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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549





FORM 10-Q





(Mark one)

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

For the quarterly period ended: June 30, 2008

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





IOWA TELECOMMUNICATIONS SERVICES, INC.

(Exact name of registrant as specified
in its charter)







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

403 W. Fourth Street North

Newton, Iowa 50208

(Address of principal executive offices)

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





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, a non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule
12b-2 of the Exchange Act.



|                                                                          |  |                             
|------------------------------------------------------------------------- |  | ----------------------------
|Large accelerated filer  x                                                |  | Accelerated filer   ̈        
|Non-accelerated filer   ̈    (Do not check if a smaller reporting company) |  | Smaller reporting company   ̈

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 July 22, 2008 was 31,983,551.









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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 |  | 14  
|         |  |                                                                                      
|         |  | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                            |  | 32  
|         |  |                                                                                      
|         |  | CONTROLS AND PROCEDURES                                                               |  | 32  
|         |  |                                                                                      
|PART II. |  | OTHER INFORMATION                                                                     |  | 33  
|         |  |                                                                                      
|         |  | LEGAL PROCEEDINGS                                                                     |  | 33  
|         |  |                                                                                      
|         |  | RISK FACTORS                                                                          |  | 33  
|         |  |                                                                                      
|         |  | PURCHASE OF EQUITY SECURITIES BY THE ISSUER AND AFFILDATED PURCHASERS                 |  | 33  
|         |  |                                                                                      
|         |  | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                   |  | 34  
|         |  |                                                                                      
|         |  | EXHIBITS                                                                              |  | 34  



ii



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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 Per Share Data)



|                                                                                                                             |  |                  |          |   |              |   |          |  
|---------------------------------------------------------------------------------------------------------------------------- |  | ---------------- | -------- | - | ------------ | - | -------- | -
|                                                                                                                             |  | December 31,2007 |          |   | June 30,2008 |  
|ASSETS                                                                                                                       |  |                  |          |   |              |   |          |  
|CURRENT ASSETS:                                                                                                              |  |                  |          |   |              |   |          |  
|Cash and cash equivalents                                                                                                    |  | $                | 21,919   |   |              | $ | 4,093    |  
|Accounts receivable, net                                                                                                     |  |                  | 20,252   |   |              |   | 18,948   |  
|Inventories                                                                                                                  |  |                  | 2,995    |   |              |   | 3,434    |  
|Prepayments and other current assets                                                                                         |  |                  | 2,288    |   |              |   | 2,445    |  
|                                                                                                                             |  |                  |          |   |              |   |          |  
|Total Current Assets                                                                                                         |  |                  | 47,454   |   |              |   | 28,920   |  
|                                                                                                                             |  |                  |          |   |              |   |          |  
|PROPERTY, PLANT AND EQUIPMENT:                                                                                               |  |                  |          |   |              |   |          |  
|Property, plant and equipment                                                                                                |  |                  | 542,949  |   |              |   | 552,981  |  
|Accumulated depreciation                                                                                                     |  |                  | (264,284 | ) |              |   | (285,908 | )
|                                                                                                                             |  |                  |          |   |              |   |          |  
|Net Property, Plant and Equipment                                                                                            |  |                  | 278,665  |   |              |   | 267,073  |  
|                                                                                                                             |  |                  |          |   |              |   |          |  
|GOODWILL                                                                                                                     |  |                  | 466,554  |   |              |   | 466,554  |  
|INTANGIBLE ASSETS AND OTHER, net                                                                                             |  |                  | 24,888   |   |              |   | 30,493   |  
|INVESTMENT IN AND RECEIVABLE FROM THE RURAL TELEPHONE FINANCE COOPERATIVE                                                    |  |                  | 13,998   |   |              |   | 13,934   |  
|                                                                                                                             |  |                  |          |   |              |   |          |  
|Total Assets                                                                                                                 |  | $                | 831,559  |   |              | $ | 806,974  |  
|                                                                                                                             |  |                  |          |   |              |   |          |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                         |  |                  |          |   |              |   |          |  
|CURRENT LIABILITIES:                                                                                                         |  |                  |          |   |              |   |          |  
|Revolving credit facility                                                                                                    |  | $                | 18,000   |   |              | $ | 1,000    |  
|Accounts payable                                                                                                             |  |                  | 9,062    |   |              |   | 10,150   |  
|Advanced billings and customer deposits                                                                                      |  |                  | 9,365    |   |              |   | 8,838    |  
|Accrued and other current liabilities                                                                                        |  |                  | 32,104   |   |              |   | 27,793   |  
|                                                                                                                             |  |                  |          |   |              |   |          |  
|Total Current Liabilities                                                                                                    |  |                  | 68,531   |   |              |   | 47,781   |  
|LONG-TERM DEBT                                                                                                               |  |                  | 477,778  |   |              |   | 477,778  |  
|DEFERRED TAX LIABILITIES                                                                                                     |  |                  | 35,255   |   |              |   | 44,354   |  
|OTHER LONG-TERM LIABILITIES                                                                                                  |  |                  | 7,028    |   |              |   | 6,588    |  
|                                                                                                                             |  |                  |          |   |              |   |          |  
|Total Liabilities                                                                                                            |  |                  | 588,592  |   |              |   | 576,501  |  
|                                                                                                                             |  |                  |          |   |              |   |          |  
|COMMITMENTS AND CONTINGENCIES                                                                                                |  |                  |         |   |              |   |         |  
|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, 31,440,215 and 31,476,776 issued and outstanding, respectively |  |                  | 314      |   |              |   | 315      |  
|Additional paid-in capital                                                                                                   |  |                  | 324,170  |   |              |   | 325,670  |  
|Retained deficit                                                                                                             |  |                  | (82,154  | ) |              |   | (95,816  | )
|Accumulated other comprehensive income                                                                                       |  |                  | 637      |   |              |   | 304      |  
|                                                                                                                             |  |                  |          |   |              |   |          |  
|Total Stockholders Equity                                                                                                   |  |                  | 242,967  |   |              |   | 230,473  |  
|                                                                                                                             |  |                  |          |   |              |   |          |  
|Total Liabilities and Stockholders Equity                                                                                   |  | $                | 831,559  |   |              | $ | 806,974  |  
|                                                                                                                             |  |                  |          |   |              |   |          |  

See notes to condensed consolidated financial statements.



1



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Iowa Telecommunications Services, Inc. and Subsidiaries

Condensed Consolidated Statements of Income

(Unaudited)

(Amounts in Thousands, Except Per Share Data)



|                                                                       |  |                            |        |   |                          |   |        |      |  |   |         |   |  |   |         |  
|---------------------------------------------------------------------- |  | -------------------------- | ------ | - | ------------------------ | - | ------ | ---- |  | - | ------- | - |  | - | ------- | -
|                                                                       |  | Three Months EndedJune 30, |        |   | Six Months EndedJune 30, |  
|                                                                       |  | 2007                       |        |   | 2008                     |   |        | 2007 |  |   | 2008    |  
|REVENUES AND SALES                                                     |  | $                          | 62,735 |   |                          | $ | 58,177 |      |  | $ | 129,231 |   |  | $ | 119,022 |  
|OPERATING COSTS AND EXPENSES:                                          |  |                            |        |   |                          |   |        |      |  |   |         |   |  |   |         |  
|Cost of services and sales (exclusive of items shown separately below) |  |                            | 20,200 |   |                          |   | 18,744 |      |  |   | 38,576  |   |  |   | 37,357  |  
|Selling, general and administrative                                    |  |                            | 11,121 |   |                          |   | 10,150 |      |  |   | 21,602  |   |  |   | 20,265  |  
|Depreciation and amortization                                          |  |                            | 12,230 |   |                          |   | 12,665 |      |  |   | 24,258  |   |  |   | 25,270  |  
|                                                                       |  |                            |        |   |                          |   |        |      |  |   |         |   |  |   |         |  
|Total Operating Costs and Expenses                                     |  |                            | 43,551 |   |                          |   | 41,559 |      |  |   | 84,436  |   |  |   | 82,892  |  
|                                                                       |  |                            |        |   |                          |   |        |      |  |   |         |   |  |   |         |  
|OPERATING INCOME                                                       |  |                            | 19,184 |   |                          |   | 16,618 |      |  |   | 44,795  |   |  |   | 36,130  |  
|                                                                       |  |                            |        |   |                          |   |        |      |  |   |         |   |  |   |         |  
|OTHER INCOME (EXPENSE):                                                |  |                            |        |   |                          |   |        |      |  |   |         |   |  |   |         |  
|Interest and dividend income                                           |  |                            | 182    |   |                          |   | 172    |      |  |   | 553     |   |  |   | 550     |  
|Interest expense                                                       |  |                            | (7,965 | ) |                          |   | (7,463 | )    |  |   | (15,977 | ) |  |   | (15,161 | )
|Other, net                                                             |  |                            | (49    | ) |                          |   |       |      |  |   | (273    | ) |  |   | (259    | )
|                                                                       |  |                            |        |   |                          |   |        |      |  |   |         |   |  |   |         |  
|Total Other Expense, net                                               |  |                            | (7,832 | ) |                          |   | (7,291 | )    |  |   | (15,697 | ) |  |   | (14,870 | )
|                                                                       |  |                            |        |   |                          |   |        |      |  |   |         |   |  |   |         |  
|EARNINGS BEFORE INCOME TAXES                                           |  |                            | 11,352 |   |                          |   | 9,327  |      |  |   | 29,098  |   |  |   | 21,260  |  
|INCOME TAX EXPENSE                                                     |  |                            | 4,778  |   |                          |   | 4,034  |      |  |   | 12,051  |   |  |   | 9,010   |  
|                                                                       |  |                            |        |   |                          |   |        |      |  |   |         |   |  |   |         |  
|NET INCOME                                                             |  | $                          | 6,574  |   |                          | $ | 5,293  |      |  | $ | 17,047  |   |  | $ | 12,250  |  
|                                                                       |  |                            |        |   |                          |   |        |      |  |   |         |   |  |   |         |  
|EARNINGS PER SHARE:                                                    |  |                            |        |   |                          |   |        |      |  |   |         |   |  |   |         |  
|BASIC - Earnings Per Share                                             |  | $                          | 0.21   |   |                          | $ | 0.17   |      |  | $ | 0.54    |   |  | $ | 0.39    |  
|                                                                       |  |                            |        |   |                          |   |        |      |  |   |         |   |  |   |         |  
|BASIC - Weighted Average Number of Shares Outstanding                  |  |                            | 31,406 |   |                          |   | 31,471 |      |  |   | 31,393  |   |  |   | 31,457  |  
|                                                                       |  |                            |        |   |                          |   |        |      |  |   |         |   |  |   |         |  
|DILUTED - Earnings Per Share                                           |  | $                          | 0.20   |   |                          | $ | 0.16   |      |  | $ | 0.53    |   |  | $ | 0.38    |  
|                                                                       |  |                            |        |   |                          |   |        |      |  |   |         |   |  |   |         |  
|DILUTED - Weighted Average Number of Shares Outstanding                |  |                            | 32,072 |   |                          |   | 32,133 |      |  |   | 32,043  |   |  |   | 32,085  |  
|                                                                       |  |                            |        |   |                          |   |        |      |  |   |         |   |  |   |         |  
|Dividends Declared Per Share                                           |  | $                          | 0.405  |   |                          | $ | 0.405  |      |  | $ | 0.81    |   |  | $ | 0.81    |  
|                                                                       |  |                            |        |   |                          |   |        |      |  |   |         |   |  |   |         |  

See notes to condensed consolidated financial statements.



