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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-Q



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(Mark one)

|x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ----------------------------------------------------------------------------------------

For the quarterly period ended: September 30, 2006

OR



| ̈ | 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 001-32354



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IOWA TELECOMMUNICATIONS
SERVICES, INC.

(Exact name of registrant as specified in its charter)



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|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Iowa                                                           |  | 42-1490040                          
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification No.)

115 S. Second Avenue West

Newton, Iowa 50208

(Address of principal executive offices)

Registrants telephone number, including area code: (641) 787-2000

Not Applicable

(Former name, former address and former fiscal year, if
changed since last report.)



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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Large accelerated filer ̈Accelerated filer  x    Non-accelerated filer ̈

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act).    Yes ̈No  x

The number of shares of the registrants common stock, $.01 par value, outstanding as of October 31, 2006 was 31,708,970.



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##### Table of Contents

TABLE OF CONTENTS



|         |  |                                                                                       |  |     
|-------- |  | ------------------------------------------------------------------------------------- |  | ----
|         |  |                                                                                       |  | Page
|PART I.  |  | FINANCIAL INFORMATION                                                                 |  | 1   
|         |  | FINANCIAL STATEMENTS                                                                  |  | 1   
|         |  | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |  | 15  
|         |  | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                            |  | 35  
|         |  | CONTROLS AND PROCEDURES                                                               |  | 35  
|PART II. |  | OTHER INFORMATION                                                                     |  | 36  
|         |  | LEGAL PROCEEDINGS                                                                     |  | 36  
|         |  | RISK FACTORS                                                                          |  | 36  
|         |  | EXHIBITS                                                                              |  | 36  



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##### Table of Contents

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

Iowa Telecommunications Services, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

(Unaudited)

(Dollars in Thousands, Except Share Data)



|                                                                                                                             |  |                  |          |   |                   |   |          |  
|---------------------------------------------------------------------------------------------------------------------------- |  | ---------------- | -------- | - | ----------------- | - | -------- | -
|                                                                                                                             |  | December 31,2005 |          |   | September 30,2006 |  
|ASSETS                                                                                                                       |  |                  |          |   |                   |   |          |  
|CURRENT ASSETS:                                                                                                              |  |                  |          |   |                   |   |          |  
|Cash and cash equivalents                                                                                                    |  | $                | 26,782   |   |                   | $ | 5,565    |  
|Accounts receivable, net                                                                                                     |  |                  | 18,121   |   |                   |   | 21,034   |  
|Inventories                                                                                                                  |  |                  | 2,722    |   |                   |   | 3,886    |  
|Prepayments and other current assets                                                                                         |  |                  | 2,402    |   |                   |   | 3,070    |  
|                                                                                                                             |  |                  |          |   |                   |   |          |  
|Total Current Assets                                                                                                         |  |                  | 50,027   |   |                   |   | 33,555   |  
|                                                                                                                             |  |                  |          |   |                   |   |          |  
|PROPERTY, PLANT AND EQUIPMENT:                                                                                               |  |                  |          |   |                   |   |          |  
|Property, plant and equipment                                                                                                |  |                  | 504,662  |   |                   |   | 516,038  |  
|Accumulated depreciation                                                                                                     |  |                  | (189,163 | ) |                   |   | (213,046 | )
|                                                                                                                             |  |                  |          |   |                   |   |          |  
|Net Property, Plant and Equipment                                                                                            |  |                  | 315,499  |   |                   |   | 302,992  |  
|                                                                                                                             |  |                  |          |   |                   |   |          |  
|GOODWILL                                                                                                                     |  |                  | 460,113  |   |                   |   | 466,635  |  
|INTANGIBLE ASSETS AND OTHER, net                                                                                             |  |                  | 23,993   |   |                   |   | 40,926   |  
|INVESTMENT IN AND RECEIVABLE FROM THE RURAL TELEPHONE FINANCE COOPERATIVE                                                    |  |                  | 14,890   |   |                   |   | 13,532   |  
|                                                                                                                             |  |                  |          |   |                   |   |          |  
|Total Assets                                                                                                                 |  | $                | 864,522  |   |                   | $ | 857,640  |  
|                                                                                                                             |  |                  |          |   |                   |   |          |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                         |  |                  |          |   |                   |   |          |  
|CURRENT LIABILITIES:                                                                                                         |  |                  |          |   |                   |   |          |  
|Revolving credit facility                                                                                                    |  | $                | 40,000   |   |                   | $ | 14,000   |  
|Accounts payable                                                                                                             |  |                  | 10,416   |   |                   |   | 10,473   |  
|Advanced billings and customer deposits                                                                                      |  |                  | 6,042    |   |                   |   | 7,939    |  
|Accrued and other current liabilities                                                                                        |  |                  | 29,842   |   |                   |   | 37,935   |  
|                                                                                                                             |  |                  |          |   |                   |   |          |  
|Total Current Liabilities                                                                                                    |  |                  | 86,300   |   |                   |   | 70,347   |  
|LONG-TERM DEBT                                                                                                               |  |                  | 477,778  |   |                   |   | 477,778  |  
|DEFERRED TAX LIABILITIES                                                                                                     |  |                  |         |   |                   |   | 14,921   |  
|OTHER LONG-TERM LIABILITIES                                                                                                  |  |                  | 19,913   |   |                   |   | 19,452   |  
|                                                                                                                             |  |                  |          |   |                   |   |          |  
|Total Liabilities                                                                                                            |  |                  | 583,991  |   |                   |   | 582,498  |  
|COMMITMENTS AND CONTINGENCIES (Note 8)                                                                                       |  |                  |         |   |                   |   |         |  
|STOCKHOLDERS EQUITY:                                                                                                        |  |                  |          |   |                   |   |          |  
|Preferred stock, $0.01 par value, 50,000,000 shares authorized, no shares issued and outstanding                             |  |                  |         |   |                   |   |         |  
|Common stock, $0.01 par value, 100,000,000 shares authorized, 31,065,963 and 31,354,670 issued and outstanding, respectively |  |                  | 311      |   |                   |   | 314      |  
|Additional paid-in capital                                                                                                   |  |                  | 317,877  |   |                   |   | 321,253  |  
|Retained deficit                                                                                                             |  |                  | (42,874  | ) |                   |   | (50,627  | )
|Accumulated other comprehensive income                                                                                       |  |                  | 5,217    |   |                   |   | 4,202    |  
|                                                                                                                             |  |                  |          |   |                   |   |          |  
|Total Stockholders Equity                                                                                                   |  |                  | 280,531  |   |                   |   | 275,142  |  
|                                                                                                                             |  |                  |          |   |                   |   |          |  
|Total Liabilities and Stockholders Equity                                                                                   |  | $                | 864,522  |   |                   | $ | 857,640  |  
|                                                                                                                             |  |                  |          |   |                   |   |          |  

See notes to condensed consolidated financial statements.



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##### Table of Contents

Iowa Telecommunications Services, Inc. and Subsidiaries

Condensed Consolidated Statements of Income

(Unaudited)

(Amounts in Thousands, Except Per Share Data)



|                                                                       |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|---------------------------------------------------------------------- |  | ------------------------------- | ------ | - | ------------------------------ | - | ------ | ---- |  | - | ------- | - |  | - | ------- | -
|                                                                       |  | Three Months EndedSeptember 30, |        |   | Nine Months EndedSeptember 30, |  
|                                                                       |  | 2005                            |        |   | 2006                           |   |        | 2005 |  |   | 2006    |  
|REVENUES AND SALES:                                                    |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Local services                                                         |  | $                               | 19,016 |   |                                | $ | 19,135 |      |  | $ | 56,844  |   |  | $ | 57,627  |  
|Network access services                                                |  |                                 | 24,844 |   |                                |   | 23,532 |      |  |   | 75,711  |   |  |   | 71,951  |  
|Toll services                                                          |  |                                 | 6,025  |   |                                |   | 5,419  |      |  |   | 18,000  |   |  |   | 16,421  |  
|Other services and sales                                               |  |                                 | 7,991  |   |                                |   | 11,545 |      |  |   | 22,859  |   |  |   | 28,243  |  
|                                                                       |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Total Revenues and Sales                                               |  |                                 | 57,876 |   |                                |   | 59,631 |      |  |   | 173,414 |   |  |   | 174,242 |  
|                                                                       |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|OPERATING COSTS AND EXPENSES:                                          |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Cost of services and sales (exclusive of items shown separately below) |  |                                 | 16,414 |   |                                |   | 17,836 |      |  |   | 47,856  |   |  |   | 49,233  |  
|Selling, general and administrative                                    |  |                                 | 11,710 |   |                                |   | 8,437  |      |  |   | 30,636  |   |  |   | 27,470  |  
|Depreciation and amortization                                          |  |                                 | 11,920 |   |                                |   | 11,695 |      |  |   | 36,609  |   |  |   | 35,263  |  
|                                                                       |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Total Operating Costs and Expenses                                     |  |                                 | 40,044 |   |                                |   | 37,968 |      |  |   | 115,101 |   |  |   | 111,966 |  
|                                                                       |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|OPERATING INCOME                                                       |  |                                 | 17,832 |   |                                |   | 21,663 |      |  |   | 58,313  |   |  |   | 62,276  |  
|                                                                       |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|OTHER INCOME (EXPENSE):                                                |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Interest and dividend income                                           |  |                                 | 140    |   |                                |   | 159    |      |  |   | 432     |   |  |   | 527     |  
|Interest expense                                                       |  |                                 | (7,743 | ) |                                |   | (7,969 | )    |  |   | (23,192 | ) |  |   | (23,577 | )
|Other, net                                                             |  |                                 | (612   | ) |                                |   | (204   | )    |  |   | (758    | ) |  |   | (306    | )
|                                                                       |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Total Other Expense, net                                               |  |                                 | (8,215 | ) |                                |   | (8,014 | )    |  |   | (23,518 | ) |  |   | (23,356 | )
|                                                                       |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|EARNINGS BEFORE INCOME TAXES                                           |  |                                 | 9,617  |   |                                |   | 13,649 |      |  |   | 34,795  |   |  |   | 38,920  |  
|INCOME TAX EXPENSE                                                     |  |                                 |       |   |                                |   | 5,617  |      |  |   |        |   |  |   | 8,374   |  
|                                                                       |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|NET INCOME                                                             |  | $                               | 9,617  |   |                                | $ | 8,032  |      |  | $ | 34,795  |   |  | $ | 30,546  |  
|                                                                       |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|EARNINGS PER SHARE:                                                    |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|BASIC - Earnings Per Share                                             |  | $                               | 0.31   |   |                                | $ | 0.26   |      |  | $ | 1.13    |   |  | $ | 0.98    |  
|                                                                       |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|BASIC - Weighted Average Number of Shares Outstanding                  |  |                                 | 30,939 |   |                                |   | 31,254 |      |  |   | 30,894  |   |  |   | 31,170  |  
|                                                                       |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|DILUTED - Earnings Per Share                                           |  | $                               | 0.30   |   |                                | $ | 0.25   |      |  | $ | 1.10    |   |  | $ | 0.95    |  
|                                                                       |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|DILUTED - Weighted Average Number of Shares Outstanding                |  |                                 | 31,790 |   |                                |   | 32,165 |      |  |   | 31,661  |   |  |   | 32,062  |  
|                                                                       |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  

See notes to condensed consolidated financial statements.



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##### Table of Contents

Iowa Telecommunications Services, Inc. and Subsidiaries

Condensed Consolidated Statements of Stockholders Equity

(Unaudited)

(Dollars in Thousands, Except Share Data)



|                                                        |  |                                                |  |             |     |                           |   |                 |  |   |                                            |   |  |       |        |   |  |   |         |  
|------------------------------------------------------- |  | ---------------------------------------------- |  | ----------- | --- | ------------------------- | - | --------------- |  | - | ------------------------------------------ | - |  | ----- | ------ | - |  | - | ------- | -
|                                                        |  | Three Months Ended September 30, 2005 and 2006 | 
|                                                        |  | CommonShares                                   |  | CommonStock |     | AdditionalPaid- InCapital |   | RetainedDeficit |  |   | AccumulatedOtherComprehensiveIncome (Loss) |   |  | Total |       
|Balance, June 30, 2005                                  |  | 30,915,016                                     |  | $           | 309 |                           | $ | 315,733         |  | $ | (38,740                                    | ) |  | $     | 2,061  |   |  | $ | 279,363 |  
|Comprehensive income:                                   |  |                                                |  |             |     |                           |   |                 |  |   |                                            |   |  |       |        |   |  |   |         |  
|Net Income                                              |  |                                               |  |             |    |                           |   |                |  |   | 9,617                                      |   |  |       |       |   |  |   | 9,617   |  
|Unrealized gains on derivatives                         |  |                                               |  |             |    |                           |   |                |  |   |                                           |   |  |       | 5,729  |   |  |   | 5,729   |  
|                                                        |  |                                                |  |             |     |                           |   |                 |  |   |                                            |   |  |       |        |   |  |   |         |  
|Total comprehensive income                              |  |                                               |  |             |    |                           |   |                |  |   | 9,617                                      |   |  |       | 5,729  |   |  |   | 15,346  |  
|Compensation from compensatory stock plans              |  | 1,356                                          |  |             |    |                           |   | 541             |  |   |                                           |   |  |       |       |   |  |   | 541     |  
|Exercise of employee stock options                      |  | 116,048                                        |  |             | 1   |                           |   | 810             |  |   |                                           |   |  |       |       |   |  |   | 811     |  
|Dividends declared ($0.405 per share)                   |  |                                               |  |             |    |                           |   |                |  |   | (12,666                                    | ) |  |       |       |   |  |   | (12,666 | )
|                                                        |  |                                                |  |             |     |                           |   |                 |  |   |                                            |   |  |       |        |   |  |   |         |  
|Balance, September 30, 2005                             |  | 31,032,420                                     |  | $           | 310 |                           | $ | 317,084         |  | $ | (41,789                                    | ) |  | $     | 7,790  |   |  | $ | 283,395 |  
|                                                        |  |                                                |  |             |     |                           |   |                 |  |   |                                            |   |  |       |        |   |  |   |         |  
|Balance, June 30, 2006                                  |  | 31,177,356                                     |  | $           | 312 |                           | $ | 319,705         |  | $ | (45,823                                    | ) |  | $     | 9,727  |   |  | $ | 283,921 |  
|Comprehensive income (loss):                            |  |                                                |  |             |     |                           |   |                 |  |   |                                            |   |  |       |        |   |  |   |         |  
|Net Income                                              |  |                                               |  |             |    |                           |   |                |  |   | 8,032                                      |   |  |       |       |   |  |   | 8,032   |  
|Unrealized earnings on derivatives, net of tax effect   |  |                                               |  |             |    |                           |   |                |  |   |                                           |   |  |       | (5,525 | ) |  |   | (5,525  | )
|                                                        |  |                                                |  |             |     |                           |   |                 |  |   |                                            |   |  |       |        |   |  |   |         |  
|Total comprehensive income (loss)                       |  |                                               |  |             |    |                           |   |                |  |   | 8,032                                      |   |  |       | (5,525 | ) |  |   | 2,507   |  
|Compensation from compensatory stock plans              |  |                                               |  |             |    |                           |   | 597             |  |   |                                           |   |  |       |       |   |  |   | 597     |  
|Exercise of employee stock options                      |  | 177,314                                        |  |             | 2   |                           |   | 951             |  |   |                                           |   |  |       |       |   |  |   | 953     |  
|Dividends declared ($0.405 per share)                   |  |                                               |  |             |    |                           |   |                |  |   | (12,836                                    | ) |  |       |       |   |  |   | (12,836 | )
|                                                        |  |                                                |  |             |     |                           |   |                 |  |   |                                            |   |  |       |        |   |  |   |         |  
|Balance, September 30, 2006                             |  | 31,354,670                                     |  | $           | 314 |                           | $ | 321,253         |  | $ | (50,627                                    | ) |  | $     | 4,202  |   |  | $ | 275,142 |  
|                                                        |  |                                                |  |             |     |                           |   |                 |  |   |                                            |   |  |       |        |   |  |   |         |  
|                                                        | 
|                                                        |  | Nine Months Ended September 30, 2005 and 2006  | 
|                                                        |  | CommonShares                                   |  | CommonStock |     | AdditionalPaid- InCapital |   | RetainedDeficit |  |   | AccumulatedOtherComprehensiveIncome (Loss) |   |  | Total |       
|Balance, December 31, 2004                              |  | 30,864,195                                     |  | $           | 309 |                           | $ | 314,634         |  | $ | (38,897                                    | ) |  | $     | (84    | ) |  | $ | 275,962 |  
|Comprehensive income:                                   |  |                                                |  |             |     |                           |   |                 |  |   |                                            |   |  |       |        |   |  |   |         |  
|Net Income                                              |  |                                               |  |             |    |                           |   |                |  |   | 34,795                                     |   |  |       |       |   |  |   | 34,795  |  
|Unrealized earnings on derivatives                      |  |                                               |  |             |    |                           |   |                |  |   |                                           |   |  |       | 7,874  |   |  |   | 7,874   |  
|                                                        |  |                                                |  |             |     |                           |   |                 |  |   |                                            |   |  |       |        |   |  |   |         |  
|Total comprehensive income                              |  |                                               |  |             |    |                           |   |                |  |   | 34,795                                     |   |  |       | 7,874  |   |  |   | 42,669  |  
|Compensation from compensatory stock plans              |  | 1,356                                          |  |             |    |                           |   | 1,256           |  |   |                                           |   |  |       |       |   |  |   | 1,256   |  
|Exercise of employee stock options                      |  | 166,869                                        |  |             | 1   |                           |   | 1,194           |  |   |                                           |   |  |       |       |   |  |   | 1,195   |  
|Dividends declared ($1.215 per share)                   |  |                                               |  |             |    |                           |   |                |  |   | (37,687                                    | ) |  |       |       |   |  |   | (37,687 | )
|                                                        |  |                                                |  |             |     |                           |   |                 |  |   |                                            |   |  |       |        |   |  |   |         |  
|Balance, September 30, 2005                             |  | 31,032,420                                     |  | $           | 310 |                           | $ | 317,084         |  | $ | (41,789                                    | ) |  | $     | 7,790  |   |  | $ | 283,395 |  
|                                                        |  |                                                |  |             |     |                           |   |                 |  |   |                                            |   |  |       |        |   |  |   |         |  
|Balance, December 31, 2005                              |  | 31,065,963                                     |  | $           | 311 |                           | $ | 317,877         |  | $ | (42,874                                    | ) |  | $     | 5,217  |   |  | $ | 280,531 |  
|Comprehensive income (loss):                            |  |                                                |  |             |     |                           |   |                 |  |   |                                            |   |  |       |        |   |  |   |         |  
|Net Income                                              |  |                                               |  |             |    |                           |   |                |  |   | 30,546                                     |   |  |       |       |   |  |   | 30,546  |  
|Unrealized earnings on derivatives, net of tax effect   |  |                                               |  |             |    |                           |   |                |  |   |                                           |   |  |       | (3,418 | ) |  |   | (3,418  | )
|Minimum pension liability adjustment, net of tax effect |  |                                               |  |             |    |                           |   |                |  |   |                                           |   |  |       | 2,403  |   |  |   | 2,403   |  
|                                                        |  |                                                |  |             |     |                           |   |                 |  |   |                                            |   |  |       |        |   |  |   |         |  
|Total comprehensive income                              |  |                                               |  |             |    |                           |   |                |  |   | 30,546                                     |   |  |       | (1,015 | ) |  |   | 29,531  |  
|Compensation from compensatory stock plans              |  | 779                                            |  |             |    |                           |   | 1,762           |  |   |                                           |   |  |       |       |   |  |   | 1,762   |  
|Exercise of employee stock options                      |  | 287,928                                        |  |             | 3   |                           |   | 1,614           |  |   |                                           |   |  |       |       |   |  |   | 1,617   |  
|Dividends declared ($1.215 per share)                   |  |                                               |  |             |    |                           |   |                |  |   | (38,299                                    | ) |  |       |       |   |  |   | (38,299 | )
|                                                        |  |                                                |  |             |     |                           |   |                 |  |   |                                            |   |  |       |        |   |  |   |         |  
|Balance, September 30, 2006                             |  | 31,354,670                                     |  | $           | 314 |                           | $ | 321,253         |  | $ | (50,627                                    | ) |  | $     | 4,202  |   |  | $ | 275,142 |  
|                                                        |  |                                                |  |             |     |                           |   |                 |  |   |                                            |   |  |       |        |   |  |   |         |  

