,520

CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR                             14,686,034       12,455,399        9,571,879
                                                                        -------------     -------------    -------------

CASH AND CASH EQUIVALENTS AT END OF YEAR                                 $ 27,055,772     $ 14,686,034     $ 12,455,399
                                                                        =============     =============    =============

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
  Interest paid                                                          $  6,700,250     $  7,096,930     $  7,316,215
  Income taxes paid                                                         7,840,312        4,262,666        2,564,157

                                     See   notes   to   consolidated   financial
statements.

</TABLE>

                                       30

<PAGE>

               HECTOR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Description of business: Hector Communications  Corporation owns a 100% interest
in  five  local  exchange  telephone   subsidiaries  and  one  cable  television
subsidiary. The Company also owns a 68% interest in Alliance  Telecommunications
Corporation,  which owns and operates five local exchange  telephone  companies,
two cable  television  companies,  an  engineering  company,  and a credit  card
communications  company. At December 31, 1999, the Company's wholly and majority
owned subsidiaries provided telephone service to 35,867 access lines in 35 rural
communities in Minnesota, Wisconsin, South Dakota and Iowa. Its cable television
operations   provided  cable  television   services  to  13,100  subscribers  in
Minnesota,  South  Dakota and  Wisconsin.  The  Company is also an  investor  in
partnerships   and   corporations   providing   wireless   telephone  and  other
telecommunications related services.

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

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

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

Property,  plant and  equipment:  Property,  plant and  equipment is recorded at
cost.  Depreciation  is computed using  principally  the  straight-line  method.
Depreciation  included in costs and  expenses  was  $6,942,357,  $6,260,624  and
$5,807,103 for 1999,  1998 and 1997,  respectively.  Maintenance and repairs are
charged to operations and additions or improvements  are  capitalized.  Items of
property  sold,  retired or  otherwise  disposed  of in the  ordinary  course of
business  are  removed  from  assets  and any gains or losses  are  included  in
accumulated depreciation.

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

Other  assets:  The excess of cost over net assets of  subsidiaries  acquired in
purchase  transactions  is being  amortized  on the  straight-line  method  over
periods ranging from fifteen to forty years.  Amortization included in costs and
expenses was  $1,583,380,  $1,499,456  and  $1,401,889  in 1999,  1998 and 1997,
respectively.

Deferred  debenture issue costs are the underwriting,  legal and accounting fees
incurred by the Company in  completing  its  February,  1995 public  offering of
convertible  subordinated  debentures.  The debenture issue costs were amortized
over the expected life of the debentures (Note 6). Amortization cost included in
interest  expense was  $115,562,  $176,317 and $189,112 in 1999,  1998 and 1997,
respectively.  When  the  debentures  were  converted  into  common  stock,  the
remaining  issue  costs were  charged  to  capital.  $256,151  and  $233,549  of
debenture  issue costs were  charged to capital in 1999 and 1998,  respectively.
None of the convertible  debentures  remained  outstanding at December 31, 1999.
Accumulated amortization was $460,425 at December 31, 1998.

                                       31

<PAGE>

Other  investments  consist of Rural  Telephone Bank stock,  Onvoy,  Inc. stock,
CoBank stock,  and  investments  in stock  companies and  partnerships  of other
telecommunications  service providers.  Long-term  investments in companies that
are not  intended for resale or are not readily  marketable  are valued at cost,
which does not exceed  net  realizable  value.  Investments  in joint  ventures,
partnerships and limited  liability  companies are recorded on the equity method
of  accounting,  which reflects  original cost and  recognition of the Company's
share of operating income or losses from the respective operations.

Other  assets are cable  television  franchises  owned by the  Company and other
deferred  charges.  Amortization  included in expenses was $21,882,  $21,130 and
$100,738 for 1999, 1998 and 1997, 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
$34,117,000  and $31,183,000 at December 31, 1999 and 1998,  respectively.  Fair
values were  estimated  based on current  rates  offered to the Company for debt
with similar terms and maturities.

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

Income taxes and investment tax credits: The provision for income taxes consists
of an amount for taxes  currently  payable and a provision for tax  consequences
deferred  to  future  periods.   For  financial  statement  purposes,   deferred
investment  tax credits are being  amortized as a reduction of the provision for
income taxes over the estimated useful lives of the related property,  plant and
equipment.

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

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

New  accounting  principles:  In June 1998, the Financial  Accounting  Standards
Board  issued  Statement  of  Financial  Accounting  Standards  (SFAS) No.  133,
"Accounting for Derivative  Instruments and Hedging  Activities" which was to be
effective January 1, 2000. SFAS 133 requires  companies to record derivatives on
the balance  sheet as assets or  liabilities,  measured at fair value.  Gains or
losses  resulting  from  changes  in the  values of those  derivatives  would be
accounted  for depending on the use of the  derivative  and whether it qualifies
for hedge accounting.  SFAS No. 137, an amendment of SFAS No. 133, was issued in
June of 1999 and  defers  the  effective  date of SFAS No.  133 to fiscal  years
beginning  after June 15, 2000. The Company has not yet determined the impact of
this pronouncement on its financial statements.

Basis of presentation: Certain amounts in the 1997 and 1998 financial statements
have been reclassified to conform to the 1999 financial statement  presentation.
These  reclassifications  had no effect on net income or stockholders' equity as
previously reported.

                                       32

<PAGE>

NOTE 2 - ACQUISITIONS.

Effective April 1, 1998, Alliance  Telecommunications  Corporation  acquired all
the outstanding  common stock of Felton Telephone  Company  ("Felton");  a rural
telephone  company located in northwestern  Minnesota  adjacent to areas already
served by the Company's telephone subsidiaries.  Felton serves approximately 700
access  lines  and  held  a  significant  portfolio  of  marketable  securities,
including investments in Rural Cellular  Corporation,  U.S. West Communications,
Inc. and MediaOne Group,  Inc.  Purchase price was $3,650,000,  which includes a
cash  downpayment and seller  financing of the balance through a $3,149,000 note
payable  bearing  interest  at  8.25%.  The  note  matures  April 1,  2005.  The
acquisition is being accounted for as a purchase. Excess of cost over net assets
acquired  in the  transaction  was  $536,000,  which  is  being  amortized  on a
straight-line  basis over 40 years.  The  operations  of Felton,  which were not
material to the Company's  financial  statements,  are included in the Company's
financial  results from the purchase  date.  In the  acquisition,  the following
assets were acquired and liabilities assumed:

  Property, plant and equipment                             $  1,427,800
  Excess of cost over net assets acquired                        536,215
  Marketable securities                                        4,363,854
  Long-term debt                                              (1,770,895)
  Deferred taxes and credits                                  (1,709,976)
  Other assets and liabilities                                   803,002
                                                            -------------
    Total purchase price                                       3,650,000
  Less notes payable issued to seller                         (3,149,358)
  Less cash and cash equivalents acquired                       (590,944)
  Less deposits and acquisition costs paid in 1997              (106,198)
                                                            -------------
  Increase in cash from purchase of Felton
    Telephone Company                                       $    196,500
                                                            =============

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

NOTE 3 - MARKETABLE SECURITIES AND GAINS ON SALES OF INVESTMENTS

Marketable   securities  consist  principally  of  equity  securities  of  other
telecommunications  companies obtained by the Company's subsidiaries in sales of
investments  in  wireless  telephone  partnerships.  The  acquisition  of Felton
Telephone Company included a substantial  portfolio of marketable  securities of
this type.  The Company's  marketable  securities  portfolio  was  classified as
available-for-sale at December 31, 1999 and December 31, 1998. The cost and fair
values of available-for-sale investment securities was as follows:

                                      Gross        Gross
                                 Unrealized   Unrealized          Fair

                        Cost          Gains       Losses         Value

December 31, 1999  $4,074,353   $ 8,174,811  $   (30,861)   $12,218,303
December 31, 1998   7,792,397     1,949,794   (1,386,855)     8,555,336

Net unrealized gains on marketable securities, net of related deferred taxes and
minority  interest,  are included in stockholders'  equity as accumulated  other
comprehensive income at December 31, 1999 and 1998 as follows:

                          Net      Deferred                 Accumulated
                   Unrealized        Income     Minority   Comprehensive
                        Gains         Taxes     Interest         Income

December 31, 1999  $8,143,950   $(3,257,581) $(1,559,887)   $ 3,326,482
December 31, 1998     562,939      (175,234)            -       387,705

                                       33

<PAGE>

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

Gross proceeds from sales of  available-for-sale  securities  were  $18,920,000,
$1,820,000 and $1,728,000 in 1999, 1998 and 1997,  respectively.  Gross realized
gains on sales of these securities were $13,203,000,  $965,000 and $1,496,000 in
1999,  1998 and  1997,  respectively.  Realized  gains on sales are based on the
difference between net sales proceeds and the book value of the securities sold,
using the specific identification method.