2



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Iowa Telecommunications Services, Inc. and Subsidiaries

Condensed Consolidated Statements of Stockholders Equity

(Unaudited)

(Dollars in Thousands, Except Per Share Data)



|                                                           |  |                                           |   |  |             |     |                          |   |         |                 |  |   |                                            |   |  |       |        |   |  |   |         |  
|---------------------------------------------------------- |  | ----------------------------------------- | - |  | ----------- | --- | ------------------------ | - | ------- | --------------- |  | - | ------------------------------------------ | - |  | ----- | ------ | - |  | - | ------- | -
|                                                           |  | Three Months Ended June 30, 2007 and 2008 |  
|                                                           |  | CommonShares                              |   |  | CommonStock |     | AdditionalPaid-InCapital |   |         | RetainedDeficit |  |   | AccumulatedOtherComprehensiveIncome (loss) |   |  | Total |       
|Balance, March 31, 2007                                    |  | 31,380,292                                |   |  | $           | 314 |                          | $ | 322,619 |                 |  | $ | (62,349                                    | ) |  | $     | 4,061  |   |  | $ | 264,645 |  
|Net Income                                                 |  |                                          |   |  |             |    |                          |   |        |                 |  |   | 6,574                                      |   |  |       |       |   |  |   | 6,574   |  
|Unrealized gains on derivatives, net of tax effect         |  |                                          |   |  |             |    |                          |   |        |                 |  |   |                                           |   |  |       | 3,505  |   |  |   | 3,505   |  
|Post retirement benefit plan adjustment, net of tax effect |  |                                          |   |  |             |    |                          |   |        |                 |  |   |                                           |   |  |       | 3,085  |   |  |   | 3,085   |  
|                                                           |  |                                           |   |  |             |     |                          |   |         |                 |  |   |                                            |   |  |       |        |   |  |   |         |  
|Total comprehensive income                                 |  |                                          |   |  |             |    |                          |   |        |                 |  |   | 6,574                                      |   |  |       | 6,590  |   |  |   | 13,164  |  
|Compensation from compensatory stock plans                 |  | 46,200                                    |   |  |             |    |                          |   | 676     |                 |  |   |                                           |   |  |       |       |   |  |   | 676     |  
|Shares reacquired                                          |  | (15,179                                   | ) |  |             |    |                          |   | (316    | )               |  |   |                                           |   |  |       |       |   |  |   | (316    | )
|Exercise of employee stock options                         |  | 5,000                                     |   |  |             |    |                          |   | 21      |                 |  |   |                                           |   |  |       |       |   |  |   | 21      |  
|Dividends declared ($.405 per share)                       |  |                                          |   |  |             |    |                          |   |        |                 |  |   | (12,893                                    | ) |  |       |       |   |  |   | (12,893 | )
|                                                           |  |                                           |   |  |             |     |                          |   |         |                 |  |   |                                            |   |  |       |        |   |  |   |         |  
|Balance, June 30, 2007                                     |  | 31,416,313                                |   |  | $           | 314 |                          | $ | 323,000 |                 |  | $ | (68,668                                    | ) |  | $     | 10,651 |   |  | $ | 265,297 |  
|                                                           |  |                                           |   |  |             |     |                          |   |         |                 |  |   |                                            |   |  |       |        |   |  |   |         |  
|Balance, March 31, 2008                                    |  | 31,445,215                                |   |  | $           | 314 |                          | $ | 325,040 |                 |  | $ | (88,156                                    | ) |  | $     | (6,978 | ) |  | $ | 230,220 |  
|Net Income                                                 |  |                                          |   |  |             |    |                          |   |        |                 |  |   | 5,293                                      |   |  |       |       |   |  |   | 5,293   |  
|Unrealized gains on derivatives, net of tax effect         |  |                                          |   |  |             |    |                          |   |        |                 |  |   |                                           |   |  |       | 7,431  |   |  |   | 7,431   |  
|Post retirement benefit plan adjustment, net of tax effect |  |                                          |   |  |             |    |                          |   |        |                 |  |   |                                           |   |  |       | (149   | ) |  |   | (149    | )
|                                                           |  |                                           |   |  |             |     |                          |   |         |                 |  |   |                                            |   |  |       |        |   |  |   |         |  
|Total comprehensive income                                 |  |                                          |   |  |             |    |                          |   |        |                 |  |   | 5,293                                      |   |  |       | 7,282  |   |  |   | 12,575  |  
|Compensation from compensatory stock plans, net of tax     |  | 47,200                                    |   |  |             | 1   |                          |   | 908     |                 |  |   |                                           |   |  |       |       |   |  |   | 909     |  
|Shares reacquired                                          |  | (15,639                                   | ) |  |             |    |                          |   | (278    | )               |  |   |                                           |   |  |       |       |   |  |   | (278    | )
|Dividends declared ($.405 per share)                       |  |                                          |   |  |             |    |                          |   |        |                 |  |   | (12,953                                    | ) |  |       |       |   |  |   | (12,953 | )
|                                                           |  |                                           |   |  |             |     |                          |   |         |                 |  |   |                                            |   |  |       |        |   |  |   |         |  
|Balance, June 30, 2008                                     |  | 31,476,776                                |   |  | $           | 315 |                          | $ | 325,670 |                 |  | $ | (95,816                                    | ) |  | $     | 304    |   |  | $ | 230,473 |  
|                                                           |  |                                           |   |  |             |     |                          |   |         |                 |  |   |                                            |   |  |       |        |   |  |   |         |  



|                                                           |  |                                         |   |  |             |     |                          |   |         |                 |  |   |                                            |   |  |       |        |   |  |   |         |  
|---------------------------------------------------------- |  | --------------------------------------- | - |  | ----------- | --- | ------------------------ | - | ------- | --------------- |  | - | ------------------------------------------ | - |  | ----- | ------ | - |  | - | ------- | -
|                                                           |  | Six Months Ended June 30, 2007 and 2008 |  
|                                                           |  | CommonShares                            |   |  | CommonStock |     | AdditionalPaid-InCapital |   |         | RetainedDeficit |  |   | AccumulatedOtherComprehensiveIncome (loss) |   |  | Total |       
|Balance, December 31, 2006                                 |  | 31,379,670                              |   |  | $           | 314 |                          | $ | 322,016 |                 |  | $ | (59,976                                    | ) |  | $     | 5,345  |   |  | $ | 267,699 |  
|Net Income                                                 |  |                                        |   |  |             |    |                          |   |        |                 |  |   | 17,047                                     |   |  |       |       |   |  |   | 17,047  |  
|Unrealized gains on derivatives, net of tax effect         |  |                                        |   |  |             |    |                          |   |        |                 |  |   |                                           |   |  |       | 2,221  |   |  |   | 2,221   |  
|Post retirement benefit plan adjustment, net of tax effect |  |                                        |   |  |             |    |                          |   |        |                 |  |   |                                           |   |  |       | 3,085  |   |  |   | 3,085   |  
|                                                           |  |                                         |   |  |             |     |                          |   |         |                 |  |   |                                            |   |  |       |        |   |  |   |         |  
|Total comprehensive income                                 |  |                                        |   |  |             |    |                          |   |        |                 |  |   | 17,047                                     |   |  |       | 5,306  |   |  |   | 22,353  |  
|Compensation from compensatory stock plans                 |  | 46,822                                  |   |  |             |    |                          |   | 1,279   |                 |  |   |                                           |   |  |       |       |   |  |   | 1,279   |  
|Shares reacquired                                          |  | (15,179                                 | ) |  |             |    |                          |   | (316    | )               |  |   |                                           |   |  |       |       |   |  |   | (316    | )
|Exercise of employee stock options                         |  | 5,000                                   |   |  |             |    |                          |   | 21      |                 |  |   |                                           |   |  |       |       |   |  |   | 21      |  
|Dividends declared ($.81 per share)                        |  |                                        |   |  |             |    |                          |   |        |                 |  |   | (25,739                                    | ) |  |       |       |   |  |   | (25,739 | )
|                                                           |  |                                         |   |  |             |     |                          |   |         |                 |  |   |                                            |   |  |       |        |   |  |   |         |  
|Balance, June 30, 2007                                     |  | 31,416,313                              |   |  | $           | 314 |                          | $ | 323,000 |                 |  | $ | (68,668                                    | ) |  | $     | 10,651 |   |  | $ | 265,297 |  
|                                                           |  |                                         |   |  |             |     |                          |   |         |                 |  |   |                                            |   |  |       |        |   |  |   |         |  
|Balance, December 31, 2007                                 |  | 31,440,215                              |   |  | $           | 314 |                          | $ | 324,170 |                 |  | $ | (82,154                                    | ) |  | $     | 637    |   |  | $ | 242,967 |  
|Net Income                                                 |  |                                        |   |  |             |    |                          |   |        |                 |  |   | 12,250                                     |   |  |       |       |   |  |   | 12,250  |  
|Unrealized loss on derivatives, net of tax effect          |  |                                        |   |  |             |    |                          |   |        |                 |  |   |                                           |   |  |       | (40    | ) |  |   | (40     | )
|Post retirement benefit plan adjustment, net of tax effect |  |                                        |   |  |             |    |                          |   |        |                 |  |   |                                           |   |  |       | (293   | ) |  |   | (293    | )
|                                                           |  |                                         |   |  |             |     |                          |   |         |                 |  |   |                                            |   |  |       |        |   |  |   |         |  
|Total comprehensive income (loss)                          |  |                                        |   |  |             |    |                          |   |        |                 |  |   | 12,250                                     |   |  |       | (333   | ) |  |   | 11,917  |  
|Compensation from compensatory stock plans, net of tax     |  | 52,200                                  |   |  |             | 1   |                          |   | 1,778   |                 |  |   |                                           |   |  |       |       |   |  |   | 1,779   |  
|Shares reacquired                                          |  | (15,639                                 | ) |  |             |    |                          |   | (278    | )               |  |   |                                           |   |  |       |       |   |  |   | (278    | )
|Dividends declared ($.81 per share)                        |  |                                        |   |  |             |    |                          |   |        |                 |  |   | (25,912                                    | ) |  |       |       |   |  |   | (25,912 | )
|                                                           |  |                                         |   |  |             |     |                          |   |         |                 |  |   |                                            |   |  |       |        |   |  |   |         |  
|Balance, June 30, 2008                                     |  | 31,476,776                              |   |  | $           | 315 |                          | $ | 325,670 |                 |  | $ | (95,816                                    | ) |  | $     | 304    |   |  | $ | 230,473 |  
|                                                           |  |                                         |   |  |             |     |                          |   |         |                 |  |   |                                            |   |  |       |        |   |  |   |         |  

See notes to condensed consolidated financial statements.



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##### Table of Contents

Iowa Telecommunications Services, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(Dollars in Thousands)



|                                                                              |  |                          |         |   |      |   |         |  
|----------------------------------------------------------------------------- |  | ------------------------ | ------- | - | ---- | - | ------- | -
|                                                                              |  | Six Months EndedJune 30, |        
|                                                                              |  | 2007                     |         |   | 2008 |  
|CASH FLOWS FROM OPERATING ACTIVITIES:                                         |  |                          |         |   |      |   |         |  
|Net income                                                                    |  | $                        | 17,047  |   |      | $ | 12,250  |  
|Adjustments to reconcile net income to cash provided by operating activities: |  |                          |         |   |      |   |         |  
|Depreciation                                                                  |  |                          | 23,267  |   |      |   | 24,523  |  
|Amortization of intangible assets                                             |  |                          | 991     |   |      |   | 747     |  
|Amortization of debt issuance costs                                           |  |                          | 296     |   |      |   | 296     |  
|Deferred income taxes                                                         |  |                          | 11,274  |   |      |   | 8,594   |  
|Non-cash stock based compensation expense                                     |  |                          | 1,273   |   |      |   | 1,770   |  
|Changes in operating assets and liabilities:                                  |  |                          |         |   |      |   |         |  
|Receivables                                                                   |  |                          | (1,081  | ) |      |   | 1,304   |  
|Inventories                                                                   |  |                          | (499    | ) |      |   | (439    | )
|Accounts payable                                                              |  |                          | 1,459   |   |      |   | 1,088   |  
|Other assets and liabilities                                                  |  |                          | (3,856  | ) |      |   | (5,904  | )
|                                                                              |  |                          |         |   |      |   |         |  
|Net Cash Provided by Operating Activities                                     |  |                          | 50,171  |   |      |   | 44,229  |  
|                                                                              |  |                          |         |   |      |   |         |  
|CASH FLOWS FROM INVESTING ACTIVITIES:                                         |  |                          |         |   |      |   |         |  
|Capital expenditures                                                          |  |                          | (13,212 | ) |      |   | (12,993 | )
|Purchase of wireless licenses                                                 |  |                          |        |   |      |   | (5,938  | )
|                                                                              |  |                          |         |   |      |   |         |  
|Net Cash Used in Investing Activities                                         |  |                          | (13,212 | ) |      |   | (18,931 | )
|                                                                              |  |                          |         |   |      |   |         |  
|CASH FLOWS FROM FINANCING ACTIVITIES:                                         |  |                          |         |   |      |   |         |  
|Net change in revolving credit facility                                       |  |                          | (19,000 | ) |      |   | (17,000 | )
|Proceeds from exercise of stock options                                       |  |                          | 21      |   |      |   |        |  
|Shares reacquired                                                             |  |                          | (316    | ) |      |   | (278    | )
|Dividends paid                                                                |  |                          | (25,692 | ) |      |   | (25,846 | )
|                                                                              |  |                          |         |   |      |   |         |  
|Net Cash Used in Financing Activities                                         |  |                          | (44,987 | ) |      |   | (43,124 | )
|                                                                              |  |                          |         |   |      |   |         |  
|NET CHANGE IN CASH AND CASH EQUIVALENTS                                       |  |                          | (8,028  | ) |      |   | (17,826 | )
|CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD                              |  |                          | 13,613  |   |      |   | 21,919  |  
|                                                                              |  |                          |         |   |      |   |         |  
|CASH AND CASH EQUIVALENTS AT END OF PERIOD                                    |  | $                        | 5,585   |   |      | $ | 4,093   |  
|                                                                              |  |                          |         |   |      |   |         |  
|SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:                             |  |                          |         |   |      |   |         |  
|Cash paid for interest                                                        |  | $                        | 15,815  |   |      | $ | 15,105  |  
|                                                                              |  |                          |         |   |      |   |         |  
|Cash paid for income taxes                                                    |  | $                        | 442     |   |      | $ | 147     |  
|                                                                              |  |                          |         |   |      |   |         |  

SUPPLEMENTAL NON-CASH ACTIVITIES:

Dividends on Common Stock of $12,893 were declared on June 15, 2007 for shareholders of record as of June 29, 2007 and the dividends were paid on July 16, 2007.

Dividends on Common Stock of $12,953 were declared on June 12, 2008 for shareholders of record as of June 30, 2008 and the dividends were paid
on July 15, 2008.

See notes to condensed consolidated financial statements.



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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 (SEC) for interim financial information.
Certain information and disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been omitted or 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 unaudited condensed consolidated financial statements should be read in conjunction with the Companys audited consolidated financial statements as of and for the year ended December 31, 2007, that are included in the
Companys most recently filed annual report on Form 10-K as filed with the SEC.