See notes to condensed consolidated financial statements.



3



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##### Table of Contents

Iowa Telecommunications Services, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(Dollars in Thousands)



|                                                                                      |  |                                |         |   |      |   |         |  
|------------------------------------------------------------------------------------- |  | ------------------------------ | ------- | - | ---- | - | ------- | -
|                                                                                      |  | Nine Months EndedSeptember 30, |        
|                                                                                      |  | 2005                           |         |   | 2006 |  
|CASH FLOWS FROM OPERATING ACTIVITIES:                                                 |  |                                |         |   |      |   |         |  
|Net income                                                                            |  | $                              | 34,795  |   |      | $ | 30,546  |  
|Adjustments to reconcile net income to cash provided by operating activities:         |  |                                |         |   |      |   |         |  
|Depreciation                                                                          |  |                                | 34,824  |   |      |   | 33,674  |  
|Amortization of intangible assets                                                     |  |                                | 1,785   |   |      |   | 1,589   |  
|Gain from sale of exchanges                                                           |  |                                |        |   |      |   | (4,180  | )
|Deferred income taxes                                                                 |  |                                |        |   |      |   | 7,720   |  
|Non-cash stock based compensation expense                                             |  |                                | 1,256   |   |      |   | 1,762   |  
|Changes in operating assets and liabilities, net of effects of business acquisitions: |  |                                |         |   |      |   |         |  
|Receivables                                                                           |  |                                | 797     |   |      |   | (321    | )
|Inventories                                                                           |  |                                | 85      |   |      |   | (707    | )
|Accounts payable                                                                      |  |                                | (4,724  | ) |      |   | (827    | )
|Other assets and liabilities                                                          |  |                                | 2,449   |   |      |   | 407     |  
|                                                                                      |  |                                |         |   |      |   |         |  
|Net Cash Provided by Operating activities                                             |  |                                | 71,267  |   |      |   | 69,663  |  
|                                                                                      |  |                                |         |   |      |   |         |  
|CASH FLOWS FROM INVESTING ACTIVITIES:                                                 |  |                                |         |   |      |   |         |  
|Capital expenditures                                                                  |  |                                | (23,532 | ) |      |   | (20,399 | )
|Business acquisitions, net of cash acquired                                           |  |                                | (94     | ) |      |   | (18,126 | )
|Purchase of wireless licenses                                                         |  |                                |        |   |      |   | (3,102  | )
|Proceeds from sale of exchanges                                                       |  |                                |        |   |      |   | 13,273  |  
|                                                                                      |  |                                |         |   |      |   |         |  
|Net Cash Used in Investing Activities                                                 |  |                                | (23,626 | ) |      |   | (28,354 | )
|                                                                                      |  |                                |         |   |      |   |         |  
|CASH FLOWS FROM FINANCING ACTIVITIES:                                                 |  |                                |         |   |      |   |         |  
|Net change in revolving credit facility                                               |  |                                | (16,007 | ) |      |   | (26,000 | )
|Proceeds from exercise of stock options                                               |  |                                | 1,195   |   |      |   | 1,617   |  
|Dividends paid                                                                        |  |                                | (30,422 | ) |      |   | (38,143 | )
|                                                                                      |  |                                |         |   |      |   |         |  
|Net Cash Used in Financing Activities                                                 |  |                                | (45,234 | ) |      |   | (62,526 | )
|                                                                                      |  |                                |         |   |      |   |         |  
|NET CHANGE IN CASH AND CASH EQUIVALENTS                                               |  | $                              | 2,407   |   |      | $ | (21,217 | )
|CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD                                      |  |                                | 2,874   |   |      |   | 26,782  |  
|                                                                                      |  |                                |         |   |      |   |         |  
|CASH AND CASH EQUIVALENTS AT END OF PERIOD                                            |  | $                              | 5,281   |   |      | $ | 5,565   |  
|                                                                                      |  |                                |         |   |      |   |         |  
|SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:                                     |  |                                |         |   |      |   |         |  
|Cash paid for interest                                                                |  | $                              | 24,336  |   |      | $ | 23,140  |  
|                                                                                      |  |                                |         |   |      |   |         |  
|Cash paid for income taxes                                                            |  | $                              |        |   |      | $ | 654     |  
|                                                                                      |  |                                |         |   |      |   |         |  

SUPPLEMENTAL NON-CASH ACTIVITIES:

Dividends on Common Stock of $12,666 were declared on September 13, 2005 for shareholders of record as of September 30, 2005 and the dividends were paid on October 17, 2005.

Dividends on Common Stock of $12,836 were declared on September 15, 2006 for shareholders of record as of September 29, 2006 and the dividends
were paid on October 16, 2006.

In the nine months ended September 30, 2006, the Company purchased certain wireless licenses for
a total amount of $11,473. Payment of $3,102 was made during the period. The remaining amount of $8,371 was included in accrued and other current liabilities as of September 30, 2006 and was subsequently paid on October 19, 2006.

In the nine months ended September 30, 2006, the Company completed the purchase of Baker Communications, Inc. for $8,250 in cash. The
Company has accrued an estimated working capital liability of $590, which is subject to certain future adjustments.

See notes to condensed
consolidated financial statements.



4



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##### Table of Contents

Iowa Telecommunications Services, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

1. BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements of
Iowa Telecommunications Services, Inc. and Subsidiaries (the Company) have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and disclosures normally
included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been omitted and condensed pursuant to such rules and regulations. In the opinion of the Companys
management, all adjustments (consisting of only normal and recurring accruals) have been made to present fairly the financial positions, the results of operations and cash flows for the periods presented. The results of operations for the periods
presented are not necessarily indicative of the results to be expected for the full year. Although the Company believes that the disclosures are adequate to make the information presented not misleading, these financial statements should be read in
conjunction with the Companys audited consolidated financial statements as of and for the year ended December 31, 2005, that are included in the Companys most recently filed annual report on Form 10-K.

2. EARNINGS PER SHARE

Basic earnings per share is
computed based on the weighted average number of common shares outstanding. Diluted earnings per share is computed based on the weighted average outstanding common shares plus equivalent shares assuming exercise of stock options and vesting of
unvested compensatory shares. The following is a reconciliation between basic and diluted weighted average shares outstanding:



|                                                        |  |                                          |        |                                 |   |        |  |      |        |  |   |       
|------------------------------------------------------- |  | ---------------------------------------- | ------ | ------------------------------- | - | ------ |  | ---- | ------ |  | - | ------
|                                                        |  | Three Months EndedSeptember 30,          |        | Nine Months Ended September 30,
|                                                        |  | 2005                                     |        | 2006                            |   | 2005   |  | 2006
|                                                        |  | (in thousands, except per share amounts)
|Net Income                                              |  | $                                        | 9,617  |                                 | $ | 8,032  |  | $    | 34,795 |  | $ | 30,546
|                                                        |  |                                          |        |                                 |   |        |  |      |        |  |   |       
|Weighted average shares outstanding  basic             |  |                                          | 30,939 |                                 |   | 31,254 |  |      | 30,894 |  |   | 31,170
|                                                        |  |                                          |        |                                 |   |        |  |      |        |  |   |       
|Diluted shares outstanding:                             |  |                                          |        |                                 |   |        |  |      |        |  |   |       
|Weighted average shares outstanding                     |  |                                          | 30,939 |                                 |   | 31,254 |  |      | 30,894 |  |   | 31,170
|Add shares issuable upon exercise of stock options, net |  |                                          | 694    |                                 |   | 576    |  |      | 714    |  |   | 602   
|Add unvested compensatory stock shares                  |  |                                          | 157    |                                 |   | 335    |  |      | 53     |  |   | 290   
|                                                        |  |                                          |        |                                 |   |        |  |      |        |  |   |       
|Weighted average number of shares outstanding  diluted |  |                                          | 31,790 |                                 |   | 32,165 |  |      | 31,661 |  |   | 32,062
|                                                        |  |                                          |        |                                 |   |        |  |      |        |  |   |       
|Earnings Per Share:                                     |  |                                          |        |                                 |   |        |  |      |        |  |   |       
|Basic                                                   |  | $                                        | 0.31   |                                 | $ | 0.26   |  | $    | 1.13   |  | $ | 0.98  
|Diluted                                                 |  | $                                        | 0.30   |                                 | $ | 0.25   |  | $    | 1.10   |  | $ | 0.95  



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##### Table of Contents

As of September 30, 2006 and September 30, 2005, total options outstanding were 707,579 and
1,029,050, respectively.

3. EMPLOYEE BENEFIT PLANS

Retirement Pension Plan

The Company sponsors the Iowa Telecom Pension Plan (the Plan), a defined benefit
pension plan that covers many former GTE Midwest Incorporated (GTE) employees and most union employees. The provisions of the Plan were assumed by the Company in connection with the GTE acquisition in 2000. The Plan generally provides
for employee retirement at age 65 with benefits based upon length of service and compensation. The Plan provides for early retirement, lump sum benefits, and various annuity options. There were contributions of $1.9 million made to the plan during
the third quarter of 2006.

Components of benefit cost are as follows:



|                                            |  |                                 |       |   |                                |   |      |      |  |   |       |   |  |   |       |  
|------------------------------------------- |  | ------------------------------- | ----- | - | ------------------------------ | - | ---- | ---- |  | - | ----- | - |  | - | ----- | -
|                                            |  | Three Months EndedSeptember 30, |       |   | Nine Months EndedSeptember 30, |  
|                                            |  | 2005                            |       |   | 2006                           |   |      | 2005 |  |   | 2006  |  
|                                            |  | (dollars in thousands)          |      
|Pension Benefit Cost:                       |  |                                 |       |   |                                |   |      |      |  |   |       |   |  |   |       |  
|Service cost                                |  | $                               | 59    |   |                                | $ | 58   |      |  | $ | 523   |   |  | $ | 174   |  
|Interest cost                               |  |                                 | 365   |   |                                |   | 327  |      |  |   | 1,127 |   |  |   | 981   |  
|Expected return on plan assets              |  |                                 | (243  | ) |                                |   | (178 | )    |  |   | (761  | ) |  |   | (534  | )
|Amortization of unrecognized actuarial loss |  |                                 | 248   |   |                                |   | 124  |      |  |   | 492   |   |  |   | 372   |  
|                                            |  |                                 |       |   |                                |   |      |      |  |   |       |   |  |   |       |  
|Net periodic benefit cost                   |  |                                 | 429   |   |                                |   | 331  |      |  |   | 1,381 |   |  |   | 993   |  
|Settlement cost                             |  |                                 | 1,050 |   |                                |   |     |      |  |   | 1,050 |   |  |   | 320   |  
|                                            |  |                                 |       |   |                                |   |      |      |  |   |       |   |  |   |       |  
|Net periodic benefit cost, with adjustments |  | $                               | 1,479 |   |                                | $ | 331  |      |  | $ | 2,431 |   |  | $ | 1,313 |  
|                                            |  |                                 |       |   |                                |   |      |      |  |   |       |   |  |   |       |  

During the second quarter of 2005, we amended our defined benefit pension plan to freeze the
accrued benefit for all salaried participants and for certain hourly participants and to permit certain other hourly participants to elect to discontinue further benefit accruals. As a result of the amendment, the benefits to be paid to salaried
participants at their normal retirement age of 65 are fixed. The accrued benefits for hourly employees subject to the mandatory benefit freeze and for those who elect to discontinue further benefit accruals will be transferred to a separate plan
(the Spin-Off Plan), which will be terminated upon the receipt of the necessary approvals. The Spin-Off Plan termination is expected to occur during the fourth quarter of 2006. Certain employees who are at least age 55 and who would be
covered under the Spin-Off Plan may elect to receive a current distribution of their accrued benefits without terminating their employment or waiting for the Spin-Off Plan termination. As a result of the amendment, the number of employees accruing
further benefits under the Plan has been reduced to approximately 40 from 175.

We expect to recognize total expense for the Spin-Off Plan
of approximately $3.5 million during 2006. We expect to recognize $464,000 of FAS 87 periodic pension cost during the year for the Spin-Off Plan and have recorded a $320,000 settlement loss during the nine months ended September 30, 2006. We
expect the Spin-Off Plan will be terminated in the fourth quarter of 2006, and expect the expense to be incurred upon termination of the Spin-Off Plan to be approximately $2.7 million.

We also expect that additional funding of approximately $5.9 million will be required upon the termination of the Spin-Off Plan. The amount of the
additional expense and funding required upon termination are subject to change based upon changes in interest rates, returns on plan assets, the timing of the termination, and distributions to participants prior to termination.



6



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##### Table of Contents

Postretirement Benefits

The Company assumed a postretirement benefit obligation plan for employees who qualified for these benefits at the date of the GTE acquisition in 2000. This plan provides for certain medical and life insurance
benefits to select employees who satisfy the requirements for an early or normal pension under the defined benefit pension plan.

Components of postretirement benefit cost are as follows:



|                                                |  |                                 |     |   |                                |   |     |      |  |   |      |   |  |   |      |  
|----------------------------------------------- |  | ------------------------------- | --- | - | ------------------------------ | - | --- | ---- |  | - | ---- | - |  | - | ---- | -
|                                                |  | Three Months EndedSeptember 30, |     |   | Nine Months EndedSeptember 30, |  
|                                                |  | 2005                            |     |   | 2006                           |   |     | 2005 |  |   | 2006 |  
|                                                |  | (dollars in thousands)          |    
|Postretirement Benefit Cost:                    |  |                                 |     |   |                                |   |     |      |  |   |      |   |  |   |      |  
|Service cost                                    |  | $                               | 46  |   |                                | $ | 46  |      |  | $ | 137  |   |  | $ | 138  |  
|Interest cost                                   |  |                                 | 134 |   |                                |   | 128 |      |  |   | 402  |   |  |   | 384  |  
|Amortization of unrecognized net actuarial loss |  |                                 | 49  |   |                                |   | 35  |      |  |   | 147  |   |  |   | 105  |  
|Amortization of unrecognized prior service cost |  |                                 | (39 | ) |                                |   | (39 | )    |  |   | (116 | ) |  |   | (117 | )
|                                                |  |                                 |     |   |                                |   |     |      |  |   |      |   |  |   |      |  
|Net periodic benefit cost                       |  | $                               | 190 |   |                                | $ | 170 |      |  | $ | 570  |   |  | $ | 510  |  
|                                                |  |                                 |     |   |                                |   |     |      |  |   |      |   |  |   |      |  

4. LONG-TERM DEBT AND REVOLVING CREDIT FACILITIES

Credit Facilities

As a part of our initial
public offering and the related debt refinancing in 2004, we entered into an Amended and Restated Credit Agreement with the Rural Telephone Finance Cooperative, as administrative agent, and a group of lenders, including the Rural Telephone Finance
Cooperative, providing for a total of up to $577.8 million in term and revolving credit facilities, and simultaneously retired the previously outstanding senior credit facility with the Rural Telephone Finance Cooperative. In August 2005, we entered
into amendments to the credit agreement that reduced the applicable interest rates and clarified certain definitions. As of September 30, 2006, we had outstanding $477.8 million of senior debt under the term facilities, and had $14.0 million
drawn under the $100 million revolving credit facility. The details of the credit facilities are as follows:

The revolving credit facility
will expire in 2011 and permits borrowings up to the aggregate principal amount of $100 million (less amounts reserved for letters of credit up to a maximum amount of $25 million). As of September 30, 2006, $14.0 million was outstanding on the
revolving credit facility, $50,000 under letters of credit, and $85.9 million was available. Borrowings under the revolving credit facility bear interest per annum at either (a) the London inter-bank offered rate, or LIBOR, plus 2.0% or
(b) a base rate plus 1.0%. As of September 30, 2006, we had $14.0 million outstanding under LIBOR elections at an average all-in rate of 7.40%.