NOTE 4 - WIRELESS TELEPHONE INVESTMENTS

Investments in wireless telephone  partnerships and limited liability  companies
are recorded on the equity method of accounting,  which  reflects  original cost
and  recognition  of the  Company's  share of income or losses.  At December 31,
1999,  the Company owned 10.69% of Midwest  Wireless  Communications  LLC, which
provides  cellular  service  to the  former RSA  partnership  areas in  southern
Minnesota and the Rochester,  Minnesota MSA. Income from this investment, net of
associated  amortization  expense, was $1,481,000,  $1,508,000 and $1,210,000 in
1999,  1998 and 1997,  respectively.  Cash  distributions  received from Midwest
Wireless  were  $710,000,   $848,000  and  $397,000  in  1999,  1998  and  1997,
respectively.  The excess of cost over the Company's  share of equity in Midwest
Wireless,  net of  amortization  reserves,  was  $6,897,000  and  $5,990,000  at
December 31, 1999 and 1998, respectively.  Excess cost is being amortized on the
straight-line  method  over forty  years.  Amortization  expense  was  $183,000,
$158,000  and  $151,000 in 1999,  1998 and 1997,  respectively.  At December 31,
1999,  the  Company's  cumulative  share of income  from  Midwest  Wireless  was
$5,070,000, of which $3,108,000 was undistributed.

The Company  owns 13.36% of Wireless  North,  LLC which has  licenses to provide
personal communications services in Minnesota, Wisconsin, North Dakota and South
Dakota.  At December 31, 1999,  the Company had invested  $2,303,000 of cash and
guaranteed debt of $1,373,000 in Wireless  North.  Its PCS systems have not been
profitable  to  date.  The  Company's  share  of  Wireless  North's  losses  was
$1,597,000,  $1,066,000 and $435,000 in 1999, 1998 and 1997,  respectively.  The
Company cannot predict if it will be necessary to provide  additional capital to
Wireless North.

Summarized audited financial  information for these companies for 1999, 1998 and
1997 is as follows:

                                       Year Ended December 31
                                  1999           1998            1997
                           ------------   ------------    ------------
Current assets             $ 11,602,675   $ 14,894,978    $ 14,361,193
Noncurrent assets            94,755,699     84,844,144      68,816,885
Current liabilities          13,815,844     14,856,061      10,796,036
Noncurrent liabilities       66,079,559     51,090,911      43,117,318
Members' equity              26,462,971     33,792,150      29,264,724
Revenues                     60,228,148     50,268,747      40,330,759
Expenses                     55,910,186     41,649,381      30,581,537
Net income                    4,317,962      8,619,366       9,749,222


In December, 1998, the Company sold its 12.25% interest in Sioux Falls Cellular,
Ltd., which provides  cellular service in the Sioux Falls,  South Dakota MSA for
$6,725,000 of cash. Gain on the sale was $4,817,000. Income from this investment
prior to the sale,  net of  associated  amortization  expense,  was $334,000 and
$377,000 in 1998 and 1997,  respectively.  Amortization  expense was $29,000 and
$36,000 in 1998 and 1997, respectively.

                                       34

<PAGE>

NOTE 5 - PROPERTY, PLANT AND EQUIPMENT

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

                                Estimated              December 31
                              useful life            1999            1998
                              -----------     ------------   -------------
  Land                                        $    606,397    $    589,560
  Buildings                    5-40 years        5,562,920       5,379,836
  Machinery and equipment      3-15 years        2,016,253       1,238,040
  Furniture and fixtures       5-10 years        2,142,535       2,129,062
  Telephone plant              5-33 years       64,107,388      57,385,560
  Cable television plant      10-15 years        8,948,737       8,495,861
  Construction in progress                       1,236,205       1,027,314
                                              ------------   -------------
                                                84,620,435      76,245,233
  Less accumulated depreciation                 33,210,402      25,434,769
                                              ------------   -------------
                                              $ 51,410,033    $ 50,810,464
                                              ============   =============

NOTE 6 - NOTES PAYABLE AND LONG-TERM DEBT
<TABLE>
<CAPTION>

                                                                          December 31
                                                               --------------------------------
                                                                      1999               1998
                                                               ------------        ------------
Notes payable to CoBank, payable by Alliance
 Telecommunications Corporation in monthly installments,
<S>                                                            <C>                 <C>
 average interest rate of 7.5%, due 2000 to 2011               $ 47,580,800        $ 50,524,700
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 2000 to 2026                         38,041,254          33,761,429
Notes payable to Rural Telephone Finance Cooperative

  in quarterly installments, interest rate of 6.95%, due 2013     3,743,712           3,914,852
Notes payable on line of credit from Rural Telephone
  Finance Cooperative                                                                 2,000,000
Notes payable to former owners of Felton Telephone
  Company, payable by a subsidiary of Alliance Tele-
  communications Corporation in monthly installments,
  interest rate of 8.25%, due 2005                                2,522,990           2,891,908
Convertible subordinated debentures, payable to
  debentureholders, interest rate of 8.5%                                             7,948,000
                                                               ------------        ------------
                                                                 91,888,756         101,040,889
Less current portion                                              5,607,100           6,808,500
                                                               ------------        ------------
                                                               $ 86,281,656        $ 94,232,389
                                                               ============        ============
</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.  As a condition to receiving the loans,  Alliance  purchased
stock in the bank.  Alliance's investment in St. Paul Bank stock at December 31,
1998 was $3,095,000.  In 1999, St. Paul Bank merged with CoBank.  As part of the
merger, Alliance's St. Paul Bank stock was revalued. Alliance recorded a loss of
$199,995 in 1999 due to this  revaluation.  At  December  31,  1999,  Alliance's
investment in CoBank stock was $3,239,000.

       CoBank is a  cooperative,  owned and  controlled by its  customers.  Each
customer  borrowing from the bank on a patronage  basis shares in the bank's net
income through payment of patronage refunds.  Patronage refund received from the
bank was  $694,000 in 1997;  approximately  30% was  received in cash,  with the
balance in the bank. The patronage  refund was shown in the Company's  operating
statement as a reduction of interest  expense.  No patronage  refund was accrued
for 1998 or 1999. The Company cannot predict what patronage  refunds might be in
future years.

                                       35

<PAGE>

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

       The Rural Utilities  Service (RUS) and the Rural Telephone Bank (RTB) are
the Company's primary sources of long-term  financing for additions to telephone
plant and  equipment.  The RUS has made long-term  loans to telephone  companies
since  1949,  at  interest  rates of 2% and 5%,  for the  purpose  of  improving
telephone  service in rural areas.  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 at the
average U.S. government cost-of-money for the year for like maturities.  In some
cases RTB loans are made  concurrently with RUS loans. At December 31, 1999, the
Company's local exchange  carrier  subsidiaries  had unadvanced loan commitments
under the RUS and RTB programs aggregating  approximately $11,655,000 to finance
specific construction activities in future years.

       Substantially  all of the  telephone  plant  of the LEC  subsidiaries  is
pledged or is subject to mortgages to secure  obligations to the RUS and RTB. In
addition,  the amount of  dividends  on common stock that may be paid by the LEC
subsidiaries to the Company is limited by certain financial  covenants set forth
in the mortgages. At December 31, 1999, $8,099,000 of retained earnings of these
subsidiaries was available for dividend payments to HCC.

         The  Company is  continuing  its  construction  program to upgrade  its
telephone and cable  television  properties.  Planned  expenditures  for HCC and
Alliance  properties in 2000 are $1,894,000 and  $5,500,000,  respectively.  The
Company  intends to use RUS and RTB loan funds to help finance  these  projects.
Loan  funds   received  are   deposited  in   construction   fund  accounts  and
disbursements  are restricted,  subject to RUS approval,  to construction  costs
authorized by the loan agreements.

       The Company  has a term loan and a  $5,000,000  revolving  line of credit
from Rural Telephone Financing  Cooperative  ("RTFC").  The interest rate on the
term loan varies  according to the rate charged by the Lender for similar  loans
(6.95% at December 31, 1999).  Interest on borrowings against the credit line is
at the bank's prime rate plus 1.5%. The Company borrowed  $2,000,000 against the
credit line in 1998 to help finance the purchase of additional  cable television
systems  from  Spectrum  Cablevision  Limited  Partnership.  The credit line was
repaid in 1999.  Both the credit  line and the term loan are secured by a pledge
of the stock of HCC's wholly owned subsidiaries.

