8-K/A

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 8-K/A

CURRENT REPORT

PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

November 3, 2006

Date of report (Date of earliest event reported)

NEW ULM TELECOM, INC.

(Exact name of registrant as specified in its charter)

Minnesota	0-3024	41-0440990
(State or other jurisdiction of incorporation)	(Commission File Number)	(IRS Employer Identification No.)

27 North Minnesota Street

New Ulm, MN 56073

(Address of principal executive offices, including zip code)

(507) 354-4111

(Registrant’s telephone number, including area code)

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2):

o    Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

o    Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

o    Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

o    Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

This Form 8-K/A amends the Current Report on form 8-K filed by New Ulm Telecom, Inc. on November 3, 2006 in connection with the acquisition described in Item 2.01 below that was completed on November 3, 2006. This amended form is being filed to include the financial information required by item 9.01.

Item 2.01 Completion of Acquisition or Deposition of Assets.

On November 3, 2006, New Ulm Telecom, Inc. (the “New Ulm”) announced that it had acquired a one-third interest in Hector Communications Corporation through the previously announced merger with Hector Acquisition Corporation. The Hector Acquisition Corporation is equally owned by New Ulm Telecom, Inc., Blue Earth Valley Communications, Inc. and Arvig Enterprises, Inc. Hector Acquisition Corporation acquired all of the outstanding shares of Hector Communications Corporation stock for $36.40 per share.

Item 9.01 Financial Statements and Exhibits.

(a) Financial Statements of Business Acquired.

The following audited consolidated financial statements of Hector Communications Corporation are filed with this Report as Exhibit 99.1:

• Report of Independent Registered Public Accounting Firm for the years ended December 31, 2005, 2004 and 2003

• Consolidated Balance Sheets for the years ended December 31, 2005 and 2004

• Consolidated Statements of Income for the years ended December 31, 2005, 2004 and 2003

• Consolidated Statements of Comprehensive Income for the years ended December 31, 2005, 2004 and 2003

• Consolidated Statements of Stockholder’s Equity for the years ended December 31, 2005, 2004 and 2003

• Consolidated Statements of Cash Flows for the years ended December 31, 2005, 2004 and 2003

• Notes to Consolidated Financial Statements

(b) The following unaudited condensed consolidated financial statements of Hector Communications Corporation are filed with this Report as Exhibit 99.2:

• Condensed Consolidated Balance Sheet as of June 30, 2006

• Condensed Consolidated Statements of Income for the six months ended June 30, 2006 and 2005

• Condensed Consolidated Statements of Cash Flows for the six month ended June 30, 2006 and 2005

• Notes to Unaudited Condensed Consolidated Financial Statements

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(c) Pro Forma Financial Information

The following unaudited pro forma combined financial statements of New Ulm Telecom, Inc. and Hector Communications Corporation are filed with this Report as Exhibit 99.3:

• Introduction to Pro Forma Combined Financial Information

• Pro Forma Combined Balance Sheet as of June 30, 2006

• Pro Forma Combined Statement of Operations for the six months ended June 30, 2006

• Pro Forma Combined Statement of Operations for the year ended December 31, 2005

• Notes to Pro Forma Combined Financial Statements

(d) Exhibits

99.1 Consolidated Financial Statements of Hector Communications Corporation, Years Ended December 31, 2005 and 2004

99.2 Unaudited Condensed Consolidated Financial Statements of Hector Communications Corporation, Six Months Ended June 30, 2006 and 2005

99.3 New Ulm Telecom, Inc. Unaudited Pro Forma Combined Financial Statements as of June 30, 2006 and the year ended December 31, 2005

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

	New Ulm Telecom, Inc.
Date:  January 12, 2007	By:	/s/ Nancy Blankenhagen
		Nancy Blankenhagen Chief Financial Officer

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EX-99.1

EXHIBIT 99-1

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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, 2005 and 2004, and the related consolidated statements of income, comprehensive income, stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2005. 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 did not audit the financial statements of Midwest Wireless Holdings L.L.C., a limited liability company, the investment in which, as discussed in Note 5 to the consolidated financial statements, is accounted for by the equity method of accounting. The investment in Midwest Wireless Holdings L.L.C. was $18,067,471 and $15,380,543 as of December 31, 2005 and 2004 and the equity earnings in its net income was $4,681,888, $2,765,887 and $2,148,444 for the years ended December 31, 2005, 2004 and 2003. The financial statements of Midwest Wireless Holdings L.L.C. were audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to the amounts included for Midwest Wireless Holdings L.L.C., is based solely on the report of the other auditors.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also 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, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, based on our audits and the report of other auditors, 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, 2005 and 2004, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2005 in conformity with accounting principles generally accepted in the United States of America.

/s/Olsen Thielen & Co., Ltd.

St. Paul, Minnesota

February 17, 2006

1

HECTOR COMMUNICATIONS CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

ASSETS
	December 31
	2005		2004
CURRENT ASSETS:
Cash and cash equivalents	$	25,245,358	$	19,980,506
Construction fund (Note 9)		756,260		3,944,684
Accounts receivable (net of allowance for doubtful accounts of $26,000 and $37,000, respectively)		2,678,690		3,017,569
Materials, supplies and inventories (Note 1)		795,181		820,081
Other current assets		247,182		250,276
TOTAL CURRENT ASSETS		29,722,671		28,013,116
PROPERTY, PLANT AND EQUIPMENT, net (Notes 1 and 3)		37,381,570		40,040,493
INVESTMENTS AND OTHER ASSETS:
Excess of cost over net assets acquired (Note 4)		30,921,094		30,921,094
Investment in Midwest Wireless Holdings LLC (Note 5)		18,067,471		15,380,543
Investments in other unconsolidated affiliates (Note 6)		3,307,593		3,304,726
Other investments (Notes 1, 7 and 16)		8,037,986		6,880,549
Other assets (Notes 1 and 4)		315,906		382,322
TOTAL OTHER ASSETS		60,650,050		56,869,234
TOTAL ASSETS	$	127,754,291	$	124,922,843
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Notes payable and current portion of long-term debt (Note 9)	$	6,527,400	$	6,352,000
Accounts payable (Note 12)		1,287,547		2,072,722
Accrued expenses		1,873,656		1,936,188
Income taxes payable		1,052,944		51,701
TOTAL CURRENT LIABILITES		10,741,547		10,412,611
LONG-TERM DEBT, less current portion (Note 9)		49,456,138		54,084,480
DEFERRED INVESTMENT TAX CREDITS (Note 8)		2,638		3,340
DEFERRED INCOME TAXES (Note 8)		5,306,152		5,460,554
DEFERRED COMPENSATION (Note 11)		802,116		749,128
COMMITMENTS AND CONTINGENCIES (Notes 9 and 15)
STOCKHOLDERS’ EQUITY: (Notes 1, 9 and 10)
Preferred stock, par value $1.00 per share; 3,000,000 shares authorized:
Convertible Series A, 0 and 157,800 shares issued and outstanding				157,800
Common stock, par value $.01 per share; 10,000,000 shares authorized; 3,982,789 and 3,723,390 shares issued and outstanding		39,828		37,234
Additional paid-in capital		17,138,826		15,621,048
Retained earnings		43,794,447		38,359,117
Accumulated other comprehensive income (Note 7)		472,599		37,531
TOTAL STOCKHOLDERS’ EQUITY		61,445,700		54,212,730
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	127,754,291	$	124,922,843

See notes to consolidated financial statements.

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HECTOR COMMUNICATIONS CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

	Year Ended December 31
	2005			2004			2003
REVENUES FROM CONTINUING OPERATIONS:
Local network	$	6,088,047		$	6,201,326		$	6,117,238
Network access		15,875,103			15,323,096			16,075,254
Video services		3,171,117			3,324,588			3,579,773
Internet services		3,832,037			3,150,089			2,647,156
Other nonregulated services		3,407,171			3,570,671			3,903,007
TOTAL REVENUES		32,373,475			31,569,770			32,322,428
COSTS AND EXPENSES:
Plant operations, excluding depreciation		4,567,951			4,339,102			4,516,711
Depreciation and amortization		7,688,691			7,990,216			7,851,511
Customer operations		1,778,507			1,617,767			1,552,109
General and administrative		4,144,194			3,869,811			4,531,736
Other operating expenses:
Video service expenses		3,228,645			3,059,031			3,026,613
Internet expenses		967,315			959,834			910,900
Other		2,008,459			2,751,829			1,976,202
TOTAL COSTS AND EXPENSES		24,383,762			24,587,590			24,365,782
OPERATING INCOME FROM CONTINUING OPERATIONS		7,989,713			6,982,180			7,956,646
OTHER INCOME (EXPENSES):
Interest expense		(2,957,370	)		(2,867,135	)		(3,401,479	)
Income (loss) from investments in unconsolidated affiliates:
Midwest Wireless Holdings, LLC (Note 5)		4,681,888			2,765,887			2,148,444
Other unconsolidated affiliates (Note 6)		199,462			482,847			96,299
Interest and dividend income		1,018,641			445,333			391,897
Gain on sale of cable television systems and other business (Note 14)					85,271			1,080,723
OTHER INCOME (EXPENSES), net		2,942,621			912,203			315,884
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES AND MINORITY INTEREST		10,932,334			7,894,383			8,272,530
Income tax expense (Note 8)		4,365,000			3,250,000			3,316,000
INCOME FROM CONTINUING OPERATIONS BEFORE MINORITY INTEREST		6,567,334			4,644,383			4,956,530
Minority interest in continuing operations of Alliance Telecommunications Corporation								(659,624	)
INCOME FROM CONTINUING OPERATIONS		6,567,334			4,644,383			4,296,906
INCOME FROM DISCONTINUED OPERATIONS (Note 2)								881,854
NET INCOME	$	6,567,334		$	4,644,383		$	5,178,760
BASIC NET INCOME PER COMMON SHARE (Note 1):
Continuing operations	$	1.72		$	1.28		$	1.23
Discontinued operations								.25
	$	1.72		$	1.28		$	1.48
DILUTED NET INCOME PER COMMON SHARE (Note 1):
Continuing operations	$	1.61		$	1.17		$	1.14
Discontinued operations								.23
	$	1.61		$	1.17		$	1.37
DIVIDENDS PER SHARE	$	.28		$	.05		$	—
AVERAGE SHARES OUTSTANDING (Notes 1 and 10):
Common shares only		3,821,000			3,635,000			3,487,000
Common and potential common shares		4,084,000			3,970,000			3,765,000

See notes to consolidated financial statements.

