UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

FORM 10-Q

(Mark One)

ý	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
	OF THE SECURITIES EXCHANGE ACT OF 1934
	For the quarterly period ended September 30, 2005
	OR
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR
	15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                     to                     

Commission File Number:   001-13891

HECTOR COMMUNICATIONS CORPORATION

(Exact name of registrant as specified in its charter)

MINNESOTA	41-1666660
(State or other jurisdiction of	(Federal Employer
incorporation or organization)	Identification No.)
211 South Main Street, Hector, MN	55342
(Address of principal executive offices)	(Zip Code)

(320) 848-6611

Registrant’s telephone number, including area code

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  YES  ý  NO  o

Indicate by a check mark whether the registrant is an accelerated filer (as defined by Rule 12b-2 of the Act). YES  o  NO  ý

Indicate by a check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Act). YES  o  NO  ý

APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

	Name of Exchange
Class	On Which Registered	Outstanding at October 31, 2005
Common Stock, par value $.01 per share	American Stock Exchange	3,971,327

HECTOR COMMUNICATIONS CORPORATION AND SUBSIDIARIES

INDEX

Part I. Financial Information
	Item 1. Financial Statements
		Consolidated Balance Sheets
		Consolidated Statements of Income
		Consolidated Statement of Stockholders’ Equity
		Consolidated Statements of Cash Flows
		Notes to Consolidated Financial Statements
	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
	Item 3. Quantitative and Qualitative Disclosures About Market Risk
	Item 4. Controls and Procedures
Part II. Other Information

2

PART I. FINANCIAL INFORMATION

HECTOR COMMUNICATIONS CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(unaudited)

	September 30			December 31
	2005			2004
Assets:
Current assets:
Cash and cash equivalents	$	25,238,604		$	19,980,506
Construction fund	1,417,743			3,944,684
Accounts receivable, net	2,021,226			3,017,569
Materials, supplies and inventories	1,275,356			820,081
Other current assets	256,760			250,276
Total current assets	30,209,689			28,013,116
Property, plant and equipment	103,174,327			100,921,511
less accumulated depreciation	(66,142,308		)	(60,881,018		)
Net property, plant and equipment	37,032,019			40,040,493
Other assets:
Excess of cost over net assets acquired	30,921,094			30,921,094
Investment in Midwest Wireless Holdings, LLC	17,514,420			15,380,543
Investment in other unconsolidated affiliates	3,294,339			3,304,726
Other investments	8,138,543			6,880,549
Other assets	350,890			382,322
Total other assets	60,219,286			56,869,234
Total Assets	$	127,460,994		$	124,922,843
Liabilities and Stockholders’ Equity:
Current liabilities:
Notes payable and current portion of long-term debt	$	6,481,500		$	6,352,000
Accounts payable	1,784,259			2,072,722
Accrued expenses	1,763,216			1,936,188
Income taxes payable	907,033			51,701
Total current liabilities	10,936,008			10,412,611
Long-term debt, less current portion	50,351,244			54,084,480
Deferred investment tax credits	2,798			3,340
Deferred income taxes	5,980,664			5,460,554
Deferred compensation	740,342			749,128
Stockholders’ Equity	59,449,938			54,212,730
Total Liabilities and Stockholders’ Equity	$	127,460,994		$	124,922,843

See the notes to the consolidated financial statements.

3

HECTOR COMMUNICATIONS CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(unaudited)