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

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

                    2000               $    5,607,100
                    2001                    5,955,100
                    2002                    6,321,900
                    2003                    6,707,200
                    2004                    7,098,400


NOTE 7 - INCOME TAXES

       Hector Communications  Corporation and its wholly owned subsidiaries file
a consolidated  tax return  separate from the  consolidated  return for Alliance
Telecommunications  Corporation  and  its  subsidiaries.   Income  tax  expenses
(benefits) consist of the following:

                                       36

<PAGE>
<TABLE>
<CAPTION>

                                                                           Year Ended December 31
                                                          --------------------------------------------------------
                                                                   1999                1998              1997
                                                          -----------------  ------------------  -----------------
Currently payable taxes:
<S>                                                       <C>                <C>                 <C>
     Federal                                              $       8,120,000  $        4,445,000  $       2,305,000
     State                                                        1,662,000           1,244,000            682,000
                                                          -----------------  ------------------  -----------------
                                                                  9,782,000           5,689,000          2,987,000

Deferred income taxes (benefit)                                  (2,157,000)           (604,000)            25,000
Deferred investment tax credits                                    (112,000)           (136,000)          (145,000)
                                                          ------------------ ------------------- ------------------
                                                          $       7,513,000  $        4,949,000  $       2,867,000
                                                          ================== =================== ==================
</TABLE>

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

                                                       1999              1998
                                               ---------------  ---------------
     Accelerated depreciation                  $   (6,012,515)  $   (6,291,637)
     Alternative minimum tax credits                   28,000           69,000
     Marketable securities                         (4,073,000)      (2,947,000)
     Deferred compensation                            363,000          400,000
     Other                                            259,000          259,000
                                               ---------------  ---------------
                                               $   (9,435,515)  $   (8,510,637)
                                               ===============  ===============

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

                                                    Year Ended December 31
                                               -------------------------------
                                                   1999       1998       1997
                                               ---------  ---------  ---------
Tax at U.S. statutory rate                         35.0%      35.0%      35.0%
Surtax exemption                                      -       (1.0)      (1.0)
State income taxes, net of federal benefit          3.8        7.8        7.4
Excess of cost over net assets acquired             3.0        5.1        8.3  .
Investment tax credits                             ( .6)      (1.3)      (2.3)
Other                                              ( .5)       1.1       (2.5)
                                               ---------  ---------  ---------
Effective tax rate                                 40.7%      46.7%      44.9%
                                               =========  =========  =========

NOTE 8 - STOCKHOLDERS' EQUITY

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

       Common shares are reserved for issuance in  connection  with stock option
plans under which 800,000 shares may be issued pursuant to stock options,  stock
appreciation rights,  restricted stock or deferred stock granted to officers and
key  employees.  Exercise  prices of stock options under the plan cannot be less
than fair market value of the stock on the date of grant.  Rules and  conditions
governing awards of stock options,  stock appreciation  rights and restricted or
deferred  stock are  determined  by the  Compensation  Committee of the Board of
Directors,  subject to certain  limitations  incorporated into the plan. Another
provision of the plans  automatically  grants 2,000 shares of nonqualified stock
options  per  year to each  nonemployee  director.  Options  issued  under  this
provision  have a ten-year term and an exercise  price not less than fair market
value at date of grant. At December 31, 1999,  388,675 shares remained available
to be issued under the plans.

       Changes in  outstanding  employee and director  stock options  during the
three years ended December 31, 1999 is as follows:

                                       37

<PAGE>

                                                              Average
                                              Number of    exercise price
                                                 shares      per share
                                             -----------    ----------
Outstanding at December 31, 1996                212,175     $     7.12
  Granted                                        69,775           7.87
  Exercised                                      (9,000)          6.89
  Canceled                                      (33,200)          7.69
                                             -----------    ----------
Outstanding at December 31, 1997                239,750           7.27
  Granted                                        74,775          11.50
  Exercised                                     (48,200)          6.75
  Canceled                                         (300)          7.50
                                             -----------    ----------
Outstanding at December 31, 1998                266,025           8.55
  Granted                                        91,400           8.80
  Exercised                                     (43,675)          7.93
  Canceled                                       (6,100)          8.44
                                             -----------    ----------
Outstanding at December 31, 1999                307,650     $     8.72
                                             ===========    ==========

Options issued to officers and key employees are subject to vesting. Options are
vested and become exercisable one-third at the date of issue, one-third one year
from date of issue and one-third  two years from date of issue.  At December 31,
1999,  232,958 stock options are  currently  exercisable  at an average price of
$8.47 per share.  The  following  table  summarizes  the status of stock options
outstanding at December 31, 1999:

                                        Weighted Average            Weighted
                                           Remaining                 Average
Range of Exercise Prices         Shares   Option Life         Exercise Price
------------------------      ---------   -----------         --------------
$ 6.50 to $ 8.50                216,375    2.6 years             $      7.69
$ 8.51 to $10.93                 20,000    6.8 years                    9.86
$10.94 to $12.51                 71,275    3.7 years                   11.50

Effective  August 1, 1990,  the 1990 Employee  Stock  Purchase Plan ("ESPP") was
adopted,  for which  100,000  shares  were  reserved.  Under  terms of the plan,
eligible employees may acquire shares of common stock through payroll deductions
of not more  than 10% of  compensation.  The price of  shares  purchased  by the
employees is 85% of the lower of fair market value for such shares on one of two
specified  dates in each plan year. A participant is limited to the  acquisition
in any plan year to the number of shares which their payroll  deductions for the
year would  purchase  based on the market  price on the first day of the year or
$25,000,  whichever  is less.  Shares  issued to  employees  under the plan were
14,890,  10,753 and 3,695 for the plan years  ended  August 31,  1999,  1998 and
1997, respectively. At December 31, 1999 employees had subscribed to purchase an
additional 11,300 shares in the current plan cycle ending August 31, 2000.

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

                                           Year Ended December 31
                                 -----------------------------------------
                                        1999           1998           1997
                                 -----------    -----------    -----------
Net income                       $ 7,211,118    $ 3,709,988    $ 2,579,427
Basic net income per share       $      2.33    $      1.54    $      1.36
Diluted net income per share     $      1.90    $      1.10    $       .89

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

                                       38

<PAGE>

                                                Year Ended December 31
                                         ---------------------------------------
                                             1999            1998           1997
                                         --------        --------       --------
Expected volatility                         28.2%           23.3%          21.4%
Risk free interest rate                      5.3%            5.6%           6.5%
Expected holding period - employees       4 years         4 years        4 years
Expected holding period - directors       7 years         7 years        7 years
Dividend yield                                 0%              0%             0%

       Pro  forma  stock-based  compensation  cost was  $268,063,  $200,255  and
$141,326 in 1999, 1998 and 1997, respectively.  Fair value of all options issued
was $286,529, $271,770 and $180,134, in 1999, 1998 and 1997, respectively.

       In 1995  the  Company  issued  $12,650,000  (par  value)  of  convertible
subordinated  debentures.  The debentures were  convertible into common stock of
the  Company at a rate of 112.5  common  shares per $1,000 par value  debenture.
During  1998  and  1999  the  Company  issued  calls  retiring  the  debentures;
$10,757,000  of debentures  being  converted into common stock and $1,893,000 of
debentures  being retired for cash. The  underwriters of the debenture  offering
also received  warrants to purchase  shares of the  Company's  common stock at a
price of $8.70 per  share.  8,742  shares  and 7,876  shares  were  issued  upon
exercise of  warrants in 1999 and 1998,  respectively.  At  December  31,  1999,
warrants for 91,046 shares remain outstanding.  All of the outstanding  warrants
were exercised in February 2000.

       Effective  August 1, 1990,  the Board of  Directors  adopted a  leveraged
employee stock ownership plan ("ESOP"). Contributions to the ESOP are determined
by the Board on an annual basis and can be made in cash or by issuing  shares of
the Company's  common stock.  ESOP expense  reflects the market value of company
stock  contributed  to the  accounts  of eligible  employees  at the time of the
contribution.  ESOP expense was $97,000,  $83,000 and $60,000 for 1999, 1998 and
1997,  respectively.  At December 31, 1998,  the ESOP held 57,205  shares of the
Company's  common  stock,  all of which had been  allocated  to the  accounts of
participating   employees.  All  eligible  employees  of  Hector  Communications
Corporation  participate  in the plan  after  completing  one  year of  service.
Employees of Alliance  Telecommunications  Corporation do not participate in the
plan.  Contributions are allocated to each participant based on compensation and
vest 30% after three years of service and  incrementally  thereafter,  with full
vesting after seven years.