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HECTOR COMMUNICATIONS CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

	Year Ended December 31
	2005			2004			2003
Net income	$	6,567,334		$	4,644,383		$	5,178,760
Other comprehensive income (loss):
Unrealized holding gains (losses) on marketable securities		725,115			(22,824	)		97,612
Income tax (expense) benefit related to unrealized holding gains and losses on marketable securities		(290,047	)		9,130			(39,053	)
Minority interest in other comprehensive loss of Alliance Telecommunications Corporation								3,783
Other comprehensive income (loss)		435,068			(13,694	)		62,342
Comprehensive income	$	7,002,402		$	4,630,689		$	5,241,102

See notes to consolidated financial statements

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HECTOR COMMUNICATIONS CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

	Preferred Stock					Common Stock					Additional Paid-in Capital			Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Total
	Shares		Amount			Shares		Amount
BALANCE AT DECEMBER 31, 2002	220,100		$	220,100		3,455,067		$	34,551		$	13,262,969		$	28,742,832		$	(11,117	)	$	42,249,335
Net income															5,178,760						5,178,760
Issuance of common stock under Employee Stock Purchase Plan						15,685			157			131,166									131,323
Issuance of common stock to Employee Stock Ownership Plan						11,000			110			139,040									139,150
Issuance of common stock under Employee Stock Option Plan						34,836			348			299,572									299,920
Purchase and retirement of common stock						(1,106	)		(11	)		(4,333	)		(12,818	)					(17,162	)
Change in unrealized gains on marketable securities, net of deferred taxes																		62,342			62,342
BALANCE AT DECEMBER 31, 2003	220,100			220,100		3,515,482			35,155			13,828,414			33,908,774			51,225			48,043,668
Net income															4,644,383						4,644,383
Dividends															(194,040	)					(194,040	)
Conversion of preferred stock to common stock	(62,300	)		(62,300	)	62,300			623			61,677									0
Issuance of common stock under Employee Stock Purchase Plan						10,951			109			133,575									133,684
Issuance of common stock to Employee Stock Ownership Plan						20,467			205			286,753									286,958
Issuance of common stock under Employee Stock Option Plan						114,190			1,142			1,310,629									1,311,771
Change in unrealized gains on marketable securities, net of deferred taxes																		(13,694	)		(13,694	)
BALANCE AT DECEMBER 31, 2004	157,800			157,800		3,723,390			37,234			15,621,048			38,359,117			37,531			54,212,730
Net income															6,567,334						6,567,334
Dividends															(1,107,080	)					(1,107,080	)
Conversion of preferred stock to common stock	(157,800	)		(157,800	)	157,800			1,578			156,222									0
Issuance of common stock under Employee Stock Purchase Plan						10,733			107			197,728									197,835
Issuance of common stock to Employee Stock Ownership Plan						15,861			159			346,316									346,475
Issuance of common stock under Employee Stock Option Plan						76,174			762			822,488									823,250
Purchase and retirement of common stock						(1,169	)		(12	)		(4,976	)		(24,924	)					(29,912	)
Change in unrealized gains on marketable securities, net of deferred taxes																		435,068			435,068
BALANCE AT DECEMBER 31, 2005	—		$	—		3,982,789		$	39,828		$	17,138,826		$	43,794,447		$	472,599		$	61,445,700

See notes to consolidated financial statements.

5

HECTOR COMMUNICATIONS CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

	Year Ended December 31
	2005			2004			2003
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income	$	6,567,334		$	4,644,383		$	5,178,760
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization		7,706,308			8,007,835			8,798,414
Minority stockholders’ interest in earnings of Alliance Telecommunications Corporation								976,023
Gain on split-up of Alliance Telecommunications Corporation								(348,505	)
Gains on sales of cable television systems and other business					(85,271	)		(1,080,723	)
Income from Midwest Wireless Holdings LLC		(4,681,888	)		(2,765,887	)		(2,533,703	)
Income from other unconsolidated affiliates		(199,462	)		(482,847	)		(272,917	)
Cash distributions from Midwest Wireless Holdings LLC		1,994,960			734,499			905,051
Cash distributions from other unconsolidated affiliates		196,595			277,630			239,544
Noncash patronage refunds		(43,587	)		(207,951	)		(192,669	)
Noncash investment income		(59,137	)		(46,920	)
Changes in assets and liabilities net of effects of discontinued operations:
Accounts receivable		338,879			1,122,483			(259,394	)
Materials, supplies and inventories		24,900			124,018			64,449
Other current assets		3,094			34,795			(64,130	)
Accounts payable		(785,175	)		514,753			(379,206	)
Accrued expenses		283,943			(15,441	)		547,399
Income taxes payable		1,001,243			(1,490,129	)		1,361,111
Deferred investment tax credits		(702	)		(5,659	)		(18,555	)
Deferred income taxes		(444,449	)		52,924			1,058
Deferred compensation		52,988			50,874			30,558
Net cash provided by operating activities		11,955,844			10,464,089			12,952,565
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment		(4,997,969	)		(4,182,687	)		(3,912,756	)
Decrease (increase) in construction fund		3,188,424			(704,611	)		(2,577,844	)
Proceeds from sales of cable television systems and other business					241,301			1,665,782
Investments in other unconsolidated affiliates					(45,510	)		(23,191	)
Purchases of other investments		(1,101,968	)		(453,144	)		(443,742	)
Proceeds from other investments		772,370			476,036			1,538,423
Decrease (increase) in other assets		17,000			(17,000	)		(130,696	)
Cash effect of split-up of Alliance Telecommunications Corporation								(5,214,465	)
Net cash used in investing activities		(2,122,143	)		(4,685,615	)		(9,098,489	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of notes payable and long-term debt		(6,953,622	)		(6,523,531	)		(32,517,635	)
Proceeds from issuance of notes payable and long-term debt		2,500,680			2,892,833			32,810,607
Issuance of common stock		1,021,085			1,445,455			431,243
Cash dividends		(1,107,080	)		(194,040	)
Purchase of stock		(29,912	)					(17,162	)
Net cash provided by (used in) financing activities		(4,568,849	)		(2,379,283	)		707,053
NET INCREASE IN CASH AND CASH EQUIVALENTS		5,264,852			3,399,191			4,561,129
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR		19,980,506			16,581,315			12,020,186
CASH AND CASH EQUIVALENTS AT END OF YEAR	$	25,245,358		$	19,980,506		$	16,581,315
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid	$	3,120,718		$	3,156,583		$	4,338,703
Income taxes paid		3,829,704			4,318,608			3,491,394

See notes to consolidated financial statements.

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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 100% interest in Alliance Telecommunications Corporation, which owns and operates four local exchange telephone companies. At December 31, 2005, the Company’s subsidiaries provided telephone service to 29,407 access lines in 28 rural communities in Minnesota, Wisconsin and North Dakota and cable television services to 7,923 subscribers in Minnesota. The Company is also an investor in partnerships and corporations providing wireless telephone and other telecommunications related services.

Prior to July 7, 2003 Alliance Telecommunications Corporation (“Alliance”) was 68% owned by Hector. Golden West Telecommunications Cooperative, Inc. (“Golden West”) of Wall, South Dakota and Alliance Communications Cooperative, Inc. (“ACCI”) of Garretson, South Dakota owned the remaining interests in Alliance. Effective July 7, 2003 Alliance was reorganized under Section 355 of the Internal Revenue Code (“the Split-Up Transactions’). In the Split-Up Transactions, Golden West exchanged its minority ownership interest in Alliance for all of the outstanding stock of Sioux Valley Telephone Company, its pro rata share of Alliance’s ownership interest in Midwest Wireless Holdings, LLC and certain other Alliance assets. ACCI exchanged its minority ownership interest in Alliance for all of the outstanding stock of Hills Telephone Company, its pro rata share of Alliance’s ownership interest in Midwest Wireless Holdings, LLC and certain other Alliance assets (Note 2).

Basis of presentation: Certain amounts in the 2004 and 2003 financial statements have been reclassified to conform to the 2005 financial statement presentation. These reclassifications had no effect on net income or stockholders’ equity as previously reported.

Principles of consolidation: The consolidated financial statements include the accounts of Hector Communications Corporation and its subsidiaries (“Hector” 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 accounting principles generally accepted in the United States of America 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).

Estimates: The presentation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets, 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.

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.

7

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 and warrants. The calculation of the Company’s net income per share is included in Exhibit 11 of this form 10-K.

Stock compensation: The Company has stock plans under which stock options, stock appreciation rights, restricted stock or deferred stock may be granted to officers, key employees and nonemployee directors. Employees may also participate in an employee stock purchase plan which allows them to purchase shares through payroll deductions on favorable terms. These plans are described more fully in Note 10. The Company has elected to apply APB Opinion No. 25, “Accounting for Stock Issued to Employees” for measurement and recognition of stock-based transactions with its employees and directors. If the Company had elected to recognize compensation cost for its stock-based transactions based on the fair value of the options method prescribed by SFAS No. 123 (see Note 10), net income and net income per share would have been as follows:

	2005			2004			2003
Net income as reported	$	6,567,334		$	4,644,383		$	5,178,760
Less: Total stock-based employee compensation expense determined under the fair value method for all awards		(664,617	)		(602,259	)		(472,941	)
Pro forma net income	$	5,902,717		$	4,042,124		$	4,705,819
Basic net income per share:
As reported	$	1.72		$	1.28		$	1.48
Pro forma	$	1.54		$	1.11		$	1.35
Diluted net income per share:
As reported	$	1.61		$	1.17		$	1.34
Pro forma	$	1.45		$	1.02		$	1.25

Cash and cash equivalents: The Company considers temporary cash investments with an original maturity of three months or less to be cash equivalents. The Company places its cash investments with high credit quality financial institutions. The Company maintains its cash in bank deposit accounts. The account balances at times exceed the federally insured limits. The Company has not experienced losses in these accounts and does not believe they are exposed to any significant credit risk.

Accounts receivable: Receivables are stated at the amount the Company expects to collect from outstanding balances. The Company provides for probable uncollectible amounts through a charge to earnings and a credit to a valuation allowance based on its assessment of the current status of individual accounts. Balances that are still outstanding after the Company has used reasonable collection efforts are written off through a charge to the valuation allowance and a credit to the receivable accounts.

A significant portion of the Company’s revenues is received from long distance carriers in the telephone industry. Consequently, the Company is directly affected by the financial well-being of that industry. The credit risk associated with these accounts is minimized due to the large number of long distance carriers.

Materials, supplies and inventories: Materials, supplies and inventories are valued at the lower of average cost or market.