2. EARNINGS PER SHARE

Basic earnings per share is computed based on the weighted average number of common shares issued and outstanding during the period, excluding unvested
restricted shares. Diluted earnings per share is computed based on the weighted average common shares issued and outstanding plus equivalent shares assuming exercise of stock options and vesting of unvested compensatory shares. The dilutive effect
of stock options and unvested compensatory shares is computed by application of the treasury stock method. The following is a reconciliation between basic and diluted weighted average shares outstanding:



|                                                        |  |                                          |        |                          |   |        |  |      |        |  |   |       
|------------------------------------------------------- |  | ---------------------------------------- | ------ | ------------------------ | - | ------ |  | ---- | ------ |  | - | ------
|                                                        |  | Three Months EndedJune 30,               |        | Six Months EndedJune 30,
|                                                        |  | 2007                                     |        | 2008                     |   | 2007   |  | 2008
|                                                        |  | (in thousands, except per share amounts)
|Net Income                                              |  | $                                        | 6,574  |                          | $ | 5,293  |  | $    | 17,047 |  | $ | 12,250
|                                                        |  |                                          |        |                          |   |        |  |      |        |  |   |       
|Weighted average shares outstanding  basic             |  |                                          | 31,406 |                          |   | 31,471 |  |      | 31,393 |  |   | 31,457
|                                                        |  |                                          |        |                          |   |        |  |      |        |  |   |       
|Diluted shares outstanding:                             |  |                                          |        |                          |   |        |  |      |        |  |   |       
|Weighted average shares outstanding                     |  |                                          | 31,406 |                          |   | 31,471 |  |      | 31,393 |  |   | 31,457
|Add shares issuable upon exercise of stock options, net |  |                                          | 546    |                          |   | 577    |  |      | 534    |  |   | 564   
|Add unvested compensatory stock shares                  |  |                                          | 120    |                          |   | 85     |  |      | 116    |  |   | 64    
|                                                        |  |                                          |        |                          |   |        |  |      |        |  |   |       
|Weighted average number of shares outstanding  diluted |  |                                          | 32,072 |                          |   | 32,133 |  |      | 32,043 |  |   | 32,085
|                                                        |  |                                          |        |                          |   |        |  |      |        |  |   |       
|Earnings Per Share:                                     |  |                                          |        |                          |   |        |  |      |        |  |   |       
|Basic                                                   |  | $                                        | 0.21   |                          | $ | 0.17   |  | $    | 0.54   |  | $ | 0.39  
|Diluted                                                 |  | $                                        | 0.20   |                          | $ | 0.16   |  | $    | 0.53   |  | $ | 0.38  

As of June 30, 2007 and 2008, total options outstanding were 677,579.



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##### Table of Contents

3. REVENUES AND SALES

The table below sets forth the components of our revenues and sales for the three and six months ended June 30, 2007 and 2008:



|                           |  |                            |        |                          |   |        |  |      |         |  |   |        
|-------------------------- |  | -------------------------- | ------ | ------------------------ | - | ------ |  | ---- | ------- |  | - | -------
|                           |  | Three Months EndedJune 30, |        | Six Months EndedJune 30,
|                           |  | 2007                       |        | 2008                     |   | 2007   |  | 2008
|                           |  | (dollars in thousands)    
|Local services             |  | $                          | 18,745 |                          | $ | 17,422 |  | $    | 37,592  |  | $ | 35,113 
|Network access services    |  |                            | 24,736 |                          |   | 20,343 |  |      | 54,017  |  |   | 43,005 
|Toll services              |  |                            | 5,285  |                          |   | 5,679  |  |      | 10,675  |  |   | 11,549 
|Data and internet services |  |                            | 7,298  |                          |   | 8,408  |  |      | 14,242  |  |   | 16,486 
|Other services and sales   |  |                            | 6,671  |                          |   | 6,325  |  |      | 12,705  |  |   | 12,869 
|                           |  |                            |        |                          |   |        |  |      |         |  |   |        
|Total revenues and sales   |  | $                          | 62,735 |                          | $ | 58,177 |  | $    | 129,231 |  | $ | 119,022
|                           |  |                            |        |                          |   |        |  |      |         |  |   |        

4. 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 several union employees. The provisions of the Plan were assumed by the Company in connection with the GTE acquisition on June 30,
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. During the three and six months
ended June 30, 2008, the Company contributed $1.0 million to the Plan.

Components of pension benefit cost are as follows:



|                                            |  |                            |      |   |                          |   |      |      |  |   |      |   |  |   |      |  
|------------------------------------------- |  | -------------------------- | ---- | - | ------------------------ | - | ---- | ---- |  | - | ---- | - |  | - | ---- | -
|                                            |  | Three Months EndedJune 30, |      |   | Six Months EndedJune 30, |  
|                                            |  | 2007                       |      |   | 2008                     |   |      | 2007 |  |   | 2008 |  
|                                            |  | (dollars in thousands)     |     
|Pension Benefit Cost:                       |  |                            |      |   |                          |   |      |      |  |   |      |   |  |   |      |  
|Service cost                                |  | $                          | 59   |   |                          | $ | 55   |      |  | $ | 118  |   |  | $ | 110  |  
|Interest cost                               |  |                            | 185  |   |                          |   | 189  |      |  |   | 369  |   |  |   | 374  |  
|Expected return on plan assets              |  |                            | (154 | ) |                          |   | (175 | )    |  |   | (307 | ) |  |   | (350 | )
|Amortization of unrecognized actuarial loss |  |                            | 42   |   |                          |   | 1    |      |  |   | 84   |   |  |   | 8    |  
|Amortization of prior service cost          |  |                            |     |   |                          |   | 9    |      |  |   |     |   |  |   | 9    |  
|                                            |  |                            |      |   |                          |   |      |      |  |   |      |   |  |   |      |  
|Net periodic benefit cost                   |  | $                          | 132  |   |                          | $ | 79   |      |  | $ | 264  |   |  | $ | 151  |  
|                                            |  |                            |      |   |                          |   |      |      |  |   |      |   |  |   |      |  

The benefits to be paid to participants at their normal retirement age of 65 are fixed.

Postretirement Benefits

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

During the second quarter of 2007, the Company amended its postretirement
welfare plan. The amendment eliminated medical benefits for certain retirees and reduced benefits for others. Life insurance benefits were eliminated for most retirees covered under the plan. The plan amendment resulted in a significant change in
the number of plan participants which required a re-measurement of both the plan assets and benefit obligations. The re-measurement resulted in a one time curtailment gain of $247,000 and reduction in the liability recorded for prior service costs
of $5.6 million, which is being amortized over 5.31 years as a component of the annual cost.



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Components of postretirement benefit cost (income) are as follows:



|                                                |  |                            |      |   |                          |   |      |      |  |   |      |   |  |   |      |  
|----------------------------------------------- |  | -------------------------- | ---- | - | ------------------------ | - | ---- | ---- |  | - | ---- | - |  | - | ---- | -
|                                                |  | Three Months EndedJune 30, |      |   | Six Months EndedJune 30, |  
|                                                |  | 2007                       |      |   | 2008                     |   |      | 2007 |  |   | 2008 |  
|                                                |  | (dollars in thousands)     |     
|Postretirement Benefit Cost (Income):           |  |                            |      |   |                          |   |      |      |  |   |      |   |  |   |      |  
|Service cost                                    |  | $                          | 19   |   |                          | $ | 3    |      |  | $ | 61   |   |  | $ | 7    |  
|Interest cost                                   |  |                            | 76   |   |                          |   | 46   |      |  |   | 204  |   |  |   | 97   |  
|Amortization of unrecognized net actuarial loss |  |                            | 22   |   |                          |   | 1    |      |  |   | 38   |   |  |   | 13   |  
|Amortization of unrecognized prior service cost |  |                            | (189 | ) |                          |   | (265 | )    |  |   | (228 | ) |  |   | (529 | )
|                                                |  |                            |      |   |                          |   |      |      |  |   |      |   |  |   |      |  
|Net periodic benefit cost (income)              |  |                            | (72  | ) |                          |   | (215 | )    |  |   | 75   |   |  |   | (412 | )
|Curtailment gain                                |  |                            | (247 | ) |                          |   |     |      |  |   | (247 | ) |  |   |     |  
|                                                |  |                            |      |   |                          |   |      |      |  |   |      |   |  |   |      |  
|Total income recognized                         |  | $                          | (319 | ) |                          | $ | (215 | )    |  | $ | (172 | ) |  | $ | (412 | )
|                                                |  |                            |      |   |                          |   |      |      |  |   |      |   |  |   |      |  

5. LONG-TERM DEBT AND REVOLVING CREDIT FACILITIES

Credit Facilities

As of June 30, 2008,
the Company had outstanding $477.8 million of senior debt under its term loan facilities, and had $1.0 million drawn under its $100.0 million revolving credit facility. The details of the credit facilities are as follows:

The revolving credit facility will expire in November 2011 and permits borrowings up to the aggregate principal amount of $100.0 million (less amounts
reserved for letters of credit up to a maximum amount of $25.0 million). As of June 30, 2008, $1.0 million was outstanding on the revolving credit facility and $99.0 million was available. Borrowings under our 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 June 30, 2008, the Company had $1.0 million outstanding under LIBOR elections at an average all-in rate of
4.49%.

Term Loan B is a $400.0 million senior secured term facility maturing in November 2011, bearing interest per annum at either
(a) a LIBOR rate plus an applicable rate adder of 1.75% per annum or (b) a base rate election plus an applicable rate adder of 0.75% per annum. The Company has entered into interest rate swap agreements to fix the rate on $350.0
million of Term Loan B as more fully described below. As of June 30, 2008, $350.0 million of the Term Loan B was based upon a LIBOR election effective through September 30, 2008 at an all-in rate of 4.56%. As of June 30, 2008, the
interest rate on the remaining $50.0 million was based upon a LIBOR election effective through September 12, 2008 at an all-in rate of 4.54%.

Term Loan C is a $70.0 million senior secured term facility maturing in November 2011, bearing interest per annum at either (a) a fixed rate or (b) a Rural Telephone Finance Cooperative variable rate plus 0.85%. The interest rate
on Term Loan C was fixed at 6.65% until November 2007. Effective August 1, 2007, the Company elected a new all-in fixed interest rate of 6.95% through June 2011 on Term Loan C. Upon the expiration of the fixed interest rate period, the 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 November 2011, bearing interest per annum at either (a) a fixed rate or (b) a Rural Telephone Finance Cooperative variable rate plus 0.85%. The interest rate on Term Loan D was fixed at 6.65% until November 2007.
Effective August 1, 2007, the Company elected a new all-in fixed interest rate of 6.95% through June 2011 on Term Loan D. Upon the expiration of the fixed interest rate period, the term loan will convert to the Rural Telephone Finance
Cooperative variable rate plus 0.85%.

As a condition of borrowing under Term Loans C and D, the Company is 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, the Company shares 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.



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##### Table of Contents

The credit facilities are secured by substantially all of the Companys tangible and intangible
assets, properties and revenues. 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 in 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 June 30, 2008, no prepayment amounts were due under these provisions.

On July 14, 2008, the Company entered into Amendment No. 2 to its credit agreement, dated as of November 23, 2004 (as amended from time to
time, the  Credit Agreement), among the Company, the lenders party thereto and Rural Telephone Finance Cooperative, as an administrative agent. Amendment No. 2 to the Credit Agreement (1) gives the Company greater flexibility
to acquire companies which have non-wholly owned subsidiaries, by, among other things, not requiring acquired non-wholly owned subsidiaries to guarantee the loans under the Credit Agreement, (2) permits the Company to assume or acquire up to
$20 million of existing indebtedness of acquired entities and (3) modifies the Companys excess cash flow prepayment obligations with respect to uses of the revolving credit facility for permitted acquisitions.

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 the Company was in compliance with as of June 30, 2008.

Interest Rate Swaps

On August 26, 2005, the Company amended the interest rate swap arrangements that were
originally entered into on November 4, 2004. The amended swap arrangements effectively fixed the interest rate the Company will pay on $350.0 million of 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%.

6. 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 initial public offering, 518,340 have been exercised and 677,579 remained outstanding as of June 30, 2008. No new options will be granted
under the 2002 Incentive Plan.