       On July 28, 1999 the Board of Directors  adopted a  shareholders'  rights
plan.  Under this plan, the Board of Directors  declared a  distribution  of one
right per share of common  stock.  Each right  entitles  the holder to  purchase
1/100th of a share of a new series of Junior  Participating  Preferred  Stock of
the Company at an initial  exercise  price of $65. The rights expire on July 27,
2009. The rights will become  exercisable  only  following the  acquisition by a
person or group, without the prior consent of the Board of Directors,  of 15% or
more of the Company's  voting stock,  or following the  announcement of a tender
offer or exchange  offer to acquire an  interest  of 15% or more.  If the rights
become  exercisable,  each  rightholder  will be  entitled to  purchase,  at the
exercise  price,  common  stock with a market  value equal to twice the exercise
price.  Should the Company be acquired,  each right would  entitle the holder to
purchase,  at the exercise price,  common stock of the acquiring  company with a
market  value  equal  to twice  the  exercise  price.  Any  rights  owned by the
acquiring person or group would become void.

NOTE 9 - EMPLOYEE BENEFIT PLANS

       The Company has 401(k)  savings  plans for its  employees.  Employees who
meet  certain age and service  requirements  may  contribute  up to 10% of their
salaries  to the plan on a pretax  basis.  The  Company  matches  a  portion  of
employee contributions.  Contributions to the plan by the Company for 1999, 1998
and 1997 were approximately $152,000, $135,000 and $121,000, respectively.

       Employees of Alliance Telecommunications Corporation who meet certain age
and service  requirements  are eligible to participate in a profit sharing plan.
Contributions  are determined  annually by Alliance's Board of Directors and are
allocated   proportionately  to  the  participants  in  each  allocation  group.
Contributions  to the plan by the Company in 1999,  1998 and 1997 were $224,000,
$177,000 and $166,000, respectively.

                                       39

<PAGE>

Ollig Utilities  Company had a deferred  compensation  agreement with two of its
former officers that the Company has assumed. Under the agreement,  the salaries
of these  officers  were  continued  after their  retirement  based on a formula
stated in the agreement. The Company incurred no expense under this agreement in
1999 or 1997. The Company's  1998 expense under the plan was $143,000.  Payments
made  under the  agreement  in 1999,  1998 and 1997 were  $93,000,  $93,000  and
$47,500, respectively.

NOTE 10 - TRANSACTIONS WITH COMMUNICATIONS SYSTEMS, INC.

Transactions  between the Company and  Communications  Systems,  Inc. (CSI), the
Company's former parent, are based on a distribution  agreement,  which provides
for the  Company's  use of certain of CSI's staff and  facilities,  with related
costs paid by the Company.  Services  provided by CSI  aggregated  approximately
$270,000, $300,000 and $264,000 in 1999, 1998 and 1997, respectively.

Employees  of the  Company  also  participated  in a joint  self-funded  medical
insurance program with employees of CSI through August,  1999. Costs paid by the
Company into this program were $429,000,  $595,000,  and $535,000 in 1999,  1998
and 1997, 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
$428,000 and $645,000 at December 31, 1999 and 1998, respectively.

NOTE 11 - SEGMENT INFORMATION

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

<TABLE>
<CAPTION>

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

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

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

Capital Expenditures                      $  2,901,944      $  4,639,982     $  7,541,926
                                          ============      ============     ============
</TABLE>

                                       40

<PAGE>

<TABLE>
<CAPTION>

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

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

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

Capital Expenditures                      $  2,651,776      $  7,064,359     $  9,716,135
                                          ============      ============     ============

                                                Hector         Alliance      Consolidated
                                          ------------      ------------     ------------
Year Ended December 31, 1997

Revenues                                  $  7,356,830     $ 21,509,535      $ 28,866,365
Costs and expenses                           5,477,058       13,635,899        19,112,957
                                          ------------      ------------     ------------
Operating income                             1,879,772        7,873,636         9,753,408
Interest expense                            (2,059,948)      (4,737,406)       (6,797,354)
Partnership and LLC income                     259,050        1,049,296         1,308,346
Investment income                              169,878          455,704           625,582
Gain on sale of marketable securities        1,495,999                          1,495,999
                                          ------------      ------------     ------------
Income before income taxes                $  1,744,751      $ 4,641,230      $  6,385,981
                                          ============      ============     ============

Depreciation and Amortization             $  1,973,699      $ 5,336,031      $  7,309,730
                                          ============      ============     ============

Total Assets                              $ 25,917,132      $113,373,824     $139,290,956
                                          ============      ============     ============

Capital Expenditures                      $  2,316,025      $  2,379,276     $  4,695,301
                                          ============      ============     ============
</TABLE>

                                       41

<PAGE>

 (b)  SUPPLEMENTAL FINANCIAL INFORMATION

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


                                                    Quarter Ended

                                       March 31    June 30    Sept 30     Dec 31
--------------------------------------------------------------------------------
                           1999

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

                           1998

Revenues                                $ 7,249    $ 8,023    $ 8,027    $ 8,539
Operating income                          2,449      2,928      2,992      2,278
Net income                                  434        778        874      1,824
Basic net income per share              $   .21    $   .34    $   .34    $   .69
Diluted net income per share            $   .16    $   .25    $   .26    $   .50




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

Not applicable.


                                       42

<PAGE>

                                    PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The information called for by paragraphs (a), (c), (d), (e), and (f) of Item 401
under  Regulation  S-K,  to the extent  applicable,  will be set forth under the
caption  "Election of Directors" in the Company's  definitive proxy material for
its May 18, 2000 Annual Meeting of Shareholders to be filed within 120 days from
the  end of  the  Registrant's  fiscal  year,  which  information  is  expressly
incorporated by reference herein. The information called for by paragraph (b) of
Item 401 is set forth under Item 1(c) herein. The information called for by Item
405 under Regulation S-K, to the extent applicable,  will be set forth under the
caption  "Certain  Transactions"  in the Company's above  referenced  definitive
proxy material.

ITEM 11.  EXECUTIVE COMPENSATION

The  information  called  for by Item 402  under  Regulation  S-K to the  extent
applicable,  will be set forth under the caption "Executive Compensation" in the
Company's  definitive  proxy materials for its May 18, 2000 Annual Meeting to be
filed  within  120 days  from the end of the  Registrant's  fiscal  year,  which
information is expressly incorporated herein by reference.

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The  information  called for by Item 403 under  Regulation S-K will be set forth
under  the  captions  "Security  Ownership  of  Certain  Beneficial  Owners  and
Management"  and  "Election of  Directors"  in the  Company's  definitive  proxy
materials  for its May 18, 2000 Annual  Meeting to be filed within 120 days from
the  end of  the  Registrant's  fiscal  year,  which  information  is  expressly
incorporated herein by reference.

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The  information  called for by Item 404 under  Regulation S-K will be set forth
under the caption  "Certain  Transactions"  in the  Company's  definitive  proxy
materials  for its May 18, 2000 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.

                                       43

<PAGE>

                                     PART IV

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

(a)      (1)  Consolidated Financial Statements

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

         Independent Auditors' Report for the years ended
         December 31, 1999, 1998 and 1997

         Consolidated Balance Sheets as of December 31, 1999 and 1998

         Consolidated  Statements  of Income  and  Comprehensive  Income for the
         years ended December 31, 1999, 1998 and 1997

         Consolidated Statements of Stockholders' Equity for the years ended
         December 31, 1999, 1998 and 1997

         Consolidated Statements of Cash Flows for the years ended
         December 31, 1999, 1998 and 1997

         Notes to Consolidated Financial Statements

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

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

         Independent Auditors' Report on financial statement
         schedule for the years ended December 31, 1999,
         1998 and 1997                                                    47

         Schedule I - Condensed Financial Information of Registrant      48-51

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

         Separate financial statements of Midwest Wireless Communications LLC, a
         50 percent or less owned  equity  method  investment,  included as this
         entity   constitutes  a  "significant   subsidiary"   pursuant  to  the
         provisions of Regulation S-X, Article 3-09. 52-65

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

(b) REPORTS ON FORM 8-K FILED DURING THE THREE MONTHS ENDED DECEMBER 31, 1999

         Not Applicable.