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 from continuing operations was $7,665,246, $7,966,772 and $7,828,067 for 2005, 2004 and 2003, respectively. Depreciation included in costs and expenses from discontinued operations for 2003 was $938,095. 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.

8

Investments in unconsolidated affiliates: The Company is a co-investor with other rural ILECS in Midwest Wireless Holdings LLC (Note 5) and several other partnerships and limited liability corporations (Note 6). The Company’s percentage of ownership in these joint ventures ranges from 5% to 20%. The Company uses the equity method of accounting for these investments, which reflects original cost and recognition of the Company’s share of operating income or losses from the respective operations.

Other investments: The Company owns Rural Telephone Bank stock, CoBank stock, long-term certificates of deposit, and investments in the stock of other telecommunications service providers. Long-term investments in corporations that are not intended for resale or are not readily marketable and in which the Company does not exercise significant influence are valued using the cost method. The cost method requires the Company to periodically evaluate these investments for impairment and if impairment is found, reduce the investment’s valuation to its net realizable value. No impairment charges have been taken against these investments in the last three years.

Other assets: Other assets owned by the Company include cable television franchises, customer lists and other deferred charges. In accordance with SFAS 142, intangible assets determined to have an indefinite useful life are not amortized. Intangible assets with a determinable life are amortized over the useful life. Amortization included in expenses from continuing operations was $23,445, $23,444 and $23,444 for 2005, 2004 and 2003, respectively (Note 4).

Financial instruments: The Company has a long term investment in Rural Telephone Bank (“RTB”) stock. It is expected the RTB will be dissolved in 2006 and outstanding RTB stock will be redeemed at par value. At December 31, 2005 the par value of the Company’s RTB stock is $11,610,000 and the carrying value is $1,269,000.

The Company also has a long-term investment in units of Midwest Wireless Holdings, LLC. Midwest Wireless and Alltel Corporation (“Alltel”) have entered into a definitive agreement for Alltel to purchase Midwest Wireless. (U.S. Cellular Corporation has filed motions at the FCC and in Delaware State court contesting the definitive agreement.) The Company estimates its pretax share of the sale proceeds will be $64,900,000. Carrying value of the Company’s investment at December 31, 2005 is $18,067,000.

The fair value of the Company’s remaining financial instruments approximates carrying value except for long-term investments in other companies and long-term debt. Other long-term investments are not intended for resale and not readily marketable, thus a reasonable estimate of fair value is not practicable (except for investments in RTB stock and Midwest Wireless). The fair value of long-term debt (including the current portion) was $53,533,000 and $56,865,000 at December 31, 2005 and 2004, respectively. Fair values were estimated based on current rates offered to the Company for debt with similar terms and maturities.

New accounting principles: In December 2004, the FASB issued SFAS No. 123R, “Shared-Based Payment”. SFAS 123R requires all share-based payments to employees, including grants of employee stock options, to be valued at fair value on the date of grant and expensed over the applicable vesting period. Compensation expense for outstanding unvested awards will be measured based on the fair value of the awards as previously calculated developing the pro forma disclosures previously permitted under SFAS 123R. On April 14, 2005 the SEC issued a rule that changed the effective date of SFAS 123R for public companies to the first annual period or interim period in the first fiscal year beginning after June 15, 2005. The Company has chosen the modified prospective basis of the Black-Scholes option pricing model to calculate future stock compensation expense, using a fair value method as prescribed under SFAS 123R. The valuation of equity instruments underlying stock-based compensation and the period in which the related expense is recognized will be based on various assumptions including the estimated life of equity instruments, stock volatility, interest rates and vesting terms. The Company has assessed the impact of adopting SFAS 123R and determined that the disclosures made in Notes 1 and 10 of the Notes to Consolidated Financial Statements provide a reasonable expectation of future expense.

9

NOTE 2 - SPLIT-UP OF ALLIANCE TELECOMMUNICATIONS CORPORATION

Effective July 7, 2003, Alliance was reorganized under Section 355 of the Internal Revenue Code. As a result of the Split-Up Transactions, Golden West exchanged its 20% minority ownership interest in Alliance for all of the outstanding stock of Sioux Valley Telephone Company, which included a pro rata share of Alliance’s ownership interest in Midwest Wireless Holdings, LLC and certain other Alliance assets. ACCI exchanged its 12% minority ownership interest in Alliance for all of the outstanding stock of Hills Telephone Company, which included a pro rata share of Alliance’s ownership interest in Midwest Wireless Holdings, LLC and certain other Alliance assets. Hector became the 100% owner of all the remaining Alliance operations and assets. The Company’s operating results have been restated to separately reflect the continuing and discontinued Alliance operations. Operating results for the discontinued operations in the 2003 period were as follows:

	Six Months Ended June 30, 2003
Revenues	$	4,750,877
Operating costs and expenses		2,919,858
Operating income		1,831,019
Other income and (expenses):
Interest expense		(680,059	)
Interest and dividend income		45,911
Income from investments in unconsolidated affilates:
Midwest Wireless Holdings, LLC		385,259
Other unconsolidated affiliates		176,618
Other expense, net		(72,271	)
Income before income taxes and minority interest		1,758,748
Income tax expense		770,000
Income before minority interest		988,748
Minority interest in discontinued operations of Alliance Telecommunications Corporation		(316,399	)
Gain on split-up of Alliane Telecommunications Corporation, net of income taxes		209,505
Income from discontinued operations	$	881,854

The Company accounted for this transaction using the purchase method. The Company recognized a gain on the transaction to the extent that the fair value of the assets transferred to Golden West and ACCI exceeded book value. The gain was recorded as follows:

Fair value of the Company’s 68% ownership interest in assets and liabilities transferred to Golden West and ACCI in Split-Up Transactions	$	12,351,908
Less: Recorded value of assets and liabilities transferred to Golden West and ACCI in Split-Up Transactions		(12,003,403	)
Gain on disposal before income taxes		348,505
Deferred income tax expense		(139,000	)
Net gain	$	209,505

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NOTE 3 - PROPERTY, PLANT AND EQUIPMENT

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

	Estimated useful life	December 31
		2005		2004
Land		$	447,638	$	447,638
Buildings	5-40 years		5,707,743		5,633,898
Machinery and equipment	3-15 years		4,173,175		4,126,976
Furniture and fixtures	5-10 years		1,220,775		1,205,834
Telephone plant	5-33 years		85,974,219		81,948,811
Cable television plant	10-15 years		7,597,515		7,306,199
Construction in progress			199,910		252,155
			105,320,975		100,921,511
Less accumulated depreciation			67,939,405		60,881,018
		$	37,381,570	$	40,040,493

NOTE 4 - GOODWILL AND INTANGIBLE ASSETS

The Company accounts for goodwill and other intangible assets under SFAS No. 142, “Goodwill and Other Intangible Assets”. Under the provisions of this accounting standard, goodwill and intangible assets with indefinite useful lives are no longer amortized but are instead tested for impairment on at least an annual basis and when changes in circumstances indicate that the value of goodwill may be below its carrying value.

The Company performed its most recent annual impairment test of goodwill during the third quarter of 2005. The determined fair value of the reporting units was sufficient to pass the first step impairment test, and no impairment was recorded. Changes in the Company’s goodwill by segment are as follows:

	POTS			Other Services			Consolidated
Balance December 31, 2002	$	46,768,996		$	2,305,997		$	49,074,993
Cable television system sales					(970,673	)		(970,673	)
Split-up of Alliance Telecommunications Corporation:
Goodwill included in discontinued operations		(13,315,447	)					(13,315,447	)
Eliminate previously recorded goodwill related to the minority interest acquired		(11,005,952	)					(11,005,952	)
Excess fair value allocated to goodwill in acquisition of minority interest		7,909,006						7,909,006
Balance December 31, 2003		30,356,603			1,335,324			31,691,927
Reduction in goodwill recorded following completion of minority interest acquisition appraisal		(770,833	)					(770,883	)
Balance December 31, 2004		29,585,770			1,335,324			30,921,094
Balance December 31, 2005	$	29,585,770		$	1,335,324		$	30,921,094

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The Company’s other intangible assets consist of deferred loan origination fees, cable television franchises and internet customer lists. Amortization expense for the next five years is estimated as follows: 2006 - $40,600, 2007 - $31,000, 2008 - $17,600, 2009 - $17,600, 2010 - $17,600.

Changes in the Company’s intangible assets and other assets are as follows:

	Intangible Assets			Other Assets			Consolidated
Balance December 31, 2002	$	106,751		$	304,748		$	411,499
Additions		167,845						167,845
Disposals					(14,993	)		(14,993	)
Amortization		(32,052	)					(32,052	)
Distributed in Alliance split-up					(122,635	)		(122,635	)
Balance December 31, 2003		242,544			167,120			409,664
Additions		17,000						17,000
Amortization		(41,063	)					(41,063	)
Disposals					(3,279	)		(3,279	)
Balance December 31, 2004		218,481			163,841			382,322
Amortization		(41,062	)					(41,062	)
Disposals		(17,000	)		(8,354	)		(25,354	)
Balance December 31, 2005	$	160,419		$	155,487		$	315,906

NOTE 5 - MIDWEST WIRELESS HOLDINGS LLC

At December 31, 2005 the Company owned 8.0% of Midwest Wireless Holdings LLC, which provides cellular service to rural service areas in Minnesota, Wisconsin and Iowa and the Rochester, Minnesota MSA. The Company’s ownership is recorded on the equity method of accounting, which reflects original cost and recognition of the Company’s share of income or losses. The excess of cost over the Company’s share of equity in Midwest Wireless at the time of acquisition was $5,595,000 at December 31, 2005. At December 31, 2005, the Company’s cumulative share of income from Midwest Wireless was $18,140,000, of which $11,186,000 was undistributed. Midwest Wireless has loan agreements with the Rural Telephone Finance Cooperative (“RTFC”) that place restrictions on distributions to members.

On November 17, 2005 Midwest Wireless and Alltel Corporation (“Alltel”) entered into a definitive agreement for Alltel to purchase Midwest Wireless. Compensation paid by Alltel would total $1.075 billion, including payments to Midwest Wireless shareholders, payments to minority interest holders in certain Midwest properties and assumption of Midwest Wireless’ outstanding debt. The Company estimates its pretax share of the proceeds will be $64,900,000. U.S. Cellular Corporation has initiated proceedings at the FCC and in Delaware State court contesting the definitive agreement. Midwest Wireless expects to close the transaction in 2006, subject to settlement of U.S. Cellular’s claims, satisfaction of customary conditions and receipt of regulatory approvals.