	Three Months Ended Sept. 30						Nine Months Ended Sept. 30
	2005			2004			2005			2004
Revenues:
Local network	$	1,576,760		$	1,601,814		$	4,600,332		$	4,662,810
Network access	3,937,704			3,645,122			11,395,568			11,583,892
Nonregulated services:
Video services	807,666			835,541			2,381,160			2,528,573
Internet services	962,338			815,610			2,726,328			2,329,398
Other nonregulated services	848,861			907,503			2,537,030			2,638,576
Total revenues	8,133,329			7,805,590			23,640,418			23,743,249
Costs and expenses:
Plant operations, excluding depreciation	1,097,232			1,043,564			3,449,728			3,247,757
Customer operations	430,646			437,496			1,365,852			1,233,376
General and administrative	1,058,074			926,325			2,907,265			3,243,749
Depreciation and amortization	1,915,191			1,995,983			5,746,017			6,012,651
Other operating expenses:
Operating taxes	150,589			142,202			399,308			352,589
Video service expenses	821,178			735,242			2,390,298			2,282,263
Internet expenses	224,688			229,628			714,082			720,700
Other	357,893			371,882			1,060,500			1,293,945
Total costs and expenses	6,055,491			5,882,322			18,033,050			18,387,030
Operating income	2,077,838			1,923,268			5,607,368			5,356,219
Other income and (expenses):
Interest expense	(748,016		)	(728,323		)	(2,223,363		)	(2,216,200		)
Interest and dividend income	166,494			75,043			553,539			191,575
Income from investment in Midwest Wireless Holdings, LLC	1,238,173			842,842			3,605,391			2,151,089
Income from investments in other unconsolidated affiliates	91,461			52,003			135,890			231,444
Gain on sale of business				12,805						41,395
Other income, net	748,112			254,370			2,071,457			399,303
Income before income taxes	2,825,950			2,177,638			7,678,825			5,755,522
Income tax expense	1,149,000			884,000			3,123,000			2,314,000
Net income	$	1,676,950		$	1,293,638		$	4,555,825		$	3,441,522
Basic net income per share	$	.44		$	.35		$	1.21		$	.95
Diluted net income per share	$	.41		$	.32		$	1.12		$	.87
Dividends per share	$	.08		$	—		$	.18		$	—

See the notes to the consolidated financial statements.

4

HECTOR COMMUNICATIONS CORPORATION

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

(unaudited)

	Shares		Amount
Preferred Stock
Balance at December 31, 2004	157,800		$	157,800
Conversion of preferred stock to common	(33,800	)	(33,800		)
Balance at September 30, 2005	124,000		$	124,000
Common Stock
Balance at December 31, 2004	3,723,390		$	37,234
Issuance of common stock under Employee Stock Option Plan	62,849		629
Issuance of common stock under Employee Stock Ownership Plan	15,016		150
Issuance of common stock under Employee Stock Purchase Plan	8,185		82
Conversion of preferred stock to common	33,800		338
Purchase and retirement of common stock	(886	)	(9		)
Balance at September 30, 2005	3,842,354		$	38,424
Additional Paid in Capital
Balance at December 31, 2004			$	15,621,048
Issuance of common stock under Employee Stock Option Plan			461,508
Issuance of common stock under Employee Stock Ownership Plan			327,949
Issuance of common stock under Employee Stock Purchase Plan			141,116
Conversion of preferred stock to common			33,462
Purchase and retirement of common stock			(3,783		)
Balance at September 30, 2005			$	16,581,300
Retained Earnings
Balance at December 31, 2004			$	38,359,117
Net income			4,555,825
Dividends paid			(709,147		)
Purchase and retirement of common stock			(18,014		)
Balance at September 30, 2005			$	42,187,781
Accumulated Comprehensive Income
Balance at December 31, 2004			$	37,531
Unrealized holding gains on marketable securities			801,504
Income tax expense related to unrealized holding gains on marketable securities			(320,602		)
Balance at September 30, 2005			$	518,433
Total Stockholders’ Equity			$	59,449,938

See the notes to the consolidated financial statements.