8



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##### Table of Contents

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 Companys 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 $268,000 and $534,000 of stock-based
compensation expense during the three and six month periods ended June 30, 2008, respectively, to reflect the change in the fair value of the options due to the reduction of the exercise price resulting from the declaration of cash dividends.
During the three and six month periods ended June 30, 2007, the Company recorded $244,000 and $492,000 of stock-based compensation expense, respectively, to reflect the change in the fair value of the options due to 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 EndedJune 30, |    |  | Six Months EndedJune 30, |   
|                                          |  | 2007(1)                    |    |  | 2008                     |    |  | 2007(1) |    |  | 2008 |   
|Weighted Average Expected Life (in years) |  | 2.4                        | yr |  | 1.4                      | yr |  | 2.4     | yr |  | 1.5  | yr
|Risk free interest rate                   |  | 4.89                       | %  |  | 2.06                     | %  |  | 4.71    | %  |  | 1.93 | % 
|Volatility                                |  | 19                         | %  |  | 31                       | %  |  | 19      | %  |  | 30   | % 
|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.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

A summary of the status of options
granted under the 2002 Incentive Plan as of June 30, 2007 and 2008, and the changes during the three and six month periods then ended, is presented below:



|                                 |  |                                 |   |                                 |                                        |      |        |         |                                        |   |     
|-------------------------------- |  | ------------------------------- | - | ------------------------------- | -------------------------------------- | ---- | ------ | ------- | -------------------------------------- | - | ----
|                                 |  | Three Months EndedJune 30, 2007 |   | Three Months EndedJune 30, 2008
|Fixed Options                    |  | Shares                          |   |                                 | WeightedAverageExercise Priceper Share |      | Shares |         | WeightedAverageExercise Priceper Share
|OUTSTANDING AT MARCH 31,         |  | 682,579                         |   |                                 | $                                      | 4.32 |        | 677,579 |                                        | $ | 2.70
|Granted                          |  |                                |   |                                 |                                        |     |        |        |                                        |   |    
|Exercised                        |  | (5,000                          | ) |                                 |                                        | 4.14 |        |        |                                        |   |    
|                                 |  |                                 |   |                                 |                                        |      |        |         |                                        |   |     
|OUTSTANDING AT JUNE 30,          |  | 677,579                         |   |                                 | $                                      | 3.91 |        | 677,579 |                                        | $ | 2.29
|                                 |  |                                 |   |                                 |                                        |      |        |         |                                        |   |     
|                                 |  |                                
|                                 |  | Six Months EndedJune 30, 2007   |   | Six Months EndedJune 30, 2008  
|Fixed Options                    |  | Shares                          |   |                                 | WeightedAverageExercise Priceper Share |      | Shares |         | WeightedAverageExercise Priceper Share
|OUTSTANDING AT BEGINNING OF YEAR |  | 682,579                         |   |                                 | $                                      | 4.72 |        | 677,579 |                                        | $ | 3.10
|Granted                          |  |                                |   |                                 |                                        |     |        |        |                                        |   |    
|Exercised                        |  | (5,000                          | ) |                                 |                                        | 4.14 |        |        |                                        |   |    
|                                 |  |                                 |   |                                 |                                        |      |        |         |                                        |   |     
|OUTSTANDING AT JUNE 30,          |  | 677,579                         |   |                                 | $                                      | 3.91 |        | 677,579 |                                        | $ | 2.29
|                                 |  |                                 |   |                                 |                                        |      |        |         |                                        |   |     



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The following table summarizes information about stock options outstanding at June 30, 2008:



|                               |  |                     |  |                                                  |  |         |  |                                        |      |                                         |   |          
|------------------------------ |  | ------------------- |  | ------------------------------------------------ |  | ------- |  | -------------------------------------- | ---- | --------------------------------------- | - | ---------
|                               |  | Options Outstanding |  | Options Exercisable                             
|Exercise Price per Share Range |  | Number              |  | WeightedAverageRemainingContractualLife In Years |  | Number  |  | WeightedAverageExercise Priceper Share |      | WeightedAverageAggregateIntrinsic Value
|$2.01 to $2.50                 |  | 533,005             |  | 3.8                                              |  | 533,005 |  | $                                      | 2.12 |                                         | $ | 8,256,648
|$2.51 to $3.00                 |  | 129,379             |  | 4.2                                              |  | 129,379 |  | $                                      | 2.67 |                                         | $ | 1,933,455
|$5.01 to $5.50                 |  | 15,195              |  | 5.6                                              |  | 15,195  |  | $                                      | 5.25 |                                         | $ | 187,746  

The weighted average exercise prices of options exercisable at June 30, 2008 reflects the
reductions required by the plan as a result of the declaration of cash dividends.

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 1.5 million shares of restricted or unrestricted stock, of which 634,800 shares of restricted stock, net of forfeitures and cancellations, have been awarded to various officers and employees of the Company, and 8,757 shares of unrestricted
stock have been issued to members of the Companys Board of Directors.

A summary of the status of the restricted shares awarded
pursuant to the 2005 Incentive Plan as of June 30, 2007 and 2008, and the changes during the three and six month periods then ended, is presented below:



|                                 |  |                                 |   |                                 |                                     |       |        |         |     |                                     |   |      
|-------------------------------- |  | ------------------------------- | - | ------------------------------- | ----------------------------------- | ----- | ------ | ------- | --- | ----------------------------------- | - | -----
|                                 |  | Three Months EndedJune 30, 2007 |   | Three Months EndedJune 30, 2008
|                                 |  | Shares                          |   |                                 | WeightedAverageGrant DateFair Value |       | Shares |         |     | WeightedAverageGrant DateFair Value
|OUTSTANDING AT MARCH 31,         |  | 339,300                         |   |                                 | $                                   | 18.50 |        | 552,975 |     |                                     | $ | 18.72
|Granted                          |  | 123,000                         |   |                                 |                                     | 21.90 |        |        |     |                                     |   |     
|Vested                           |  | (46,200                         | ) |                                 |                                     | 18.33 |        | (46,200 | )   |                                     |   | 18.33
|                                 |  |                                 |   |                                 |                                     |       |        |         |     |                                     |   |      
|OUTSTANDING AT JUNE 30,          |  | 416,100                         |   |                                 | $                                   | 19.53 |        | 506,775 |     |                                     | $ | 18.76
|                                 |  |                                 |   |                                 |                                     |       |        |         |     |                                     |   |      
|                                 |  |                                
|                                 |  | Six Months EndedJune 30, 2007   |   | Six Months EndedJune 30, 2008  
|                                 |  | Shares                          |   |                                 | WeightedAverageGrant DateFair Value |       | Shares |         |     | WeightedAverageGrant DateFair Value
|OUTSTANDING AT BEGINNING OF YEAR |  | 339,300                         |   |                                 | $                                   | 18.50 |        | 378,475 |     |                                     | $ | 19.64
|Granted                          |  | 123,000                         |   |                                 |                                     | 21.90 |        | 174,500 | (1) |                                     |   | 16.73
|Vested                           |  | (46,200                         | ) |                                 |                                     | 18.33 |        | (46,200 | )   |                                     |   | 18.33
|                                 |  |                                 |   |                                 |                                     |       |        |         |     |                                     |   |      
|OUTSTANDING AT JUNE 30,          |  | 416,100                         |   |                                 | $                                   | 19.53 |        | 506,775 |     |                                     | $ | 18.76
|                                 |  |                                 |   |                                 |                                     |       |        |         |     |                                     |   |      



|(1) | Weighted average vesting period at grant date for shares granted is 61 months.
|--- | ------------------------------------------------------------------------------

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 Company recorded $619,000 and $1,143,000 of stock-based compensation expense during the three and six month periods ended June 30, 2008, respectively. The Company recorded $433,700 and $775,000 of stock-based compensation expense
during the three and six month periods ended June 30, 2007, respectively. The remaining amount to be charged to expense for unvested awards over the remaining service periods is $7.5 million. The Company also recorded $16,000 and $93,000,
respectively, of expense during the three and six month periods ended June 30, 2008 related to the unrestricted shares issued to members of its Board of Directors. During the three and six month periods ended June 30, 2007, the Company
recorded $3,000 and $6,000, respectively, of expense related to the unrestricted shares issued to members of its Board of Directors. The total fair value of shares vested during the three and six month periods ended June 30, 2008 was $823,000.



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7. DISCLOSURES ABOUT FAIR VALUE OF INTEREST RATE SWAP

Effective August 31, 2005, the Company amended the terms of its interest rate swap agreement which the Company designated as a hedge against the
variability in future interest payments due on $350.0 million of Term Loan B. The amended terms of the interest rate swap agreement effectively convert the variable rate interest payments due on $350.0 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 the Companys debt obligations and to achieve a targeted mix of floating and fixed rate debt.

During the three and six month periods ended June 30, 2008, the fair market value of the swap instrument increased by $12.7 million and decreased by
$328,000, respectively. The portion of the change in fair value attributable to hedge ineffectiveness, which for the three and six month periods ended June 30, 2008 was $0 and $259,000, respectively, was recorded in the Other Income (Expense)
section of the Companys Condensed Consolidated Statements of Income. The portion of the change in fair value attributable to hedge effectiveness was recorded, net of income tax effects, in the Accumulated Other Comprehensive Income (Loss)
section of the Companys Condensed Consolidated Statements of Stockholders Equity. In assessing hedge effectiveness, no portion of the gain or loss from the swap is excluded.

During the three and six month periods ended June 30, 2007, the fair market value of the swap instrument increased by $5.9 million and $3.5 million,
respectively. The portion of the change in fair value attributable to hedge ineffectiveness, which for the three and six month periods ended June 30, 2007 was $0 and $174,000, respectively, was recorded in the Other Income (Expense) section of
the Companys Condensed Consolidated Statements of Income. The portion of the change in fair value attributable to hedge effectiveness was recorded, net of income tax effects, in the Accumulated Other Comprehensive Income (Loss) section of the
Companys Condensed Consolidated Statements of Stockholders Equity. In assessing hedge effectiveness, no portion of the gain or loss from the swap is excluded.

The fair value of the 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 in a liability position of $2.2 million as of June 30, 2008 and $1.9 million as of December 31, 2007. The swap was recorded in the Other Long-Term
Liabilities section of the Companys Condensed Consolidated Balance Sheets. The inputs used in determining the fair value fall within Level 2 of the fair value hierarchy, as defined in Statement of Financial Accounting Standards (SFAS)
No. 157, Fair Value Measurements (SFAS 157).

8. INCOME TAXES

Income tax expense consists of the following for the three and six month periods ended June 30:



|                         |  |                            |       |                          |   |       |  |      |        |  |   |      
|------------------------ |  | -------------------------- | ----- | ------------------------ | - | ----- |  | ---- | ------ |  | - | -----
|                         |  | Three Months EndedJune 30, |       | Six Months EndedJune 30,
|                         |  | 2007                       |       | 2008                     |   | 2007  |  | 2008
|                         |  | (dollars in thousands)    
|Current Tax Expense:     |  |                            |       |                          |   |       |  |      |        |  |   |      
|Federal                  |  | $                          | 283   |                          | $ | 152   |  | $    | 570    |  | $ | 305  
|State                    |  |                            | 116   |                          |   | 57    |  |      | 207    |  |   | 111  
|                         |  |                            |       |                          |   |       |  |      |        |  |   |      
|Total                    |  |                            | 399   |                          |   | 209   |  |      | 777    |  |   | 416  
|                         |  |                            |       |                          |   |       |  |      |        |  |   |      
|Deferred Tax Expense:    |  |                            |       |                          |   |       |  |      |        |  |   |      
|Federal                  |  |                            | 3,766 |                          |   | 3,267 |  |      | 9,643  |  |   | 7,331
|State                    |  |                            | 613   |                          |   | 558   |  |      | 1,631  |  |   | 1,263
|                         |  |                            |       |                          |   |       |  |      |        |  |   |      
|Total                    |  |                            | 4,379 |                          |   | 3,825 |  |      | 11,274 |  |   | 8,594
|                         |  |                            |       |                          |   |       |  |      |        |  |   |      
|Total Income Tax Expense |  | $                          | 4,778 |                          | $ | 4,034 |  | $    | 12,051 |  | $ | 9,010
|                         |  |                            |       |                          |   |       |  |      |        |  |   |      

Current income tax expense for 2007 and 2008 is primarily due to the alternative minimum tax
requirements.



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As of June 30, 2008, the Company had unused tax net operating loss carryforwards of approximately
$146.1 million which expire between 2021 and 2024. Additionally, the Company expects continued goodwill amortization for tax purposes at the rate of approximately $40 million per year through June 2015. The Company determined that, based upon the
evidence available as of June 30, 2008, the combination of the continued generation of taxable income and the taxable income generated from reversing temporary differences will, more likely than not, be sufficient to utilize the entire deferred
tax asset.

Effective January 1, 2008, the Company adopted the provisions of EITF Issue No. 06-11,Accounting for Income Tax
Benefits of Dividends on Share-Based Payment Awards. The Company now accounts for the income tax benefit related to dividend equivalents paid on unvested restricted stock units that are expected to vest as an increase to additional paid-in
capital when the deduction reduces taxes payable. Prior to adoption, the Company accounted for this tax benefit as a reduction to its income tax provision. Adoption of EITF Issue No. 06-11 did not have a material impact on the Companys
financial position, results of operations or cash flows.

9. COMMITMENTS AND 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.

10.
DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS

Effective January 1, 2008, the Company adopted the provisions of SFAS
No. 157,Fair Value Measurements. SFAS 157 defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements.

SFAS 157 establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include: Level 1, defined
as observable inputs such as quoted prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs in which little or no
market data exists, therefore requiring an entity to develop its own assumptions.

As of June 30, 2008, the Company held certain
liabilities that are required to be measured at fair value on a recurring basis. These included the Companys interest rate swap derivative instruments. The fair values of our interest rate swap agreements are determined based on inputs that
are readily available in public markets or can be derived from information available in publicly quoted markets. Therefore, the Company has categorized these swap contracts as Level 2. The fair value of the 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. See Note 7 for further information on the
Companys derivative instruments.