Term Loan B is a $400.0 million senior secured term facility maturing in 2011, bearing interest per annum at either (a) a LIBOR rate plus an applicable rate adder or (b) a base rate election plus an
applicable rate adder. On August 26, 2005, the Company entered into Amendment No. 1 to the credit facilities. Amendment No. 1 reduced the applicable rate adder for Term Loan B (i) from 1.00% to 0.75% per annum for the base
rate, and (ii) from 2.00% to 1.75% per annum for the LIBOR rate. As of September 30, 2006, $350 million was based upon a LIBOR election effective through December 29, 2006, at an all-in rate of 7.12%. We have entered into
interest rate swap agreements to fix the rate on $350 million of Term Loan B as more fully described below. As of September 30, 2006, the interest rate on the remaining $50 million was based upon a LIBOR election effective through
December 12, 2006 at an all-in rate of 7.15%.

Term Loan C is a $70.0 million senior secured term facility maturing in 2011, bearing
interest per annum at either (a) a fixed rate or (b) a Rural Telephone Finance Cooperative variable rate plus 0.85%. Upon the expiration of the 6.65% fixed interest rate on Term Loan C in November 2007, the interest rate on such term loan
will convert to the Rural Telephone Finance Cooperative base variable rate plus 0.85%.

Term Loan D is a $7.8 million senior secured term
facility maturing in 2011, bearing interest per annum at either (a) a fixed rate or (b) a Rural Telephone Finance Cooperative variable rate plus 0.85%. Upon the expiration of the 6.65% fixed interest rate on Term Loan D in November 2007,
interest on such term loan will convert to the Rural Telephone Finance Cooperative base variable rate plus 0.85%.



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##### Table of Contents

As a condition of borrowing under Term Loans C and D, we are required to invest $7.8 million,
representing 10% of the total amounts of Term Loans C and D, in Subordinated Capital Certificates (SCCs) of the Rural Telephone Finance Cooperative. SCCs are non-interest bearing, but as a member of the Rural Telephone Finance
Cooperative, we share proportionately in the institutions net earnings. The Rural Telephone Finance Cooperative will redeem the SCCs in proportion to our principal repayments on Term Loans C and D.

The credit facilities are secured by substantially all of our tangible and intangible assets, properties and revenues as well as those of all of our
subsidiaries. The credit facilities are guaranteed by all of our subsidiaries.

The credit facilities permit us to pay dividends to holders
of our common stock; however, they contain significant restrictions on our ability to do so. The credit facilities contain certain negative covenants that, among other things, limit or restrict our ability (as well as those of our subsidiaries) to:
create liens and encumbrances; incur debt, issue preferred stock, or enter into leases and guarantees; enter into loans, investments and acquisitions; make asset sales, transfers or dispositions; change lines of business; enter into hedging
agreements; pay dividends, redeem stock, or make certain restricted payments; amend material debt agreements or other material contracts; engage in certain transactions with affiliates; enter into sale/leaseback or synthetic lease transactions;
grant negative pledges or agree to such other restrictions relating to subsidiary dividends and distributions; make changes to our fiscal year; and engage in mergers and consolidations.

The credit facilities require us, subject to certain exceptions, to prepay outstanding loans under the credit facilities to the extent of net cash
proceeds received from the following: issuance of certain indebtedness; proceeds of certain asset sales; and casualty insurance proceeds. The credit facilities further require us, subject to certain exceptions, to make prepayments under the credit
facilities equal to 50% of any net increase in the following: distributable cash during a dividend suspension period, as defined; and cumulative distributable cash, as defined, during the fiscal year less the cumulative reductions of revolving loans
through such period, with reductions to the percentage to be determined based on improvements in certain credit ratios. As of September 30, 2006, no prepayment amounts were due under these provisions.

The credit facilities generally permit voluntary prepayments of the term loans and reductions of commitments without penalty or premium, other than
standard breakage costs.

In addition, the financial covenants under the credit facilities specify, among other things, certain fixed
charge coverage ratios and a maximum total leverage ratio, as defined, all of which we were in compliance with as of September 30, 2006.

Interest Rate Swaps

On August 26, 2005, we amended the swap arrangements that were originally entered into on
November 4, 2004. The amended swap arrangements effectively fixed the interest rate we will pay on $350 million of our indebtedness under Term Loan B. The purpose of the swap agreements is to adjust the interest rate profile of our debt
obligations and to achieve a targeted mix of floating and fixed rate debt. As a result of these arrangements, the effective all-in interest rate on $350.0 million of indebtedness under Term Loan B for the period beginning August 31, 2005
and ending November 23, 2011 will be 5.865%.

The previous swap arrangements that we entered into on November 4, 2004,
effectively fixed the interest rate we would have paid on specified portions of our indebtedness under Term Loan B. Pursuant to this swap: from November 5, 2004 through December 30, 2007 the interest on $350 million of our indebtedness
under Term Loan B was to be fixed at a weighted average rate of 5.69%; from December 31, 2007 through December 30, 2008 the interest rate on $285.3 million of such indebtedness was to be fixed at a weighted average rate of 5.76%; and from
December 31, 2008 through November 4, 2009 the interest rate on $142.7 million of such indebtedness was to be fixed at 5.87%.



8



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##### Table of Contents

5. STOCK INCENTIVE PLANS

2002 Stock Incentive Plan

The Iowa Telecommunications, Inc. 2002 Stock Incentive Plan (the 2002 Incentive
Plan) allows for the issuance of incentive stock options or nonqualified stock options. Under the 2002 Incentive Plan, options have been granted for the purchase of 2,227,714 shares of which 1,031,795 were redeemed for cash in 2004 in
conjunction with the Companys IPO, 488,340 have been exercised and 707,579 remain outstanding as of September 30, 2006. No new options will be granted under the 2002 Incentive Plan. The term of each option did not exceed 10 years from the
date of grant. Options granted to employees vested over 3 to 5 years from the date of the grant. All unvested options outstanding at the time of the closing of the initial public offering vested pursuant to the terms of the 2002 Incentive Plan. The
exercise price for unexercised options is automatically decreased by the amount of dividends that would have been paid on the shares issuable upon exercise.

The Company recorded $259,000 and $883,000, respectively, of stock-based compensation expense during the three and nine month periods ended September 30, 2006, to reflect the change in the fair value of the
options upon the reduction of the exercise price resulting from the declaration of cash dividends. During the three and nine month periods ended September 30, 2005 the Company recorded $360,000 and $1,075,000, respectively, of stock-based
compensation expense to reflect the change in the fair value of the options upon the reduction of the exercise price resulting from the declaration of cash dividends.

The fair value of each option grant and subsequent modification is estimated using the Black-Scholes option-pricing model. The table below depicts the weighted-average assumptions used in determining the options
fair value at the time of the exercise price reductions.



|                                          |  |                                 |      |  |                                |      |  |      |      |  |      |     
|----------------------------------------- |  | ------------------------------- | ---- |  | ------------------------------ | ---- |  | ---- | ---- |  | ---- | ----
|                                          |  | Three Months EndedSeptember 30, |      |  | Nine Months EndedSeptember 30, |     
|                                          |  | 2005                            |      |  | 2006                           |      |  | 2005 |      |  | 2006 |     
|Weighted Average Expected Life (in years) |  | 3.03                            | yr   |  | 2.15                           | yr   |  | 4.01 | yr   |  | 3.0  | yr  
|Risk free interest rate                   |  | 4.05                            | %    |  | 4.65                           | %    |  | 3.94 | %    |  | 4.91 | %   
|Volatility(1)                             |  | 26                              | %(1) |  | 21                             | %(1) |  | 30   | %(1) |  | 22   | %(1)
|Dividend yield                            |  | 0                               | %    |  | 0                              | %    |  | 0    | %    |  | 0    | %   

---

|(1) | Because the Companys stock had not been publicly traded long enough to establish a reliable historical volatility rate, the average historical volatility rate for a pool of
similar entities was used.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



9



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##### Table of Contents

A summary of the status of options granted under the 2002 Incentive Plan as of September 30, 2005 and 2006, and the
changes during the three and nine month periods then ended, is presented below:



|                                     |  |                                      |   |                                       |                                |      |        |          |   |                                |   |     
|------------------------------------ |  | ------------------------------------ | - | ------------------------------------- | ------------------------------ | ---- | ------ | -------- | - | ------------------------------ | - | ----
|                                     |  | Three Months EndedSeptember 30, 2005 |   | Three Months Ended September 30, 2006
|Fixed Options                        |  | Shares                               |   |                                       | AverageExercise Priceper Share |      | Shares |          |   | AverageExercise Priceper Share
|OUTSTANDING AT JUNE 30,              |  | 1,145,098                            |   |                                       | $                              | 7.09 |        | 884,893  |   |                                | $ | 5.50
|Granted                              |  |                                     |   |                                       |                                |     |        |         |   |                                |   |    
|Exercised                            |  | (116,048                             | ) |                                       |                                | 7.00 |        | (177,314 | ) |                                |   | 5.38
|                                     |  |                                      |   |                                       |                                |      |        |          |   |                                |   |     
|OUTSTANDING AT SEPTEMBER 30,         |  | 1,029,050                            |   |                                       | $                              | 6.70 |        | 707,579  |   |                                | $ | 5.12
|                                     |  |                                      |   |                                       |                                |      |        |          |   |                                |   |     
|                                     |  |                                     
|                                     |  | Nine Months EndedSeptember 30, 2005  |   | Nine Months EndedSeptember 30, 2006  
|Fixed Options                        |  | Shares                               |   |                                       | AverageExercise Priceper Share |      | Shares |          |   | AverageExercise Priceper Share
|OUTSTANDING AT BEGINNING OF YEAR     |  | 1,195,919                            |   |                                       | $                              | 7.90 |        | 995,507  |   |                                | $ | 6.29
|Granted                              |  |                                     |   |                                       |                                |     |        |         |   |                                |   |    
|Exercised                            |  | (166,869                             | ) |                                       |                                | 7.17 |        | (287,928 | ) |                                |   | 5.61
|                                     |  |                                      |   |                                       |                                |      |        |          |   |                                |   |     
|OUTSTANDING AT SEPTEMBER 30,         |  | 1,029,050                            |   |                                       | $                              | 6.70 |        | 707,579  |   |                                | $ | 5.12
|                                     |  |                                      |   |                                       |                                |      |        |          |   |                                |   |     
|Options exercisable at SEPTEMBER 30, |  | 1,029,050                            |   |                                       | $                              | 6.70 |        | 707,579  |   |                                | $ | 5.12
|                                     |  |                                      |   |                                       |                                |      |        |          |   |                                |   |     

The following table summarizes information about stock options outstanding at September 30,
2006:



|                               |  |                     |  |                                                  |  |         |  |                                        |     
|------------------------------ |  | ------------------- |  | ------------------------------------------------ |  | ------- |  | -------------------------------------- | ----
|                               |  | Options Outstanding |  | Options Exercisable                             
|Exercise Price per Share Range |  | Number              |  | WeightedAverageRemainingContractualLife in Years |  | Number  |  | WeightedAverageExercise Priceper Share
|$4.75 - $5.25                  |  | 563,005             |  | 5.6                                              |  | 563,005 |  | $                                      | 4.95
|$5.26 - $5.75                  |  | 129,379             |  | 6.0                                              |  | 129,379 |  | $                                      | 5.50
|$8.00 - $8.50                  |  | 15,195              |  | 7.3                                              |  | 15,195  |  | $                                      | 8.09

The weighted average exercise price of options exercisable at September 30, 2006 reflects the
reductions required by the plan, as a result of the declaration of cash dividends. Pursuant to the 2002 Incentive Plan, all options became fully vested on November 23, 2004 as a result of the change in share ownership resulting from the
Companys initial public offering of common stock.

2005 Stock Incentive Plan

The Iowa Telecommunications Services, Inc. 2005 Stock Incentive Plan (the 2005 Incentive Plan) allows for the issuance of up to an aggregate
of 500,000 shares of Restricted or Unrestricted Stock, of which 339,300 shares of Restricted Stock have been awarded to various officers and employees of the Company and 2,135 shares of Unrestricted Stock have been issued to members of the
Companys Board of Directors.

During the three and nine month periods ended September 30, 2006, the Company awarded 12,000 and
96,800 shares of Restricted Stock respectively, to various officers and employees of the Company. These shares had a weighted average grant date fair value of $18.10 per share, total grant date fair values of $1.8 million, and vest over four years.
During the three and nine month periods ended September 30, 2005, 242,500 shares of restricted stock were awarded under the 2005 Stock Incentive Plan. These awards have a weighted average vesting period of 58 months and total grant date fair
values of $4.5 million.



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The Company recognizes compensation cost related to awards of restricted stock on a straight-line basis
over the requisite service period for the entire award. The total grant date fair market value of all outstanding restricted stock awards to officers and employees was $6.3 million. The Company recorded $337,000 and $866,000, respectively, of
stock-based compensation expense during the three and nine month periods ended September 30, 2006. The Company recorded approximately $155,000 of stock-based compensation expense related to the 2005 Plan during the three and nine month periods
ended September 30, 2005. The remaining amount to be charged to expense over the remaining service periods is $5.3 million. The Company also recorded $13,000 of expense during the three and nine month periods ended September 30, 2006
related to the unrestricted shares issued to members of its Board of Directors.

6. DISCLOSURES ABOUT FAIR VALUE OF INTEREST RATE SWAP

Effective August 31, 2005, the Company amended the terms of our interest rate swap agreement which the Company designated as a hedge against the
variability in future interest payments due on $350 million of Term Loan B. The amended terms of the interest rate swap agreement effectively convert the variable rate interest payments due on $350 million of Term Loan B to a fixed rate of 5.865%
through maturity on November 23, 2011. The purpose of the swap agreement is to adjust the interest rate profile of our debt obligations and to achieve a targeted mix of floating and fixed rate debt.

During the three and nine month periods ended September 30, 2006, the fair market value of the swap instrument decreased by $9.6 million and
increased by $1.6 million, respectively. The portion of the change in fair value attributable to hedge ineffectiveness, which for both the three and nine month periods ended September 30, 2006 was $153,000, is recorded in the Other Income
section of the Companys Condensed Consolidated Statement of Income. The portion of the change in fair value attributable to hedge effectiveness is recorded, net of income tax effects, in the Accumulated Other Comprehensive Income section of
the Companys Condensed Consolidated Statement of Stockholders Equity. In assessing hedge effectiveness, no portion of the gain or loss from the swap is excluded.

During the three and nine month periods ended September 30, 2005, the Company recognized a gain of $5.6 million and $7.6 million, respectively,
resulting from changes in the fair market value of the swap instrument. The portion of the change in fair value attributable to hedge ineffectiveness, which for the three and nine months ended September 30, 2005 was $0 and $1,000, respectively,
was recorded in the Other Income section of the Companys Condensed Consolidated Statement of Income. The portion of the change in fair value attributable to hedge effectiveness was recorded in the Accumulated Other Comprehensive Income section
of the Companys Condensed Consolidated Statement of Stockholders Equity. In assessing hedge effectiveness, no portion of the gain or loss from the swap was excluded.

The fair value of our interest rate swap has been calculated by discounting the future cash flows of both the fixed rate and variable rate interest
payments. The discount rate was derived from a yield curve created by a nationally recognized financial institution. The fair value of the interest rate swap was $13.8 million as of September 30, 2006 and $8.9 million as of September 30,
2005. The swap was recorded in the Intangible and Other Assets section of our Condensed Consolidated Balance Sheets.

7. INCOME TAXES

At September 30, 2006 the Company had unused tax net operating loss carryforwards of approximately $183 million which expire in 2020 to 2024. For
income tax purposes, the amount of net operating loss allowable to offset income after a change in ownership is limited under IRC Section 382. Additionally, IRC Section 338 allows for an increase in this allowance by an additional
$762,000, $37.4 million, $26.3 million, $18.7 million and $17.2 million, for tax periods ending in 2005 through 2009, respectively. The IRC Section 382 limitation of approximately $19 million will continue to apply after 2009.

A valuation allowance had been provided at December 31, 2005 and March 31, 2006 for our deferred tax assets that expire over time to the extent
that they exceeded the net deferred tax assets and liabilities resulting from reversing temporary differences. We determined that, based upon the evidence available as of June 30, 2006 and September 30, 2006, that the combination of the
continued generation of taxable income and the taxable income generated from reversing temporary differences will be, more likely than not, sufficient to utilize the entire deferred tax asset. As such, we have determined that no valuation allowance
is required for our deferred tax assets, and we reversed the remaining valuation allowance during the second quarter of 2006.