5

HECTOR COMMUNICATIONS CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

	Nine Months Ended September 30
	2005			2004
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income	$	4,555,825		$	3,441,522
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	5,759,119			6,025,864
Income from Midwest Wireless Holdings LLC	(3,605,391		)	(2,151,089		)
Income from other unconsolidated affiliates	(135,890		)	(231,444		)
Cash distributions from Midwest Wireless Holdings LLC	1,471,514			567,835
Cash distributions from other unconsolidated affiliates	146,277			212,781
Noncash investment income	(52,854		)
Gain on sale of business				(41,395		)
Changes in assets and liabilities:
Accounts receivable	996,343			551,074
Materials, supplies and inventories	(455,275		)	(434,913		)
Other current assets	(6,484		)	12,921
Accounts payable	(288,463		)	(40,279		)
Accrued expenses	155,127			368,796
Income taxes payable	855,332			(921,073		)
Deferred taxes	199,508
Deferred investment tax credits	(542		)	(5,470		)
Deferred compensation	(8,786		)	14,910
Net cash provided by operating activities	9,585,360			7,370,040
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment	(2,719,848		)	(2,399,307		)
Change in the RUS construction fund	2,526,941			127,915
Investments in other unconsolidated affiliates				(45,510		)
Purchases of other investments	(1,094,335		)	(282,579		)
Proceeds from other investments	690,699			407,440
Decrease in other assets	635			4,925
Proceeds from sale of business				147,265
Net cash provided by (used in) investing activities	(595,908		)	(2,039,851		)
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of notes payable and long-term debt	(5,372,854		)	(4,850,299		)
Proceeds from issuance of notes payable and long-term debt	1,769,118			2,033,907
Issuance of stock	603,335			1,120,416
Purchase and retirement of stock	(21,806		)
Cash dividends	(709,147		)
Net cash used in financing activities	(3,731,354		)	(1,695,976		)
NET INCREASE IN CASH AND CASH EQUIVALENTS	5,258,098			3,634,213
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR	19,980,506			16,581,315
CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	25,238,604		$	20,215,528
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid	$	2,328,338		$	2,417,226
Income taxes paid	2,268,210			3,240,543

See the notes to the consolidated financial statements.

6

HECTOR COMMUNICATIONS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SIGNIFICANT 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 September 30, 2005 and the statements of income and statements of cash flows for the periods ended September 30, 2005 and 2004 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 September 30, 2005 and 2004 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, 2004 Annual Report to Shareholders.  The results of operations for the periods ended September 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.

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 amounts in the 2004 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.

7

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 nine months ended September 30, 2005 and 2004 was $5,036,727 and $3,441,029, respectively.  Comprehensive income for the three months ended September 30, 2005 and 2004 was $2,151,763 and $1,293,576, respectively.

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:

			Gross		Gross
			Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
September 30, 2005	$	1,102,009	$	894,264	$	(30,209	)	$	1,966,064
December 31, 2004	447,483		79,586		(17,035		)	510,034

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

	Net		Deferred			Accumulated
	Unrealized		Income			Comprehensive
	Gains		Taxes			Income
September 30, 2005	$	864,055	$	(345,622	)	$	518,433
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.

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. 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, net income and net income per share would have been as follows:

8

	Three Months Ended September 30
	2005			2004
Net income as reported	$	1,676,950		$	1,293,638
Less: Total stock-based employee compensation expense determined under the fair value method for all awards	(78,484		)	(137,749		)
Pro forma net income	$	1,598,466		$	1,155,889
Basic net income per share:
As reported	$	.44		$	.35
Pro forma	$	.42		$	.32
Diluted net income per share:
As reported	$	.41		$	.32
Pro forma	$	.39		$	.29

	Nine Months Ended September 30
	2005			2004
Net income as reported	$	4,555,825		$	3,441,522
Less: Total stock-based employee compensation expense determined under the fair value method for all awards	(595,949		)	(496,213		)
Pro forma net income	$	3,959,876		$	2,945,309
Basic net income per share:
As reported	$	1.21		$	.95
Pro forma	$	1.05		$	.82
Diluted net income per share:
As reported	$	1.12		$	.87
Pro forma	$	.97		$	.75

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.

The carrying value of HCC’s goodwill was $30,921,000 at September 30, 2005 and December 31, 2004; $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			Other
	Assets			Assets		Consolidated
Balance December 31, 2004	$	221,930		$	160,392	$	382,322
Cash proceeds	(635		)			(635		)
Amortization	(30,797		)			(30,797		)
Balance September 30, 2005	$	190,498		$	160,392	$	350,890

9

MIDWEST WIRELESS HOLDINGS, LLC

Midwest Wireless Holdings LLC (“Midwest Wireless”) provides wireless telecommunications services to 427,000 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 is presently the second largest member of Midwest Wireless Holdings LLC, with an 8.0% ownership stake. HCC accounts for its investment in Midwest Wireless using the equity method.  Income from this investment was $3,605,000 and $2,151,000 in the nine-month periods ended September 30, 2005 and 2004, respectively. Cash distributions received from Midwest Wireless were $1,472,000 and $568,000 in the same respective periods.