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Summarized audited financial information for Midwest Wireless for 2005, 2004 and 2003 is as follows:

	Year Ended December 31
	2005		2004		2003
Current assets	$	33,104,932	$	27,685,169	$	22,017,707
Noncurrent assets		362,172,494		366,455,303		360,331,919
Current liabilities		40,753,598		54,760,003		42,224,377
Noncurrent liabilities		120,351,115		142,767,502		172,862,375
Minority interest		19,146,185		14,919,971		11,617,812
Members’ equity		215,026,528		181,692,996		155,645,062
Revenues		264,013,168		220,679,372		179,563,840
Operating income		73,851,914		44,700,128		38,208,082
Net income		58,232,113		35,215,044		26,695,403

NOTE 6 - INVESTMENTS IN UNCONSOLIDATED AFFILIATES

The Company is a co-investor with other rural ILECS in several other partnerships and limited liability corporations. These joint ventures make it possible to offer certain services to customers, including directory services, centralized switching or fiber optic transport of messaging, that the Company could not afford to offer on its own. These joint ventures also make it possible to invest in new technologies with a lower level of financial risk. The Company recognizes income and losses from these investments on the equity method of accounting. The following table summarizes the Company’s ownership percentage, current investment and income or loss from these investments in 2005, 2004 and 2003:

	Ownership Interest		Book Value at December 31				Income (Loss) on Investment
			2005		2004		2005			2004			2003
Broadband Visions	16.7	%	$	644,845	$	673,425	$	(28,580	)	$	(10,548	)	$	(14,182	)
Communications Mgmt Grp	6.5	%		251,456		232,215		19,241			35,915			20,058
Desktop Media	17.0	%		144,792		152,938		(3,146	)					(167,036	)
Independent Pinnacle	7.9	%		530,371		471,892		82,012			235,743
Northern Transport Group	20.0	%		131,236		234,699		(103,463	)		(79,880	)		(38,860	)
NW Minnesota Spec Access	5.3	%		34,606		47,396		17,210			19,671			19,113
South Central Switching														1,894
702 Communications	18.1	%		1,376,101		1,289,003		205,160			270,980			236,813
West Central Transport	5.0	%		194,186		203,158		11,028			10,966			38,499
			$	3,307,593	$	3,304,726	$	199,462		$	482,847		$	96,299

NOTE 7 - MARKETABLE SECURITIES AND GAINS ON SALES OF INVESTMENTS

Marketable securities consist principally of equity securities of other telecommunications companies. The Company’s marketable securities portfolio was classified as available-for-sale at December 31, 2005 and December 31, 2004. The cost and fair values of available-for-sale investment securities were as follows:

	Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
December 31, 2005	$	1,102,009	$	844,188	$	(56,522	)	$	1,889,675
December 31, 2004	$	447,483	$	79,586	$	(17,035	)	$	510,034

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Net unrealized gains on marketable securities, net of related deferred taxes, are included in stockholders’ equity as accumulated other comprehensive income at December 31, 2005 and 2004 as follows:

	Net Unrealized Gains		Deferred Income Taxes			Accumulated Comprehensive Income
December 31, 2005	$	787,666	$	(315,067	)	$	472,599
December 31, 2004	$	62,551	$	(25,020	)	$	37,531

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

NOTE 8 - INCOME TAXES

Before completion of the split-up of Alliance Telecommunications Corporation, Hector Communications Corporation and its wholly owned subsidiaries filed a consolidated tax return separate from the consolidated return for Alliance and its subsidiaries. Since the split-up date all subsidiary companies are included in Hector’s consolidated return. Income tax expenses (benefits) from continuing operations on the last three years were: 

	Year Ended December 31
	2005			2004			2003
Currently payable taxes:
Federal	$	3,950,000		$	2,318,000		$	2,434,000
State		1,060,000			884,000			1,039,000
		5,010,000			3,202,000			3,473,000
Deferred income taxes (benefit)		(644,000	)		53,000			(138,000	)
Deferred investment tax credits		(1,000	)		(5,000	)		(19,000	)
	$	4,365,000		$	3,250,000		$	3,316,000

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

	2005		2004
Deferred tax liabilities:
Accelerated depreciation	$	3,948,152	$	4,893,554
Partnership and LLC investments		1,721,000		1,798,000
Marketable securities		315,000		25,000
Other		163,000		188,000
		6,147,152		6,904,544
Deferred tax assets:
Deferred compensation		330,000		292,000
Intangibles		77,000		127,000
Accrued expenses		271,000		245,000
Bad debts		11,000		406,000
Other		152,000		374,000
		841,000		1,444,000
Net deferred tax liability	$	5,306,152	$	5,460,554

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

	Year Ended December 31
	2005		2004		2003
Tax at U.S. statutory rate	35.0	%	35.0	%	35.0	%
Surtax exemption	(1.0	)	(1.0	)	(.9	)
State income taxes, net of federal benefit	6.1		7.1		6.2
Investment tax credits	—		—		(.2	)
Other	(.2	)	.1		—
Effective tax rate	39.9	%	41.2	%	40.1	%

NOTE 9 - NOTES PAYABLE AND LONG-TERM DEBT

	December 31
	2005		2004
Notes payable to CoBank by Hector Communications Corporation in quarterly installments, average interest rate of 6.9%, due 2006 to 2013	$	20,625,000	$	23,375,000
Rural Utilities Service (“RUS”) and Rural Telephone Bank (“RTB”) mortgage notes, payable by telephone company subsidiaries in monthly and quarterly installments, average rate of 5.0%, due 2006 to 2028		35,358,538		36,915,059
Notes payable to former owners of Felton Telephone Company by Hector Communications Corporation in monthly installments, interest rate of 8.25%, due 2005				146,421
		55,983,538		60,436,480
Less current portion		6,527,400		6,352,000
	$	49,456,138	$	54,084,480

The Rural Utilities Service (RUS) and the Rural Telephone Bank (RTB) are the Company’s primary sources of long-term financing for additions to telephone plant and equipment. The RUS has made long-term, low-interest loans to telephone companies since 1949 for the purpose of improving telephone service in rural areas. The RUS is authorized to make hardship loans at a 5% interest rate and cost-of-money loans at a rate reflecting the government’s cost of money for a like term. The RTB advances funds at the average U.S. government cost-of-money for the year for like maturities. In some cases RTB loans are made concurrently with RUS loans.

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. At December 31, 2005, the Company’s local exchange carrier subsidiaries had unadvanced loan commitments under the RUS and RTB programs aggregating approximately $57,615,000. These loan funds can be drawn down to finance RUS and RTB approved capital additions in future years.

As a condition of maintaining the Company’s loan with CoBank, the Company owns stock in the bank. At December 31, 2005, investment in CoBank stock was $2,739,000.

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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 refunds included in continuing operations were $218,000, $245,000 and $219,000 in 2005, 2004 and 2003, respectively. Approximately 50% of patronage refunds are received in cash, with the balance in stock in the bank. The accrued patronage refund is reflected in the Company’s operating statement as a reduction of interest expense. The Company cannot predict what patronage refunds might be in future years.

Pledges of the parent company assets and the stock of the Company’s subsidiaries secure CoBank’s loan. Interest rates on long-term portions of the loan are fixed through 2007, while the non-fixed portion floats at short-term market rates. The average rate on the total loan was approximately 6.9% at December 31, 2005. Principal payments are made quarterly and will continue until April 2013.

The amount of dividends on common stock that may be paid by the subsidiaries to the Company is limited by certain financial covenants set forth in the RUS, RTB and CoBank mortgages. At December 31, 2005, $20,804,000 of subsidiaries’ retained earnings was available for dividend payments to Hector. At December 31, 2005, $42,152,000 of Hector’s retained earnings was not available to pay dividends to shareholders due to restrictions in the debt agreements.

The Company is continuing its construction program to upgrade its telephone and cable television properties. Planned expenditures for Hector and Alliance properties in 2006 are $4,234,000. The Company intends to use RUS and RTB loan funds to help finance these projects. Loan funds received are deposited in construction fund accounts and disbursements are restricted, subject to RUS approval, to construction costs authorized by the loan agreements.

Until July 7, 2003 the Company had a term loan and a $5,000,000 revolving line of credit from Rural Telephone Finance Cooperative (“RTFC”). Part of the proceeds of the Company’s term loan from CoBank was used to repay the RTFC loan and terminate the revolving line of credit.

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

2006	$	6,527,400
2007		6,312,400
2008		6,409,100
2009		6,584,800
2010		6,852,500

NOTE 10 - 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 1,100,000 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 3,000 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, 2005, 109,333 shares were available to be issued under the plans. Changes in outstanding employee and director stock options during the three years ended December 31, 2005 are as follows:

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	Number of shares		Average exercise price per share
Outstanding at December 31, 2002	446,175		$	11.28
Granted	115,850			12.18
Exercised	(67,125	)		10.22
Canceled	(23,583	)		11.86
Outstanding at December 31, 2003	471,317			11.62
Granted	123,850			18.63
Exercised	(140,800	)		10.83
Canceled	(2,800	)		10.61
Outstanding at December 31, 2004	451,567			13.80
Granted	51,750			22.48
Exercised	(107,525	)		12.48
Canceled	(9,200	)		16.01
Outstanding at December 31, 2005	386,592		$	15.27

The Company receives an income tax benefit related to the gains received by employees who make disqualifying dispositions of stock received on exercise of qualified incentive stock options. The amount of tax benefit received by the Company was $179,000, $247,000 and $23,000 in 2005, 2004 and 2003 respectively. The tax benefit amounts have been credited to additional paid-in capital.

Options issued to officers and key employees are subject to vesting. Options issued in 2005 vested and became exercisable six months from the date of issue. Options issued prior to 2005 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, 2005, 356,000 stock options are currently exercisable at an average price of $15.00 per share. The following table summarizes the status of stock options outstanding at December 31, 2005:

Range of Exercise Prices					Shares	Weighted Average Remaining Option Life		Weighted Average Exercise Price
$	7.25	to	$	9.99	3,000	1.0 years	$	8.08
$	10.00	to	$	12.00	115,492	1.8 years		11.17
$	12.01	to	$	15.00	111,550	3.1 years		13.30
$	15.01	to	$	20.00	95,900	4.2 years		18.49
$	20.01	to	$	24.31	60,650	5.5 years		21.96

100,000 shares are reserved for issuance under the 2003 Employee Stock Purchase Plan (“ESPP”). Under terms of the plan, eligible employees may acquire shares of common stock through payroll deductions of not more than 10% of compensation. The price of shares purchased by the employees is 85% of the lower of fair market value for such shares on one of two specified dates in each plan year. A participant is limited to the acquisition in any plan year to the number of shares which their payroll deductions for the year would purchase based on the market price on the first day of the year or $25,000, whichever is less. Shares issued to employees under the plan were 10,733 and 10,951 in 2005 and 2004 respectively. Shares issued to employees under the 1990 Employee Stock Purchase Plan in 2003 were 15,685. There were no employee subscriptions for additional shares outstanding at December 31, 2005.