                                       44

<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 28, 2000                   /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 28, 2000
-----------------------    Chief Executive Officer and Director
Curtis A. Sampson

/s/Steven H. Sjogren       President, Chief Operating Officer,    March 28, 2000
----------------------     and Director
Steven H. Sjogren

/s/Paul N. Hanson          Vice President, Treasurer and          March 28, 2000
-----------------------    Director
Paul N. Hanson

/s/Charles A. Braun        Chief Financial Officer and            March 28, 2000
-----------------------    Principal Accounting Officer
Charles A. Braun

/s/Charles R. Dickman      Director                               March 28, 2000
-----------------------
Charles R. Dickman

/s/Jjames O. Ericson       Director                               March 28, 2000
-----------------------
James O. Ericson

/s/Paul A. Hoff            Director                               March 28, 2000
-----------------------
Paul A. Hoff

/s/Wayne E. Sampson        Director                               March 28, 2000
-----------------------
Wayne E. Sampson

/s/Edward E. Strickland    Director                               March 28, 2000
-----------------------
Edward E. Strickland

                                       45

<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, 1999



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

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






                                       46

<PAGE>

          INDEPENDENT AUDITORS' REPORT ON FINANCIAL STATEMENT SCHEDULE

Shareholders and Board of Directors
Hector Communications Corporation

The audit of the  consolidated  financial  statements  of Hector  Communications
Corporation and subsidiaries referred to in our opinion dated February 16, 2000,
included the related financial  statement  schedule as listed in item 14(a)2. In
our opinion,  this financial statement schedule,  when considered in relation to
the basic  consolidated  financial  statements,  presents fairly in all material
respects the information set forth therein.

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

February 16, 2000


                                       47

<PAGE>
<TABLE>
<CAPTION>

                                  HECTOR COMMUNICATIONS CORPORATION
                      SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT

                          HECTOR COMMUNICATIONS CORPORATION (PARENT COMPANY)
                                            BALANCE SHEETS
                                                                                 December 31
                                                                       -------------------------------
                                                                               1999              1998
                                                                       -------------     -------------
Assets:
<S>                                                                     <C>               <C>
  Cash                                                                                    $      8,024
  Investment in subsidiaries                                            $ 41,255,044        30,297,399
  Other current assets                                                       464,374           159,219
  Property, plant and equipment, net                                          92,548            88,603
  Accounts with subsidiaries                                               2,157,388         5,809,257
  Other investments                                                          449,582           616,286
  Deferred debenture issue costs                                                               371,311
  Other assets                                                                25,000
                                                                       -------------     -------------
Total Assets                                                            $ 44,443,936      $ 37,350,099
                                                                       =============     =============

Liabilities and Stockholders' Equity:
  Cash overdraft                                                        $     29,931
  Accounts payable                                                           257,787      $    387,242
  Other current liabilities                                                  430,588           379,684
  Current portion of long-term debt                                          183,000         2,171,000
  Long-term debt                                                           3,560,712        11,691,852
  Stockholders' equity:
    Preferred stock, par value $1.00 per share; 3,000,000 shares authorized:

      Convertible Series A, 229,300 and 342,800
        shares issued and outstanding                                        229,300           342,800
    Common stock, par value $.01 per share;
      10,000,000 shares authorized; 3,574,712 and
      2,661,062 shares issued and outstanding                                 35,747            26,611
    Additional paid-in capital                                            13,274,444         6,326,441
    Retained earnings                                                     23,115,945        15,636,764
    Accumulated other comprehensive income                                 3,326,482           387,705
                                                                       -------------     -------------
Total Liabilities and Stockholders' Equity                              $ 44,443,936      $ 37,350,099
                                                                       =============     =============
</TABLE>

                                       48

<PAGE>
<TABLE>
<CAPTION>

                                            HECTOR COMMUNICATIONS CORPORATION
                               SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT

                                   HECTOR COMMUNICATIONS CORPORATION (PARENT COMPANY)
                                      STATEMENT OF INCOME AND COMPREHENSIVE INCOME

                                                                                     Year Ended December 31
                                                                       --------------------------------------------------
                                                                               1999              1998               1997
                                                                       -------------     -------------      -------------
Revenues:
<S>                                                                     <C>               <C>                 <C>
  Sales                                                                 $    303,779      $    286,569        $   287,345

Expenses:
  Operating expenses                                                         116,466           103,164             90,464
  Amortization of goodwill                                                    34,721            41,245             52,126
  Gain on sale of marketable securities                                                                        (1,464,409)
  Interest expense, net                                                      719,739         1,329,491          1,571,655
  Income tax expense (benefit)                                              (170,504)         (412,835)            24,315
                                                                       -------------     -------------      -------------
    Total expenses                                                           700,422         1,061,065            274,151

Income (loss) before equity in earnings of
  subsidiaries                                                              (396,643)         (774,496)            13,194

Equity in earnings of subsidiaries                                         7,875,824         4,684,739          2,707,559
                                                                       -------------     -------------      -------------
Net income                                                                 7,479,181         3,910,243          2,720,753

Other comprehensive income (loss):

  Unrealized holding gains of subsidiaries on marketable
    securities                                                            20,784,075           492,287          1,754,213
  Reclassification adjustment for gains of subsidiaries
    included in net income                                               (13,203,062)         (965,069)        (1,495,999)
                                                                       -------------     -------------      -------------
Other comprehensive income (loss) before
  income taxes                                                             7,581,013          (472,782)           258,214
                                                                       -------------     -------------     -------------
Income tax expense related to unrealized holding gains
  of subsidiaries on marketable securities                                 8,450,555           189,519            752,667
Income tax benefit related to reclassification adjustment for
  gains of subsidiaries included in net income                            (5,368,207)         (371,529)          (641,877)
                                                                       -------------     -------------     -------------

Income tax expense (benefit) related to items of other
  comprehensive income                                                     3,082,348          (182,010)           110,790
Minority interest in other comprehensive income
  of subsidiaries                                                          1,559,887
                                                                       -------------     -------------      -------------

Other comprehensive income (loss)                                          2,938,778          (290,772)           147,424
                                                                       -------------     -------------      -------------

Comprehensive income                                                    $ 10,417,959      $  3,619,471        $ 2,868,177
                                                                       =============     =============      =============
</TABLE>

                                       49

<PAGE>

<TABLE>
<CAPTION>

                                            HECTOR COMMUNICATIONS CORPORATION
                               SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT

                                   HECTOR COMMUNICATIONS CORPORATION (PARENT COMPANY)
                                   --------------------------------------------------

                                                STATEMENTS OF CASH FLOWS

                                                                                     Year Ended December 31
                                                                       --------------------------------------------------
                                                                               1999              1998               1997
                                                                       -------------     -------------      -------------
Cash flows from operating activities:

<S>                                                                      <C>               <C>                <C>
 Net income                                                              $ 7,479,181       $ 3,910,243        $ 2,720,753
  Adjustments  to  reconcile  net  income  to net  cash  provided  by  operating
   activities:

    Gain on sale of marketable securities                                                                      (1,464,409)
    Noncash patronage refund                                                 (12,569)
    Equity in earnings of subsidiaries                                    (7,875,824)       (4,684,739)        (2,707,559)
    Dividends from subsidiaries                                                              1,671,639            527,444
    Depreciation and amortization                                            190,151           272,326            304,700
    Changes in assets and liabilities:
     Decrease (increase) in other current assets                            (310,195)          (90,163)           186,866
     Decrease (increase) in accounts with subsidiaries                     3,651,869        (2,935,762)          (428,294)
     Increase in cash overdraft                                               29,931
     Increase (decrease) in accounts payable                                (129,455)          240,890            (19,803)
     Increase (decrease) in other current liabilities                        213,616          (103,691)          (166,479)
                                                                       -------------     -------------      -------------
 Net cash provided by (used in) operating activities                       3,236,705        (1,719,257)        (1,046,781)

Cash flows from investing activities:

  Purchases of property, plant and equipment                                 (44,214)          (10,167)           (71,485)
  Cash investments in affiliates                                             (18,600)
  Purchases of other investments                                                              (342,171)          (169,737)
  Cash proceeds from other investments                                         2,897                            1,646,900
  Purchases of other assets                                                  (25,000)
                                                                       -------------     -------------      -------------
 Net cash provided by (used in) investing activities                         (84,917)         (352,338)         1,405,678

Cash flows from financing activities:

  Issuance of debt                                                                           5,996,281
  Repayment of long-term debt                                             (3,626,140)       (4,519,429)        (2,000,000)
  Issuance of common stock                                                   466,328           489,703          1,575,107
  ESOP shares allocated                                                                         63,095             58,000
                                                                       -------------     -------------      -------------
 Net cash provided by (used in) financing activities                      (3,159,812)        2,029,650           (366,893)
                                                                       -------------     -------------      -------------

Net decrease in cash and cash equivalents                                     (8,024)          (41,945)            (7,996)

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

Supplemental disclosures of cash flow information:

  Interest paid                                                          $   890,545       $ 1,231,676        $ 1,420,884
  Income taxes paid                                                          168,500            45,000            450,000
</TABLE>

                                       50

<PAGE>

              NOTES TO CONDENSED FINANCIAL STATEMENT OF REGISTRANT

Note 1 - Basis of Presentation

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

Note 2 - Cash Dividends from Subsidiaries

The  Registrant  received  dividends  from its  subsidiaries  of $1,671,639  and
$527,444 in 1998 and 1997, respectively. No dividends were received in 1999.