The following table presents the Companys liabilities measured at fair value subject to the
disclosure requirements of SFAS 157 as of June 30, 2008:



|                    |  |                                             |       |       |   |         |  |         |   |         |   |       |  |   |  
|------------------- |  | ------------------------------------------- | ----- | ----- | - | ------- |  | ------- | - | ------- | - | ----- |  | - | -
|                    |  | Fair Value Measurements as of June 30, 2008
|                    |  | CarryingAmount                              |       | Total |   | Level 1 |  | Level 2 |   | Level 3
|                    |  | (dollars in thousands)                     
|Interest Rate Swaps |  | $                                           | 2,193 |       | $ | 2,193   |  | $       |  |         | $ | 2,193 |  | $ | 

11. NEW ACCOUNTING PRONOUNCEMENTS

In December 2007, the FASB issued SFAS No. 160,Non-controlling Interest in Consolidated Financial Statements (SFAS 160), an
amendment of ARB No.51. SFAS 160 establishes new accounting and reporting standards for the non-controlling interest in a subsidiary and for the deconsolidation of a subsidiary. SFAS 160 clarifies that changes in a parents ownership interest
in a



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subsidiary that do not result in deconsolidation are equity transactions if the parent retains its controlling financial interest. In addition, this
statement requires that a parent recognize a gain or loss in net income when a subsidiary is deconsolidated. Such gain or loss will be measured using the fair value of the non-controlling equity investment on the deconsolidation date. SFAS 160 also
includes expanded disclosure requirements regarding the interest of the parent and its non-controlling interest. SFAS 160 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008.
Early adoption is prohibited. The Company is currently evaluating the potential impact of SFAS 160 on its financial position, results of operations and cash flows.

In December 2007, the FASB issued SFAS No. 141(R),Business Combinations (SFAS 141(R)). SFAS 141(R) requires an acquiring entity to recognize all the assets acquired and liabilities assumed in
a transaction at the acquisition-date fair value, with limited exceptions, and also includes a substantial number of new disclosure requirements. SFAS 141(R) applies prospectively to business combinations for which the acquisition date is on or
after the beginning of the first annual reporting period beginning on or after December 15, 2008. Early adoption is prohibited. The Company is currently evaluating the potential impact of SFAS 141(R) on its financial position, results of
operations and cash flows.

In March 2008, the FASB issued SFAS No. 161,Disclosures about Derivative Instruments and Hedging
Activities (SFAS 161)  an amendment of FASB Statement No. 133. The new standard is intended to improve financial reporting about derivative instruments and hedging activities by requiring enhanced disclosures to enable
investors to better understand their effects on an entitys financial condition, financial performance and cash flows. SFAS 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15,
2008. SFAS No. 161 will impact disclosures only and will not have an impact on the Companys consolidated financial condition, results of operations and cash flows.

12. SUBSEQUENT EVENTS

On July 18, 2008 the Company completed its acquisition of Bishop
Communications Corporation (Bishop Communications), headquartered in Annandale, Minnesota. The Company paid approximately $33 million in cash, net of cash received, and assumed debt of approximately $13 million. The assumed debt bears
interest at an average all-in rate of 7.22%. Principal payments on the Bishop debt of $576,000 are due in 2008, $1.3 million in 2009, $1.4 million in 2010, $1.5 million in 2011, and $1.6 million in 2012.

Bishop Communications was a privately held holding company whose operations include the Lakedale Telephone Company, a rural telecommunications provider.
Bishop Communications currently serves approximately 16,600 telephone access lines, 4,800 high speed Internet customers and 3,800 video subscribers.



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|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, intend, 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, 2007 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. We are the second-largest local exchange carrier in Iowa. In Iowa we operate 288
telephone exchanges serving 417 communities as the incumbent or historical local exchange carrier and are the sole telecommunications company providing wireline services in approximately 68% of these communities. Together with our
competitive local exchange carrier subsidiaries, we provide services to approximately 233,300 access lines in Iowa. In addition, as a result of the Bishop transaction completed on July 18, 2008, we operate 16,600 access lines in Minnesota.

Our core business is 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 66% of our total revenues in the first six months of 2008, we provide long distance service, dial-up and DSL Internet access and other communications services. As
part of our strategy of pursuing growth beyond our current service area, we compete for customers in mostly adjacent markets 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 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;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------



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



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

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 decreasing. We
expect that this trend will continue. Because most of our revenues result from our relationships with customers who utilize our access lines and the level of activity 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 by selling additional services to our



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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, the numbers of long distance and dial-up and DSL Internet subscribers are also meaningful performance indicators for us.

The
table below indicates the total number of access lines we serve and the number of customers subscribing to the indicated types of service as of the dates shown:



|                                                   |  |                |  |        
|-------------------------------------------------- |  | -------------- |  | -------
|                                                   |  | As of June 30,
|                                                   |  | 2007           |  | 2008   
|Incumbent local exchange access lines(1)           |  | 222,800        |  | 206,000
|Competitive local exchange carrier access lines(2) |  | 25,300         |  | 27,300 
|                                                   |  |                |  |        
|Total access lines                                 |  | 248,100        |  | 233,300
|                                                   |  |                |  |        
|Long distance subscribers                          |  | 147,000        |  | 139,200
|Dial-up Internet subscribers                       |  | 26,700         |  | 18,800 
|DSL subscribers                                    |  | 57,900         |  | 67,600 



|(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 3,000 wholesale lines subscribed at
June 30, 2007 and 2,600 at June 30, 2008.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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

We intend to continue our strategy of increasing revenues by cross-selling additional services to our existing customer
base, in the form of both bundled service packages and individual additional services. Between June 30, 2007 and June 30, 2008, total long distance service subscribers decreased by 7,800, total DSL Internet access service subscribers
increased by 9,700, and total dial-up Internet access service subscribers decreased by 7,900, with much of the decrease in total dial-up subscribers being a reflection of customer migration from dial-up to DSL service.

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

Competition. We currently face competition from other providers of local services in approximately 135 of the 417 incumbent local exchange
communities that we serve. Of these 135 communities, we believe 108 communities have some voice service offered by Mediacoms telephony affiliate, MCC Telephony of Iowa, Inc. (MCC), which initiated service in these markets during
the second quarter of 2007.

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.

Statewide retail local exchange service deregulation of our business began on July 1, 2005, pursuant to our election to deregulate our rates for all of our 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. Further, as of January 2006, all or our retail local exchange service was
deregulated in 28 exchanges based on competitive findings made by the Iowa Utilities Board. The remaining retail local exchange service rate regulation in our then-rate-regulated exchanges was eliminated as of July 1, 2008. The Iowa Utilities
Board had an opportunity to extend such remaining rate regulation until July 1, 2010, but, in a June 27, 2008 order, found that an extension of rate regulation was not in the public interest. The resulting deregulation will permit us to
respond better to competitive offerings by other providers.



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MCC is offering voice services through a business arrangement with Sprint Communications L.P.
(Sprint). 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 an interconnection agreement with Sprint and asking the court to invalidate the agreement. On April 15, 2008, the court issued a ruling holding against us, therefore maintaining the status quo in which we are
obligated to enter into an interconnection agreement with Sprint. We have appealed this decision to the U.S. Court of Appeals for the Eighth Circuit on May 14, 2008. We cannot predict how and when this litigation will be resolved.

Notwithstanding the period in which our complaint was under consideration, 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. On January 22, 2007, we filed a second complaint against the Iowa Utilities Board and Sprint in U.S. District Court asking the court to rule
that the Iowa Utilities Board acted unlawfully when it interpreted the interconnection agreement to require Iowa Telecom to provide certain services to Sprint, particularly in the manner requested by Sprint. Briefing on this complaint will conclude
during the third quarter of 2008. We cannot predict how and when this litigation will be resolved.

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. This state court proceeding had been stayed pending the result
of our first federal complaint. On the basis of our pending appeal to the Eighth Circuit of the first federal complaint, we are currently resisting a request by MCC to lift the stay of the state court proceeding. We can neither predict the result of
our resistance to the lifting of the stay nor when and how this state court litigation will be resolved.

Ancillary Effects of our Data
Businesses. Part of our decreasing line count has been an ancillary effect of our strategic focus on growing our Internet access service business. As our Internet service provider business has expanded, some competitors offering dial-up Internet
service 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 has decreased 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, statewide retail local exchange service deregulation of our business began on July 1, 2005, pursuant to our election to deregulate our rates for all
of our 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. Further, as of
January 2006, all of our retail local exchange service was deregulated in 28 exchanges based on competitive findings made by the Iowa Utilities Board. The remaining retail local exchange service rate regulation in our then-rate-regulated exchanges
sunset effective July 1, 2008. The Iowa Utilities Board had an opportunity to extend such remaining rate regulation until July 1, 2010, but, in a June 27, 2008 order, found that an extension of rate regulation was not in the public
interest to do so. The resulting deregulation will permit us to respond better to competitive offerings by other providers.

From
July 1, 2005 through June 30, 2008, monthly rates for single line services remaining under price regulation could be adjusted annually by one dollar for residential lines and two dollars for business lines, plus an inflation increment, up
to a monthly rate cap of $19.00 for residential lines and $38.00 for business lines. Pursuant to a January 25, 2007 interpretation by the Iowa Utilities Board, the $19.00 and $38.00 limits were inclusive of any incremental inflationary
adjustments and, therefore, once met, did not permit further inflationary adjustments. These rates did not, however, include charges for EAS, which, to the extent that it is offered in conjunction with single line flat-rate service, remained
regulated by the Iowa Utilities Board. As a result of retail rate deregulation, these pricing limits are no longer applicable.



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Effective January 1, 2007, our then-regulated monthly single line flat-rated business rate became
$37.96. Effective February 1, 2007, our regulated monthly single line flat-rated residential rate became $18.99. Both rates are exclusive of EAS, taxes, fees and regulatory surcharges. As of July 1, 2008, these retail local exchange
service rates are no longer subject to regulation by the Iowa Utilities Board.

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 changes. Because some 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 in close proximity to our rural local exchange carrier markets. We
plan to continue this strategy by seeking growth opportunities on a low-cost, selective basis, focusing primarily on business customers.

As of June 30, 2008, our CLEC served 27,300 access lines and accounted for 11.7% of Iowa Telecoms total access lines. We plan to maintain a limited investment approach as we continue to grow our competitive local exchange carrier
business.

Revenues

We derive our
revenues from five sources:

Local 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 (mandatory expanded calling service to select 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. We receive federally administered universal service support, representing approximately 2% of our total revenue in the first six months of 2008, as a result of the
interstate switched access support provisions of the FCCs CALLS Order to which the Company became subject in 2000. In addition, Montezuma Mutual Telephone Company (Montezuma Telephone) received high cost loop universal service
support amounting to less than 1% of our revenue. Our incumbent local exchange carrier switched access charges for services within Iowa are based on rates approved by the Iowa Utilities Board. Our incumbent local exchange carrier 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.

Data and Internet Services. We receive revenues from monthly recurring charges for dial-up and DSL Internet access services as well as for providing enhanced data solutions to our customers.

Other Services and Sales. We receive revenues from directory publishing, inside line care and the sale, installation and maintenance of customer
premise voice and data equipment (CPE), and the lease of office space to third parties.



17



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##### Table of Contents

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



|                           |  |                          |         |                                                               |   |         |  |     |      |  |     |  
|-------------------------- |  | ------------------------ | ------- | ------------------------------------------------------------- | - | ------- |  | --- | ---- |  | --- | -
|                           |  | Six Months EndedJune 30, |         | % of Total Revenues andSales for the Six MonthsEnded June 30, |  
|                           |  | 2007                     |         | 2008                                                          |   | 2007    |  |     | 2008 | 
|                           |  | (dollars in thousands)   |         |                                                               |   |         |  |    
|Local services             |  | $                        | 37,592  |                                                               | $ | 35,113  |  | 29  | %    |  | 29  | %
|Network access services    |  |                          | 54,017  |                                                               |   | 43,005  |  | 42  | %    |  | 36  | %
|Toll services              |  |                          | 10,675  |                                                               |   | 11,549  |  | 8   | %    |  | 10  | %
|Data and internet services |  |                          | 14,242  |                                                               |   | 16,486  |  | 11  | %    |  | 14  | %
|Other services and sales   |  |                          | 12,705  |                                                               |   | 12,869  |  | 10  | %    |  | 11  | %
|                           |  |                          |         |                                                               |   |         |  |     |      |  |     |  
|Total                      |  | $                        | 129,231 |                                                               | $ | 119,022 |  | 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 CPE 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.