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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
	2005		2004		2003
Net income	$	5,902,717	$	4,042,124	$	4,705,819
Basic net income per share	$	1.54	$	1.11	$	1.35
Diluted net income per share	$	1.45	$	1.02	$	1.25

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:

	Year Ended December 31
	2005	2004	2003
Expected volatility	31.7%	28.8%	29.6%
Risk free interest rate	4.2%	2.9%	2.9%
Expected holding period – employees	4 years	4 years	4 years
Expected holding period – directors	7 years	7 years	7 years
Dividend yield	.9%	0%	0%

Pro forma stock-based compensation cost was $664,617, $602,259 and $472,941 in 2005, 2004 and 2003, respectively. Fair value of all options issued was $380,593, $712,191 and $453,450 in 2005, 2004 and 2003, respectively.

Hector paid cash dividends totaling $.28 and $.05 per share on its common stock and preferred stock in 2005 and 2004 respectively. The amount and timing of future dividends will be determined at the discretion of the Board of Directors. Hector has no obligation to pay dividends on its preferred stock except that preferred stock receives the same per share dividend as common stock.

The Company’s Board of Directors has authorized the purchase and retirement, from time to time, of shares of the Company’s stock on the open market, or in private transactions consistent with overall market and financial conditions. The Company purchased and retired 1,169 and 1,106 shares in 2005 and 2003 respectively. No shares were repurchased in 2004. Cost of the repurchased shares was $30,000 and $17,000 in 2005 and 2003 respectively. At December 31, 2005, 213,800 shares could be repurchased under outstanding Board authorizations.

18

Effective August 1, 1990, the Board of Directors adopted an 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 $307,600, $328,100 and $284,600 for 2005, 2004 and 2003, respectively. At December 31, 2005, the ESOP held 112,460 shares of the Company’s common stock, all of which had been allocated to the accounts of participating employees. An additional 10,220 shares of common stock, representing the Company’s 2005 contribution, were issued to the plan in March 2006. All eligible employees of Hector Communications Corporation and its subsidiaries participate in the plan after completing one year of service. Contributions are allocated to each participant based on compensation and vest 30% after three years of service and incrementally thereafter, with full vesting after seven years.

In 1999 the Board of Directors adopted a shareholders’ rights plan. Under the plan, the Board of Directors declared a distribution of one right per share of common stock. Each right entitles the holder to purchase 1/100^th 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 11 - EMPLOYEE BENEFIT PLANS

The Company has 401(k) savings plans for its employees. Employees who meet certain age and service requirements may contribute up to 15% of their salaries to the plan on a pretax basis. The Company matches a portion of employee contributions. Contributions to the plan by the Company’s continuing operations for 2005, 2004 and 2003 were approximately $156,000, $159,000 and $166,000 respectively.

Alliance had a deferred compensation agreement with two former officers of Ollig Utilities, Inc. Under the agreement, the salaries of these officers were continued after their retirement based on a formula stated in the agreement. Under the terms of the split-up agreement, the Company is responsible for 68% of the remaining deferred compensation, Golden West is responsible for 20% and ACCI is responsible for 12%. Deferred compensation expense included in continuing operations was $120,000, $116,000 and $98,000 in 2005, 2004 and 2003 respectively. Payments made under the agreement by the Company’s continuing operations were $67,000, $65,000 and $63,000 in 2005, 2004 and 2003 respectively.

NOTE 12 - TRANSACTIONS WITH AFFILIATES

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 $241,000, $293,000 and $208,000 in 2005, 2004 and 2003 respectively. Intercompany accounts with CSI are handled on an open account basis. Outstanding amounts payable to CSI were $51,000 and $217,000 at December 31, 2005 and 2004, respectively.

The Company receives and provides services to various partnerships and limited liability corporations in which it is a minority investor. Services received include transport, directory services, centralized equal access and digital television signals. Services provided include commissioned sales, transport, accounting and management. Revenues from transactions with these affiliates were $1,469,000, $1,533,000 and $1,676,000 in 2005, 2004 and 2003 respectively. Expenses from transactions with the affiliates were $1,020,000, $980,000 and $1,276,000 in 2005, 2004 and 2003 respectively.

Costs of services the Company receives from affiliated parties may not be indicative of the costs of such services had they been obtained from different parties.

19

NOTE 13 - SEGMENT INFORMATION

The Company’s segment information is presented on a product line basis. The majority of the Company’s operations consist of providing basic telephone services (often referred to as “plain old telephone service” or “POTS”) to residential and business customers within its service territories. POTS revenues consist mainly of fees for local service which are billed directly to customers and access revenues which are received for intrastate and interstate exchange services provided to long distance carriers. POTS revenues are subject to regulation by a number of state and federal government agencies.

The Company also provides a number of nonregulated telecommunications services to customers. These services include cable television or video service, internet access services, lease of fiber optic transport facilities, billing and collection services to long distance carriers, telephone directory services and equipment rental. The Company also makes retail sales of consumer telecommunications equipment and sells wireless telephone services on a commission basis.

No single customer accounted for a material portion of the Company’s revenues in any of the last three years. Segment information presents only continuing operations except where noted:

	POTS		Other Services		Consolidated
Year Ended December 31, 2005
Revenues	$	21,963,150	$	10,410,325	$	32,373,475
Costs and expenses		16,361,143		8,022,619		24,383,762
Operating income	$	5,602,007	$	2,387,706	$	7,989,713
Depreciation and amortization:
Charged to operations	$	6,116,020	$	1,572,671	$	7,688,691
Charged to interest expense				17,617		17,617
	$	6,116,020	$	1,590,288	$	7,706,308
Total assets	$	90,447,583	$	37,306,708	$	127,754,291
Capital expenditures	$	4,260,960	$	737,009	$	4,997,969
Year Ended December 31, 2004
Revenues	$	21,524,422	$	10,045,348	$	31,569,770
Costs and expenses		16,245,236		8,342,354		24,587,590
Operating income	$	5,279,186	$	1,702,994	$	6,982,180
Depreciation and amortization:
Charged to operations	$	6,275,688	$	1,714,528	$	7,990,216
Charged to interest expense				17,618		17,618
	$	6,275,688	$	1,732,146	$	8,007,834
Total assets	$	93,816,150	$	31,106,693	$	124,922,843
Capital expenditures	$	3,371,071	$	811,616	$	4,182,687

20

	POTS		Other Services		Consolidated
Year Ended December 31, 2003
Revenues from continuing operations	$	22,192,492	$	10,129,936	$	32,322,428
Costs and expenses		15,897,022		8,468,760		24,365,782
Operating income from continuing operations		6,295,470		1,661,176		7,956,646
Depreciation and amortization:
Charged to operations	$	6,178,096	$	1,673,415	$	7,851,511
Charged to interest expense				8,808		8,808
	$	6,178,096	$	1,682,223	$	7,860,319
Discontinued operations						938,095
					$	8,798,414
Total assets	$	92,086,084	$	30,973,271	$	123,059,355
Capital expenditures	$	2,926,738	$	729,123	$	3,655,861
Discontinued operations						256,895
					$	3,912,756

NOTE 14 - SALES OF CABLE TELEVISION SYSTEMS AND OTHER BUSINESS

In 2004 the Company sold the assets of Hastad Engineering Company to Finley Engineering Company. Proceeds from the sale totaled $48,390 and the Company recorded a gain of $12,805. Effective June 30, 2004 the Company sold the assets of the cable television system serving Hudson Township, WI to Baldwin Telecom Inc. for $193,000 of cash and a note receivable of $395,000. The Company recorded a gain on the sale of $72,466.

Alliance completed sales of two groups of cable television systems during 2003. Alliance sold four systems in rural North Dakota serving 930 subscribers to MLGC, LLC for $200,000 of cash and a note receivable of $650,000. Alliance sold systems serving 1,150 subscribers in three communities surrounding the Fargo, ND – Moorhead, MN area to Cable One, Inc. for $1,545,000 of cash. Effect of the asset sales was as follows:

Sales Price	$	2,395,032
Less: Property, plant and equipment (net)		(343,636	)
Less: Intangible assets (goodwill)		(970,673	)
Gain on sale of cable assets	$	1,080,723

NOTE 15 - COMMITMENTS AND CONTINGENCIES

The Company has entered into employment agreements or change in control agreements with officers and key employees of the Company. The agreements provide for severance payments in the event of a change in control of the Company and employment termination for reasons other than cause.

NOTE 16 - PENDING TRANSACTIONS

In 2005, the Board of Directors of the RTB approved resolutions to liquidate the bank and redeem the stock. Congress removed legal restrictions on the redemption of RTB stock in 2005. It is expected the RTB will be dissolved in 2006 and outstanding RTB stock will be redeemed at par value. At December 31, 2005 the par value of the Company’s RTB stock is $11,610,000 and the carrying value is $1,269,000.

21

EX-99.2

EXHIBIT 99-2

HECTOR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(unaudited)

	June 30 2006			December 31 2005
Assets:
Current assets:
Cash and cash equivalents	$	25,764,742		$	25,245,358
Construction fund		756,263			756,260
Accounts receivable, net		2,277,032			2,678,690
Materials, supplies and inventories		918,473			795,181
Other current assets		104,798			247,182
Total current assets		29,821,308			29,722,671
Property, plant and equipment		106,745,107			105,320,975
less accumulated depreciation		(71,361,501	)		(67,939,405	)
Net property, plant and equipment		35,383,606			37,381,570
Other assets:
Excess of cost over net assets acquired		30,921,095			30,921,094
Investment in Midwest Wireless Holdings, LLC		19,517,725			18,067,471
Investment in other unconsolidated affiliates		3,469,114			3,307,593
Other investments		6,385,900			8,037,986
Other assets		289,866			315,906
Total other assets		60,583,700			60,650,050
Total Assets	$	125,788,614		$	127,754,291
Liabilities and Stockholders’ Equity:
Current liabilities:
Notes payable and current portion of long-term debt	$	6,437,000		$	6,527,400
Accounts payable		2,348,030			1,287,547
Accrued expenses		1,506,550			1,873,656
Income taxes payable		3,604,005			1,052,944
Total current liabilities		13,895,585			10,741,547
Long-term debt, less current portion		35,115,688			49,456,138
Deferred investment tax credits		0			2,638
Deferred income taxes		5,193,247			5,306,152
Deferred compensation		792,848			802,116
Stockholders’ Equity		70,791,246			61,445,700
Total Liabilities and Stockholders’ Equity	$	125,788,614		$	127,754,291

See the notes to the consolidated financial statements.

