Hector Communications Corporation (Hector) is a telecommunications holding company that primarily provides local telephone, cable television and Internet access services through its wholly owned subsidiaries. The Company's operations consist of two segments: Plain Old Telephone Service (POTS) and Other Services. POTS includes basic telephone services to residential and business customers within its service territories. Other Services include a number of non-regulated telecommunications services, such as 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. Plain Old Telephone Service Local Service accounted for 18.8% of revenues during the year ended December 31, 2005. Network access comprised 49.1% of revenues in 2005. Hector, directly and through its 100% owned subsidiary, Alliance Telecommunications Corporation (Alliance) owns and operates nine local exchange company subsidiaries (local exchange carriers or LECs), which served 29,407 access lines in 28 rural communities in Minnesota, Wisconsin and North Dakota at December 31, 2005. Local service revenues are earned by providing customers with local service to connecting points within the local exchange boundaries and, in certain cases, to nearby local exchanges under extended area service (EAS) plans that eliminate long distance charges to the neighboring exchanges. Hector's LEC subsidiaries offer their customers a number of enhanced custom calling features, including call waiting, caller identification (ID) and voice mail. Charges for custom calling services are generally billed monthly together with the customers' local service bill. Hector maintains a local presence in each of its LEC subsidiaries. The Company provides its LEC subsidiaries with various services, including finance, accounting and treasury services, marketing, customer service, purchasing, engineering and construction, customer billing, rate administration, credit and collection, and development of administrative and procedural practices. Access revenues are received by LECs for intrastate and interstate exchange services provided to long distance carriers (generally referred to as interexchange carriers or IXCs). These services enable IXCs to provide long distance service to end users in the local exchange network. During 2005, 16% of the Company's access revenues were received from subscriber line charges (SLCs), 11% were from the universal service fund, 23% from IXCs, 22% from high cost support funds, and 28% were from intrastate sources. In this segment, the Company competes with Sprint, Vonage and Skype. Other Services The Company, through its cable television and LEC subsidiaries, provide cable television services to 7,923 subscribers in Minnesota. Video service revenues are derived almost exclusively from monthly fees for basic and premium programming. Basic service can include the major television networks, non-network independent stations, sports programming, news services and automated information channels, children's programming, access channels for public, governmental, educational and leased use, senior citizens' and religious programming and compact disc (CD)-quality music channels. Premium programming services, such as the HBO or Showtime movie services, are provided to subscribers on either an individual channel basis or in packages for additional fees. Premium programming is obtained from suppliers for a flat monthly fee per subscriber and/or a fee based on the monthly charge to subscribers for the service. Video Services accounted for 9.8% of revenues during 2005. Internet access is available, through local dial-up telephone numbers, to all of the Company's local service customers. Digital subscriber lines (DSL) permit high-speed Internet access and are available

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