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Income tax (benefit) expense consists of the following for each of the periods shown:



|                                |  |                                 |        |                                |      |   |       |  |   |         |   |  |   |        |  
|------------------------------- |  | ------------------------------- | ------ | ------------------------------ | ---- | - | ----- |  | - | ------- | - |  | - | ------ | -
|                                |  | Three Months EndedSeptember 30, |        | Nine Months EndedSeptember 30, |     
|                                |  | 2005                            |        |                                | 2006 |   | 2005  |  |   | 2006    |  
|                                |  | (dollars in thousands)          |       
|Current Tax Expense:            |  |                                 |        |                                |      |   |       |  |   |         |   |  |   |        |  
|Federal                         |  | $                               |       |                                |      | $ | 220   |  | $ |        |   |  | $ | 480    |  
|State                           |  |                                 |       |                                |      |   | 90    |  |   |        |   |  |   | 174    |  
|                                |  |                                 |        |                                |      |   |       |  |   |         |   |  |   |        |  
|Total                           |  |                                 |       |                                |      |   | 310   |  |   |        |   |  |   | 654    |  
|Deferred Tax Expense            |  |                                 |        |                                |      |   |       |  |   |         |   |  |   |        |  
|Federal                         |  |                                 | 2,974  |                                |      |   | 4,502 |  |   | 12,070  |   |  |   | 12,680 |  
|State                           |  |                                 | 536    |                                |      |   | 805   |  |   | 2,173   |   |  |   | 2,240  |  
|                                |  |                                 |        |                                |      |   |       |  |   |         |   |  |   |        |  
|Total                           |  |                                 | 3,510  |                                |      |   | 5,307 |  |   | 14,243  |   |  |   | 14,920 |  
|Valuation Allowance Adjustments |  |                                 | (3,510 | )                              |      |   |      |  |   | (14,243 | ) |  |   | (7,200 | )
|                                |  |                                 |        |                                |      |   |       |  |   |         |   |  |   |        |  
|Income Tax Expense              |  | $                               |       |                                |      | $ | 5,617 |  | $ |        |   |  | $ | 8,374  |  
|                                |  |                                 |        |                                |      |   |       |  |   |         |   |  |   |        |  

8. COMMITMENTS AND CONTINGENCIES

Commitments On August 1, 2006, the Company completed the purchase of Baker Communications, Inc. for $8.25 million in cash. The
Company has accrued an estimated working capital liability of $590,000, which is subject to certain future adjustments and is expected to be paid during the fourth quarter of 2006.

During the third quarter of 2006, we participated in the FCCs auction of Advanced Wireless Services licenses in the 1710-1755 MHz and 2110-2155 MHz
bands (AWS-1) (Auction No. 66). Prior to the commencement of the auction, we deposited $3.1 million to establish bidding credits. In September 2006, we were the successful bidder on 15 licenses in Iowa covering the majority of our local exchange
serving area for a total amount of approximately $11.5 million. On October 19, 2006, we paid the balance due of approximately $8.4 million. In order to renew such licenses after their initial 15-year term, certain build out requirements must be met,
the precise amount of which has not been determined.

Contingencies The Company is involved in various claims and
legal actions arising in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on the Companys financial position, results of operations or cash flows.

9. DEPRECIATION

Depreciation has been
calculated using the composite remaining life methodology and straight-line depreciation rates. This method depreciates the remaining net investment in telephone plant, less anticipated salvage value, over remaining economic asset lives by asset
category. This method requires the periodic review and revision of depreciation rates.

The Company completed a review of the depreciation
rates during the first quarter of 2006. The revised depreciation rates were made effective January 1, 2006 and decreased the composite depreciation rates from 9.8% to 9.6%. The effect of this change in accounting estimate is expected to be a
reduction to depreciation expense of approximately $500,000 on an annualized basis, based on the levels of property, plant and equipment as of December 31, 2005.

10. NEW ACCOUNTING PRONOUNCEMENTS

In September 2006, the FASB released Statement of Financial
Accounting Standards No. 158, Employers Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106, and 132(R) (SFAS 158). SFAS 158 requires that we
recognize the over-funded or under-funded status of our defined benefit and retiree medical plans as an asset or liability in our 2006 year-end balance sheet, with changes in the funded status recognized through comprehensive income in the year in
which they occur. The Company will be required to adopt the recognition and disclosure provisions of SFAS 158 as of December 31, 2006. The Company is currently reviewing the impacts of adopting SFAS 158 on its consolidated financial
position and results of operations.



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In July 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation
No. 48, Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109 (FIN 48). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in accordance with Statement
of Financial Accounting Standards (SFAS) No. 109, Accounting for Income Taxes (SFAS 109). Guidance is provided on derecognition, classification, interest and penalties, accounting in interim periods,
disclosure and transition. FIN 48 requires that we recognize in our financial statements the impact of a tax position if that position is more likely than not of being sustained on audit, based on the technical merits of the position. The provisions
of FIN 48 are effective as of the beginning of our 2007 fiscal year, with the cumulative effect of the change in accounting principle recorded as an adjustment to opening retained earnings. The Company is currently evaluating the impact of adopting
FIN 48 on its consolidated financial position and results of operations.

In December 2004, the FASB issued SFAS No. 123 (Revised),
Share-Based Payment. This statement replaces SFAS No. 123, Accounting for Stock-Based Compensation and supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees. SFAS 123(R) requires
companies to apply a fair-value-based measurement method in accounting for share-based payment transactions with employees and to record compensation cost for all stock awards granted after the required effective date and for awards modified,
repurchased, or cancelled after that date. Previously the Company had accounted for stock-based compensation under the fair value recognition provisions of SFAS 123. Adoption of SFAS 123 (R) standard on January 1, 2006 did not have a
material effect on the Companys financial position, results of operations or cash flows because all of our outstanding stock options were fully vested at the date of issuance of SFAS 123(R). Additional grants of stock based awards under the
2005 Incentive Plan or modifications to outstanding stock options after the effective date of the standard may result in additional compensation expense pursuant to the provisions of SFAS 123(R).

11. SALE OF EXCHANGES

We closed on the sale of three
exchanges representing approximately 600 access lines on April 28, 2006, and received proceeds of approximately $4.8 million. As part of the transaction, we retired net plant of $1.5 million and goodwill and other intangible assets of $2.0
million and recorded a gain of approximately $1.3 million, which is included in the selling, general and administrative expenses in the Condensed Consolidated Statements of Income.

On July 1, 2006, we completed the sale of four of our incumbent local exchanges representing approximately 2,000 access lines and received net
proceeds of approximately $8.4 million. As part of the transaction, we retired net plant of $1.8 million and goodwill and other intangible assets of $3.7 million and recorded a gain of approximately $2.9 million, which is included in the selling,
general and administrative expenses in the Condensed Consolidated Statements of Income.

12. BUSINESS ACQUISITIONS

Montezuma Mutual Telephone Company.On July 1, 2006, the Company acquired the Montezuma Mutual Telephone Company (Montezuma
Telephone), a provider of telecommunications, cable television, and Internet services to customers in rural Iowa. The acquisition of Montezuma Telephone expanded the Companys service area and builds upon the Companys strategy
to pursue transactions that are accretive to free cash flow. The purchase price was $11.9 million and consisted of $11.7 million in cash consideration and $220,000 of direct transaction costs.

The preliminary allocation of the purchase price of Montezuma Mutual Telephone Company is as follows:



|                                                        |  |                        |        |   
|------------------------------------------------------- |  | ---------------------- | ------ | --
|                                                        |  | Allocation             |       
|                                                        |  | (dollars in thousands) |       
|Property, Plant & Equipment                             |  | $                      | 3,625  |   
|Current Assets                                          |  | $                      | 1,728  |   
|Liabilities                                             |  | $                      | (2,624 | ) 
|Amortizable Intangible Assets                           |  | $                      | 2,620  |   
|Goodwill                                                |  | $                      | 6,586  |   
|Weighted average useful life of amortizable intangibles |  |                        | 9      | yr



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##### Table of Contents

Baker Communications, Inc. On August 1, 2006, the Company acquired Baker
Communications, Inc. a leader in the sales and support of communications and data networking systems to companies across Iowa and Nebraska. The acquisition of Baker Communications expands the Companys customer base, as Baker
Communications clients are generally located in communities in which we previously had little presence. This acquisition is consistent with our mission of providing reliable voice and data solutions to our customers and builds upon our
strategy to pursue transactions that are accretive to free cash flow. The purchase price was $9.0 million and consisted of $8.8 million in cash consideration and $158,000 of direct transaction costs.

The preliminary allocation of the purchase price of Baker Communications, Inc. is as follows:



|                                                        |  |                        |        |   
|------------------------------------------------------- |  | ---------------------- | ------ | --
|                                                        |  | Allocation             |       
|                                                        |  | (dollars in thousands) |       
|Property, Plant & Equipment                             |  | $                      | 881    |   
|Current Assets                                          |  | $                      | 3,689  |   
|Liabilities                                             |  | $                      | (4,609 | ) 
|Amortizable Intangible Assets                           |  | $                      | 3,450  |   
|Goodwill                                                |  | $                      | 5,586  |   
|Weighted average useful life of amortizable intangibles |  |                        | 8      | yr

The purchase price allocations for these acquisitions are preliminary and subject to revision as
more detailed analyses are completed and additional information on the fair value of assets and liabilities become available. The results of operations for each acquired company are included in the Condensed Consolidated Statements of Income
beginning on the respective acquisition dates.



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##### Table of Contents

ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Information contained herein contains forward-looking statements which can be identified by the use of forward-looking terminology such as believes, expects, may, will,
should, or anticipates or the negative thereof or variations thereon or comparable terminology, or by discussions of strategy. No assurance can be given that the future results covered by the forward-looking statements will
be achieved. Some of the matters set forth in the Risk Factors section of our Annual Report on Form 10-K for the year ended December 31, 2005 constitute cautionary statements identifying factors with respect to such forward-looking
statements, including certain risks and uncertainties, that could cause actual results to vary materially from the future results indicated in such forward-looking statements. Other factors could also cause actual results to vary materially from the
future results indicated in such forward-looking statements.

Overview

General

We are the largest provider of wireline local exchange telecommunications services to
residential and business customers in rural Iowa, serving over 435 communities across the state. We are the second-largest local exchange carrier in Iowa. Iowa Telecom currently operates 288 telephone exchanges as the incumbent or
historical local exchange carrier and is the sole telecommunications company providing wireline services in approximately 84% of those exchanges. Together with our competitive local exchange carrier subsidiaries, we provide services to
approximately 253,600 access lines in Iowa.

Our core businesses are the provision of local telephone service and network access to other
telecommunications carriers for calls originated or terminated on our network. In addition to these core activities, which generated 74% of our total revenues in the first nine months of 2006, we provide long distance service, dial-up and DSL
Internet access and other communications services. As part of our strategy of pursuing low-cost growth beyond our current service area, we compete for customers in adjacent markets in Iowa through our competitive local exchange carrier subsidiaries,
Iowa Telecom Communications, Inc. (ITC) and IT Communications, LLC (IT Communications). Together, ITC and IT Communications are referred to as the CLEC or our CLEC Operations.

Factors Affecting Our Operating Performance

We
believe that a number of industry and Company-specific factors have affected and will continue to affect our results of operations. These factors include the following:



| |  |  | the effect on our revenues of declining numbers of access lines resulting from competition and other factors and our strategic response to this trend, which includes efforts to
introduce enhanced local services and additional services like dial-up and DSL Internet access and long distance service and to cross-sell these services to our subscriber base;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the effect on our revenues of our rate and pricing structure, including recent and potential future changes in rate regulation at the state and federal levels;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the continuing effects of the implementation of 2004 and 2005 Iowa Utilities Board orders deregulating retail local service rates in 28 exchanges and the statewide election we made
effective July 1, 2005;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | our ability to control our variable operating expenses, such as sales and marketing expense; and
| | - |  | ------------------------------------------------------------------------------------------------



| |  |  | the development of our competitive local exchange carrier strategy.
| | - |  | -------------------------------------------------------------------



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##### Table of Contents

Access Line Trends

The number of access lines served is a factor that can affect a telecommunications providers revenues. Consistent with a general trend in the rural local exchange carrier industry in the past few years, the
number of access lines we serve as an incumbent local exchange carrier has been gradually decreasing. We expect that this trend will continue. Because substantially all of our revenues result from our relationships with customers who utilize our
access lines and the level of activity recorded on those lines, the access line trend has an adverse impact on our revenues. Our response to this trend will have an important impact on our future revenues. Our primary strategy to respond to this
trend is to leverage our strong incumbent market position to increase our revenue per access line by selling additional services to our customer base and to promote our DSL Internet access service offering, which is often used in lieu of additional
access lines devoted to Internet usage. In addition, we expect to add new access lines as we pursue expansion of our service area through our competitive local exchange carrier subsidiaries and, potentially, through selected acquisitions of other
telecommunications companies or lines from other telecommunications companies. However, we believe that the number of access lines served is not the sole meaningful indicator of our operating prospects and that, given our relatively stable
subscriber base and ability to offer additional services, average revenue per access line is also a meaningful indicator for us.

The table
below indicates the total number of access lines we serve, the number of customers subscribing to the indicated types of service, and average revenue per access line, as of the dates and for the periods shown:



|                                                                                    |  |                     |         |      |   |        
|----------------------------------------------------------------------------------- |  | ------------------- | ------- | ---- | - | -------
|                                                                                    |  | As of September 30,
|                                                                                    |  | 2005                |         | 2006
|Incumbent local exchange access lines(1)                                            |  |                     | 240,500 |      |   | 230,600
|Competitive local exchange carrier access lines(2)                                  |  |                     | 20,200  |      |   | 23,000 
|                                                                                    |  |                     |         |      |   |        
|Total access lines                                                                  |  |                     | 260,700 |      |   | 253,600
|                                                                                    |  |                     |         |      |   |        
|Long distance subscribers                                                           |  |                     | 141,800 |      |   | 145,900
|Dial-up Internet subscribers                                                        |  |                     | 44,200  |      |   | 33,700 
|DSL subscribers                                                                     |  |                     | 27,200  |      |   | 45,000 
|Average monthly revenue per access line for the three months ended September 30,(3) |  | $                   | 73.34   |      | $ | 78.19  
|                                                                                    |  |                     |         |      |   |        
|Average monthly revenue per access line for the nine months ended September 30,(3)  |  | $                   | 73.03   |      | $ | 75.58  
|                                                                                    |  |                     |         |      |   |        

---

|(1) | Includes lines subscribed by our incumbent local exchange carrier retail customers and lines subscribed by our wholesale customers who are competing local exchange
carriers. Wholesale access lines include: lines subscribed by our local exchange carrier competitors pursuant to interconnection agreements on an unbundled network element basis, for which the competitive local exchange carrier pays us a monthly
fee; lines that we provide to competitive local exchange carriers for resale to their subscribers, for which the competitive local exchange carrier pays us a monthly fee equal to what we would charge our customers for local service less an agreed
discount; and shared lines, for which a competitive local exchange carrier pays us a monthly fee to provide DSL service to its customers. We had 3,600 wholesale lines subscribed at September 30, 2005 and 3,200 at September 30, 2006.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Access lines subscribed by retail customers of our competitive local exchange carrier subsidiaries.
|--- | ---------------------------------------------------------------------------------------------------

|(3) | Average monthly revenue per access line is computed by dividing the total revenue for the period by the average of the access lines at the beginning and at the end of the period.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

We intend to continue our strategy of increasing revenues by cross-selling services to our existing customer base, in the
form of both bundled service packages and individual additional services. Between September 30, 2005 and September 30, 2006, total long distance service subscribers increased by 4,100, total DSL Internet access service subscribers
increased by 17,800, and total dial-up Internet access service subscribers decreased by 10,500, with much of the decrease in total dial-up subscribers being a reflection of customer migration from dial-up to DSL service. Thus, while our total access
line count fell by 2.7% from September 30, 2005 to September 30, 2006, inclusive of exchange sales and purchases described below, average revenue per access line for the period grew by 3.5%.

The following is a discussion of the major factors affecting our access line counts:

Cyclical Economic and Industry Factors. We believe that the general downturn in economic conditions since 2000 has had a negative effect on our
access line counts. In addition, incumbent local exchange carriers generally experienced an unusual increase in access line demand during the late 1990s, as households purchased additional lines devoted to dial-up Internet access. In our view,
this spike in access line demand in the late 1990s was not sustainable over the long term, and current access line levels are more indicative of underlying demand.



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##### Table of Contents

Competition. Competitive local exchange carriers are offering service or are in the process of
beginning to offer service in approximately 46 of the 418 incumbent local exchange communities that we serve. Of these communities, 25 were subject to competition at the time of the acquisition of the Iowa property from GTE in 2000. We believe that
most of these competitive local exchange carrier market entries and subsequent line losses were related to customer dissatisfaction with the previous providers service. Since 2001, we believe we have slowed significantly the loss of customers
to competitive local exchange carriers by providing additional service offerings, focusing our marketing efforts and implementing competitive pricing.

In addition, we have experienced and expect to continue experiencing some line losses due to competition from wireless providers, but cannot precisely quantify the effect of this competition on us. We are responding
proactively to wireless competition by offering bundled service packages that include blocks of long distance minutes. These packages are designed to meet the demand of our customers who wish to purchase both local and long distance services in a
package, as is typically offered by wireless providers.

Our rates for many of our retail local exchange services have been deregulated on
both an exchange-by-exchange and a service-by-service basis. The Iowa Utilities Board has determined that all of the retail local exchange services we provide in 28 exchanges are subject to effective competition and has deregulated our rates in
those exchanges.