Income statement information for Midwest Wireless Holdings, LLC for the periods ended September 30, 2005 and 2004 was as follows:

	Three Months Ended Sept. 30				Nine Months Ended Sept. 30
	2005		2004		2005		2004
Revenues	$	66,713,865	$	57,375,673	$	188,148,907	$	157,716,801
Operating income	20,400,466		13,969,486		57,206,052		33,202,852
Net income	15,477,160		10,535,522		45,067,384		26,888,611

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
Three Months Ended September 30, 2005
Revenues	$	5,514,464	$	2,618,865	$	8,133,329
Costs and expenses	4,049,901		2,005,590		6,055,491
Operating income	$	1,464,563	$	613,275	$	2,077,838
Depreciation and amortization	$	1,513,547	$	401,644	$	1,915,191
Capital expenditures	$	1,058,090	$	352,276	$	1,410,366

10

	POTS		Other Services		Total
Three Months Ended September 30, 2004
Revenues	$	5,246,936	$	2,558,654	$	7,805,590
Costs and expenses	3,904,257		1,978,065		5,882,322
Operating income	$	1,342,679	$	580,589	$	1,923,268
Depreciation and amortization	$	1,542,105	$	453,878	$	1,995,983
Capital expenditures	$	753,455	$	74,808	$	828,263
	POTS		Other Services		Total
Nine Months Ended September 30, 2005
Revenues	$	15,995,900	$	7,644,518	$	23,640,418
Costs and expenses	12,147,206		5,885,844		18,033,050
Operating income	$	3,848,694	$	1,758,674	$	5,607,368
Depreciation and amortization	$	4,540,187	$	1,205,830	$	5,746,017
Total assets	$	92,437,189	$	35,023,805	$	127,460,994
Capital expenditures	$	1,932,260	$	787,588	$	2,719,848
	POTS		Other Services		Total
Nine Months Ended September 30, 2004
Revenues	$	16,246,702	$	7,496,547	$	23,743,249
Costs and expenses	12,010,995		6,376,035		18,387,030
Operating income	$	4,235,707	$	1,120,512	$	5,356,219
Depreciation and amortization	$	4,626,314	$	1,386,337	$	6,012,651
Total assets	$	92,020,076	$	32,714,775	$	124,734,851
Capital expenditures	$	2,139,421	$	259,886	$	2,399,307

Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

Hector Communications Corporation (“HCC” or “Company”) is a telecommunications holding company which, through its subsidiaries, primarily provides local telephone, broadband (video and high speed internet) cable television and dial-up internet services. The Company also invests in other companies providing wireless telephone and other telecommunications related services, including an 8% ownership in Midwest Wireless Holdings LLC.

At September 30, 2005 HCC operated nine wholly-owned local exchange company subsidiaries (generally referred to as “local exchange carriers” or “LECs”) serving 29,062 access lines in 28 rural communities in Minnesota, Wisconsin and North Dakota.  HCC, through its subsidiaries, also provides video services to 7,954 subscribers, provides high speed internet service to 4,880 customers and has 6,162 dial-up internet customers.

While growth from the Company’s investment in Midwest Wireless has softened the impact of declining access revenues on net income in the past several quarters, the Company expects its core business, wireline telephone service in rural communities, to continue to face significant challenges.  In addition to the loss of access revenue due to the impact of the dramatic growth in wireless telephony, these challenges include the emergence of Voice over Internet Protocol (VoIP) and possible changes to the level of regulatory support for rural telecommunications. The management and Board of Directors of the Company continue to assess all strategic options and have retained the investment-banking firm of Legg Mason Wood Walker, Inc. to assist in this effort.