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 EndedJune 30, |   |  | Six Months EndedJune 30, |  
|                                                                        |  | 2007                       |   |  | 2008                     |   |  | 2007 |   |  | 2008 |  
|Total revenues and sales                                                |  | 100                        | % |  | 100                      | % |  | 100  | % |  | 100  | %
|Cost of services and sales (excluding expenses listed separately below) |  | 32                         | % |  | 32                       | % |  | 30   | % |  | 31   | %
|Selling, general and administrative                                     |  | 18                         | % |  | 17                       | % |  | 17   | % |  | 17   | %
|Depreciation and amortization                                           |  | 19                         | % |  | 22                       | % |  | 19   | % |  | 21   | %
|                                                                        |  |                            |   |  |                          |   |  |      |   |  |      |  
|Operating income                                                        |  | 31                         | % |  | 29                       | % |  | 34   | % |  | 31   | %
|Total other expenses, net                                               |  | 13                         | % |  | 13                       | % |  | 12   | % |  | 13   | %
|                                                                        |  |                            |   |  |                          |   |  |      |   |  |      |  
|Income before income taxes                                              |  | 18                         | % |  | 16                       | % |  | 22   | % |  | 18   | %
|Income taxes                                                            |  | 8                          | % |  | 7                        | % |  | 9    | % |  | 8    | %
|                                                                        |  |                            |   |  |                          |   |  |      |   |  |      |  
|Net income                                                              |  | 10                         | % |  | 9                        | % |  | 13   | % |  | 10   | %



18



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##### Table of Contents

Three Months Ended June 30, 2008 and 2007

Revenues and Sales

The table below sets forth the components of our revenues and sales for the three
months ended June 30, 2008 compared to the same period in 2007:



|                           |  |                            |        |        |   |        |  |   |         |   |  |       |  
|-------------------------- |  | -------------------------- | ------ | ------ | - | ------ |  | - | ------- | - |  | ----- | -
|                           |  | Three Months EndedJune 30, |        | Change |  
|                           |  | 2007                       |        | 2008   |   | Amount |  |   | Percent |  
|                           |  | (dollars in thousands)     |       
|Revenues and Sales:        |  |                            |        |        |   |        |  |   |         |  
|Local services             |  | $                          | 18,745 |        | $ | 17,422 |  | $ | (1,323  | ) |  | -7.1  | %
|Network access services    |  |                            | 24,736 |        |   | 20,343 |  |   | (4,393  | ) |  | -17.8 | %
|Toll services              |  |                            | 5,285  |        |   | 5,679  |  |   | 394     |   |  | 7.5   | %
|Data and internet services |  |                            | 7,298  |        |   | 8,408  |  |   | 1,110   |   |  | 15.2  | %
|Other services and sales   |  |                            | 6,671  |        |   | 6,325  |  |   | (346    | ) |  | -5.2  | %
|                           |  |                            |        |        |   |        |  |   |         |   |  |       |  
|Total revenues and sales   |  | $                          | 62,735 |        | $ | 58,177 |  | $ | (4,558  | ) |  | -7.3  | %
|                           |  |                            |        |        |   |        |  |   |         |   |  |       |  

Local Services. Local services revenues decreased $1.3 million, or 7.1%, for the three
months ended June 30, 2008 as compared to the same period in 2007. The decrease was primarily due to the loss of access lines. From June 30, 2007 to June 30, 2008, total access lines decreased by 14,800, including the loss of 16,800
incumbent local exchange carrier lines offset by an increase in lines served by our competitive local exchange carriers of 2,000.

Network Access Services. Our network access services revenues decreased $4.4 million, or 17.8%, for the three months ended June 30, 2008 as compared to the same period in 2007. The decrease was partially due to a $1.5 million
revenue reduction related to a network access billing matter during 2008. In addition, the three months ended June 30, 2007 included a $980,000 favorable revenue impact from the settlement of a similar matter. The remainder of the decrease was
primarily due to lower revenues resulting from the decline in access lines.

Toll Services. Our toll services revenues increased by
$394,000, or 7.5%, for the three months ended June 30, 2008 as compared to the same period in 2007. The increase in revenue was due to customer connection charges which were $862,000 higher in 2008, and was partially offset by fewer long
distance customers.

Data and Internet Services. Data and Internet Services revenues increased by $1.1 million, or 15.2%, for the
three months ended June 30, 2008 as compared to the same period in 2007. The increase was primarily a result of growth in revenue from our DSL Internet access service of $1.3 million and growth in our data solutions products of $273,000. This
increase was partially offset by decreases in dial-up Internet revenue of $426,000. We believe the decline in dial-up Internet access service customers primarily was the result of customer migration to broadband products such as our DSL service.

Other Services and Sales. Other services and sales revenues decreased by $346,000, or 5.2%, for the three months ended
June 30, 2008 as compared to the same period in 2007. The revenue decrease was primarily due a decrease in rental income partially offset by higher miscellaneous customer fees.

Operating Costs and Expenses

The table below sets forth the components of our operating costs and
expenses for the three months ended June 30, 2008 compared to the same period in 2007:



|                                                                       |  |                            |        |        |   |        |  |   |         |   |  |      |  
|---------------------------------------------------------------------- |  | -------------------------- | ------ | ------ | - | ------ |  | - | ------- | - |  | ---- | -
|                                                                       |  | Three Months EndedJune 30, |        | Change |  
|                                                                       |  | 2007                       |        | 2008   |   | Amount |  |   | Percent |  
|                                                                       |  | (dollars in thousands)     |       
|Operating Costs and Expenses:                                          |  |                            |        |        |   |        |  |   |         |   |  |      |  
|Cost of services and sales (exclusive of items shown separately below) |  | $                          | 20,200 |        | $ | 18,744 |  | $ | (1,456  | ) |  | -7.2 | %
|Selling, general and administrative                                    |  |                            | 11,121 |        |   | 10,150 |  |   | (971    | ) |  | -8.7 | %
|Depreciation and amortization                                          |  |                            | 12,230 |        |   | 12,665 |  |   | 435     |   |  | 3.6  | %
|                                                                       |  |                            |        |        |   |        |  |   |         |   |  |      |  
|Total operating costs and expenses                                     |  | $                          | 43,551 |        | $ | 41,559 |  | $ | (1,992  | ) |  | -4.6 | %
|                                                                       |  |                            |        |        |   |        |  |   |         |   |  |      |  



19



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##### Table of Contents

Cost of Services and Sales. Cost of services and sales decreased $1.5 million, or 7.2%, for the
three months ended June 30, 2008 as compared to the same period in 2007. The decrease was principally due to a decline of $947,000 in access expense.

Selling, General and Administrative. Selling, general and administrative costs decreased $971,000, or 8.7%, for the three months ended June 30, 2008 as compared to the same period in 2007. The decrease was
primarily due to lower salary, wages, and benefits costs.

Depreciation and Amortization. Depreciation and amortization increased
$435,000, or 3.6%, for the three months ended June 30, 2008 as compared to the same period in 2007. The increase was primarily due to higher plant balances.

Other Income (Expense)

The table below sets forth the components of other income (expense) for the three months ended
June 30, 2008 compared to the same period in 2007:



|                             |  |                            |        |   |        |   |        |        |  |   |         |   |  |        |  
|---------------------------- |  | -------------------------- | ------ | - | ------ | - | ------ | ------ |  | - | ------- | - |  | ------ | -
|                             |  | Three MonthsEnded June 30, |        |   | Change |  
|                             |  | 2007                       |        |   | 2008   |   |        | Amount |  |   | Percent |  
|                             |  | (dollars in thousands)     |       
|Other Income (Expense):      |  |                            |        |   |        |   |        |        |  |   |         |   |  |        |  
|Interest and dividend income |  | $                          | 182    |   |        | $ | 172    |        |  | $ | (10     | ) |  | -5.5   | %
|Interest expense             |  |                            | (7,965 | ) |        |   | (7,463 | )      |  |   | 502     |   |  | -6.3   | %
|Other, net                   |  |                            | (49    | ) |        |   |       |        |  |   | 49      |   |  | -100.0 | %
|                             |  |                            |        |   |        |   |        |        |  |   |         |   |  |        |  
|Total other expense, net     |  | $                          | (7,832 | ) |        | $ | (7,291 | )      |  | $ | 541     |   |  | -6.9   | %
|                             |  |                            |        |   |        |   |        |        |  |   |         |   |  |        |  

Interest and Dividend Income. Interest and dividend income decreased $10,000.

Interest Expense. Interest expense decreased $502,000, or 6.3%, for the three months ended June 30, 2008 as compared to the same period in
2007. The decrease was due to a lower average balance on the revolving credit facility and lower interest rates on the Companys variable rate debt.

Other, Net. Other, net was a net expense of zero for the three months ended June 30, 2008 as compared to $49,000 related to ineffectiveness of the interest rate swap in the same period in 2007.

Income Tax Expense

Income tax expense decreased
$744,000 to $4.0 million for the three months ended June 30, 2008 as compared to $4.8 million for the same period in 2007 due to lower income before taxes. During the three months ended June 30, 2007 and 2008, cash income taxes paid were
$439,000 and $143,000, respectively.



20



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##### Table of Contents

Six Months Ended June 30, 2008 and 2007

Revenues and Sales

The table below sets forth the components of our revenues and sales for the six
months ended June 30, 2008 compared to the same period in 2007:



|                           |  |                          |         |        |   |         |  |   |         |   |  |       |  
|-------------------------- |  | ------------------------ | ------- | ------ | - | ------- |  | - | ------- | - |  | ----- | -
|                           |  | Six Months EndedJune 30, |         | Change |  
|                           |  | 2007                     |         | 2008   |   | Amount  |  |   | Percent |  
|                           |  | (dollars in thousands)   |        
|Revenues and Sales:        |  |                          |         |        |   |         |  |   |         |   |  |       |  
|Local services             |  | $                        | 37,592  |        | $ | 35,113  |  | $ | (2,479  | ) |  | -6.6  | %
|Network access services    |  |                          | 54,017  |        |   | 43,005  |  |   | (11,012 | ) |  | -20.4 | %
|Toll services              |  |                          | 10,675  |        |   | 11,549  |  |   | 874     |   |  | 8.2   | %
|Data and internet services |  |                          | 14,242  |        |   | 16,486  |  |   | 2,244   |   |  | 15.8  | %
|Other services and sales   |  |                          | 12,705  |        |   | 12,869  |  |   | 164     |   |  | 1.3   | %
|                           |  |                          |         |        |   |         |  |   |         |   |  |       |  
|Total revenues and sales   |  | $                        | 129,231 |        | $ | 119,022 |  | $ | (10,209 | ) |  | -7.9  | %
|                           |  |                          |         |        |   |         |  |   |         |   |  |       |  

Local Services. Local services revenues decreased $2.5 million, or 6.6%, for the six months
ended June 30, 2008 as compared to the same period in 2007. The decrease was primarily due to the loss of access lines. From June 30, 2007 to June 30, 2008, total access lines decreased by 14,800, including the loss of 16,800
incumbent local exchange carrier lines offset by an increase in lines served by our competitive local exchange carriers of 2,000.

Network Access Services. Our network access services revenues decreased $11.0 million, or 20.4%, for the six months ended June 30, 2008 as compared to the same period in 2007. The decrease was primarily due to $5.5 million of
revenue from non-recurring network access billing matters with connecting carriers recorded in 2007, while 2008 included a $1.5 million unfavorable impact due to similar items. The remainder of the decrease was primarily due to lower revenues
resulting from the decline in access lines.

Toll Services. Our toll services revenues increased by $874,000, or 8.2%, for the six
months ended June 30, 2008 as compared to the same period in 2007. The increase in revenue was due to higher customer connection charges, which were partially offset by fewer long distance customers combined with a decrease in the average
minutes of use per customer.

Data and Internet Services. Data and Internet Services revenues increased by $2.2 million, or 15.8%,
for the six months ended June 30, 2008 as compared to the same period in 2007. The increase was primarily a result of growth in our DSL Internet access service revenue of $2.6 million and growth in our data solutions products revenue of
$525,000. This increase was partially offset by decreases in dial-up Internet revenue of $838,000. We believe the decline in dial-up Internet access service customers primarily was the result of customer migration to broadband products such as our
DSL service.

Other Services and Sales. Other services and sales revenues increased by $164,000, or 1.3%, for the six months ended
June 30, 2008 as compared to the same period in 2007. The revenue increase was primarily due to a $1.4 million growth in our CPE business partially offset by a $1.3 million decrease in rental income.



21



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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 six months ended June 30, 2008 compared to the same period in 2007:



|                                                                       |  |                          |        |        |   |        |  |   |         |   |  |      |  
|---------------------------------------------------------------------- |  | ------------------------ | ------ | ------ | - | ------ |  | - | ------- | - |  | ---- | -
|                                                                       |  | Six Months EndedJune 30, |        | Change |  
|                                                                       |  | 2007                     |        | 2008   |   | Amount |  |   | Percent |  
|                                                                       |  | (dollars in thousands)   |       
|Operating Costs and Expenses:                                          |  |                          |        |        |   |        |  |   |         |   |  |      |  
|Cost of services and sales (exclusive of items shown separately below) |  | $                        | 38,576 |        | $ | 37,357 |  | $ | (1,219  | ) |  | -3.2 | %
|Selling, general and administrative                                    |  |                          | 21,602 |        |   | 20,265 |  |   | (1,337  | ) |  | -6.2 | %
|Depreciation and amortization                                          |  |                          | 24,258 |        |   | 25,270 |  |   | 1,012   |   |  | 4.2  | %
|                                                                       |  |                          |        |        |   |        |  |   |         |   |  |      |  
|Total operating costs and expenses                                     |  | $                        | 84,436 |        | $ | 82,892 |  | $ | (1,544  | ) |  | -1.8 | %
|                                                                       |  |                          |        |        |   |        |  |   |         |   |  |      |  

Cost of Services and Sales. Cost of services and sales decreased $1.2 million, or 3.2%, for
the six months ended June 30, 2008 as compared to the same period in 2007. The decrease was principally due to a decline in access expense of $1.5 million partially offset by an increase in material costs attributable to growth of our CPE and
data businesses.

Selling, General and Administrative. Selling, general and administrative costs decreased $1.3 million, or 6.2%,
for the six months ended June 30, 2008 as compared to the same period in 2007. The decrease was primarily due to lower salary, wages, and benefits costs.

Depreciation and Amortization. Depreciation and amortization increased $1.0 million or 4.2%, for the six months ended June 30, 2008 as compared to the same period in 2007. The increase was primarily due to
higher plant balances.