Service-by-service retail local exchange service deregulation became effective on July 1, 2005, pursuant to our
election to deregulate our rates for all retail local exchange services except for single line flat-rated business and residential service and extended area service (EAS) in accordance with legislation enacted by the Iowa General
Assembly in March 2005. Under this law and our subsequent election, single line flat-rated business and residential service and EAS will also be deregulated as of July 1, 2008 unless the Iowa Utilities Board determines that the public interest
requires it to extend its jurisdiction over such services to July 1, 2010. This legislation also provides us the opportunity to increase rates for services that remain price regulated, as discussed in more detail below. We believe that the
gradual deregulation of our business, on an exchange-by-exchange, and a service-by-service basis, will enable us to better respond to competitive offerings by other providers.

We believe Mediacoms telephony affiliate, MCC Telephony of Iowa, Inc. (MCC) intends to offer voice services in certain of the
communities where we operate as the incumbent local exchange carrier through a business arrangement with Sprint Communications L.P. (Sprint) pursuant to an interconnection agreement approved by the Iowa Utilities Board on April 24,
2006. On June 23, 2006, we filed a complaint against the Iowa Utilities Board and Sprint in the U.S. District Court for the Southern District of Iowa asking the court to rule that the Iowa Utilities Board acted unlawfully when it required us to
enter into the agreement with Sprint and asking the court to invalidate the agreement. Notwithstanding the filing of our federal complaint, we have negotiated, mediated and litigated with Sprint and, at times, with MCC, to resolve issues relating to
interpretation and implementation of the interconnection agreement, and we anticipate a final order will be issued no later than November 10, 2006 by the Iowa Utilities Board on a complaint filed on July 24, 2006, jointly by Sprint and MCC
asking that Sprints interpretation of the interconnection agreement be enforced. In addition to the disputes pending in federal district court and before the Iowa Utilities Board, we are also defending a complaint filed by MCC on July 31,
2006, in the Iowa District Court for Polk County alleging that our refusal to accede to Sprints negotiation demands improperly interfered with MCCs contracts and prospective customer relationships. The state court complaint seeks
unspecified damages and costs and additional relief as warranted. We have filed a pleading that this complaint be summarily dismissed, and are awaiting a decision on our request. How and when the disputes regarding interpretation and implementation
of the interconnection agreement are ultimately resolved is uncertain, as is the ultimate outcome the federal and state litigation.

Exchange Sales. During the second quarter of 2006, we received the final required regulatory approval for the sale of four exchanges to Partner Communications, representing approximately 2,000 access lines. We closed this transaction
on July 1, 2006 and received net proceeds of approximately $8.4 million.

Exchange Purchases. As of July 1, 2006, we have
completed the purchase of the Montezuma Mutual Telephone Company (Montezuma Telephone) for a total purchase price of $11.9 million, inclusive of $1.2 million in cash and working capital which are subject to certain future adjustments and
$220,000 of direct transaction costs. Montezuma Telephone provides telecommunications services to 2,100 access lines, cable television service to approximately 1,350 subscribers and Internet access service to more than 950 subscribers, most of which
are located in Montezuma, Iowa.



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##### Table of Contents

Ancillary Effects of our Data Businesses. Part of our decreasing line count has been an ancillary
effect of our strategic focus on growing our dial-up and DSL Internet access service business. As our Internet service provider business expanded, some competitors have cancelled their connections to our network. These connections had historically
been counted as access lines. Moreover, as we increase DSL Internet access service penetration, customer demand for second lines for dial-up Internet access service decreases accordingly because DSL Internet access service often replaces a second
line dedicated to Internet usage. We believe that the revenue generated by our dial-up and DSL Internet access services outweighs the effect of these types of access line losses.

Our Retail Local Rate and Pricing Structure

As described under Overview 
Competition above, effective July 1, 2005, the rates for all of our retail local exchange service except for single line flat-rated business and residential service and EAS were deregulated. Beginning July 1, 2005, monthly rates for
single line services remaining under price regulation may be adjusted annually by one dollar for residential lines and two dollars for business lines, up to a monthly rate cap of $19.00 for residential lines and $38.00 for business lines. Rates may
be further adjusted annually to reflect the effect of inflation. Single line flat-rated business and residential service and EAS will also be deregulated as of July 1, 2008 unless the Iowa Utilities Board determines that the public interest
requires it to extend its jurisdiction over such services to July 1, 2010. If the Iowa Utilities Board decides to continue price regulation to 2010, the annual rate increase caps will be doubled to two dollars and four dollars and the overall
rate caps of $19.00 and $38.00 will be eliminated.

Effective January 1, 2006, our regulated monthly single line flat-rated business
rate became $35.79. Effective February 1, 2006, our regulated monthly single line flat-rated residential rate became $18.39. Both rates are exclusive of EAS, taxes, fees and regulatory surcharges.

Deregulation of Retail Local Service Rates

We offer
a variety of bundled packages on a deregulated basis, particularly in our competitive markets. In addition, we have also exercised our ability to modify prices on single line flat-rated residential and business services in the exchanges in which
such offerings are deregulated. The ability to offer these services on a deregulated basis provides us with the flexibility to more quickly respond to new competition and enhances our ability to regain market share in previously competitive
exchanges. In addition, it allows us flexibility to create bundled packages that can more effectively compete against wireless and other competitors.

Our Ability to Control Operating Expenses

We strive to control expenses in order to maintain our operating margins. We
anticipate that operating expenses generally will remain stable in line with revenue growth. Because many of our operating expenses, such as those relating to sales and marketing, are variable, we believe we can calibrate expenses to growth in the
business to a significant degree.

Development of our Competitive Local Exchange Carrier Strategy

Part of our business strategy is to use our competitive local exchange carrier subsidiaries, ITC and IT Communications, to pursue customers in markets
adjacent to our rural local exchange carrier markets. We plan to continue this strategy by seeking growth opportunities on a low-cost, selective basis.

As of September 30, 2006, our CLEC Operations served 23,000 access lines. Our CLEC Operations accounted for 9.1% of Iowa Telecoms total access lines as of September 30, 2006. Throughout 2006, we plan
to maintain this limited investment approach as we continue to grow our competitive local exchange carrier business.



18



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##### Table of Contents

Revenues

We derive our revenues from four sources:

Local Telephone Services. We receive revenues from providing local exchange
telephone services. These revenues include monthly subscription charges for basic service, as well as charges for extended area service (usually mandatory expanded calling service to selected nearby communities at a flat monthly rate), local private
line services and enhanced calling features, such as voice mail, caller ID and 3-way calling.

Network Access Services. We receive
revenues from charges established to compensate us for the origination, transport and termination of calls generated by the customers of long distance carriers and for calls transported and terminated for the customers of wireless carriers. These
include subscriber line charges imposed on end users, and switched and special access charges paid by carriers and others. In addition, we receive federally administered universal service support, representing approximately 1% of our total revenue
in the first nine months of 2006, as a result of the interstate switched access support provisions of the FCCs CALLS Order to which the Company became subject in 2000. Switched access charges for services within Iowa are based on rates
approved by the Iowa Utilities Board. Switched and special access charges for interstate and international services are based on rates approved by the FCC. The transport and termination charges paid by wireless carriers are specified in
interconnection agreements negotiated with each individual wireless carrier.

Toll Services. We receive revenues for providing toll,
or long distance, services to our customers. This revenue category also includes fees relating to our provision of directory assistance, operator assistance and long distance private lines.

Other Services and Sales. We receive revenues from monthly recurring charges for dial-up and DSL Internet access services. Other services and
sales also include revenues from directory publishing, inside line care and the sale and maintenance of customer premise equipment, or CPE.

The following table summarizes our revenues and sales from these sources:



|                         |  |                                |         |                                                                     |   |         |  |     |      |  |     |  
|------------------------ |  | ------------------------------ | ------- | ------------------------------------------------------------------- | - | ------- |  | --- | ---- |  | --- | -
|                         |  | Nine Months EndedSeptember 30, |         | % of Total Revenues andSales for the Nine MonthsEnded September
30, |  
|                         |  | 2005                           |         | 2006                                                                |   | 2005    |  |     | 2006 | 
|                         |  | (dollars in thousands)         |         |                                                                     |   |         |  |    
|Local services           |  | $                              | 56,844  |                                                                     | $ | 57,627  |  | 33  | %    |  | 33  | %
|Network access services  |  |                                | 75,711  |                                                                     |   | 71,951  |  | 44  | %    |  | 41  | %
|Toll services            |  |                                | 18,000  |                                                                     |   | 16,421  |  | 10  | %    |  | 10  | %
|Other services and sales |  |                                | 22,859  |                                                                     |   | 28,243  |  | 13  | %    |  | 16  | %
|                         |  |                                |         |                                                                     |   |         |  |     |      |  |     |  
|Total                    |  | $                              | 173,414 |                                                                     | $ | 174,242 |  | 100 | %    |  | 100 | %
|                         |  |                                |         |                                                                     |   |         |  |     |      |  |     |  

Operating Expenses

Our operating expenses are categorized as cost of services and sales; selling, general and administrative expense; and depreciation and amortization.

Cost of services and sales. This includes expense for salaries and wages relating to plant operations and maintenance; other plant operations,
maintenance and administrative costs; network access costs; bad debt expense; operating tax expense and cost of sales for our dial-up and DSL Internet access services and customer premise equipment products and services.

Selling, general and administrative expense. This includes expense for salaries, wages and benefits and contract service payments (e.g., legal
fees) relating to customer and corporate operations; recruiting costs; expenses for travel, lodging and meals; internal communications costs; insurance premiums; and supplies and postage.

Depreciation and amortization. This includes depreciation of our telecommunications network and equipment, and amortization of intangible assets.



19



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##### Table of Contents

Results of Operations

The following table sets forth certain items reflected in our consolidated statements of income for the periods indicated, expressed as a percentage of total revenues and sales:



|                                                                        |  |                                 |   |  |                                |   |  |      |   |  |      |  
|----------------------------------------------------------------------- |  | ------------------------------- | - |  | ------------------------------ | - |  | ---- | - |  | ---- | -
|                                                                        |  | Three Months EndedSeptember 30, |   |  | Nine Months EndedSeptember 30, |  
|                                                                        |  | 2005                            |   |  | 2006                           |   |  | 2005 |   |  | 2006 |  
|Total revenues and sales                                                |  | 100                             | % |  | 100                            | % |  | 100  | % |  | 100  | %
|Cost of services and sales (excluding expenses listed separately below) |  | 28                              | % |  | 30                             | % |  | 27   | % |  | 28   | %
|Selling, general and administrative                                     |  | 20                              | % |  | 14                             | % |  | 18   | % |  | 16   | %
|Depreciation and amortization                                           |  | 21                              | % |  | 20                             | % |  | 21   | % |  | 20   | %
|                                                                        |  |                                 |   |  |                                |   |  |      |   |  |      |  
|Operating income                                                        |  | 31                              | % |  | 36                             | % |  | 34   | % |  | 36   | %
|Total other expenses, net                                               |  | 14                              | % |  | 13                             | % |  | 14   | % |  | 14   | %
|                                                                        |  |                                 |   |  |                                |   |  |      |   |  |      |  
|Income before income taxes                                              |  | 17                              | % |  | 23                             | % |  | 20   | % |  | 22   | %
|Income taxes                                                            |  |                                | % |  | 9                              | % |  |     | % |  | 5    | %
|                                                                        |  |                                 |   |  |                                |   |  |      |   |  |      |  
|Net income                                                              |  | 17                              | % |  | 14                             | % |  | 20   | % |  | 17   | %
|                                                                        |  |                                 |   |  |                                |   |  |      |   |  |      |  

Three Months Ended September 30, 2006 and 2005

Revenues and Sales

The table below
sets forth the components of our revenues and sales for the three months ended September 30, 2006 compared to the same period in 2005:



|                         |  |                                 |        |        |   |        |  |   |         |   |  |       |  
|------------------------ |  | ------------------------------- | ------ | ------ | - | ------ |  | - | ------- | - |  | ----- | -
|                         |  | Three Months EndedSeptember 30, |        | Change |  
|                         |  | 2005                            |        | 2006   |   | Amount |  |   | Percent |  
|                         |  | (dollars in thousands)          |        |        |   |        |  |  
|Revenues and Sales       |  |                                 |        |        |   |        |  |   |         |   |  |       |  
|Local services           |  | $                               | 19,016 |        | $ | 19,135 |  | $ | 119     |   |  | 0.6   | %
|Network access services  |  |                                 | 24,844 |        |   | 23,532 |  |   | (1,312  | ) |  | -5.3  | %
|Toll services            |  |                                 | 6,025  |        |   | 5,419  |  |   | (606    | ) |  | -10.1 | %
|Other services and sales |  |                                 | 7,991  |        |   | 11,545 |  |   | 3,554   |   |  | 44.5  | %
|                         |  |                                 |        |        |   |        |  |   |         |   |  |       |  
|Total revenues and sales |  | $                               | 57,876 |        | $ | 59,631 |  | $ | 1,755   |   |  | 3.0   | %
|                         |  |                                 |        |        |   |        |  |   |         |   |  |       |  

Local Services. Local services revenues increased $119,000, or 0.6%, for the three months
ended September 30, 2006 as compared to 2005. The increase is primarily attributable to higher revenue from enhanced local services, which increased by $211,000 due to growth of our bundled product offerings. Local rate increases also helped to
offset the impact of access line erosion. From September 30, 2005 to September 30, 2006, total access lines decreased by 7,100 including the loss of 9,900 incumbent local exchange carrier lines and an increase in lines served by our
competitive local exchange carriers of 2,800.

Network Access Services. Our network access services revenues decreased $1.3 million,
or 5.3%, for the three months ended September 30, 2006 as compared to the same period in 2005. Revenues from switched access services decreased approximately $1.9 million. The decrease is due to a decrease in access lines, a decrease in access
minutes of use per line and a slight decrease in the average revenue per minute of use. We believe the decrease in the access minutes of use per line and the decrease in the average revenue per minute of use are due to a larger shift to cellular
usage. We are compensated at a slightly lower rate per minute for terminating cellular traffic. These reductions were partially offset by a $424,000 increase in revenue from special access services.



20



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##### Table of Contents

Toll Services. Our toll services revenues decreased by $606,000, or 10.1%, for the three months
ended September 30, 2006 as compared to the same period in 2005. The number of long distance customers increased by approximately 4,100, or 2.9%. However, this increase was offset by a decrease in average minutes of use per customer and average
revenue per minute.

Other Services and Sales. Other services and sales revenues increased by $3.6 million, or 44.5%, for the three
months ended September 30, 2006 as compared to the same period in 2005. The revenue increase was primarily due to growth of our CPE and data business, primarily as a result of our acquisition of Baker Communications in August 2006.
Additionally, DSL Internet access service revenues increased $1.4 million, or 46.2%, due primarily to customer growth. This increase was partially offset by decreases in dial-up Internet revenue of $470,000. We believe the decline in dial-up
Internet access service customers is generally the result of customer migration to broadband products such as our DSL service.

Operating Costs and
Expenses

The table below sets forth the components of our operating costs and expenses for the three months ended September 30,
2006 compared to the same period in 2005:



|                                                                       |  |                                 |        |        |   |        |  |   |         |   |  |       |  
|---------------------------------------------------------------------- |  | ------------------------------- | ------ | ------ | - | ------ |  | - | ------- | - |  | ----- | -
|                                                                       |  | Three Months EndedSeptember 30, |        | Change |  
|                                                                       |  | 2005                            |        | 2006   |   | Amount |  |   | Percent |  
|                                                                       |  | (dollars in thousands)          |        |        |   |        |  |  
|Operating Costs and Expenses:                                          |  |                                 |        |        |   |        |  |   |         |   |  |       |  
|Cost of services and sales (exclusive of items shown separately below) |  | $                               | 16,414 |        | $ | 17,836 |  | $ | 1,422   |   |  | 8.7   | %
|Selling, general and administrative                                    |  |                                 | 11,710 |        |   | 8,437  |  |   | (3,273  | ) |  | -28.0 | %
|Depreciation and amortization                                          |  |                                 | 11,920 |        |   | 11,695 |  |   | (225    | ) |  | -1.9  | %
|                                                                       |  |                                 |        |        |   |        |  |   |         |   |  |       |  
|Total operating costs and expenses                                     |  | $                               | 40,044 |        | $ | 37,968 |  | $ | (2,076  | ) |  | -5.2  | %
|                                                                       |  |                                 |        |        |   |        |  |   |         |   |  |       |  

Cost of Services and Sales. Cost of services and sales increased $1.4 million, or 8.7%, for
the three months ended September 30, 2006 compared to the same period in 2005. The increase was principally due to growth of our CPE and data business, primarily as a result of our acquisition of Baker Communications in August 2006.

Selling, General and Administrative Costs. Selling, general and administrative costs decreased $3.3 million, or 28.0%, for the three months
ended September 30, 2006 compared to the same period in 2005. The 2006 period includes a $2.9 million gain on the sale of four exchanges during the period. Additionally, the 2005 period includes $1.0 million of additional pension expense.
Savings in salary and benefit costs and other contracted costs more than offset the increased costs from Baker Communications.

Depreciation and Amortization. Depreciation and amortization decreased $225,000, or 1.9%, for the three months ended September 30, 2006 compared to the same period in 2005. The decrease is primarily due to the elimination of
depreciation expense on certain five-year assets in the latter part of 2005. Also contributing to the decrease was the reduction in our composite average depreciation rate as a result of a depreciation study that was completed during the first
quarter of 2006. The lower composite average depreciation rate reduced expense during the three months ended September 30, 2006 by approximately $125,000.