11

Nine Months Ended September 30, 2005 Compared to Nine Months Ended September 30, 2004

Revenues decreased to $23,640,000 in 2005 from $23,743,000 in 2004. The revenue breakdown was as follows:

	Nine Months Ended September 30
	2005		2004
Plain old telephone service (“POTS”):
Local network	$	4,600,332	$	4,662,810
Network access revenues:
Long distance providers (including NECA)	10,048,007		10,287,166
Universal service fund support	1,347,561		1,296,726
Total network access revenues	11,395,568		11,583,892
Total POTS revenues	15,995,900		16,246,702
Other services:
Video services	2,381,160		2,528,573
Internet services	2,726,328		2,329,398
Other nonregulated services:
Fiber leases	501,274		558,869
Cellular sales commissions	276,217		325,100
Directory revenues	402,694		385,667
Retail sales	301,832		377,439
Long distance resale	354,334		287,398
Customer equipment installation and repair	277,586		290,494
All other revenues	423,093		413,609
Total nonregulated services revenue	2,537,030		2,638,576
Total other service revenues	7,644,518		7,496,547
Total revenue	$	23,640,418	$	23,743,249

Total POTS revenues decreased $251,000 or 2%.  Local network revenues decreased $62,000 or 1%.  The decrease was due to decreases in access lines purchased by customers and local service rate reductions in the Company’s Hager WI telephone exchanges. Access lines served were 29,062 at September 30, 2005, a decrease of 2% from September 2004.  The number of access lines served fell due to substitution of cellular phones for landline phones by customers and the reduced number of second lines being used for dial-up internet service.

Total network access revenues decreased $188,000 or 2%.  The revenue decrease was primarily due to lower network access revenues from traditional long distance providers. Access revenues from wireless communications providers increased due to interconnection agreements negotiated in 2005 between the Company and certain wireless carriers that had not been paying access charges.  However, the access rates provided in the new interconnection agreements were generally lower than those charged previously to wireless carriers. Universal service support funding increased $51,000 or 4%.

Total revenues from other services increased $148,000 or 2%.  Revenues from video (cable television) services declined $147,000 or 6%. Video service revenues in 2005 were reduced by the sale of the Hudson Township WI system in June 2004.  Revenues from internet services increased $397,000 or 17%, due to a 34% increase in the number of DSL customers. At September 30, 2005 the Company had 4,880 digital subscriber line (“DSL”) customers and 6,162 dial-up internet customers, compared to 3,652 DSL customers and 7,108 dial-up customers in September 2004. The DSL customer growth was facilitated by the deployment of broadband equipment manufactured by Next Level Communications, Inc. in the Company’s Sleepy Eye, MN and Pine Island MN exchanges. This equipment makes it

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possible to deliver voice, video and high speed internet services to the customer over the same circuit. Revenues from other nonregulated services declined $102,000 or 4%.  The revenue decline was due to the sale of the Company’s engineering business in 2004, lower cellular commissions, lower retail sales and lower revenues from leases of fiber optic facilities.

Operating costs and expenses decreased 2% to $18,033,000 in 2005 from $18,387,000 in 2004.  The breakdown of costs and expenses was as follows:

	Nine Months Ended September 30
	2005		2004
Plain old telephone service (“POTS”):
Plant operations, excluding depreciation	$	3,447,338	$	3,244,537
Customer operations	1,221,043		1,062,479
General and administrative	2,539,330		2,613,739
Depreciation and amortization	4,540,187		4,626,314
Operating taxes	399,308		344,261
Cellular receivable write-downs			119,665
Total POTS costs and expenses	12,147,206		12,010,995
Other services:
Plant operations	2,390		3,220
Customer operations	144,809		170,897
General and administrative	367,935		630,010
Depreciation and amortization	1,205,830		1,386,337
Operating taxes			8,328
Other costs and expenses:
Video service expenses	2,390,298		2,282,263
Internet expenses	714,082		720,700
Other	1,060,500		1,174,280
Total other service costs and expenses	5,885,844		6,376,035
Total costs and expenses	$	18,033,050	$	18,387,030

Total POTS costs and expenses increased $136,000 or 1%.  Plant operations expenses increased $203,000 or 6% due to increased labor and overhead costs. Customer operations expenses increased $159,000 or 15% due to increased marketing expenses and increased labor and overhead costs. General and administrative expenses decreased $74,000 or 3% due to lower information management costs, lower executive expenses and lower administration costs. Operating income in 2005 from POTS was $3,849,000, a decrease of 9% from $4,236,000 in 2004.