1

HECTOR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)

	Three Months Ended June 30						Six Months Ended June 30
	2006			2005			2006			2005
Revenues:
Local network	$	1,526,281		$	1,596,408		$	2,985,549		$	3,023,572
Network access		3,772,663			3,739,453			7,418,562			7,457,864
Nonregulated services:
Video services		831,994			790,551			1,622,004			1,573,494
Internet services		1,081,936			860,326			2,131,045			1,763,990
Other nonregulated services		841,272			871,354			1,651,177			1,688,169
Total revenues		8,054,146			7,858,092			15,808,337			15,507,089
Costs and expenses:
Plant operations, excluding depreciation		1,170,161			1,240,584			2,334,836			2,352,496
Customer operations		463,592			471,723			860,714			935,206
General and administrative		1,612,706			1,006,532			2,566,406			1,849,191
Depreciation and amortization		1,861,129			1,915,191			3,739,566			3,830,826
Other operating expenses:
Operating taxes		108,740			123,833			211,566			248,719
Video service expenses		855,457			812,394			1,643,015			1,569,120
Internet expenses		239,200			208,117			465,746			489,394
Other		387,821			363,499			762,386			702,607
Total costs and expenses		6,698,806			6,141,873			12,584,235			11,977,559
Operating income		1,355,340			1,716,219			3,224,102			3,529,530
Other income and (expenses):
Interest expense		(921,453	)		(745,175	)		(1,647,742	)		(1,475,347	)
Interest and dividend income		393,553			202,264			622,237			387,045
Income from investment in Midwest Wireless Holdings, LLC		1,476,840			1,296,875			3,043,205			2,367,218
Income (loss) from investments in other unconsolidated affiliates		46,855			46,630			(3,043	)		44,429
Gain on sale of RTB Stock		10,340,908						10,340,908
Gain on sale of other assets		87,852						87,852
Other income (expense), net		11,424,555			800,594			12,443,417			1,323,345
Income before income taxes		12,779,895			2,516,813			15,667,519			4,852,875
Income tax expense		5,448,000			1,024,000			6,637,000			1,974,000
Net income	$	7,331,895		$	1,492,813		$	9,030,519		$	2,878,875
Basic net income per share	$	1.81		$	.40		$	2.24		$	.77
Diluted net income per share	$	1.75		$	.37		$	2.16		$	.71
Dividends per share	$	.10		$	.05		$	.20		$	.10

See the notes to the consolidated financial statements.

2

HECTOR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS

	Six Months Ended June 30
	2006			2005
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income	$	9,030,519		$	2,878,875
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization		3,748,374			3,839,634
Stock based compensation					289,926
Income from Midwest Wireless Holdings LLC		(3,043,205	)		(2,367,218	)
Gain on sale of RTB Stock					(10,340,908	)
Gain on sale of assets		(87,853	)
Loss (income) from other unconsolidated affiliates		3,043			(44,429	)
Cash distributions from Midwest Wireless Holdings LLC		1,592,951			922,942
Cash distributions from other unconsolidated affiliates		113,962			64,492
Noncash investment income		(13,160	)		(41,560	)
Changes in assets and liabilities:
Accounts receivable		401,658			690,181
Materials, supplies and inventories		(123,292	)		(425,647	)
Other current assets		142,384			133,172
Accounts payable		1,060,483			(213,360	)
Accrued expenses		(77,880	)		194,378
Income taxes payable		2,551,061			536,780
Deferred income taxes		(80,667	)		199,508
Deferred investment tax credits		(2,638	)		(383	)
Deferred compensation		(9,268	)		(5,857	)
Net cash provided by operating activities		5,155,490			6,361,508
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment		(1,756,518	)		(1,309,482	)
Change in RUS construction fund		(3	)		2,526,941
Purchases of other investments		(3,244	)		(913,003	)
Investments in other partnerships and LLCs		(278,526	)
Proceeds from other investments		11,928,805			137,972
Proceeds from sales of assets		120,000
Net cash provided by investing activities		10,010,514			442,428
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of notes payable and long-term debt		(14,684,112	)		(3,288,153	)
Proceeds from issuance of notes payable and long-term debt		253,262			1,769,118
Issuance of common stock		593,951			257,684
Cash dividends		(806,621	)		(390,892	)
Purchase of stock		(3,100	)		(7,875	)
Net cash used in financing activities		(14,646,620	)		(1,660,118	)
NET INCREASE IN CASH AND CASH EQUIVALENTS		519,384			5,143,818
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR		25,245,358			19,980,506
CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	25,764,742		$	25,124,324
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid	$	1,790,787		$	1,540,578
Income taxes paid		4,169,244			1,437,603

See the notes to the consolidated financial statements.

3

HECTOR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The consolidated financial statements include the accounts of Hector Communications Corporation (“HCC” or “Company”) and its subsidiaries. All material intercompany transactions and accounts have been eliminated. 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).

The balance sheet and statement of stockholders’ equity as of June 30, 2006 and the statements of income and cash flows for the periods ended June 30, 2006 and 2005 have been prepared by the Company without audit. In the opinion of management, all adjustments (which include only normal recurring adjustments) necessary to present fairly the financial position, results of operations, and changes in cash flows at June 30, 2006 and 2005 have been made.

Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. It is suggested these condensed financial statements be read in conjunction with the financial statements and notes thereto included in the Company’s December 31, 2005 Annual Report to Shareholders. The results of operations for the periods ended June 30 are not necessarily indicative of the operating results for the entire year.

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.

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 cost separation studies, which are typically settled within two years.

4

Income taxes have been calculated in proportion to the earnings and tax credits generated by operations. The Company’s effective income tax rate is higher than the U.S. rate due to the effect of state income taxes.

Certain other amounts in the 2005 financial statements have been reclassified to conform to the 2006 financial statement presentation. These reclassifications had no effect on net income or stockholders’ equity as previously reported.

COMPREHENSIVE INCOME

The Company’s comprehensive income includes net income and unrealized gains and losses on investments in marketable securities, net of deferred taxes. Comprehensive income for the three-month periods ended June 30, 2006 and 2005 was $7,351,690 and $1,506,782, respectively. Comprehensive income for the six-month periods ended June 30, 2006 and 2005 was $8,982,164 and $2,884,964, respectively.

MERGER AGREEMENT

On June 27, 2006, the Company entered into an agreement and plan of merger which provides for the acquisition of the Company by Hector Acquisition Corp. (“HAC”). HAC is owned by three one-third owners, Blue Earth Valley Communications, Inc., Arvig Enterprises, Inc. and New Ulm Telecom, Inc. Completion of the merger is subject to a number of conditions including approval by the Company’s shareholders, approval by state and federal regulatory authorities and achievement of working capital and long-term debt levels specified in the agreement. In addition, completion of the merger is subject to closing of Alltel Corporation’s acquisition of Midwest Wireless. The merger is expected to close in October 2006. Shareholders of the Company will receive $36.40 per share in cash and outstanding stock options will be cashed out.

The Company has entered into employment agreements or change in control agreements with officers and key employees of the Company. The agreements provide for severance payments in the event of a change in control of the Company and employment termination for reasons other than cause.

STOCK-BASED COMPENSATION

The company adopted Statement of Financial Accounting Standards (SFAS) No. 123R, “Share-Based Payment”, on January 1, 2006. This statement requires Hector to recognize the cost of employee and director services received in exchange for the stock options it has awarded. Under SFAS 123R, Hector is required to recognize compensation expense over an award’s vesting period based on the award’s fair value at the date of grant. Hector has elected to adopt SFAS 123R on a modified prospective basis; accordingly the financial statements for periods prior to January 1, 2006 do not include stock-based compensation costs calculated under the fair value method.

5

Prior to January 1, 2006 Hector applied APB Opinion No. 25, “Accounting for Stock Issued to Employees” for measurement and recognition of stock-based transactions with its employees and directors. If Hector had recognized compensation cost for its stock-based transactions based on the fair value of the options method prescribed by SFAS No. 123R, net income and net income per share for the three and six month periods ended June 30, 2005 would have been as follows:

	Three Months Ended June 30, 2005			Six Months Ended June 30, 2005
Net income as reported	$	1,492,813		$	2,878,875
Less: Total stock-based employee compensation expense
determined under the fair value method for all awards		(330,695	)		(517,465	)
Pro forma net income	$	1,162,118		$	2,361,410
Basic net income per share:
As reported	$	.40		$	.77
Pro forma	$	.31		$	.63
Diluted net income per share:
As reported	$	.37		$	.71
Pro forma	$	.29		$	.58

The Company did not issue any new stock option awards to key employees in the first six months of 2006. Each of the Company’s non-employee directors received an automatic grant of 3,000 shares of nonqualified stock options on May 25, 2006 concurrent with the Company’s annual shareholders meeting. The fair values of the stock options granted in 2006 were estimated on the date of grant using the Black-Scholes option pricing model and the following assumptions:

Exercise price	$29.97
Expected option holding period	7 years
Risk free interest rate	5.1%
Expected volatility	29.9%
Expected dividend yield	1.3%

Estimated fair value of the non-employee director options granted in 2006 was $11.20 per share. Total compensation expense recognized for these options was $202,000. Stock based compensation expense recognized in the three-month period and six-month period ended June 30, 2006 for awards issued in prior years was $44,000 and $88,000 respectively.