21



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##### Table of Contents

Other Income (Expense)

The table below sets forth the components of other income (expense) for the three months ended September 30, 2006, compared to the same period in
2005:



|                             |  |                                 |        |   |        |   |        |        |  |   |         |   |  |       |  
|---------------------------- |  | ------------------------------- | ------ | - | ------ | - | ------ | ------ |  | - | ------- | - |  | ----- | -
|                             |  | Three Months EndedSeptember 30, |        |   | Change |  
|                             |  | 2005                            |        |   | 2006   |   |        | Amount |  |   | Percent |  
|                             |  | (dollars in thousands)          |        |   |        |   |        |        | 
|Other Income (Expense):      |  |                                 |        |   |        |   |        |        |  |   |         |   |  |       |  
|Interest and dividend income |  | $                               | 140    |   |        | $ | 159    |        |  | $ | 19      |   |  | 13.6  | %
|Interest expense             |  |                                 | (7,743 | ) |        |   | (7,969 | )      |  |   | (226    | ) |  | 2.9   | %
|Other, net                   |  |                                 | (612   | ) |        |   | (204   | )      |  |   | 408     |   |  | -66.7 | %
|                             |  |                                 |        |   |        |   |        |        |  |   |         |   |  |       |  
|Total other expense          |  | $                               | (8,215 | ) |        | $ | (8,014 | )      |  | $ | 201     |   |  | -2.4  | %
|                             |  |                                 |        |   |        |   |        |        |  |   |         |   |  |       |  

Interest and Dividend Income. Interest and dividend income increased $19,000, or 13.6%,
primarily due to higher interest rates received on cash balances.

Interest Expense. Interest expense increased $226,000, or 2.9%,
for the three months ended September 30, 2006 compared to the same period in 2005. Higher interest rates on our variable rate debt and the increase in the rate on our interest rate swap agreement, resulting from the extension of the term in
August 2005, were partially offset by a lower average balance on the revolving credit facility.

Other, Net. Other, net was a net
expense of $204,000 for the three months ended September 30, 2006 as compared to $612,000 in the same period in 2005. The expense for 2005 includes $573,000 of non-recurring costs related to an amendment to our credit agreement.

Income Tax Expense. A valuation allowance had been recorded for all periods prior to June 30, 2006 for our deferred tax assets that expire
over time to the extent that they exceeded the net deferred tax assets and liabilities resulting from reversing temporary differences. We determined that, based upon the evidence available as of June 30, 2006 and September 30, 2006, that the
combination of the continued generation of taxable income and the taxable income generated from reversing temporary differences will be, more likely than not, sufficient to utilize the entire deferred tax asset. As such, we have determined that no
valuation allowance was required for our deferred tax assets.

Income tax expense for the three months ended September 30, 2006 was
$5.6 million compared to zero in 2005. The effective tax rate for the period was 41.2%.

Our initial public offering resulted in an
ownership change for purposes of Section 382 of the Internal Revenue Code, and consequently our ability to utilize our net operating losses will be subject to limitation each year. We currently anticipate that, as a result of such ownership
change, we will generally be limited by Section 382 to utilizing approximately $19 million of our pre-transaction net operating losses annually. However, Internal Revenue Code Section 338 allows for an increase in this allowance by an
additional $762,000, $37.4 million, $26.3 million, $18.7 million and $17.2 million, for tax periods ending in 2005 through 2009, respectively. After 2009, the IRC Section 382 limitation will apply. At September 30, 2006, the Company had
unused tax net operating loss carryforwards of approximately $183 million which expire in 2020 to 2024. Furthermore, we expect that we will continue to be able to take deductions related to the amortization of intangibles in excess of the amount
recorded for book purposes in the amount of approximately $40 million annually through 2014.



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##### Table of Contents

Nine Months Ended September 30, 2006 and 2005

Revenues and Sales

The table below
sets forth the components of our revenues and sales for the nine months ended September 30, 2006 compared to the same period in 2005:



|                         |  |                                |         |        |   |         |  |   |         |   |  |      |  
|------------------------ |  | ------------------------------ | ------- | ------ | - | ------- |  | - | ------- | - |  | ---- | -
|                         |  | Nine Months EndedSeptember 30, |         | Change |  
|                         |  | 2005                           |         | 2006   |   | Amount  |  |   | Percent |  
|                         |  | (dollars in thousands)         |         |        |   |         |  |  
|Revenues and Sales       |  |                                |         |        |   |         |  |   |         |   |  |      |  
|Local services           |  | $                              | 56,844  |        | $ | 57,627  |  | $ | 783     |   |  | 1.4  | %
|Network access services  |  |                                | 75,711  |        |   | 71,951  |  |   | (3,760  | ) |  | -5.0 | %
|Toll services            |  |                                | 18,000  |        |   | 16,421  |  |   | (1,579  | ) |  | -8.8 | %
|Other services and sales |  |                                | 22,859  |        |   | 28,243  |  |   | 5,384   |   |  | 23.6 | %
|                         |  |                                |         |        |   |         |  |   |         |   |  |      |  
|Total revenues and sales |  | $                              | 173,414 |        | $ | 174,242 |  | $ | 828     |   |  | 0.5  | %
|                         |  |                                |         |        |   |         |  |   |         |   |  |      |  

Local Services. Local services revenues increased $783,000, or 1.4%, for the nine months
ended September 30, 2006 as compared to 2005. The increase is primarily attributable to higher revenue from enhanced local services, which increased by $678,000 due to growth of our bundled product offerings. Local rate increases also helped to
offset the impact of access line erosion. From September 30, 2005 to September 30, 2006, total access lines decreased by 7,100, including the loss of 9,900 incumbent local exchange carrier lines and an increase in lines served by our
competitive local exchange carriers of 2,800.

Network Access Services. Our network access services revenues decreased $3.8 million,
or 5.0%, for the nine months ended September 30, 2006 as compared to the same period in 2005. Revenues from switched access services decreased approximately $4.7 million due to decreases in access lines, access minutes per line and in the
average revenue per minute of use due to a larger shift to cellular usage. We are compensated at a slightly lower rate per minute for terminating cellular traffic. These reductions were partially offset by a $1.3 million increase in revenue from
special access services.

Toll Services. Our toll services revenues decreased by $1.6 million, or 8.8%, for the nine months ended
September 30, 2006 as compared to the same period in 2005. The number of long distance customers increased by approximately 4,100, or 2.9%. However, this increase was offset by a decrease in average minutes of use per customer and average
revenue per minute.

Other Services and Sales. Other services and sales revenues increased by $5.4 million, or 23.6%, for the nine
months ended September 30, 2006 as compared to the same period in 2005. The revenue increase was primarily due to growth of our CPE and data business, primarily as a result of our acquisition of Baker Communications in August 2006.
Additionally, DSL Internet access service revenues increased $4.1 million, or 53.1%, due primarily to customer growth. This increase was partially offset by decreases in dial-up Internet revenue of $1.5 million. We believe the decline in dial-up
Internet access service customers is generally the result of customer migration to broadband products such as our DSL service.



23



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##### Table of Contents

Operating Costs and Expenses

The table below sets forth the components of our operating costs and expenses for the nine months ended September 30, 2006 compared to the same period in 2005:



|                                                                       |  |                                |         |        |   |         |  |   |         |   |  |       |  
|---------------------------------------------------------------------- |  | ------------------------------ | ------- | ------ | - | ------- |  | - | ------- | - |  | ----- | -
|                                                                       |  | Nine Months EndedSeptember 30, |         | Change |  
|                                                                       |  | 2005                           |         | 2006   |   | Amount  |  |   | Percent |  
|                                                                       |  | (dollars in thousands)         |         |        |   |         |  |  
|Operating Costs and Expenses:                                          |  |                                |         |        |   |         |  |   |         |   |  |       |  
|Cost of services and sales (exclusive of items shown separately below) |  | $                              | 47,856  |        | $ | 49,233  |  | $ | 1,377   |   |  | 2.9   | %
|Selling, general and administrative                                    |  |                                | 30,636  |        |   | 27,470  |  |   | (3,166  | ) |  | -10.3 | %
|Depreciation and amortization                                          |  |                                | 36,609  |        |   | 35,263  |  |   | (1,346  | ) |  | -3.7  | %
|                                                                       |  |                                |         |        |   |         |  |   |         |   |  |       |  
|Total operating costs and expenses                                     |  | $                              | 115,101 |        | $ | 111,966 |  | $ | (3,135  | ) |  | -2.7  | %
|                                                                       |  |                                |         |        |   |         |  |   |         |   |  |       |  

Cost of Services and Sales. Cost of services and sales increased $1.4 million, or 2.9%, for
the nine months ended September 30, 2006 as compared to the same period in 2005. The increase was principally due to growth of our CPE and data business, primarily as a result of our acquisition of Baker Communications in August 2006.

Selling, General and Administrative Costs. Selling, general and administrative costs decreased $3.2 million, or 10.3%, for the nine
months ended September 30, 2006 as compared to the same period in 2005. The second quarter of 2005 included a $2.0 million benefit resulting from past access disputes with other carriers offset by a pension settlement charge of approximately $1
million for distributions during the third quarter of 2005 related to amendments to the pension plan during the second quarter of 2005. The 2006 period included a $4.2 million gain on the sale of eight exchanges during the period and a pension
settlement charge of approximately $320,000 for distributions during the period related to amendments to the pension plan during the second quarter of 2005. The amendments to the plan will reduce our future pension obligations. Non-cash equity-based
compensation expense for the period was $506,000 higher than the prior year. Additionally, savings of approximately $1.3 million in other external contracted costs related to Sarbanes Oxley compliance, directory costs, and marketing costs more than
offset the increased costs from Baker Communications.

Depreciation and Amortization. Depreciation and amortization decreased $1.3
million, or 3.7%, for the nine months ended September 30, 2006, as compared to the same period in 2005. The decrease was primarily due to the elimination of depreciation expense on certain five-year assets in the latter part of 2005. Also
contributing to the decrease was the reduction in our composite average depreciation rate as a result of a depreciation study that was completed during the first quarter of 2006. The lower composite average depreciation rate reduced expense during
the nine months ended September 30, 2006 by approximately $375,000.

Other Income (Expense)

The table below sets forth the components of other income (expense) for the nine months ended September 30, 2006 compared to the same period in 2005:



|                             |  |                                |         |   |        |   |         |        |  |   |         |   |  |       |  
|---------------------------- |  | ------------------------------ | ------- | - | ------ | - | ------- | ------ |  | - | ------- | - |  | ----- | -
|                             |  | Nine Months EndedSeptember 30, |         |   | Change |  
|                             |  | 2005                           |         |   | 2006   |   |         | Amount |  |   | Percent |  
|                             |  | (dollars in thousands)         |         |   |        |   |         |        | 
|Other Income (Expense):      |  |                                |         |   |        |   |         |        |  |   |         |   |  |       |  
|Interest and dividend income |  | $                              | 432     |   |        | $ | 527     |        |  | $ | 95      |   |  | 22.0  | %
|Interest expense             |  |                                | (23,192 | ) |        |   | (23,577 | )      |  |   | (385    | ) |  | 1.7   | %
|Other, net                   |  |                                | (758    | ) |        |   | (306    | )      |  |   | 452     |   |  | -59.6 | %
|                             |  |                                |         |   |        |   |         |        |  |   |         |   |  |       |  
|Total other expense          |  | $                              | (23,518 | ) |        | $ | (23,356 | )      |  | $ | 162     |   |  | -0.7  | %
|                             |  |                                |         |   |        |   |         |        |  |   |         |   |  |       |  

Interest and Dividend Income. Interest and dividend income increased $95,000, or 22.0%,
primarily due to higher interest rates received on cash balances.

Interest Expense. Interest expense increased $385,000, or 1.7%,
for the nine months ended September 30, 2006 as compared to the same period in 2005. Higher interest rates on our variable rate debt and the increase in the rate on our interest rate swap agreement, resulting from the extension of the term in
August 2005, were partially offset by a lower average balance on the revolving credit facility.



24



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##### Table of Contents

Other, Net. Other, net was a net expense of $306,000 for the nine months ended September 30,
2006, compared to $758,000 in the same period in 2005. The expense for 2005 included $573,000 of non-recurring costs related to an amendment to our credit agreement.

Income Tax Expense. A valuation allowance had been recorded at December 31, 2005 for our deferred tax assets that expire over time to the extent that they exceeded the net deferred tax assets and
liabilities resulting from reversing temporary differences. We determined that, based upon the evidence available as of September 30, 2006, that the combination of the continued generation of taxable income and the taxable income generated from
reversing temporary differences will be, more likely than not, sufficient to utilize the entire deferred tax asset. As such, we have determined that no valuation allowance was required for our deferred tax assets, and we reversed the remaining
valuation allowance during the period.

Income tax expense for the nine months ended September 30, 2006, before adjustments to the
deferred tax valuation allowance was $15.6 million. As a result of reversing the remaining valuation allowance during the nine months ended September 30, 2006, income tax expense was reduced by $7.2 million resulting in net expense for the
period of $8.4 million.

Our initial public offering resulted in an ownership change for purposes of Section 382 of the Internal
Revenue Code, and consequently our ability to utilize our net operating losses will be subject to limitation each year. We currently anticipate that, as a result of such ownership change, we will generally be limited by Section 382 to utilizing
approximately $19 million of our pre-transaction net operating losses annually. However, Internal Revenue Code Section 338 allows for an increase in this allowance by an additional $762,000, $37.4 million, $26.3 million, $18.7 million and $17.2
million, for tax periods ending in 2005 through 2009, respectively. After 2009, the IRC Section 382 limitation will apply. At September 30, 2006, the Company had unused tax net operating loss carryforwards of approximately $183 million which
expire in 2020 to 2024. Furthermore, we expect that we will continue to be able to take deductions related to the amortization of intangibles in excess of the amount recorded for book purposes in the amount of approximately $40 million annually
through 2014.

Liquidity and Capital Resources

Our short-term and long-term liquidity requirements arise primarily from: (i) interest payments related to our credit facilities; (ii) capital expenditures; (iii) working capital requirements; (iv) dividend payments on
our common stock; (v) potential acquisitions and investments and (vi) our pension obligation as described below.

The table below
reflects the dividends declared or paid by the Company during 2005 and 2006:



|                   |  |                    |       |             |                    |              |                 
|------------------ |  | ------------------ | ----- | ----------- | ------------------ | ------------ | ----------------
|Date Declared      |  | Dividend Per Share |       | Record Date |                    | Payment Date
|December 17, 2004  |  | $                  | 0.175 |             | December 31, 2004  |              | January 17, 2005
|March 15, 2005     |  | $                  | 0.405 |             | March 31, 2005     |              | April 15, 2005  
|June 15, 2005      |  | $                  | 0.405 |             | June 30, 2005      |              | July 15, 2005   
|September 13, 2005 |  | $                  | 0.405 |             | September 30, 2005 |              | October 17, 2005
|December 16, 2005  |  | $                  | 0.405 |             | December 30, 2005  |              | January 17, 2006
|March 17, 2006     |  | $                  | 0.405 |             | March 31, 2006     |              | April 17, 2006  
|June 15, 2006      |  | $                  | 0.405 |             | June 30, 2006      |              | July 17, 2006   
|September 15, 2006 |  | $                  | 0.405 |             | September 29, 2006 |              | October 16, 2006

Our intention is to distribute a substantial portion of the cash generated by our business to our
shareholders in regular quarterly dividends to the extent we generate cash in excess of operating needs, interest and principal payments on our indebtedness, and capital expenditures.

We intend to fund our operations, interest expense, capital expenditures, working capital requirements and dividend payments on our common stock with
cash from operations. For the nine months ended September 30, 2006 and 2005, cash provided by operating activities was $69.7 million and $71.3 million, respectively.

During the second quarter of 2005, we amended our defined benefit pension plan to freeze the accrued benefit for all salaried participants and for certain hourly participants and to permit certain other hourly
participants to elect to discontinue further benefit accruals. As a result of the amendment, the benefits to be paid to salaried participants at their normal retirement age of 65 are fixed. The accrued benefits for hourly employees subject to the
mandatory benefit freeze and for those who elect to discontinue further benefit accruals will be transferred to a separate plan (the Spin-Off Plan), which will be terminated upon the receipt of the necessary approvals. The Spin-Off Plan
termination is expected to occur during the fourth quarter of 2006. Certain employees who are at least age 55 and who would be covered under the Spin-Off Plan may elect to receive a current distribution of their accrued benefits



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##### Table of Contents

without terminating their employment or waiting for the Spin-Off Plan termination. As a result of the amendment, the number of employees accruing further
benefits under the defined benefit pension plan has been reduced to approximately 40 from 175.

We expect to recognize total expense for
the Spin-Off Plan of approximately $3.5 million during 2006. We expect to recognize $464,000 of FAS 87 periodic pension costs during the year for the Spin-Off Plan, and have recorded a $320,000 settlement loss during the nine months ended
September 30, 2006. We expect the Spin-Off Plan to be terminated in the fourth quarter of 2006, and the expense to be incurred upon termination of the plan to be approximately $2.7 million.

We also expect that additional funding of approximately $5.9 million will be required upon the termination of the Spin-Off Plan. The amount of the
additional expense and the amount of the additional funding required upon termination are subject to change based upon changes in interest rates, returns on plan assets, the timing of the termination, and distributions to participants prior to
termination.

We estimate that the projected benefit obligation as of January 1, 2006 for participants that will remain in our defined
benefit pension plan subsequent to the termination of the Spin-Off Plan is approximately $12.6 million, as compared to the total projected benefit obligation for all plan participants of $25.9 million as of January 1, 2006. We estimate that the
pension amendments will result in a reduction in annual pension expense from $1.8 million in 2005, exclusive of the pension settlement charges, to approximately $800,000 annually after the spin-off is completed.