Other Income (Expense)

The table below sets forth the components of other income (expense) for the six months ended June 30, 2008 compared to the same period in 2007:



|                             |  |                          |         |   |        |   |         |        |  |   |         |   |  |      |  
|---------------------------- |  | ------------------------ | ------- | - | ------ | - | ------- | ------ |  | - | ------- | - |  | ---- | -
|                             |  | Six MonthsEnded June 30, |         |   | Change |  
|                             |  | 2007                     |         |   | 2008   |   |         | Amount |  |   | Percent |  
|                             |  | (dollars in thousands)   |        
|Other Income (Expense):      |  |                          |         |   |        |   |         |        |  |   |         |   |  |      |  
|Interest and dividend income |  | $                        | 553     |   |        | $ | 550     |        |  | $ | (3      | ) |  | -0.5 | %
|Interest expense             |  |                          | (15,977 | ) |        |   | (15,161 | )      |  |   | 816     |   |  | -5.1 | %
|Other, net                   |  |                          | (273    | ) |        |   | (259    | )      |  |   | 14      |   |  | -5.1 | %
|                             |  |                          |         |   |        |   |         |        |  |   |         |   |  |      |  
|Total other expense, net     |  | $                        | (15,697 | ) |        | $ | (14,870 | )      |  | $ | 827     |   |  | -5.3 | %
|                             |  |                          |         |   |        |   |         |        |  |   |         |   |  |      |  

Interest and Dividend Income. Interest and dividend income decreased $3,000, or 0.5%.

Interest Expense. Interest expense decreased $816,000, or 5.1%, for the six months ended June 30, 2008 as compared to the same
period in 2007. The decrease was due to a lower average balance on the revolving credit facility and lower interest rates on the Companys variable rate debt.

Other, Net. Other, net was a net expense of $259,000 related to ineffectiveness of the interest rate swap for the six months ended June 30, 2008 as compared to $273,000 in the same period in 2007.

Income Tax Expense

Income tax expense
decreased $3.0 million to $9.0 million for the six months ended June 30, 2008 as compared to $12.1 million for the same period in 2007 due to lower income before taxes. During the six months ended June 30, 2007 and 2008, cash income taxes
paid were $442,000 and $147,000, respectively.



22



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##### Table of Contents

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 and (v) potential acquisitions.

The table below reflects the dividends declared or
paid by the Company during 2007 and 2008:



|                   |  |                    |       |             |                    |              |                 
|------------------ |  | ------------------ | ----- | ----------- | ------------------ | ------------ | ----------------
|Date Declared      |  | Dividend Per Share |       | Record Date |                    | Payment Date
|December 15, 2006  |  | $                  | 0.405 |             | December 29, 2006  |              | January 16, 2007
|March 15, 2007     |  | $                  | 0.405 |             | March 30, 2007     |              | April 16, 2007  
|June 15, 2007      |  | $                  | 0.405 |             | June 29, 2007      |              | July 16, 2007   
|September 14, 2007 |  | $                  | 0.405 |             | September 28, 2007 |              | October 15, 2007
|December 14, 2007  |  | $                  | 0.405 |             | December 31, 2007  |              | January 15, 2008
|March 14, 2008     |  | $                  | 0.405 |             | March 31, 2008     |              | April 15, 2008  
|June 12, 2008      |  | $                  | 0.405 |             | June 30, 2008      |              | July 15, 2008   

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.

On July 18, 2008 the Company completed its acquisition of Bishop Communications Corporation (Bishop
Communications), headquartered in Annandale, Minnesota. The Company paid approximately $33 million in cash, net of cash received, and assumed debt of approximately $13 million. Bishop Communications was a privately held holding company whose
operations include the Lakedale Telephone Company, a rural telecommunications provider. Bishop Communications currently serves approximately 16,600 telephone access lines, 4,800 high speed Internet customers and 3,800 video subscribers.

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 on Term Loans B, C and D, which will mature in 2011. However, we may be required to make annual mandatory prepayments under these 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. As a result of the assumed debt associated with the Bishop acquisition of approximately $13.0 million, we will have principal payments of $576,000 due in 2008, $1.3 million in 2009, $1.4 million in 2010,
$1.5 million in 2011, and $1.6 million in 2012.

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, results of operations and our business could suffer. However, our board of directors may, in its discretion, amend or repeal our dividend policy to decrease the level of dividends provided for under the policy, or to discontinue
entirely the payment of dividends.



23



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##### Table of Contents

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, as defined in our credit agreement, as of December 31, 2007 and June 30, 2008:



|                                       |  |                  |         |   |              |   |         |  
|-------------------------------------- |  | ---------------- | ------- | - | ------------ | - | ------- | -
|                                       |  | As of            |        
|                                       |  | December 31,2007 |         |   | June 30,2008 |  
|                                       |  | (in thousands)   |        
|Short-Term Liquidity:                  |  |                  |         |   |              |   |         |  
|Current assets                         |  | $                | 47,454  |   |              | $ | 28,920  |  
|Current liabilities                    |  |                  | (68,531 | ) |              |   | (47,781 | )
|                                       |  |                  |         |   |              |   |         |  
|Net working capital deficit            |  | $                | (21,077 | ) |              | $ | (18,861 | )
|                                       |  |                  |         |   |              |   |         |  
|Cash and cash equivalents              |  | $                | 21,919  |   |              | $ | 4,093   |  
|Available on revolving credit facility |  | $                | 82,000  |   |              | $ | 99,000  |  
|Adjusted Total Debt:                   |  |                  |         |   |              |   |         |  
|Long-term debt                         |  | $                | 477,778 |   |              | $ | 477,778 |  
|Revolving credit facility              |  |                  | 18,000  |   |              |   | 1,000   |  
|                                       |  |                  |         |   |              |   |         |  
|Total debt                             |  |                  | 495,778 |   |              |   | 478,778 |  
|Minus:                                 |  |                  |         |   |              |   |         |  
|RTFC Capital Certificates              |  |                  | (7,778  | ) |              |   | (7,778  | )
|Cash and cash equivalents              |  |                  | (21,919 | ) |              |   | (4,093  | )
|                                       |  |                  |         |   |              |   |         |  
|Adjusted Total Debt                    |  | $                | 466,081 |   |              | $ | 466,907 |  
|                                       |  |                  |         |   |              |   |         |  

The reductions in current assets and current liabilities are primarily due to the use of cash and
cash equivalents to reduce the balance outstanding on the revolving credit facility.

The following table summarizes our Adjusted EBITDA,
as defined in our credit agreement, and reconciles such Adjusted EBITDA to net income (which we believe is the most directly comparable GAAP financial measure to Adjusted EBITDA) for the three and six month periods ended June 30, 2007 and 2008:



|                                                         |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|-------------------------------------------------------- |  | -------------------------- | ------ | - | ------------------------ | - | ------ | ---- |  | - | ------ | - |  | - | ------ | -
|                                                         |  | Three Months EndedJune 30, |        |   | Six Months EndedJune 30, |  
|                                                         |  | 2007                       |        |   | 2008                     |   |        | 2007 |  |   | 2008   |  
|Adjusted EBITDA:                                         |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|Net income                                               |  | $                          | 6,574  |   |                          | $ | 5,293  |      |  | $ | 17,047 |   |  | $ | 12,250 |  
|Income tax expense                                       |  |                            | 4,778  |   |                          |   | 4,034  |      |  |   | 12,051 |   |  |   | 9,010  |  
|Interest expense                                         |  |                            | 7,965  |   |                          |   | 7,463  |      |  |   | 15,977 |   |  |   | 15,161 |  
|Depreciation and amortization                            |  |                            | 12,230 |   |                          |   | 12,665 |      |  |   | 24,258 |   |  |   | 25,270 |  
|Unrealized losses on financial derivatives               |  |                            | 49     |   |                          |   |       |      |  |   | 273    |   |  |   | 259    |  
|Non-cash stock-based compensation expense                |  |                            | 680    |   |                          |   | 904    |      |  |   | 1,273  |   |  |   | 1,770  |  
|Extraordinary or unusual (gains) losses                  |  |                            |       |   |                          |   |       |      |  |   |       |   |  |   |       |  
|Non-cash portion of RTFC Capital Allocation              |  |                            | (41    | ) |                          |   | (44    | )    |  |   | (199   | ) |  |   | (146   | )
|Other non-cash losses (gains)                            |  |                            |       |   |                          |   |       |      |  |   |       |   |  |   |       |  
|Loss (gain) on disposal of assets not in ordinary course |  |                            |       |   |                          |   |       |      |  |   |       |   |  |   |       |  
|Transaction costs                                        |  |                            |       |   |                          |   |       |      |  |   |       |   |  |   |       |  
|                                                         |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|Adjusted EBITDA                                          |  | $                          | 32,235 |   |                          | $ | 30,315 |      |  | $ | 70,680 |   |  | $ | 63,574 |  
|                                                         |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  

The following table summarizes our sources and uses of cash for the six months ended June 30,
2007 and 2008:



|                             |  |                          |         |   |      |   |         |  
|---------------------------- |  | ------------------------ | ------- | - | ---- | - | ------- | -
|                             |  | Six Months EndedJune 30, |        
|Description                  |  | 2007                     |         |   | 2008 |  
|                             |  | (in thousands)           |        
|Net Cash Provided (Used) By: |  |                          |         |   |      |   |         |  
|Operating activities         |  | $                        | 50,171  |   |      | $ | 44,229  |  
|Investing activities         |  | $                        | (13,212 | ) |      | $ | (18,931 | )
|Financing activities         |  | $                        | (44,987 | ) |      | $ | (43,124 | )



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Cash Provided by Operating Activities

For the six months ended June 30, 2007 and 2008, cash provided by operating activities was $50.2 million and $44.2 million, respectively. The
decrease in cash provided by operating activities is primarily due to the funds received related to the resolution of certain network access disputes in 2007.

Cash Used in Investing Activities

The table below sets forth the components of cash used in investing activities for the
six months ended June 30, 2007 and 2008:



|                              |  |                          |        |      |   |       
|----------------------------- |  | ------------------------ | ------ | ---- | - | ------
|                              |  | Six MonthsEnded June 30,
|                              |  | 2007                     |        | 2008
|                              |  | (in thousands)          
|Network and support assets    |  | $                        | 10,125 |      | $ | 9,948 
|Other                         |  |                          | 3,087  |      |   | 3,045 
|                              |  |                          |        |      |   |       
|Total capital expenditures    |  |                          | 13,212 |      |   | 12,993
|Purchase of wireless licenses |  |                          |       |      |   | 5,938 
|                              |  |                          |        |      |   |       
|Total                         |  | $                        | 13,212 |      | $ | 18,931
|                              |  |                          |        |      |   |       

Capital expenditures for 2008 include $1.6 million for the implementation of a customer
relationship management system. Capital expenditures in 2007 include $2.9 million incurred to acquire, refurbish and provide network facilities for our new headquarter facility. The remaining $5.9 million change is due to the purchase of 700 MHz
wireless licenses acquired through the FCCs recent wireless auction in 2008.

In April 2004, our incumbent local exchange carrier
reached a rate settlement agreement with the Iowa Utilities Board and other parties. Pursuant to the settlement agreement, we were obligated to invest substantially all additional revenues generated by the allowed increase in our regulated rates,
except for revenues resulting from inflation adjustments, on capital improvements identified in our network improvement plan. Because deregulated services were excluded from the agreement, the retail local exchange service rate deregulation that
became effective July 1, 2008 eliminated our continuing obligation to invest any incremental revenue from the regulated rate increase.

We expect that total capital expenditures, including those pursuant to the settlement agreement, will be between approximately $27 million and $29 million in fiscal 2008 inclusive of expected capital expenditures at Bishop Communications
and to replace equipment damaged by flooding in our service area. 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.

During the
first quarter of 2008, we participated in the FCCs auction of 700 MHz Band licenses (Auction No.73) after depositing $1.9 million with the FCC. We were high bidder on three Cellular Market Area licenses in the 704-710 MHz, and 734-740 MHz
bands. We submitted the balance of our $5.9 million total winning bids on April 17, 2008. The FCC issued the licenses during the second quarter of 2008. We currently hold 15 FCC Advanced Wireless Service licenses and hold three 700 MHz licenses
in Iowa. Our ownership of these licenses subjects us to FCC regulation of the wireless services we may choose to provide and the technical operating characteristics of the network equipment we may utilize. In addition, our right to renew these
licenses depends on our compliance with build-out requirements promulgated by the FCC. For the 700 MHz licenses, we must begin meeting such requirements in stages prior to the expiration of the initial 10 year license term. For our Advanced Wireless
Service licenses, we must meet the FCCs build-out requirements by the end of such licenses 15 year initial term. We cannot predict changes that may occur in the FCCs regulation of our Advanced Wireless Services or 700 MHz licenses,
the network we may build or the services we may provide over the period of time we may hold the licenses.



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Cash Used in Financing Activities

For the six months ended June 30, 2007 and 2008, net cash used in financing activities was $45.0 million and $43.1 million, respectively.

Long-Term Debt and Revolving Credit Facilities

Credit Facilities

As of June 30, 2008, we had outstanding $477.8 million of senior debt under our term loan facilities, and had $1.0 million drawn under our $100.0
million revolving credit facility. The details of the credit facilities are as follows:

The revolving credit facility will expire in
November 2011 and permits borrowings up to the aggregate principal amount of $100.0 million (less amounts reserved for letters of credit up to a maximum amount of $25.0 million). As of June 30, 2008, $1.0 million was outstanding on the
revolving credit facility and $99.0 million was available. Borrowings under our 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
June 30, 2008, we had $1.0 million outstanding under LIBOR elections at an average all-in rate of 4.49%.