Note 3 - Long Term Debt

                                                             December 31
                                                      --------------------------
                                                            1999           1998
                                                      -----------    -----------
Notes payable to Rural Telephone
  Finance Cooperative, in quarterly installments,
  interest rate of 6.95%, due 2013                    $ 3,743,712    $ 3,914,852
Convertible subordinated debentures, payable to
  debentureholders, interest rate of 8.5%                              7,948,000
Notes payable on line of credit from Rural
  Telephone Finance Cooperative                                        2,000,000
                                                      -----------    -----------
                                                        3,743,712     13,862,852
Less current portion                                      183,000      2,171,000
                                                      -----------    -----------
                                                      $ 3,560,712    $11,691,852
                                                      ===========    ===========


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

                             2000    $ 183,000
                             2001      195,000
                             2002      209,000
                             2003      223,000
                             2004      238,000




                                       51

<PAGE>

                     MIDWEST WIRELESS COMMUNICATIONS L.L.C.

              REPORT ON AUDIT OF CONSOLIDATED FINANCIAL STATEMENTS

                 FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998


                                       52

<PAGE>

                        Report of Independent Accountants

To the Board of Managers

Midwest Wireless Communications L.L.C.:



In our opinion, the accompanying  consolidated  statements of financial position
and the  related  consolidated  statements  of  operations,  changes in members'
equity and cash flows present fairly,  in all material  respects,  the financial
position of Midwest  Wireless  Communications  L.L.C.  (a  subsidiary of Midwest
Wireless  Holdings L.L.C.) (the Company) and subsidiary at December 31, 1999 and
1998, and the consolidated  results of their operations and their cash flows for
the years then ended in conformity with accounting principles generally accepted
in the United States.  These financial  statements are the responsibility of the
Company's  management;  our  responsibility  is to  express  an opinion on these
financial  statements  based on our  audits.  We  conducted  our audits of these
statements  in  accordance  with auditing  standards  generally  accepted in the
United  States,  which  require  that we plan and  perform  the  audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the  amounts  and  disclosures  in  the  financial  statements,   assessing  the
accounting  principles  used and significant  estimates made by management,  and
evaluating the overall  financial  statement  presentation.  We believe that our
audits provide a reasonable basis for the opinion expressed above.

                                                      PRICEWATERHOUSECOOPERS LLP


February 4, 2000




                                       53

<PAGE>
<TABLE>
<CAPTION>

                                        Midwest Wireless Communications L.L.C.
                                  (A Subsidiary of Midwest Wireless Holdings, L.L.C.)
                                     Consolidated Statements of Financial Position

                                            At December 31, 1999 and 1998

Assets                                                                                 1999                 1998
                                                                             ------------------   ------------------

Current assets:
<S>                                                                              <C>                  <C>
   Cash and cash equivalents                                                     $   1,378,350        $   3,147,979
   Restricted cash                                                                   1,000,000
   Marketable securities                                                                                  3,946,270
   Accounts receivable, less allowance for doubtful accounts of
        $258,120 and $282,287in 1999 and 1998, respectively                          4,326,962            4,228,358
   Due from Parent                                                                     321,218
   Inventories                                                                       2,519,796            1,624,026
   Other                                                                               527,482              352,624
                                                                             ------------------   ------------------

      Total current assets                                                          10,073,808           13,299,257

Property, cellular plant and equipment, net                                         43,997,663           34,078,742
FCC licenses, net                                                                   16,514,927           16,736,528
Investments in cooperatives                                                          2,201,408            1,548,287
Deferred acquisition costs                                                           1,046,824              125,000
                                                                             ------------------   ------------------

      Total assets                                                               $  73,834,630        $  65,787,814
                                                                             ==================   ==================


                         Liabilities and Members' Equity

Current liabilities:
   Current portion of long-term debt                                             $   2,426,350        $   1,279,048
   Accounts payable                                                                  3,029,225            6,212,502
   Accrued commissions                                                                 818,592              615,757
   Accrued liabilities                                                               3,862,594            3,676,552
                                                                             ------------------   ------------------

      Total current liabilities                                                     10,136,761           11,783,859

Other liabilities                                                                    1,156,949              517,491
Revolving loan                                                                       2,000,000
Long-term debt                                                                      26,334,775           15,648,092
                                                                             ------------------   ------------------

      Total liabilities                                                             39,628,485           27,949,442

Commitments

Members' equity                                                                     34,206,145           37,838,372
                                                                             ------------------   ------------------

      Total liabilities and members' equity                                      $  73,834,630        $  65,787,814
                                                                             ==================   ==================

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

</TABLE>

                                       54

<PAGE>

                     Midwest Wireless Communications L.L.C.
               (A Subsidiary of Midwest Wireless Holdings, L.L.C.)
                      Consolidated Statements of Operations
                 For the Years Ended December 31, 1999 and 1998

                                                      1999                1998
                                                --------------------------------

Operating revenues:
    Retail service                              $40,009,007         $33,403,860
    Roamer service                               11,671,572          12,393,902
    Equipment sales                               5,651,878           3,321,271
                                               -------------       -------------

                                                 57,332,457          49,119,033
                                               -------------       -------------

Operating expenses:
    Operations and maintenance                   10,636,197          10,054,893
    Cost of equipment sold                        5,683,363           3,897,151
    Depreciation                                  7,528,105           4,707,905
    Amortization                                    494,381             481,392
    Selling, general and administrative          14,314,802          11,024,317
    Home roamer costs                             1,699,261           1,353,930
                                               -------------       -------------

                                                 40,356,109          31,519,588
                                               -------------       -------------

      Operating income                           16,976,348          17,599,445
                                               -------------       -------------

Other income (expense):
    Equity loss on Switch 2000                                         (710,330)
    Interest expense                             (1,291,817)           (890,930)
    Interest and dividend income                    230,760             711,388
    Other                                            46,733             262,375
                                               -------------       -------------

                                                 (1,014,324)           (627,497)
                                               -------------       -------------

Net income                                     $ 15,962,024        $ 16,971,948
                                               =============       =============

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

                                       55

<PAGE>

                     Midwest Wireless Communications, L.L.C.
               (A Subsidiary of Midwest Wireless Holdings, L.L.C.)
              Consolidated Statement of Changes in Members' Equity
                 For the Years Ended December 31, 1999 and 1998

                                                                           Total

                                       Capital    Accumulated         Members'
                                  Contributions       Income          Equity

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

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

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

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

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

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

Distributions to members                           (6,830,164)      (6,830,164)

Net income                                         15,962,024       15,962,024
                                 -------------   -------------    -------------

Balance, December 31, 1999        $14,724,517     $19,481,628      $34,206,145
                                 =============   =============    =============

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

                                       56

<PAGE>
<TABLE>
<CAPTION>

                (A Subsidiary of Midwest Wireless Holdings, L.L.C.)
                      Consolidated Statements of Cash Flows
                   For the Years Ended December 31, 1999 and 1998

                                                                       1999               1998
                                                                --------------------------------
Cash flows from operating activities:

<S>                                                             <C>                <C>
    Net income                                                  $ 15,962,024       $ 16,971,948
    Adjustments to reconcile net income to net cash
        provided by operating activities:
      Provision for bad debts                                         58,775            266,901
      Management fee to Parent                                       396,033
      Depreciation                                                 7,582,105          4,707,905
      Amortization                                                   494,381            481,392
      Loss on disposal of equipment                                  390,567
      Equity loss on investment in Switch 2000                                          710,330
      Appreciation rights                                            639,458            322,244
      Accretion of discount on marketable securities                (124,204)          (210,403)
      Changes in assets and liabilities:
        Accounts receivable                                         (157,379)            53,732
        Due from Parent                                             (717,251)
        Inventories                                                 (895,770)          (853,409)
        Accounts payable                                          (4,479,112)          (994,241)
        Accrued liabilities                                          388,877            761,884
        Other                                                       (174,858)           (25,207)
                                                                -------------      -------------
      Net cash provided by operating activities                   19,363,646         22,193,076
                                                                -------------      -------------

Cash flows from investing activities:

    Payments for property, cellular plant and equipment          (16,581,238)       (11,514,175)
    Purchases of marketable securities                            (6,679,526)       (12,794,926)
    Proceeds received upon maturity of marketable securities      10,750,000         14,970,930
    Purchase of Switch 2000 interests                                                  (383,330)
    Purchase of FCC licenses                                        (287,300)          (385,696)
    Purchases of cooperative stock                                  (653,121)        (1,150,092)
    Payments for deferred acquisition costs                         (921,824)          (125,000)
    Restriction of cash                                           (1,000,000)
                                                                -------------      -------------
      Net cash used in investing activities                      (15,373,009)       (11,382,289)
                                                                -------------      -------------

Cash flows from financing activities:

    Proceeds on revolving loan                                     2,000,000
    Proceeds on long-term debt borrowings                         13,368,420         16,372,239
    Payments on long-term debt                                    (1,534,435)       (17,361,509)
    Distributions to members                                      (6,830,164)        (8,605,964)
    Redemption of units                                          (12,764,087)          (130,854)
                                                                -------------      -------------
       Net cash used in financing activities                      (5,760,266)        (9,726,088)
                                                                -------------      -------------

Net change in cash and cash equivalents                           (1,769,629)         1,084,699

Cash and cash equivalents, beginning of year                       3,147,979          2,063,280
                                                                -------------      -------------
Cash and cash equivalents, end of year                          $  1,378,350       $  3,147,979
                                                                =============      =============

Supplemental disclosure:
    Cash paid during the year for interest                      $  1,156,323       $  1,015,834

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

</TABLE>

                                       57

<PAGE>

Midwest Wireless Communications L.L.C.
(A Subsidiary of Midwest Wireless Holdings L.L.C.)
Notes to Consolidated Financial Statements

1.       Organization and Significant Accounting Policies

       Organization and Basis of Consolidation

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

       On November 29, 1999,  certain  members which held an 86% interest in the
       Company exchanged their interests for a 100% interest in Midwest Wireless
       Holdings L.L.C. (the Parent).

       Consolidation

       The  consolidated   financial  statements  of  the  Company  include  its
       subsidiary, Switch 2000 L.L.C. (Switch 2000) as of December 31, 1999, and
       from the date of acquisition  (October 1, 1998) to December 31, 1998 (see
       Note 2). All significant intercompany balances and transactions have been
       eliminated in consolidation.

       Revenue Recognition

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

       Use of Estimates

       The  preparation  of financial  statements in conformity  with  generally
       accepted  accounting  principles in the United States requires management
       to make  estimates and  assumptions  that affect the reported  amounts of
       assets  and  liabilities  at the  date of the  financial  statements  and
       disclosure  of  contingent  assets  and  liabilities  at the  date of the
       financial  statements.  Estimates  also  affect the  reported  amounts of
       revenues and expenses during the periods  reported.  Actual results could
       differ from those estimates.

       Concentration of Credit Risk

       The Company  provides  cellular  service  and  cellular  telephones  to a
       diversified group of consumers within a concentrated  geographical  area.
       The Company  performs credit  evaluations of its customers and requires a
       deposit when deemed  necessary.  Receivables  are generally due within 30
       days.  Credit losses related to customers  have been within  management's
       expectations.

       Cash and Cash Equivalents

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

                                       58

<PAGE>

Midwest Wireless Communications L.L.C.
(A Subsidiary of Midwest Wireless Holdings L.L.C.)
Notes to Consolidated Financial Statements

       Marketable Securities

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

       Cellular Telephone Inventories

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

       Property, Cellular Plant and Equipment

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

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

       Income Taxes

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

       Advertising

       Advertising costs are expensed as incurred.  Total  advertising  expenses
       were  $1,754,394 and $1,412,628 for the years ended December 31, 1999 and
       1998, respectively.

       Federal Communications Commission (FCC) Licenses

       FCC licenses  are  recorded at fair market  value and are  amortized on a
       straight-line basis over lives ranging from 10 to 39 years.

                                       59

<PAGE>

Midwest Wireless Communications L.L.C.
(A Subsidiary of Midwest Wireless Holdings L.L.C.)
Notes to Consolidated Financial Statements

2.     Select Account Information

       Restricted Cash

       At June 29,  1999,  the  Company  signed a letter of  intent  to  acquire
       certain cellular properties.  In connection with the pending acquisition,
       the Company deposited $1,000,000 into an escrow account. Currently, other
       subsidiaries  of the  Company's  Parent  are  expected  to  complete  the
       acquisitions   in  the  first  quarter  of  2000.  Upon  closing  of  the
       acquisition  or in the event  that the  acquisition  fails to occur on or
       before  June 30,  2000,  the  restricted  funds will be  released  to the
       Company.  If the Company materially  breaches the acquisition  agreement,
       the restricted cash will be released to the seller.

       Deferred Acquisition Costs

       During 1999, the Company paid certain external deferred acquisition costs
       of  $1,046,824  on behalf of the Parent in  connection  with the  pending
       acquisition  of  certain  cellular   properties.   Upon  closing  of  the
       acquisitions, these costs will be allocated to the Parent and the Company
       will record a receivable due from the Parent.

       Property, Cellular Plant and Equipment

                                           1999                1998
                                    -------------        ------------

      Lnnd                           $ 1,696,989         $ 1,442,308
      Plant in service                56,271,401          49,641,677
      Plant under construction         8,453,176           3,112,679
                                    -------------        ------------
                                      66,421,566          54,196,664
      less accumulated depreciation  (22,423,903)        (20,117,922)
                                    -------------        ------------

                                     $43,997,663         $34,078,742
                                    =============        ============

       At December 31, 1999 and 1998,  accounts payable includes  $1,295,835 and
       $5,100,282,  respectively,  related to the purchase of property, cellular
       plant and equipment.  The Company  capitalized  interest in the amount of
       $243,973  and  $248,377  for the years ended  December 31, 1999 and 1998,
       respectively.

       FCC Licenses

                                          1999                 1998
                                    -------------        ------------

      Cellular license               $17,505,700         $17,505,700
      LMDS licenses                      357,696             357,696
      PCS licenses                       287,300
      Other                                                   28,000
                                    -------------        ------------

                                      18,150,696          17,891,396
      Less accumulated amortization   (1,635,769)         (1,154,868)
                                    -------------        ------------

                                     $16,514,927         $16,736,528
                                    =============        ============

                                       60

<PAGE>

Midwest Wireless Communications L.L.C.
(A Subsidiary of Midwest Wireless Holdings L.L.C.)
Notes to Consolidated Financial Statements


3.     Investment in Switch 2000

       Switch  2000  provided  switching  and  interconnection  services  to the
       Company  through  December 31, 1998.  During the period  January 1, 1998,
       through  September  30,  1998,  the  Company  had  ownership  and  voting
       interests in Switch 2000 of 45.55%. Accordingly, during this period, this
       investment was accounted for using the equity method of accounting.

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

       Effective  June 30,  1997,  Switch  2000 and the Company  entered  into a
       Management  Agreement  which  expired on December 31,  1997.  The Company
       continued to provide management services to Switch 2000 through September
       30,  1998.  Under  the terms of the  Management  Agreement,  Switch  2000
       retained the services of the Company to manage the  operations  of Switch
       2000,  including  administration of transport and switching  services and
       other  general  business  operations.  Switch 2000 was  required to pay a
       management fee equal to the total costs  incurred by the Company  related
       to the  management  of Switch  2000.  Total  management  fees paid to the
       Company during 1998 were $196,000.

       Switch  2000,  in  turn,  allocated  management  fees and  certain  other
       expenses,  primarily  network  costs,  to its owners,  which included the
       Company.  Amounts billed to the Company totaled approximately  $1,802,000
       for the period from January 1, 1998, to September 30, 1998.

                                       61

<PAGE>

Midwest Wireless Communications L.L.C.
(A Subsidiary of Midwest Wireless Holdings L.L.C.)
Notes to Consolidated Financial Statements


4.     Members' Capital

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

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

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

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

5.     Debt

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

                                       62

<PAGE>

Midwest Wireless Communications L.L.C.
(A Subsidiary of Midwest Wireless Holdings L.L.C.)
Notes to Consolidated Financial Statements


       The Agreement includes a term note with principal and interest payable in
       quarterly installments beginning October 31, 1998, with final maturity in
       2008.  The Agreement  provides the Company the option to fix the interest
       rate on borrowings (or portions  thereof)  through the maturity date. The
       variable  rate is  based  on the  Cooperative's  cost of  capital  and is
       adjusted  monthly.  At December 31, 1999,  the Company had  borrowings of
       $7,476,259  outstanding  that  accrue  interest  at a  variable  rate and
       $8,171,831  outstanding but accrue interest at a fixed rate of 5.75%. The
       variable rate was 6.95% at December 31, 1999.