A summary of stock option activity for the six months ended June 30, 2006 is as follows:

	Shares			Average Price
Outstanding, December 31, 2005		386,592		$	15.27
Granted		18,000			29.97
Exercised		(54,084	)		11.17
Canceled		(2,666	)		13.38
Outstanding June 30, 2006		347,842		$	16.69

6

Options issued to officers and key employees are subject to vesting. Options issued in 2005 vested and became exercisable six months from the date of issue. Options issued prior to 2005 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. There are provisions in the stock plans that accelerate vesting of stock options upon a change in control of the Company. The following table summarizes the status of stock options outstanding at June 30, 2006:

Range of Exercise Prices	Shares		Weighted Average Remaining Option Life		Weighted Average Exercise Price
$  7.25 to $  9.99		1,000		.9 years	$	8.50
$10.00 to $12.00		71,092		2.1 years		11.66
$12.01 to $15.00		106,050		2.7 years		13.31
$15.01 to $20.00		91,650		3.7 years		18.50
$20.01 to $29.97		78,050		6.2 years		23.81

MARKETABLE SECURITIES

Marketable securities consist principally of equity securities of other telecommunications companies. The Company’s marketable securities portfolio is classified as available-for-sale. The cost and fair value of available-for-sale investment securities was as follows:

	Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
June 30, 2006	$	1,102,009	$	785,639	$	(78,566	)	$	1,809,082
December 31, 2005		1,102,009		844,188		(56,522	)		1,889,675

Net unrealized gains on marketable securities, net of related deferred taxes, are included in accumulated other comprehensive income as follows:

	Net Unrealized Gains		Deferred Income Taxes			Accumulated Comprehensive Income
June 30, 2006	$	707,073	$	(282,829	)	$	424,244
December 31, 2005		787,666		(315,067	)		472,599

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

OTHER INVESTMENTS – RURAL TELEPHONE BANK STOCK

As part of its borrowing agreements, the Company made stock investments in CoBank, Rural Telephone Finance Cooperative and the Rural Telephone Bank (“RTB”). In 2005, the Board of Directors of the RTB approved resolutions to liquidate the bank and redeem its stock. Congress removed legal restrictions on the redemption of RTB stock in 2005. In April 2006 the RTB was dissolved and outstanding RTB stock was redeemed at par value. The Company received the par value of its RTB stock, which was $11,610,000 and recorded a gain on sale of $10,341,000.

7

GOODWILL AND INTANGIBLE ASSETS

The Company accounts for goodwill and other intangible assets under SFAS No. 142, “Goodwill and Other Intangible Assets”. Under the provisions of this accounting standard, goodwill and intangible assets with indefinite useful lives are no longer amortized but are instead tested for impairment on at least an annual basis and when changes in circumstances indicate that the value of goodwill may be below its carrying value.

For 2005, the Company performed its annual impairment test of goodwill during the third quarter. The determined fair value of the reporting units was sufficient to pass the first step impairment test, and no impairment was recorded.

The carrying value of HCC’s goodwill was $30,921,000 at June 30, 2006 and December 31, 2005; $29,586,000 of goodwill is related to the Company’s telephone operations and $1,335,000 of goodwill is related to other operations.

Changes in the Company’s intangible and other assets are as follows:

	Intangible Assets			Other Assets			Consolidated
Balance December 31, 2005	$	163,868		$	152,038		$	315,906
Capitalization of prepaid engineering fees					(5,732	)		(5,732	)
Amortization		(20,308	)					(20,308	)
Balance June 30, 2006	$	143,560		$	146,306		$	289,866

MIDWEST WIRELESS HOLDINGS, LLC

Midwest Wireless Holdings LLC (“Midwest Wireless”) provides wireless telecommunications services to 456,000 customers in fourteen rural service areas and one metropolitan service area in Minnesota, Wisconsin and Iowa. Population of the service areas is approximately 1,910,000. Midwest Wireless offers a complete package of services, including custom calling features, facsimile and data transmission.

Midwest Wireless is owned by telecommunications companies (principally ILECs) located within Midwest Wireless’ operating footprint in southern Minnesota, northern Iowa and southeastern Wisconsin. HCC owns 8% of Midwest Wireless Holdings LLC. HCC accounts for its investment in Midwest Wireless using the equity method. Income from this investment was $3,043,000 and $2,367,000 in the six-month periods ended June 30, 2006 and 2005, respectively. Cash distributions received from Midwest Wireless were $1,593,000 and $923,000 in the same respective periods.

Income statement information for Midwest Wireless for the periods ended June 30, 2006 and 2005 was as follows:

	Three Months Ended March 31				Six Months Ended June 30
	2006		2005		2006		2005
Revenues	$	73,028,493	$	65,137,404	$	142,409,105	$	125,335,079
Operating income		22,651,958		20,298,697		45,340,317		36,805,585
Net income		18,432,066		16,210,932		37,981,488		29,590,225

On November 17, 2005 Midwest Wireless and Alltel Corporation (“Alltel”) entered into a definitive agreement for Alltel to purchase Midwest Wireless. Compensation paid by Alltel would total $1.075 billion, including payments to Midwest Wireless shareholders, payments to minority interest holders in certain Midwest properties and assumption of Midwest Wireless’ outstanding debt. The Company estimates its pretax share of the proceeds will be $64,900,000. Legal issues raised by U.S. Cellular Corporation related to the definitive agreement have been settled and Midwest Wireless expects to close the transaction in the September/October 2006 timeframe, subject to satisfaction of customary conditions and receipt of regulatory approvals.

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SEGMENT INFORMATION

The Company operates in two business segments. The majority of the Company’s operations consist of providing basic telephone services (often referred to as “plain old telephone service” or “POTS”) to residential and business customers within its service territories. POTS revenues consist mainly of fees for local service which are billed directly to customers and access revenues which are received for intrastate and interstate exchange services provided to long distance carriers. POTS revenues are subject to regulation by a number of state and federal government agencies.

The Company also provides a number of nonregulated telecommunications services to customers. These services include cable television or video service, internet access services, lease of fiber optic transport facilities, billing and collection services to long distance carriers, telephone directory services and equipment rental. The Company also makes retail sales of consumer telecommunications equipment and sells wireless telephone services on a commission basis.

Segment information is as follows:

	POTS		Other Services		Total
Six Months Ended June 30, 2006
Revenues	$	10,404,111	$	5,404,226	$	15,808,337
Costs and expenses		7,844,955		4,739,280		12,584,235
Operating income	$	2,559,156	$	664,946	$	3,224,102
Depreciation and amortization	$	3,007,516	$	732,050	$	3,739,566
Total assets	$	89,408,933	$	36,379,681	$	125,788,614
Capital expenditures	$	1,376,766	$	379,752	$	1,756,518
Six Months Ended June 30, 2005
Revenues	$	10,481,436	$	5,025,653	$	15,507,089
Costs and expenses		8,097,305		3,880,254		11,977,559
Operating income	$	2,384,131	$	1,145,399	$	3,529,530
Depreciation and amortization	$	3,026,640	$	804,186	$	3,830,826
Total assets	$	94,931,391	$	31,931,424	$	126,862,815
Capital expenditures	$	874,170	$	435,312	$	1,309,482

	POTS		Other Services		Total
Three Months Ended June 30, 2006
Revenues	$	5,298,944	$	2,755,202	$	8,054,146
Costs and expenses		3,945,815		2,752,991		6,698,806
Operating income	$	1,353,129	$	2,211	$	1,355,340
Depreciation and amortization	$	1,504,170	$	356,959	$	1,861,129
Capital expenditures	$	352,988	$	193,236	$	546,224
Three Months Ended June 30, 2005
Revenues	$	5,335,861	$	2,522,231	$	7,858,092
Costs and expenses		4,177,004		1,964,869		6,141,873
Operating income	$	1,158,857	$	557,362	$	1,716,219
Depreciation and amortization	$	1,513,321	$	401,870	$	1,915,191
Capital expenditures	$	565,571	$	321,915	$	887,486

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EX-99.3

EXHIBIT 99-3

New Ulm Telecom, Inc.

Unaudited Pro Forma Condensed Combined Financial Statements as of June 30, 2006, for the six months ended June 30, 2006 and for the year ended December 31, 2005

Introduction to the Pro Forma Financial Statements

The following unaudited pro forma condensed combined financial statements are based on the historical financial statements of New Ulm Telecom, Inc. (“New Ulm”) and Hector Communications Corporation (“Hector”) after giving effect to the acquisition by New Ulm of a one-third ownership interest in Hector, and assumptions and adjustments described in the accompanying notes to the unaudited pro forma condensed financial statements.

The unaudited pro forma condensed combined financial statements should be read in conjunction with the audited historical financial statements of New Ulm found in its Annual Report on Form 10-K for the year ended December 31, 2005, the audited consolidated financial statements of Hector found in Item 9.01 (a) and Exhibit 99.1 of this Current Report on Form 8-K/A, and the unaudited consolidated financial statements of Hector found in Item 9.01 (b) and Exhibit 99.2 of this Current Report on Form 8-K/A.

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NEW ULM TELECOM, INC. AND SUBSIDIARIES

UNAUDITED PRO FORMA CONDENSED BALANCE SHEET
JUNE 30, 2006

ASSETS
	New Ulm		Pro Forma Adjustments			Pro Forma Combined
CURRENT ASSETS:
Cash and Cash Equivalents	$	1,228,410	$	82,492,290	(a)
		—		(20,875,301	)(b)
		—		(14,067,446	)(c)
		—		(13,750,000	)(d)
		—		(18,000,000	)(e)	$	17,027,953
Other Current Assets		1,949,787		—			1,949,787
Total Current Assets		3,178,197		15,799,543			18,977,740
INVESTMENTS AND OTHER ASSETS:
Cellular Investments		22,737,316		(22,737,316	)(a)		—
Hector Investment		—		18,000,000	(e)
		—		2,133,333	(f)		20,133,333
Goodwill and Intangibles		3,239,259		—			3,239,259
Other Investments		1,832,120		—			1,832,120
Total Investments and Other Assets		27,808,695		(2,603,983	)		25,204,712
PROPERTY, PLANT AND EQUIPMENT:
Telecommunications Plant		59,420,949		—			59,420,949
Other Property		2,542,665		—			2,542,665
Video Plant		2,706,451		—			2,706,451
Total Property, Plant and Equipment		64,670,065		—			64,670,065
Less Accumulated Depreciation		40,843,502		—			40,843,502
Net Property, Plant and Equipment		23,826,563		—			23,826,563
TOTAL ASSETS	$	54,813,455	$	13,195,560		$	68,009,015
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Current Portion of Long-Term Debt	$	2,516,796	$	(2,500,000	)(d)	$	16,796
Other Accounts Payable & Accrued Liabilities		1,363,407		—			1,363,407
Total Current Liabilities		3,880,203		(2,500,000	)		1,380,203
LONG-TERM DEBT, Less Current Portion		11,339,335		(11,250,000	)(d)		89,335
NONCURRENT LIABILITIES
Loan Guarantee		357,585		2,133,333	(f)		2,490,918
Income Taxes		5,867,918		3,306,342	(b)
		—		(1,697,499	)(g)		7,476,761
Total Noncurrent Liabilities		6,225,503		3,742,176			9,967,679
STOCKHOLDERS’ EQUITY:
Preferred Stock – $1.66 Par Value; 10,000,000 Shares
Authorized; 0 Shares Issued and Outstanding		—		—			—
Common Stock – $1.66 Par Value; 90,000,000 and 90,000,000 Shares
Authorized; 5,115,435 and 5,115,435 Shares Issued and Outstanding		8,525,725		—			8,525,725
Retained Earnings		24,842,689		59,754,974	(a)
		—		(24,181,643	)(b)
		—		(14,067,446	)(c)
		—		1,697,499	(g)		48,046,073
Total Stockholders’ Equity		33,368,414		59,754,974			56,571,798
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	54,813,455	$	49,747,150		$	68,009,015

See accompanying notes to unaudited pro forma combined financial statements.