Total costs and expenses for other services decreased $490,000 or 8%. Video service expenses increased $108,000 or 5% as expense reductions due to sales of cable television systems in 2004 were offset by higher fee payments to programming providers.  Internet expenses decreased $7,000 or 1% due to price reductions from suppliers. General and administrative expenses decreased $262,000 from 2004 due to the 2004 sale of the Company’s engineering business.  Depreciation and amortization expenses decreased $180,000 because a substantial amount of the Company’s cable television plant was fully depreciated at the end of 2004 and due to the sale of the Hudson WI cable system. Operating income in 2005 from other services was $1,759,000, an increase of 57% from $1,121,000 in 2004. Total operating income increased 5% to $5,607,000.

Interest expenses for 2005 increased $7,000 as higher interest rates on the floating portion of the Company’s debt offset principal payments made in 2004 and 2005 that reduced the amount of long-term debt outstanding. Interest and dividend income increased $362,000 due to higher interest rates earned on invested cash balances.

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Income from the Company’s investment in Midwest Wireless Holdings, LLC was $3,605,000 in 2005 an increase of 68% from $2,151,000 in 2004.  Midwest Wireless operations in 2005 benefited from increased customer counts and from investments made in 2004 to switch its cellular network to CDMA technology.  CDMA makes it possible for customers to utilize new wireless services including camera phones and text messaging.  At September 30, 2005 Midwest Wireless had 427,322 wireless customers, a 9% increase from 2004.

Income before income taxes increased 33% to $7,679,000.  Income tax expense increased to $3,123,000 in 2005 from $2,314,000 in 2004. The Company had net income of $4,556,000 in 2005 compared to $3,442,000 in 2004.

Three Months Ended September 30, 2005 Compared to Three Months Ended September 30, 2004

Revenues increased 4% to $8,133,000 in 2005 from $7,806,000 in 2004. The revenue breakdown was as follows:

	Three Months Ended September 30
	2005		2004
Plain old telephone service (“POTS”):
Local network	$	1,576,760	$	1,601,814
Network access revenues:
Long distance providers (including NECA)	3,482,118		3,294,825
Universal service fund support	455,586		350,297
Total network access revenues	3,937,704		3,645,122
Total POTS revenues	5,514,464		5,246,936
Other services:
Video services	807,666		835,541
Internet services	962,338		815,610
Other nonregulated services:
Fiber leases	157,337		176,640
Cellular sales commissions	93,829		129,693
Directory revenues	124,885		130,534
Retail sales	111,420		150,569
Long distance resale	130,835		104,927
Customer equipment installation and repair	98,256		102,285
All other revenues	132,299		112,855
Total nonregulated services revenue	848,861		907,503
Total other service revenues	2,618,865		2,558,654
Total revenue	$	8,133,329	$	7,805,590

Total POTS revenues increased $268,000 or 5%.  Local network revenues decreased $25,000 or 2% due to loss of access lines. Network access revenues increased $293,000 or 8%.  The revenue increase was due to cost study settlement payments from NECA and new contracts with wireless communications providers that were not previously paying access to the Company. Universal service support funding (“USF”) increased $105,000 or 30%. USF payments in the 2004 quarter were lower than normal due to a $103,000 adjustment from NECA for overpayments of high cost loop support in 2002 and 2003.

Total revenues from other services increased $60,000 or 2%.  Revenues from video (cable television) services declined $28,000 or 3%. The Company is losing cable television subscribers to competing satellite services in its smaller cable systems. The Company does not offer broadband services in these

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systems and cannot economically offer customers the same wide ranging channel line-up offered by the satellite providers.  Revenues from internet services increased $147,000 or 18%, due the increased number of DSL customers. Revenues from other nonregulated services decreased $59,000 or 6%.  The revenue decrease was due to lower cellular commissions, lower retail sales and lower fiber lease revenues.