       In addition,  the  Agreement  provides for an  acquisition  note of up to
       $36,842,105.  Advances  under the  acquisition  note are  subject  to the
       Cooperative's  review  and of the  Company's  acquisition  plan  and  any
       regulatory approval required to accomplish the contemplated  acquisition.
       Borrowings  under the  acquisition  note are subject to the same interest
       rate terms as the term note. The  acquisition  note becomes due ten years
       after the date of the initial  borrowing,  at which time the  outstanding
       principal  and interest are due. At December  31, 1999,  $13,113,035  was
       outstanding under the acquisition note at the variable rate of 6.95%.

       The Agreement  also provides for a revolving  loan of up to  $10,000,000.
       Borrowings  under the revolving loan bear interest at the prime rate plus
       one and one-half percent. The revolving loan expires on July 29, 2003, at
       which time the  outstanding  principal  and interest are due. At December
       31, 1999 and 1998, there were $2,000,000 of outstanding  borrowings under
       the revolving loan. The prime rate was 8.5% at December 31, 1999.

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

       Maturities of long-term debt are as follows:

                         2000                           $  2,426,350
                         2001                              2,583,994
                         2002                              2,571,912
                         2003                              5,110,777
                         2004                              3,121,304
                         Thereafter                       14,946,788
                                                        -------------
                                                        $ 30,761,125
                                                        =============


                                       63

<PAGE>

Midwest Wireless Communications L.L.C.
(A Subsidiary of Midwest Wireless Holdings L.L.C.)
Notes to Consolidated Financial Statements


6.     Commitments

       Future  minimum  rental  payments   required  under   operating   leases,
       principally for real estate related to tower sites, and other contractual
       commitments that have initial or remaining noncancellable terms in excess
       of one year as of December 31, 1999, are as follows:

                         2000                           $    622,932
                         2001                                368,874
                         2002                                275,101
                         2003                                172,839
                         2004                                140,943
                         Thereafter                        1,566,101
                                                        -------------
                                                        $  3,146,790
                                                        =============

       Rental expense was $666,765 and $433,550 for the years ended December 31,
       1999 and 1998, respectively.

7.     Cell Site Sharing Agreements

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

       The  Company  has  included  its  proportionate   share  of  the  assets,
       liabilities,  revenues  and  expenses of the Cell Sites in its  financial
       statements.  As  of  December  31,  1999  and  1998,  these  assets  were
       approximately  $1,161,000 and $769,000 and liabilities were approximately
       $-0- and $800,  respectively.  For the years ended  December 31, 1999 and
       1998,  revenues  were  approximately  $557,000 and $573,000 and operating
       expenses were approximately $78,000 and $275,000, respectively.

8.     Due from Parent

       During  1999,  the Company  entered  into a services  agreement  with its
       Parent.  Under the terms of the Agreement,  the Parent  provides  certain
       services to the Company  including  consulting,  constructing cell sites,
       switching and billing services.  During the year ended December 31, 1999,
       the Company was charged  $396,033 for these  services.  In addition,  the
       Company  advanced  $717,251  to the  Parent  for  initial  funding of the
       Parent's operations. The net $321,218 is reflected as due from the Parent
       on the statement of financial position as of December 31, 1999.

                                       64

<PAGE>

Midwest Wireless Communications L.L.C.
(A Subsidiary of Midwest Wireless Holdings L.L.C.)
Notes to Consolidated Financial Statements

9.     Employee Benefits

       The Company established the Midwest Wireless Communications L.L.C. 401(k)
       Profit  Sharing  Plan and Trust (the 401(k) Plan) for all  employees  who
       meet certain service and age  requirements.  The 401(k) Plan is comprised
       of an  employer  matching  contribution  component  and a profit  sharing
       component.  Employer matching contributions to this component of the plan
       were  $185,909  and  $128,219  for the years ended  December 31, 1999 and
       1998,  respectively.  Profit sharing  contributions are 100% vested after
       five years of  employment.  Profit  sharing  contribution  expenses  were
       $210,606  and  $155,286  for the years ended  December 31, 1999 and 1998,
       respectively.

       Effective  January 1, 1997, the Company  established the Midwest Wireless
       Communications L.L.C. Appreciation Rights Plan (the Plan) for certain key
       employees.  The Plan is designed  to create two  classes of  appreciation
       rights,  Class A and Class B, which  become  fully vested three years and
       five  years  after  the  first day of the year the  rights  are  granted,
       respectively.  Participants  in the Plan are  eligible to receive  awards
       based on the change in members' equity from the date of grant through the
       end of the vesting period. The Board of Managers granted both Class A and
       Class B  appreciation  rights in 1997.  Under  the terms of the Plan,  no
       additional  Class B appreciation  rights will be granted,  and additional
       Class A  appreciation  rights  will be granted at the  discretion  of the
       Board of  Managers.  The  Company  recognized  $639,458  and  $322,244 in
       compensation expense related to the Plan for the years ended December 31,
       1999 and 1998, respectively.

                                       65

<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, 1999

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

                                    EXHIBITS

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



                                       66
<PAGE>

              HECTOR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
                                Exhibit Index To
                 Form 10-K for the Year Ended December 31, 1999

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

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

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

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

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

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

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

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

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

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

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

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

   11      Calculation of Earnings          Filed herewith at page 68.
           Per Share

   21      Subsidiaries of the Registrant   Filed herewith at page 69.

   23      Independent Auditors' Consent    Filed herewith at page 70.

   24      Power of Attorney                Included in signatures at page 45.

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.

<PAGE>

                                       67

<TABLE>
<CAPTION>

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

                                                                                          Year Ended December 31
                                                                              ------------------------------------------------
Basic:                                                                             1999               1998              1997
-------                                                                       -----------        -----------       -----------

<S>                                                                           <C>                <C>               <C>
Net income                                                                    $ 7,479,181        $ 3,910,243       $ 2,720,753
                                                                              ===========        ===========       ===========

Common shares:

  Weighted average number of common shares outstanding                          3,095,028          2,402,794         1,901,508
  Number of unallocated shares held by ESOP                                             0                  0            (8,930)
                                                                              -----------        -----------       -----------
                                                                                3,095,028          2,402,794         1,892,578
                                                                              ===========        ===========       ===========

Net income per common share                                                   $      2.42        $      1.63       $      1.44
                                                                              ===========        ===========       ===========

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

Net income                                                                    $ 7,479,181        $ 3,910,243       $ 2,720,753
Interest on convertible debentures, net of tax                                    265,783            620,594           758,616
                                                                              -----------        -----------       -----------
  Adjusted net income                                                         $ 7,744,964        $ 4,530,837       $ 3,479,369
                                                                              ===========        ===========       ===========

Common and common equivalent shares:

  Weighted average number of common shares outstanding                          3,095,028          2,402,794         1,901,508
  Assumed conversion of convertible
    debentures into common stock                                                  431,152          1,119,683         1,423,125
  Dilutive effect of convertible preferred shares outstanding                     321,961            352,867           378,100
  Dilutive effect of stock options outstanding after
     application of treasury stock method                                          73,965             45,441            36,130
  Dilutive effect of Employee Stock

    Purchase Plan shares subscribed                                                   688              4,664             2,455
  Dilutive effect of warrants outstanding                                          21,734             11,623
  Weighted average number of
    unallocated shares held by ESOP                                                                                     (8,930)
                                                                              -----------        -----------       -----------
                                                                                3,944,528          3,937,072         3,732,388
                                                                              ===========        ===========       ===========

Diluted net income per share                                                  $      1.96        $      1.15       $       .93
                                                                              ===========        ===========       ===========
</TABLE>

                                       68

<PAGE>

                SUBSIDIARIES OF HECTOR COMMUNICATIONS CORPORATION

                                                     EXHIBIT 21

            Subsidiaries                           Jurisdiction of Incorporation

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

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

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

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

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

                                       69

<PAGE>

                                   EXHIBIT 23

                          INDEPENDENT AUDITORS' CONSENT

We consent to the  incorporation  by reference in  Registration  Statements  No.
33-39865,  33-39866,  3-65176, 33-87888,  333-45971,  333-45975 and 333-92063 of
Hector  Communications  Corporation  of our  report  dated  February  16,  2000,
appearing  in  this  Annual  Report  on  Form  10-K  of  Hector   Communications
Corporation and its subsidiaries for the year ended December 31, 1999.

/s/ Olsen Thielen and Co., Ltd.
--------------------------------
Olsen Thielen and Co., Ltd.
March 28, 2000
St. Paul, Minnesota