On July 1, 2006, we completed the purchase of the Montezuma Mutual Telephone Company (Montezuma Telephone) for a total purchase price of
$11.9 million, inclusive of $1.2 million in cash and working capital, which are subject to certain future adjustments and $220,000 of direct transaction costs. Montezuma Telephone provides telecommunications services to 2,100 access lines, cable
television service to approximately 1,350 subscribers and Internet access service to more than 950 subscribers, most of which are located in Montezuma, Iowa.

During the first quarter of 2006, we received the required regulatory approval for the sale of three exchanges representing approximately 600 access lines. We closed the transaction on April 28, 2006 and received
net proceeds of approximately $4.8 million. During April 2006 we received the final regulatory approval for the sale of four additional exchanges representing approximately 2,000 access lines. We closed the transaction on July 1, 2006 and
received net proceeds of approximately $8.4 million.

On August 1, 2006, we completed the purchase of Baker Communications, Inc. for a
total purchase price of $9.0 million, inclusive of $590,000 in cash and working capital, which are subject to certain future adjustments, and $158,000 of direct transaction costs. Baker Communications designs, develops, and provides ongoing support
of technology solutions for clients. Areas of specialization include enterprise voice solutions, IP communications and data networking. Baker Communications is headquartered in Des Moines, Iowa, with additional offices in Cedar Rapids, Iowa and
Omaha, Nebraska.

During the third quarter of 2006, we participated in the FCCs auction of Advanced Wireless Services licenses in the
1710-1755 MHz and 2110-2155 MHz bands (AWS-1) (Auction No. 66). Prior to the commencement of the auction, we deposited $3.1 million to establish bidding credits. In September 2006, we were the successful bidder on 15 licenses in Iowa covering
approximately 1.9 million pops and the majority of our local exchange serving area for a total amount of approximately $11.5 million. On October 19, 2006, we paid the balance due of approximately $8.4 million. In order to renew such licenses
after their initial 15-year term, certain build out requirements must be met, the precise amount of which has not been determined.

To fund
any significant future acquisitions, we intend to use borrowings under our revolving credit facility or, subject to the restrictions in our credit facilities, to arrange additional funding through the sale of public or private debt and/or equity
securities, including common stock, or to obtain additional senior bank debt.

Our ability to service our indebtedness will depend on our
ability to generate cash in the future. We are not required to make any scheduled principal payments under our credit facilities, which will mature in 2011. However, we may be required to make annual mandatory prepayments under our new credit
facilities with a portion of our available cash. We will need to refinance all or a portion of our indebtedness on or before maturity in 2011.



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##### Table of Contents

The dividend policy adopted by our board of directors calls for us to distribute a substantial portion of
our cash flow to our shareholders. As a result, we may not have significant cash available to meet any large unanticipated liquidity requirements, other than through available borrowings, if any, under our revolving credit facility. Therefore, we
may not have a sufficient amount of cash to finance growth opportunities, including acquisitions, to fund unanticipated capital expenditures or to fund our operations. If we do not have sufficient cash for these purposes, our financial condition and
our business could suffer. However, our board of directors may, in its discretion, amend or repeal this dividend policy to decrease the level of dividends provided for under the policy, or discontinue entirely the payment of dividends.

We have historically funded our operations and capital expenditure requirements primarily with cash from operations and our revolving line of credit.

The following table summarizes our short-term liquidity and Adjusted Total Debt and Adjusted EBITDA, as defined in our credit agreement,
as of December 31, 2005 and September 30, 2006:



|                                       |  |                  |         |   |                   |   |         |  
|-------------------------------------- |  | ---------------- | ------- | - | ----------------- | - | ------- | -
|                                       |  | As of            |        
|                                       |  | December 31,2005 |         |   | September 30,2006 |  
|                                       |  | (in thousands)   |        
|Short-Term Liquidity:                  |  |                  |         |   |                   |   |         |  
|Current assets                         |  | $                | 50,027  |   |                   | $ | 33,555  |  
|Current liabilities                    |  |                  | (86,300 | ) |                   |   | (70,347 | )
|                                       |  |                  |         |   |                   |   |         |  
|Net working capital                    |  | $                | (36,273 | ) |                   | $ | (36,792 | )
|                                       |  |                  |         |   |                   |   |         |  
|Cash and cash equivalents              |  | $                | 26,782  |   |                   | $ | 5,565   |  
|Available on revolving credit facility |  | $                | 60,000  |   |                   | $ | 85,950  |  
|Adjusted Total Debt:                   |  |                  |         |   |                   |   |         |  
|Long  term debt                       |  | $                | 477,778 |   |                   | $ | 477,778 |  
|Revolving credit facility              |  |                  | 40,000  |   |                   |   | 14,000  |  
|                                       |  |                  |         |   |                   |   |         |  
|Total debt                             |  |                  | 517,778 |   |                   |   | 491,778 |  
|Minus:                                 |  |                  |         |   |                   |   |         |  
|RTFC Capital Certificates              |  |                  | (7,778  | ) |                   |   | (7,778  | )
|Cash and cash equivalents              |  |                  | (26,782 | ) |                   |   | (5,565  | )
|                                       |  |                  |         |   |                   |   |         |  
|Adjusted Total Debt                    |  | $                | 483,218 |   |                   | $ | 478,435 |  
|                                       |  |                  |         |   |                   |   |         |  



|                                                         |  |                                 |        |   |                                |   |        |      |  |   |        |   |  |   |        |  
|-------------------------------------------------------- |  | ------------------------------- | ------ | - | ------------------------------ | - | ------ | ---- |  | - | ------ | - |  | - | ------ | -
|                                                         |  | Three Months EndedSeptember 30, |        |   | Nine Months EndedSeptember 30, |  
|                                                         |  | 2005                            |        |   | 2006                           |   |        | 2005 |  |   | 2006   |  
|Adjusted EBITDA:                                         |  |                                 |        |   |                                |   |        |      |  |   |        |   |  |   |        |  
|Net income                                               |  | $                               | 9,617  |   |                                | $ | 8,032  |      |  | $ | 34,795 |   |  | $ | 30,546 |  
|Income tax expense                                       |  |                                 |       |   |                                |   | 5,617  |      |  |   |       |   |  |   | 8,374  |  
|Interest expense                                         |  |                                 | 7,743  |   |                                |   | 7,969  |      |  |   | 23,192 |   |  |   | 23,577 |  
|Depreciation and amortization                            |  |                                 | 11,920 |   |                                |   | 11,695 |      |  |   | 36,609 |   |  |   | 35,263 |  
|Unrealized losses on financial derivatives               |  |                                 | 39     |   |                                |   | 204    |      |  |   | 185    |   |  |   | 306    |  
|Non-cash stock-based compensation expense                |  |                                 | 541    |   |                                |   | 597    |      |  |   | 1,256  |   |  |   | 1,762  |  
|Extraordinary or unusual (gains) losses                  |  |                                 |       |   |                                |   |       |      |  |   |       |   |  |   |       |  
|Non-cash portion of RTFC Capital Allocation              |  |                                 | (32    | ) |                                |   | (33    | )    |  |   | (99    | ) |  |   | (99    | )
|Other non-cash losses (gains)                            |  |                                 |       |   |                                |   |       |      |  |   |       |   |  |   |       |  
|Loss (gain) on disposal of assets not in ordinary course |  |                                 |       |   |                                |   | (2,888 | )    |  |   |       |   |  |   | (4,180 | )
|Transaction costs                                        |  |                                 |       |   |                                |   |       |      |  |   |       |   |  |   |       |  
|                                                         |  |                                 |        |   |                                |   |        |      |  |   |        |   |  |   |        |  
|Adjusted EBITDA                                          |  | $                               | 29,828 |   |                                | $ | 31,193 |      |  | $ | 95,938 |   |  | $ | 95,549 |  
|                                                         |  |                                 |        |   |                                |   |        |      |  |   |        |   |  |   |        |  

The reductions in current assets and current liabilities from December 31, 2005 to
September 30, 2006 are primarily due to the use of cash and cash equivalents to reduce the balance outstanding on the revolving credit facility.



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The following table summarizes our sources and uses of cash for the nine months ended September 30,
2005 and 2006:



|                         |  |                                        |         |   |      |   |         |  
|------------------------ |  | -------------------------------------- | ------- | - | ---- | - | ------- | -
|                         |  | For the nine monthsended September 30, |        
|Description              |  | 2005                                   |         |   | 2006 |  
|                         |  | (in thousands)                         |        
|Net Cash Provided (Used) |  |                                        |         |   |      |   |         |  
|Operating activities     |  | $                                      | 71,267  |   |      | $ | 69,663  |  
|Investing activities     |  | $                                      | (23,626 | ) |      | $ | (28,354 | )
|Financing activities     |  | $                                      | (45,234 | ) |      | $ | (62,526 | )

Cash Provided by Operating Activities

For the nine months ended September 30, 2005 and 2006, cash provided by operating activities was $71.3 million and $69.7 million, respectively.

Cash (Provided by) Used in Investing Activities

The table below sets forth the components of cash (provided by) used in investing activities for the nine months ended September 30, 2005 and 2006:



|                                |  |                                        |        |      |   |         |  
|------------------------------- |  | -------------------------------------- | ------ | ---- | - | ------- | -
|                                |  | For the nine monthsended September 30, |       
|                                |  | 2005                                   |        | 2006 |  
|                                |  | (in thousands)                         |       
|Network and support assets      |  | $                                      | 21,332 |      | $ | 18,264  |  
|Other                           |  |                                        | 2,200  |      |   | 2,135   |  
|                                |  |                                        |        |      |   |         |  
|Total capital expenditures      |  |                                        | 23,532 |      |   | 20,399  |  
|Business acquisitions           |  |                                        | 94     |      |   | 18,126  |  
|Purchase of wireless licenses   |  |                                        |       |      |   | 3,102   |  
|Proceeds from sale of exchanges |  |                                        |       |      |   | (13,273 | )
|                                |  |                                        |        |      |   |         |  
|Total                           |  | $                                      | 23,626 |      | $ | 28,354  |  
|                                |  |                                        |        |      |   |         |  

Pursuant to the terms of an April 2004 rate proceeding settlement with the Iowa Utilities Board,
we are obligated to invest substantially all additional revenues generated by the allowed increase in our rates, except for revenues resulting from inflation adjustments, on capital improvements identified in our network improvement plan. This
investment is in addition to our baseline level of network capital expenditures, which is assumed to be $16 million per year. Capital investment in our network improvement plan (including related expenses) was $17.3 million in 2004, $13.3 million in
2005, and is expected to be between $10 million and $11 million in 2006. After we have spent $38.9 million of cumulative capital expenditures in excess of our baseline level, the capital spending commitment will increase or decrease consistent with
access line changes. The deregulation of local retail services will reduce our capital expenditure obligations pursuant to our rate settlement agreement. Our network improvement plan for 20052007 was approved by the Iowa Utilities Board in
January 2005.

We expect that total capital expenditures, including those pursuant to the settlement agreement, will be between $28 million
and $30 million in fiscal 2006. We expect to fund all of these capital expenditures through cash generated by our operations. Our capital expenditures can fluctuate from quarter to quarter, and are impacted to some extent by factors beyond our
control, such as customer demand, the level of construction activity in our region, and weather.

On July 1, 2006, we completed the
purchase of Montezuma Telephone for a total purchase price of $11.9 million, inclusive of $1.2 million in cash and working capital, which are subject to certain future adjustments and $220,000 of direct transaction costs. Additionally, on
August 1, 2006 we completed the purchase of Baker, for a total purchase price of $9.0, million inclusive of $590,000 in cash and working capital, which are subject to certain future adjustments, and $158,000 of direct transaction costs.

During the third quarter of 2006, we participated the in the FCCs auction of Advanced Wireless Services licenses in the 1710-1755
MHz and 2110-2155 MHz bands (AWS-1) (Auction No. 66). Prior to the commencement of the auction, we deposited $3.1 million to establish bidding credits.

During the first nine months of 2006, we sold eight exchanges representing approximately 2,600 access lines. We received net proceeds of approximately $13.3 million.



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On August 19, 2004, the FCC released an order increasing the obligations of carriers to report
service outages to the FCC. Most significantly, the order required us to report certain non-customer affecting events related to our fiber optic transmission facilities. As part of an industry-wide effort requesting that the FCC reconsider this
requirement, we stated to the FCC, in industry-wide hearings held on November 19, 2004, that compliance would cause Iowa Telecom to incur at least $16 million of additional capital expenditures over a period of three to five years. As a result
of the industry efforts, on December 20, 2004, the FCC delayed the effectiveness of the rule until the FCC reconsiders the matter. At this time, we cannot predict the result of this FCC reconsideration, or the impact the final rules may have on
our operations.

On September 23, 2005, the FCC released an order determining that facilities-based broadband providers and providers
of interconnected voice over Internet Protocol (VoIP) services must be prepared to accommodate law enforcement wiretaps pursuant to the Communications Assistance with Law Enforcement Act (CALEA) by May 14, 2007. On May 12, 2006, the FCC
released a follow-up order, which reiterates and expands on its earlier conclusions, and reaffirmed the compliance deadline of May 14, 2007. At present, significant industry-wide implementation issues remain, making it difficult to predict the
specific nature of any new broadband and VoIP-related CALEA obligations that may ultimately become and remain applicable to us.

Cash Used in Financing
Activities

For the nine months ended September 30, 2005 and 2006, net cash used in financing activities was $45.2 million and
$62.5 million, respectively. The increase in cash used in the 2006 period as compared to 2005 was primarily attributable to the use of cash on hand at December 31, 2005, to reduce the balance outstanding on the revolving credit facility. Also
contributing to the increase in cash used was the higher aggregate amount of dividends paid during the nine months ended September 30, 2006.

Long-Term Debt and Revolving Credit Facilities

Credit Facilities

As a part of our initial public offering and the related debt refinancing in 2004, we entered into an Amended and Restated Credit Agreement with the Rural
Telephone Finance Cooperative, as administrative agent, and a group of lenders, including the Rural Telephone Finance Cooperative, providing for a total of up to $577.8 million in term and revolving credit facilities, and simultaneously retired the
previously outstanding senior credit facility with the Rural Telephone Finance Cooperative. In August 2005, we entered into amendments to the credit agreement that reduced the applicable interest rates and clarified certain definitions. As of
September 30, 2006, we had outstanding $477.8 million of senior debt under the term facilities, and had $14.0 million drawn under the $100 million revolving credit facility. The details of the credit facilities are as follows:

The revolving credit facility will expire in 2011 and permits borrowings up to the aggregate principal amount of $100 million (less amounts reserved for
letters of credit up to a maximum amount of $25 million). As of September 30, 2006, $14.0 million was outstanding on the revolving credit facility, $50,000 under letters of credit and $85.9 million was available. Borrowings under the revolving
credit facility bear interest per annum at either (a) the London inter-bank offered rate, or LIBOR, plus 2.0% or (b) a base rate plus 1.0%. As of September 30, 2006, we had $14 million outstanding under LIBOR elections at an average
all-in rate of 7.40%.

Term Loan B is a $400.0 million senior secured term facility maturing in 2011, bearing interest per annum at either
(a) a LIBOR rate plus an applicable rate adder or (b) a base rate election plus an applicable rate adder. On August 26, 2005, the Company entered into Amendment No. 1 to the credit facilities. Amendment No. 1 reduced the
applicable rate adder for Term Loan B (i) from 1.00% to 0.75% per annum for the base rate, and (ii) from 2.00% to 1.75% per annum for the LIBOR rate. As of September 30, 2006, $350 million was based upon a LIBOR election
effective through December 29, 2006, at an all-in rate of 7.12%. We have entered into interest rate swap agreements to fix the rate on $350 million of Term Loan B as more fully described below. As of September 30, 2006, the interest rate
on the remaining $50 million was based upon a LIBOR election effective through December 12, 2006 at an all-in rate of 7.15%.

Term
Loan C is a $70.0 million senior secured term facility maturing in 2011, bearing interest per annum at either (a) a fixed rate or (b) a Rural Telephone Finance Cooperative variable rate plus 0.85%. Upon the expiration of the 6.65% fixed
interest rate on Term Loan C in November 2007, the interest rate on such term loan will convert to the Rural Telephone Finance Cooperative base variable rate plus 0.85%.



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Term Loan D is a $7.8 million senior secured term facility maturing in 2011, bearing interest per annum
at either (a) a fixed rate or (b) a Rural Telephone Finance Cooperative variable rate plus 0.85%. Upon the expiration of the 6.65% fixed interest rate on Term Loan D in November 2007, interest on such term loan will convert to the Rural
Telephone Finance Cooperative base variable rate plus 0.85%.

As a condition of borrowing under Term Loans C and D, we are required to
invest $7.8 million, representing 10% of the total amounts of Term Loans C and D, in Subordinated Capital Certificates (SCCs) of the Rural Telephone Finance Cooperative. SCCs are non-interest bearing but, as a member of the Rural
Telephone Finance Cooperative, we share proportionately in the institutions net earnings. The Rural Telephone Finance Cooperative will redeem the SCCs in proportion to our principal repayments on Term Loans C and D.

The credit facilities are secured by substantially all of our tangible and intangible assets, properties and revenues as well as those of all of our
subsidiaries. The credit facilities are guaranteed by all of our subsidiaries.

The credit facilities permit us to pay dividends to holders
of our common stock; however, they contain significant restrictions on our ability to do so. The credit facilities contain certain negative covenants that, among other things, limit or restrict our ability (as well as those of our subsidiaries) to:
create liens and encumbrances; incur debt, issue preferred stock, or enter into leases and guarantees; enter into loans, investments and acquisitions; make asset sales, transfers or dispositions; change lines of business; enter into hedging
agreements; pay dividends, redeem stock, or make certain restricted payments; amend material debt agreements or other material contracts; engage in certain transactions with affiliates; enter into sale/leaseback or synthetic lease transactions;
grant negative pledges or agree to such other restrictions relating to subsidiary dividends and distributions; make changes to our fiscal year; and engage in mergers and consolidations.