Operating costs and expenses increased 3% to $6,055,000 in 2005 from $5,882,000 in 2004.  The breakdown of costs and expenses was as follows:

	Three Months Ended September 30
	2005		2004
Plain old telephone service (“POTS”):
Plant operations, excluding depreciation	$	1,096,505	$	1,041,770
Customer operations	391,992		393,292
General and administrative	897,268		796,083
Depreciation and amortization	1,513,547		1,542,105
Operating taxes	150,589		144,192
Cellular receivable write-downs			(13,185		)
Total POTS costs and expenses	4,049,901		3,904,257
Other services:
Plant operations	727		1,794
Customer operations	38,654		44,204
Operating taxes			(1,990		)
General and administrative	160,806		130,242
Depreciation and amortization	401,644		453,878
Other costs and expenses:
Video service expenses	821,178		735,242
Internet expenses	224,688		229,628
Other	357,893		385,067
Total other service costs and expenses	2,005,590		1,978,065
Total costs and expenses	$	6,055,491	$	5,882,322

Total POTS costs and expenses increased $146,000 or 4%.  Plant operations expenses increased $55,000 or 5% due to increased labor and overhead costs. Customer operations expenses decreased $1,000. General and administrative expenses increased $101,000 or 13% due to increased labor and overhead costs and increased consulting fees. Operating income in 2005 from POTS was $1,465,000, an increase of 9% from $1,343,000 in 2004.

Total costs and expenses for other services increased $28,000 or 1%. Video service expenses increased $86,000 or 12% due to increased payments to programming suppliers.  Internet expenses decreased $5,000 or 2%. General and administrative expenses increased $31,000 or 23% due to increased labor and overhead charges and increased consulting fees. Depreciation and amortization expenses decreased $52,000 because a substantial amount of the Company’s cable television plant was fully depreciated at the end of 2004. Operating income in 2005 from other services was $613,000 compared to $581,000 in 2004. Total operating income increased 8% to $2,078,000.

Interest expenses for 2005 increased $20,000 as higher interest rates on the non-fixed portion of Company’s CoBank loan offset reductions in the amount of long-term debt outstanding. Interest and dividend income increased $91,000 due to higher interest rates earned on invested cash balances.

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Income from the Company’s investment in Midwest Wireless Holdings, LLC was $1,238,000 in 2005 an increase of 47% from $843,000 in 2004.  Midwest Wireless operations in 2005 benefited from increased customer counts and from investments made in 2004 to switch its cellular network to CDMA technology.  CDMA makes it possible for customers to utilize new wireless services including camera phones and text messaging.

Income before income taxes increased 30% to $2,826,000.  Income tax expense increased to $1,149,000 in 2005 from $884,000 in 2004. The Company had net income of $1,677,000 in 2005 compared to $1,294,000 in 2004.

Liquidity and Capital Resources

Cash flows from operating activities for the nine-month periods were $9,585,000 and $7,370,000 in 2005 and 2004, respectively.  At September 30, 2005, the Company’s cash and cash equivalents totaled $25,239,000 compared to $19,981,000 at December 31, 2004.  Working capital at September 30, 2005 was $19,274,000 compared to $17,601,000 at December 31, 2004.  The current ratio was 2.8 to 1 at September 30, 2005.

Plant additions in the 2005 and 2004 periods were $2,720,000 and $2,399,000, respectively. Plant additions in the 2005 period went primarily to upgrade the Company’s central offices. Plant additions for 2005 are expected to total $4,000,000.  These plant additions will upgrade the Company’s telephone equipment to allow local number portability and other advanced telecommunications services, expand telecommunications services into new construction developments and increase usage of Next Level broadband equipment and high capacity fiber optics in the telephone network.

In addition to cashflow from operations, the Company’s working capital position benefited from debt and equity issuances.  Borrowings from the Rural Utilities Service and Rural Telephone Bank totaled $1,769,000 and $2,034,000 in the respective 2005 and 2004 periods. Loan funds are utilized to finance plant additions. During 2005, the Company converted $2,527,000 of its RUS construction fund to cash to pay for capital additions made in prior periods. At September 30, 2005, construction funds remaining on hand totaled $1,418,000. The Company received $603,000 and $1,120,000 during the respective 2005 and 2004 from employee stock option exercises and the employee stock purchase plan.

As a condition of receiving loans, the Company is an investor in the Rural Telephone Bank (“RTB”).  In August, 2005 the RTB’s Board of Directors approved resolutions to liquidate and dissolve the bank.  As a result of the dissolution, the Company expects its RTB stock will be redeemed at par within the next year.  Gross cash proceeds to the Company based on par value redemption would be $10,800,000.  Book value of the investment at September 30, 2005 was $1,264,000.  All of the gain from redemption proceeds would be subject to income tax.  The Company’s outstanding loans from the RTB would be transferred to the Rural Utilities Service with no change in terms.