2

NEW ULM TELECOM, INC. AND SUBSIDIARIES

UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 2006

	New Ulm			Pro Forma Adjustment			Pro Forma Combined
OPERATING REVENUES
Local network	$	1,948,243		$			$	1,948,243
Network access		2,808,631						2,808,631
Directory advertising, billing and other services		246,418						246,418
Video services		1,049,745						1,049,745
Internet services		777,898						777,898
Other nonregulated services		1,192,974						1,192,974
		8,023,909			0			8,023,909
OPERATING EXPENSES
Plant operations, excluding depreciation and amortization		1,243,461						1,243,461
Cost of video services		741,844						741,844
Cost of internet services		315,682						315,682
Cost of other nonregulated services		551,496						551,496
Depreciation and amortization		2,139,606						2,139,606
Selling, general and administrative		1,895,744						1,895,744
		6,887,833			0			6,887,833
OPERATING INCOME		1,136,076			0			1,136,076
OTHER (EXPENSES) INCOME
Interest expense		(438,260	)		429,966	(b)		(8,294	)
Interest income		40,089			394,989	(c)		435,078
Equity Earnings in Cellular Partnership		3,732,674			(3,732,674	)(d)		0
Equity Earnings in Hector Comm. Corp.					43,860	(a)		43,860
Other investment income (expense)		140,148						140,148
		3,474,651			(2,863,859	)		610,792
INCOME BEFORE INCOME TAXES		4,610,727			(2,863,859	)		1,746,868
INCOME TAXES		1,867,186			(1,159,004	)(e)		708,182
NET INCOME	$	2,743,541		$	(1,704,855	)	$	1,038,686
BASIC AND DILUTED NET INCOME PER SHARE	$	0.54		$	(0.33	)	$	0.20
DIVIDENDS PER SHARE	$	0.1800		$	0.0000		$	0.1800
WEIGHTED AVERAGE SHARES OUTSTANDING		5,115,435			5,115,435			5,115,435

See accompanying notes to unaudited pro forma combined financial statements.

3

NEW ULM TELECOM, INC. AND SUBSIDIARIES

UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 2005

	New Ulm			Pro Forma Adjustments			Pro Forma Combined
OPERATING REVENUES:
Local Network	$	4,033,900					$	4,033,900
Network Access		7,107,497						7,107,497
Directory Advertising, Billing and Other Services		488,656						488,656
Video Services		2,011,841						2,011,841
Internet Services		1,275,077						1,275,077
Other Nonregulated Services		2,427,866						2,427,866
Total Operating Revenues		17,344,837			—			17,344,837
OPERATING EXPENSES:
Plant Operations, Excluding Depreciation and Amortization		2,285,473						2,285,473
Cost of Video Services		1,472,020						1,472,020
Cost of Internet Services		576,557						576,557
Cost of Other Nonregulated Services		1,221,717						1,221,717
Depreciation and Amortization		4,111,769						4,111,769
Selling, General and Administrative		3,404,120						3,404,120
Total Operating Expenses		13,071,656			—			13,071,656
OPERATING INCOME		4,273,181			—			4,273,181
OTHER INCOME (EXPENSES):
Interest Expense		(799,394	)		783,407	(b)		(15,987	)
Interest and Dividend Income		74,475			789,977	(c)		864,452
Interest During Construction		8,259						8,259
Equity Earnings in Cellular Partnership		5,742,935			(5,742,935	)(d)		—
Equity Earnings in Hector Comm. Corp.					560,817	(a)		560,817
Other Investment Income		85,842			—			85,842
Total Other Income (Expenses)		5,112,117			(3,608,734	)		1,503,383
INCOME BEFORE INCOME TAXES		9,385,298			(3,608,734	)		5,776,564
INCOME TAXES		3,925,246			(1,460,455	)(e)		2,464,791
NET INCOME	$	5,460,052		$	(2,148,279	)	$	3,311,773
BASIC AND DILUTED NET INCOME PER SHARE	$	1.07		$	(0.42	)	$	0.65
DIVIDENDS PER SHARE	$	0.34		$	—		$	0.34
WEIGHTED AVERAGE SHARES OUTSTANDING		5,115,435			5,115,435			5,115,435

See accompanying notes to unaudited pro forma combined financial statements.

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NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS

Note 1 – The Acquisition of a one-third ownership interest in Hector Communications Corporation

On November 3 2006, New Ulm Telecom, Inc. acquired a one-third interest in Hector Communications Corporation (HCC) through the previously announced merger of HCC into Hector Acquisition Corporation. Hector Acquisition Corporation was equally owned by New Ulm Telecom, Inc., Blue Earth Valley Communications, Inc. and Arvig Enterprises, Inc. In the merger, Hector Acquisition Corporation acquired all of the outstanding shares of Hector Communications Corporation stock for $36.40 per share. In addition, in October 2006, New Ulm sold its interest in Midwest Wireless Holdings (MWH) (as defined below) in connection with MWH’s sale to Alltel.

The unaudited pro forma condensed combined balance sheet and statements of operations are not necessarily indicative of the financial position and operating results that would have been achieved had the acquisition been completed as of the beginning of the earliest periods presented. They should not be construed as being a representation of financial position or future operating results of the combined companies. The unaudited pro forma condensed combined financial information gives effect only to the adjustments set forth in the accompanying notes and does not reflect any integration or acquisition related costs, or any potential cost savings or other synergies that management expects to realize as a result of the merger.

Note 2 – Adjustments to Unaudited Pro Forma Condensed Combined Financial Statements

The adjustments to the unaudited pro forma condensed combined balance sheet as of June 30, 2006 and the pro forma condensed combined statements of income for the year ended December 31, 2005 and for the six months ended June 30, 2006, in connection to the acquisition of a one-third ownership interest in HCC are presented below:

Adjustments to Unaudited Pro Forma Condensed Combined Balance Sheet as of June 30, 2006

(a) This adjustment reflects the sale of New Ulm’s Midwest Wireless Holdings (MWH) sale to Alltel. This transaction was subsequently completed in October 2006. The purchase of HCC was contingent on the completion of the sale of MWH to Alltel and therefore the results of that sale are reflected in these pro forma financial statements as if the sale had occurred on January 1, 2006. Currently, New Ulm expects to receive $82,492,290 (including amounts received in October 2006 and amounts to be received from the escrow fund in 2007 and 2008) from the sale of its MWH ownership.

(b) Estimated taxes due in 2006 from the gain of the sale is estimated at $20,875,301. This is the net of total estimated taxes due of $24,181,643, less an estimated $3,306,342 to be deferred until escrow funds from the MWH sale to Alltel are received in 2007 and 2008.

(c) After receipt of the funds from the MWH sale to Alltel, the New Ulm Board of Directors declared a special dividend of $2.75 per share totaling $14,067,446.

(d) This adjustment reflects the Board authorization for the extinguishment of its debt with CoBank, ACB (CoBank). For purposes of this pro forma statement, the debt is reflected as if it had been paid in full on January 1, 2006.

5

(e) This adjustment reflects the $18,000,000 that New Ulm paid for its one-third equity ownership interest in HCC.

(f) This adjustment reflects New Ulm’s proportionate share of a loan guarantee for HCC. New Ulm has guaranteed one-third of HCC’s $6.4 million in bridge loan financing, or $2,133,333.

(g) This adjustment records the removal of deferred taxes on MWH investment.

Adjustments to the Unaudited Pro Forma Condensed Combined Statements of Income

(a) This adjustment reflects the one-third proportionate share of HCC Net Income for the six months ended June 30, 2006 and the year ended December 31, 2005 reflects additional interest expense due to HCC financing from CoBank, ACB., less transaction cost, less Equity in Earnings from MWH and less the Gain on Sale of RTB Stock.

	Six Months Ended June 30, 2006			Year Ended December 31, 2005
HCC Income Before Taxes	$	15,667,519		$	10,932,334
Less: Transaction Charges		526,137			—
Estimated Additional Interest Expense		(2,581,263	)		(3,449,630	)
Less: Equity in Earning from MWH		(3,043,205	)		(4,681,888	)
Less: Gain on Sale of RTB Stock		(10,340,908	)		—
Subtotal – Adjusted Income Before Income Taxes	$	228,280		$	2,800,816
Estimated Income Tax Expense		96,699			1,118,366
Adjusted Net Income	$	131,581		$	1,682,450
New Ulm’s Proportionate Equity Share of HCC Net Income	$	43,860		$	560,817

(b) This adjustment reflects reduced interest expense resulting from the payment in full of New Ulm’s debt to CoBank. This adjustment assumes the payment in full was made on January 1, 2006 for the pro forma statement of income for the six months ended June 30, 2006 and payment in full was made on January 1, 2005 for the pro forma statement of income for the year ended December 31, 2005.

(c) This adjustment reflects interest income received from the net pro forma cash and cash equivalent adjustment. Currently, New Ulm receives approximately 5% on the proceeds held from the MWH sale from Government and Agency notes. For the purposes of these pro forma statements, it is assumed that the net effect of the pro forma cash and cash equivalent transactions of $15,799,543 reflected on the pro forma balance sheet took place on January 1, 2006 for the pro forma statement of income for the six months ended June 30, 2006 and January 1, 2005 for the pro forma statement of income for the year ended December 31, 2005, and that the pro forma cash and cash equivalent adjustment was held for the entire periods being presented.

6

(d) This adjustment reflects the sale of MWH ownership at the beginning of the periods presented, and has therefore been adjusted out of the pro forma presentation.

(e) This adjustment reflects New Ulm’s estimated tax effect of the above statement of operations adjustments.

Note 3 – Items Not Adjusted

The pro forma statements do not reflect any effect of operating efficiencies, cost savings and other benefits anticipated by New Ulm’s management as a result of the merger.

7