The credit facilities require us, subject to certain exceptions, to prepay outstanding loans under the credit facilities to the extent of net cash
proceeds received from the following: issuance of certain indebtedness; proceeds of certain asset sales; and casualty insurance proceeds. The credit facilities further require us, subject to certain exceptions, to make prepayments under the credit
facilities equal to 50% of any net increase in the following: distributable cash during a dividend suspension period, as defined; and cumulative distributable cash, as defined, during the fiscal year less the cumulative reductions of revolving loans
through such period, with reductions to the percentage to be determined based on improvements in certain credit ratios. As of September 30, 2006, no prepayment amounts were due under these provisions.

The credit facilities generally permit voluntary prepayments of the term loans and reductions of commitments without penalty or premium, other than
standard breakage costs.

In addition, the financial covenants under the credit facilities specify, among other things, certain fixed
charge coverage ratios and a maximum total leverage ratio, as defined, all of which we were in compliance with as of September 30, 2006.

Interest
Rate Swaps

On August 26, 2005, we amended the swap arrangements that were originally entered into on November 4, 2004. The
amended swap arrangements effectively fixed the interest rate we will pay on $350 million of our indebtedness under Term Loan B. The purpose of the swap agreements was to adjust the interest rate profile of our debt obligations and to achieve a
targeted mix of floating and fixed rate debt. As a result of these arrangements, the effective all-in interest rate on $350.0 million of indebtedness under Term Loan B for the period beginning August 31, 2005 and ending November 23,
2011 will be 5.865%.

Obligations and Commitments

Our ongoing capital commitments include capital expenditures and debt service requirements. For the nine months ended September 30, 2006 our capital expenditures were $20.4 million; see Liquidity and
Capital ResourcesCash (Provided by) Used in Investing Activities.



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The following table sets forth our contractual obligations as of September 30, 2006, together with
cash payments due in each period indicated.



|                                                   |  |                        |         |               |   |           |  |           |        |                |   |        |  |   |        
|-------------------------------------------------- |  | ---------------------- | ------- | ------------- | - | --------- |  | --------- | ------ | -------------- | - | ------ |  | - | -------
|                                                   |  | Payments Due by Period
|Obligation                                         |  | Total                  |         | Oct Dec.2006 |   | 2007-2008 |  | 2009-2010 |        | 2011 and after
|                                                   |  | (dollars in thousands)
|Long-Term Debt:                                    |  |                        |         |               |   |           |  |           |        |                |   |        |  |   |        
|Senior debt payments                               |  | $                      | 477,778 |               | $ |          |  | $         |       |                | $ |       |  | $ | 477,778
|Revolving credit facility                          |  |                        | 14,000  |               |   |          |  |           |       |                |   |       |  |   | 14,000 
|Interest Payments(1)                               |  |                        | 111,593 |               |   | 6,568     |  |           | 45,609 |                |   | 41,055 |  |   | 18,361 
|Operating Lease Payments                           |  |                        | 636     |               |   | 100       |  |           | 406    |                |   | 128    |  |   | 2      
|Purchase of Advanced Wireless Services licenses(2) |  |                        | 8,371   |               |   | 8,371     |  |           |       |                |   |       |  |   |       
|                                                   |  |                        |         |               |   |           |  |           |        |                |   |        |  |   |        
|Total Contractual Obligations(3)(4)                |  | $                      | 612,378 |               | $ | 15,039    |  | $         | 46,015 |                | $ | 41,183 |  | $ | 510,141
|                                                   |  |                        |         |               |   |           |  |           |        |                |   |        |  |   |        

---

|(1) | Excludes interest payments on variable rate long-term debt that has not been fixed through hedging arrangements. Amounts include the impact of hedging arrangements.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | On October 19, 2006, we completed the purchase of Advanced Wireless Services licenses.
|--- | --------------------------------------------------------------------------------------

|(3) | Excludes the estimated working capital payment for the purchase of Baker Communications, Inc. The estimated working capital is $590,000.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------

|(4) | Excludes pension settlement payment expected to occur during 2006 or 2007 as described under Liquidity and Capital Resources.
|--- | -------------------------------------------------------------------------------------------------------------------------------

As of September 30, 2006, we had a $50,000 letter of credit outstanding.

We currently project that cash provided by operations will be adequate to meet our foreseeable operational liquidity needs for the next 12 months.
However, our actual cash needs and the availability of required funding may differ from our expectations and estimates, and those differences could be material. Our future capital requirements will depend on many factors, including, among others,
the demand for our services in our existing markets and regulatory, technological and competitive developments.

Critical Accounting Policies

The process of preparing financial statements requires the use of estimates on the part of management. The estimates used by management
are based on our historical experiences combined with managements understanding of current facts and circumstances. Certain of our accounting policies are considered critical, as they are both important to the portrayal of our financial
statements and require significant or complex judgments on the part of management. The following is a summary of certain policies considered critical by management:

Impairment of Long-Lived Assets (Including Property, Plant and Equipment), Goodwill and Identifiable Intangible Assets. We reduce the carrying amounts of long-lived assets, goodwill and identifiable intangible
assets to their fair values when the fair value of such assets is determined to be less than their carrying amounts. Fair value is typically estimated using a discounted cash flow analysis, which requires us to estimate the future cash flows
anticipated to be generated by the particular asset being tested for impairment, and to select a discount rate to measure the present value of the anticipated cash flows. When determining future cash flow estimates, we consider historical operating
results, as adjusted to reflect current and anticipated operating conditions. Estimating future cash flows requires significant judgment by us in such areas as future economic conditions, industry specific conditions and necessary capital
expenditures. The use of different assumptions or estimates for future cash flows could produce different impairment amounts (or none at all) for long-lived assets, goodwill and identifiable intangible assets.

We are required to perform an annual impairment review of goodwill as required by Statement of Financial Accounting Standards (SFAS) No. 142,
Goodwill and Other Intangible Assets. No impairment of goodwill or other long-lived assets resulted from the annual valuation of goodwill we conducted in August 2006.



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Revenue Recognition. Revenues are recorded based upon services provided to customers. We record
unbilled revenue representing the estimated amounts customers will be billed for services rendered since the last billing date through the end of a particular month. The unbilled revenue estimate is reversed in the following month when actual
billings are made.

Allowance for Doubtful Accounts. Our allowance for doubtful accounts reflects reserves for customer receivables
to reduce receivables to amounts expected to be collected. In estimating uncollectible amounts, management considers factors such as current overall economic conditions, industry-specific economic conditions, historical customer payment trends and
anticipated customer payment trends. While we believe our process effectively addresses our exposure for doubtful accounts, changes in economic, industry or specific customer conditions may require adjustment to the allowance for doubtful accounts
recorded by us.

Income Taxes. Management calculates the income tax provision, current and deferred income taxes, along with the
valuation allowance based upon various complex estimates and interpretations of income tax laws and regulations. Deferred tax assets are reduced by a valuation allowance to the extent that it is more likely than not they will not be realized.

A valuation allowance had been recorded at December 31, 2005 and March 31, 2006 for our deferred tax assets that expire over
time to the extent that they exceeded the net deferred tax assets and liabilities resulting from reversing temporary differences. We determined that, based upon the evidence available as of June 30, 2006 and September 30, 2006, that the
combination of the continued generation of taxable income and the taxable income generated from reversing temporary differences will be, more likely than not, sufficient to utilize the entire deferred tax asset. As such, we have determined that no
valuation allowance was required for our deferred tax assets, and we reversed the remaining valuation allowance during the second quarter of 2006.

Employee-Related Benefits. We incur certain employee-related benefit costs associated with pensions and other postretirement health care benefits (OPEB). We use third party specialists to assist management in
appropriately measuring the expenses associated with these employee-related benefits. In order to measure the expense associated with these employee-related benefits, management must make a variety of estimates, including discount rates used to
measure the present value of certain liabilities, assumed rates of return on assets set aside to fund these expenses, compensation increases, employee turnover rates, anticipated mortality rates and anticipated healthcare costs. The estimates used
by management are based on our historical experience, as well as current facts and circumstances. Different estimates could result in our recognizing different amounts of expense over different time periods. We evaluate our critical assumptions at
least annually, and selected assumptions are based on the following factors:



| |  |  | The discount rate is based on a hypothetical portfolio of high quality bonds with cash flows matching our expected benefit payments;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The expected return on plan assets is based on our asset allocation mix and our historical returns, taking into consideration current and expected market conditions; and
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The healthcare costs trend rate is based on historical rates of inflation and expected market conditions.
| | - |  | ---------------------------------------------------------------------------------------------------------



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The following table presents the key assumptions used to measure pension and OPEB expense for 2006 and
the estimated impact on the continuing pension plan and OPEB expense relative to a change in those assumptions:



|                                                 |  |                                                                 |      |   |      |   |      |  
|------------------------------------------------ |  | --------------------------------------------------------------- | ---- | - | ---- | - | ---- | -
|                                                 |  | Pension                                                         |      |   | OPEB |  
|Assumptions                                      |  |                                                                 |      |   |      |   |      |  
|Discount rate                                    |  |                                                                 | 5.50 | % |      |   | 5.25 | %
|Expected return on plan assets                   |  |                                                                 | 7.00 | % |      |   | NA   |  
|Healthcare costs trend rate                      |  |                                                                 |      |   |      |   |      |  
|Current                                          |  |                                                                 | NA   |   |      |   | 9.50 | %
|Level in 2011                                    |  |                                                                 | NA   |   |      |   | 7.00 | %
|                                                 | 
|                                                 |  | Increase in expense for the ninemonths ended September 30, 2006 |     
|                                                 |  | Pension                                                         |      |   | OPEB |  
|                                                 |  | (in thousands)                                                  |     
|Sensitivities                                    |  |                                                                 |      |   |      |   |      |  
|0.25% decrease in discount rate                  |  | $                                                               | 48   |   |      | $ | 6    |  
|0.25% decrease in expected return on plan assets |  | $                                                               | 9    |   |      |   | NA   |  
|1% increase in healthcare costs trend rate       |  |                                                                 | NA   |   |      | $ | 432  |  

Off-Balance Sheet Risk and Concentration of Credit Risk

Other than a $50,000 letter of credit under our credit facilities, we have no known off-balance sheet exposure or risk.

Certain financial instruments potentially subject us to concentrations of credit risk. These financial instruments consist primarily of trade receivables
and cash and temporary cash investments.

We place our cash and temporary cash investments with high credit quality financial institutions.
We also periodically evaluate the credit worthiness of the institutions with which we invest.

We have entered into interest rate swap
agreements to adjust the interest rate profile of our debt obligations and to achieve a targeted mix of floating and fixed rate debt. The floating rate payers under the interest rate swap agreements are nationally recognized counterparties. While we
may be exposed to losses due to non-performance of the counterparties or the calculation agents, we consider the risk remote and do not expect the settlement of these transactions to have a material adverse effect on our financial condition or
results of operations.

New Accounting Pronouncements

In September 2006, the FASB released Statement of Financial Accounting Standards No. 158, Employers Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB
Statements No. 87, 88, 106, and 132(R) (SFAS 158). SFAS 158 requires that we recognize the over-funded or under-funded status of our defined benefit and retiree medical plans as an asset or liability in our 2006 year-end
balance sheet, with changes in the funded status recognized through comprehensive income in the year in which they occur. The Company will be required to adopt the recognition and disclosure provisions of SFAS 158 as of December 31,
2006. The Company is currently reviewing the impacts of adopting SFAS 158 on its consolidated financial position and results of operations.

In July 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxesan interpretation of FASB Statement No. 109 (FIN
48). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in accordance with Statement of Financial Accounting Standards (SFAS) No. 109, Accounting for Income Taxes (SFAS
109). Guidance is provided on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 requires that we recognize in our financial statements, the impact of a tax position, if that
position is more likely than not of being sustained on audit, based on the technical merits of the position. The provisions of FIN 48 are effective as of the beginning of our 2007 fiscal year, with the cumulative effect of the change in accounting
principle recorded as an adjustment to opening retained earnings. We are currently evaluating the impact of adopting FIN 48 on our consolidated financial position and results of operations.



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In December 2004, the FASB issued SFAS No. 123 (Revised), Share-Based Payment. This statement replaces
SFAS No. 123, Accounting for Stock-Based Compensation and supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees. SFAS 123(R) requires companies to apply a fair-value-based measurement method in
accounting for share-based payment transactions with employees and to record compensation cost for all stock awards granted after the required effective date and to awards modified, repurchased, or cancelled after that date. Previously, we had
accounted for stock-based compensation under the fair value recognition provisions of SFAS 123. Adoption of SFAS 123 (R) on January 1, 2006 did not have a material effect on our financial position, results of operations or cash flows
because all of our outstanding stock options were fully vested at the date of issuance of SFAS 123(R). Additional grants of stock based awards under the 2005 Incentive Plan or modifications to outstanding stock options after the effective date of
the standard may result in additional compensation expense pursuant to the provisions of SFAS 123(R).

Inflation

We do not believe that inflation has a significant effect on the financial results of our operations.



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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our short-term excess cash balance, if
any, is typically invested in short-term commercial paper. We do not invest in any derivative or commodity type instruments. Accordingly, we believe we are subject to minimal market risk on our investments.

Under the terms of our credit facilities as amended, our long-term secured debt facilities will mature November 2011. Our $400.0 million of indebtedness
under Term Loan B, maturing in 2011, bears interest per year at either (a) LIBOR plus 1.75% or (b) a base rate plus 0.75%. On August 26, 2005, we entered into an interest rate swap agreement with nationally recognized counterparties
for the purpose of fixing the interest on a portion of these borrowings. Pursuant to the swap agreement, we will pay a fixed rate of interest on Term Loan B on a notional $350.0 million from August 31, 2005 through November 23, 2011.

We pay interest at a fixed rate on all borrowings under Term Loans C and D through November 2007. Thereafter, we expect our interest rates
under Term Loans C and D to convert to the Rural Telephone Finance Cooperative variable base rate then in effect, as provided in the credit facilities.

We are exposed to interest rate risk, resulting primarily from fluctuations in LIBOR, with respect to $50.0 million of borrowings under Term Loan B through November 2011. Similarly, changes in LIBOR will be the
primary source of interest rate risk we face with respect to the $14.0 million of borrowings drawn under the revolving credit facility at September 30, 2006. With respect to our $77.8 million of borrowings under Terms Loan C and D, we are
exposed to interest rate risk, resulting primarily from fluctuations in the Rural Telephone Finance Cooperatives variable base rate, from November 2007 through maturity in November 2011. A one percent change in the underlying interest rates
for the variable rate debt that was outstanding on September 30, 2006 would have an impact of approximately $640,000 per year on our interest expense while our fixed rates and swaps are in place.

ITEM 4. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we evaluated the
effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) as of September 30, 2006 (the Evaluation Date). Based upon that evaluation, the Chief
Executive Officer and Chief Financial Officer concluded that, as of the Evaluation Date, our disclosure controls and procedures were effective 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 Securities and Exchange Commission rules and forms.

Changes in Internal Controls

There was no change in our internal control over financial reporting during our most recently
completed fiscal quarter that has materially affected, or is reasonably likely to affect, our internal control over financial reporting.



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PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

We currently, and from time to time, are involved in litigation and regulatory
proceedings incidental to the conduct of our business. We are not a party to any lawsuits or proceedings that, in the opinion of our management, are likely to have a material adverse effect on us.

ITEM 1A. RISK FACTORS

In addition to the other information set forth in this report, you should carefully
consider the factors discussed in Part I, Item 1A. Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2005, which could materially affect our business, financial condition or future results. The risks
described in our Annual Report on Form 10-K are not the only risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business,
financial condition and/or operating results.

ITEM 6. EXHIBITS

See Exhibit Index following the signature page of this Report.



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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 thereunto duly authorized.



|                                  |  |                                                                                       |  |                 
|--------------------------------- |  | ------------------------------------------------------------------------------------- |  | ----------------
|                                  |  | IOWA TELECOMMUNICATIONS SERVICES, INC. (Registrant)                                  
|                                  |  |                                                                                      
|Signature                         |  | Title                                                                                 |  | Date            
|/s/ Alan L. Wells                 |  | Chairman, President and CEO                                                           |  | November 8, 2006
|Alan L. Wells                     |  |                                                                                       |  |                 
|                                  |  |                                                                                      
|/s/ Craig A. Knock Craig A. Knock |  | Vice President, Chief Financial Officer and Treasurer, (Principal Accounting Officer) |  | November 8, 2006



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EXHIBIT INDEX

IOWA TELECOMMUNICATIONS SERVICES, INC.

FORM 10-Q FOR QUARTER ENDED September 30, 2006



|              |  |                                                                                                                                                                                                                               
|------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description                                                                                                                                                                                                                   
|3.1           |  | Amended and Restated Articles of Incorporation of Iowa Telecommunications Services, Inc. - incorporated by reference to Exhibit 3.1 to Iowa Telecoms Registration Statement on Form
S-1/Amendment No. 6 (File No. 333-114349)
|              | 
|3.2           |  | Amended and Restated By laws of Iowa Telecommunications Services, Inc. - incorporated by reference to Exhibit 3.2 to Iowa Telecoms Registration Statement on Form S-1/Amendment No. 6
(File No. 333-114349)                  
|              | 
|31.1*         |  | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                                                                                            
|              | 
|31.2*         |  | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                                                                                            
|              | 
|32.1*         |  | Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                                                                                            
|              | 
|32.2*         |  | Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                                                                                            

---

|* | Filed herewith.
|- | ---------------



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