In September 2005, Midwest Wireless announced that it is engaged in a process that could lead to its sale to other investors or another wireless service provider.  Midwest Wireless Holdings LLC has been a significant source of net income for the Company for the last several years.  However, the cash distributions the Company has received from Midwest Wireless have generally only been sufficient to pay income taxes related to the investment.  The Company does not presently know if a sales transaction will occur, what the selling price or proceeds to the Company from a transaction would be or what other terms and conditions might apply to a transaction.  The Company expects that a sale transaction would result in proceeds to the Company materially greater than the book value of its investment, which was $17,514,000 at September 30, 2005.

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The Company’s long-term debt includes a term loan provided to HCC by CoBank. The loan is secured by a pledge of the stock of HCC’s subsidiary companies.  Interest rates on long-term portions of the loan ($7,772,000 at September 30, 2005) are fixed through 2007, while the non-fixed portion ($13,540,000 at September 30, 2005) floats at short-term market rates. The average rate on the total loan was approximately 6.5% at September 30, 2005.  Principal payments are made quarterly and will continue until April 2013.

The Company’s Board of Directors has initiated a policy of paying regular cash dividends. Cash dividends of $.05 per share were paid to shareholders in December 2004, March 2005 and June 2005. A cash dividend of $.08 per share was paid in September 2005.  The Board of Directors has also 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. 886 shares were purchased and retired in the 2005 period.  At September 30, 2005, 214,100 shares could be repurchased under outstanding Board authorizations.

The Company is always looking to acquire properties that advance its plan to be a provider of top quality telecommunications services to rural customers.  However, competition for properties that become available remains intense. The Company cannot predict if it will be successful in acquiring additional properties in the future and does not currently have financing plans in place to pay for possible acquisitions.

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

New Accounting Principles

In April 2005 the Securities and Exchange Commission issued an amendment to Rule 4-01(a) of regulation S-X which delayed the effective date, for non-accelerated filers, of SFAS No. 123R “Shared-Based Payment”. SFAS 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values beginning with the first interim or annual period after June 15, 2005.  Under the new amendment, non-accelerated filers will be required to adopt the provisions of SFAS 123R beginning with the first annual period after June 15, 2005.  The Company is in the process of assessing the impact SFAS No. 123R will have on its financial statements.

Item 3.  Quantitative and Qualitative Disclosures About Market Risk

The Company does not use derivative financial instruments in its operations or investment portfolio.  Its operations are not subject to risks associated with changes in the value of foreign currencies.  Portions of the Company’s long-term debt have variable interest rates based on the lenders’ cost of money.  The Company has investments in money market funds that earn interest at prevailing market rates.  In the opinion of management, the Company does not have a material exposure to loss caused by market risk.

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Item 4.  Controls and Procedures

Under the supervision and with the participation of our management, including our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)). Based on that evaluation, our CEO and CFO have concluded that, as of the end of the period covered by this report, our disclosure controls and procedures are operating effectively and are adequately designed to ensure that information required to be disclosed by us in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the applicable rules and forms and is accumulated and communicated to our management, including the CEO and CFO, as appropriate to allow timely decisions regarding required disclosure. During the period covered by this Report there was no change in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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

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PART II.  OTHER INFORMATION

Items 1 – 5. Not Applicable

Item 6(a). Exhibits

11	Calculation of Earnings Per Share
31.1	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Rules 13a-14 and 15d-14 of the Exchange Act)
31.2	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Rules 13a-14 and 15d-14 of the Exchange Act)
32	Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 USC §1350).

Item 6(b).  Reports on Form 8-K.

On August 4, 2005, the Company filed a current report on Form 8-K with the Securities and Exchange Commission, reporting under Items 2.02 and 9.01 its second quarter 2005 earnings release to shareholders.

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 thereto duly authorized.

	Hector Communications Corporation
	By	/s/Curtis A. Sampson
Date: November 10, 2005		Chief Executive Officer
	By	/s/Charles A. Braun
Date: November 10, 2005		Chief Financial Officer

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