Term Loan B is a $400.0
million senior secured term facility maturing in November 2011, bearing interest per annum at either (a) a LIBOR rate plus an applicable rate adder of 1.75% per annum or (b) a base rate election plus an applicable rate adder of
0.75% per annum. As of June 30, 2008, $350.0 million was outstanding under Term Loan B based upon a LIBOR election effective through September 30, 2008 at an all-in rate of 4.56%. We have entered into interest rate swap agreements to
fix the rate on $350.0 million of Term Loan B as more fully described below. As of June 30, 2008, the interest rate on the remaining $50.0 million was based upon a LIBOR election effective through September 12, 2008 at an all-in rate of
4.54%.

Term Loan C is a $70.0 million senior secured term facility maturing in November 2011, bearing interest per annum at either
(a) a fixed rate or (b) a Rural Telephone Finance Cooperative variable rate plus 0.85%. The interest rate on Term Loan C was fixed at 6.65% until November 2007. Effective August 1, 2007, we elected a new all-in fixed interest rate of
6.95% through June 2011 on Term Loan C. Upon the expiration of the fixed interest rate period, the 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 November 2011, bearing interest per annum at either (a) a fixed rate or
(b) a Rural Telephone Finance Cooperative variable rate plus 0.85%. The interest rate on Term Loan D was fixed at 6.65% until November 2007. Effective August 1, 2007, we elected a new all-in fixed interest rate of 6.95% through June 2011
on Term Loan D. Upon the expiration of the fixed interest rate period, the term loan will convert to the Rural Telephone Finance Cooperative 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. 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.



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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 in 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 June 30, 2008, no prepayment amounts were due under these
provisions.

On July 14, 2008, the Company entered into Amendment No. 2 to its credit agreement, dated as of November 23,
2004 (as amended from time to time, the  Credit Agreement), among the Company, the lenders party thereto and Rural Telephone Finance Cooperative, as a administrative agent. Amendment No. 2 to the Credit Agreement (1) gives the
Company greater flexibility to acquire companies which have non-wholly owned subsidiaries, by, among other things, not requiring acquired non-wholly owned subsidiaries to guarantee the loans under the Credit Agreement, (2) permits the Company
to assume or acquire up to $20 million of existing indebtedness of acquired entities and (3) modifies the Companys excess cash flow prepayment obligations with respect to uses of the revolving credit facility for permitted acquisitions.

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 June 30, 2008.

Interest
Rate Swaps

On August 26, 2005, we amended the interest rate swap arrangements that were originally entered into on
November 4, 2004. The amended swap arrangements effectively fixed the interest rate we will pay on $350.0 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 is 5.865%.

Other Items

On August 4, 2004, the FCC adopted rules requiring certain telecommunications carriers to begin reporting additional information to the FCC in the event of selected service outages and related events affecting
some fiber facilities. On December 20, 2004, the FCC stayed the rules effectiveness pending agency reconsideration of their merits, in part due to concerns about the substantial expenditures required of telecommunications carriers in
order to comply with the new reporting obligations. At this time, we cannot predict the consequences of the FCCs reconsideration or the financial or operational impacts any final rules may have on us.

In response to the Independent Panel Reviewing the Impact of Hurricane Katrina on Communications Networks, the FCC adopted rules on May 31, 2007
requiring incumbent local exchange carriers, competitive local exchange carriers, and wireless carriers to, among other things, maintain emergency back-up power for a minimum of eight hours for cell sites, remote switches, and digital loop carrier
system remote terminals that normally are powered from local AC commercial power. Five days prior to the new rules taking effect, the FCC on October 4, 2007, released an order amending some of these new requirements to provide greater
compliance flexibility. We do not anticipate incurring significant costs in complying with the FCCs requirements.



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On May 8, 2006, the Company filed with the FCC forbearance and waiver petitions asking it to allow
the Company to become eligible to qualify for high-cost support from the non-rural high cost support program of the Universal Service Fund. On August 6, 2007, the FCC issued an order denying our petition for forbearance. The FCC has not yet
ruled on our petition for waiver and there is no statutory deadline for issuing a ruling. We cannot predict whether the FCC will deny or approve the waiver petition, and the amount, if any, of high cost support funds that we may receive in the
future. Furthermore, because our use of any high cost support program funds that we may receive as a result of our waiver petition would be limited to the provision, maintenance, and upgrading of facilities and services for which the support is
intended, we cannot predict the extent to which receipt of such funds would affect our liquidity or earnings.

On February 20, 2008,
MCImetro Transmission Access Transmission Services LLC, d/b/a Verizon Access Transmission Services and MCI Communications Services, Inc. d/b/a Verizon Business Services filed a complaint with the Iowa Utilities Board against our local incumbent
exchange carrier, our CLEC, Frontier Communication of Iowa, Inc., and Citizens Mutual Telephone Company alleging that the tariffed intrastate switched access rates of each are not just and reasonable and should be lowered by the Iowa Utilities Board
to mirror the rates contained in Qwest Corporations Iowa tariff. The complaint appears to be similar to others asserted by these or related entities against the intrastate access charges of mid-sized incumbent local exchange
companies in several other states. We have filed a motion to dismiss the complaint in light of our legislated price plan, and believe the substance of the complaint to be without merit given the absence of any rationale for the proposed decrease.
Briefing on our pending motion to dismiss will conclude August 4, 2008. We cannot predict how and when our motion to dismiss will be resolved. Further, we cannot predict the outcome of Verizons complaint on its merits in the event our
motion to dismiss is denied.

In June 2008, record flooding damaged a few of the 417 ILEC communities served by Iowa Telecom. Through
June 30, 2008, we believe that we have lost approximately 200 access lines that can be directly attributed to the flooding. Additionally, we believe that our operating results for the three and six months ended June 30, 2008 were
negatively impacted by approximately $250,000, which is comprised of lost revenues, increased labor costs from overtime and a shift of capital efforts into repair efforts, along with other repair and prevention costs. As it relates to incremental
capital expenditures, we estimate that we have incurred less than $100,000 of expenditures related to the flooding through June 30, 2008. However, we expect that amount will increase over time as the infrastructure is rebuilt in the impacted
communities. We estimate that capital expenditures of approximately $1 million will be incurred over the next one to two years related to restoration and rebuilding efforts. However, this estimate is subject to change as a result of potential
capital expenditures related to unforeseen restoration activities. We believe that we will recover a portion of the costs and expenditures described from our insurance carrier, but have not submitted a final insurance claim.

Montezuma Telephone and our CLECs concur in the Iowa Telecommunications Association is (ITA) intrastate access charge tariff. On May 30,
2008, the Board issued an order rejecting ITAs proposed tariff revision, and requiring ITA to, among other things, lower its local switching rate from 4.04 to 2.44 cents-per-minute and to remove the 1.5 cents-per-minute Transport
Interconnection Charge by June 30, 2008. ITA filed a request for stay pending rehearing on a variety of issues, including the appropriate transition period for implementation. Sprint also filed a rehearing request regarding the Boards
decision not to issue refunds back to September 1, 2007, the date of Sprints objection. The Board has granted ITAs request for stay. We expect the board will issue a decision on rehearing later this year. The Boards
May 30, 2008 order also indicated that it might institute a proceeding that could lead to removal of the three cents-per-minute carrier common line charge in the ITA tariff, which would apply to Montezuma but not to our CLECs because our CLECs
do not assess the carrier common line (CCL) charge. We cannot predict the result of either the rehearing on the ITA tariff or of any proceeding regarding ITAs CCL rate.

Obligations and Commitments

Our ongoing capital commitments include capital expenditures, debt
service requirements and acquisition commitments. For the six months ended June 30, 2008, capital expenditures were $18.9 million; see Liquidity and Capital ResourcesCash Used in Investing Activities.



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The following table sets forth our contractual obligations as of June 30, 2008, together with cash
payments due in each period indicated:



|                                 |  |                        |         |                 |   |            |  |            |        |               |   |         |  |   |   
|-------------------------------- |  | ---------------------- | ------- | --------------- | - | ---------- |  | ---------- | ------ | ------------- | - | ------- |  | - | --
|                                 |  | Payments Due by Period
|Obligation                       |  | Total                  |         | Jul. Dec. 2008 |   | 2009 2010 |  | 2011 2012 |        | 2013and after
|                                 |  | (dollars in thousands)
|Current Debt:                    |  |                        |         |                 |   |            |  |            |        |               |   |         |  |   |   
|Revolving credit facility(1) (3) |  | $                      | 1,000   |                 | $ |           |  | $          |       |               | $ | 1,000   |  | $ |  
|Long-Term Debt:                  |  |                        |         |                 |   |            |  |            |        |               |   |         |  |   |   
|Senior debt payments             |  |                        | 477,778 |                 |   |           |  |            |       |               |   | 477,778 |  |   |  
|Interest Payments(2)             |  |                        | 85,839  |                 |   | 12,894     |  |            | 51,866 |               |   | 21,079  |  |   |  
|Operating Lease Payments         |  |                        | 452     |                 |   | 143        |  |            | 253    |               |   | 14      |  |   | 42
|                                 |  |                        |         |                 |   |            |  |            |        |               |   |         |  |   |   
|Total Contractual Obligations    |  | $                      | 565,069 |                 | $ | 13,037     |  | $          | 52,119 |               | $ | 499,871 |  | $ | 42
|                                 |  |                        |         |                 |   |            |  |            |        |               |   |         |  |   |   



|(1) | Advances on the line of credit mature in periods within one year. The terms of the line of credit are a component of our
senior debt agreement which expires in November 2011.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Excludes interest payments on variable rate long-term debt that has not been fixed through hedging arrangements. Amounts
include the impact of hedging arrangements.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | Excludes commitments for purchase of Bishop Communications of approximately $33 million in cash, net of cash received
and assumed debt of approximately $13 million. The assumed debt bears interest at an average all-in rate of 7.22%. Principal payments of $576,000 are due in 2008, $1.3 million in 2009, $1.4 million in 2010, $1.5 million in 2011, and $1.6 million in
2012.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

As of June 30, 2008, no letters of credit were outstanding.

We currently project that cash provided by operations will be adequate to meet our foreseeable operational liquidity needs for the next twelve 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, regulatory, technological and competitive developments, the level of construction activity in our region and the impact of weather.

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 to their fair values when the carrying amounts are not recoverable from estimated future cash flows on an undiscounted basis. We reduce the carrying amounts of 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 performed an annual impairment review of goodwill and indefinite lived intangible assets as required by SFAS No. 142, Goodwill and Other
Intangible Assets as of August 31, 2007.



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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. All revenues are recorded net of applicable taxes assessed by governmental authorities.

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.

As of June 30, 2008, our
unused tax net operating loss carry forward was $146.1 million, and will expire between 2021 and 2024. Additionally, the Company expects to be able to continue taking deductions related to the amortization of intangibles in excess of the amount
recorded for book purposes in the amount of approximately $40.0 million per year through June 2015. Based upon the evidence available as of June 30, 2008, the combination of the continued generation of taxable income from operations and
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.

Off-Balance Sheet Risk and Concentration of Credit Risk

The Company has 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, interest rate swap agreements, cash, and cash equivalents.

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 December 2007, the FASB issued SFAS No. 160,Non-controlling Interest in Consolidated Financial Statements (SFAS 160), an
amendment of ARB No. 51. SFAS 160 establishes new accounting and reporting standards for the non-controlling interest in a subsidiary and for the deconsolidation of a subsidiary. SFAS 160 clarifies that changes in a parents ownership
interest in a subsidiary that do not result in deconsolidation are equity transactions if the parent retains its controlling financial interest. In addition, this statement requires that a parent recognize a gain or loss in net income when a
subsidiary is deconsolidated. Such gain or loss will be measured using the fair value of the non-controlling equity investment on the deconsolidation date. SFAS 160 also includes expanded disclosure requirements regarding the interest of the parent
and its non-controlling interest. SFAS 160 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. Early adoption is prohibited. The Company is currently evaluating the potential
impact of SFAS 160 on its financial position, results of operations and cash flows.



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In December 2007, the FASB issued SFAS No. 141(R),Business Combinations (SFAS
141(R)). SFAS 141(R) requires an acquiring entity to recognize all the assets acquired and liabilities assumed in a transaction at the acquisition-date fair value, with limited exceptions and also includes a substantial number of new
disclosure requirements. SFAS 141(R) applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. Early adoption is
prohibited. The Company is currently evaluating the potential impact of SFAS 141(R) on its financial position, results of operations and cash flows.

In March 2008, the FASB issued SFAS No. 161,Disclosures about Derivative Instruments and Hedging Activities (SFAS 161)  an amendment of FASB Statement No. 133. The new standard is
intended to improve financial reporting about derivative instruments and hedging activities by requiring enhanced disclosures to enable investors to better understand their effects on an entitys financial condition, financial performance and
cash flows. It is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. SFAS No. 161 will impact disclosures only and will not have an impact on the Companys consolidated
financial condition, results of operations and cash flows.

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 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 in November 2011. Our $400.0
million of indebtedness under Term Loan B, maturing in 2011, bears an annual interest at either (a) LIBOR plus 1.75% or (b) a base rate plus 0.75%. On August 26, 2005, we entered into interest rate swap agreements with nationally
recognized counterparties for the purpose of fixing the interest on a portion of these borrowings. Pursuant to the swap agreements, we will pay a fixed rate of interest of 5.865% on a notional $350.0 million of Term Loan B 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 June 2011. Thereafter,
we expect our interest rates under Term Loans C and D to convert to the Rural Telephone Finance Cooperative variable 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 $1.0 million of borrowings drawn under the revolving credit facility at June 30, 2008. With respect to our $77.8
million of borrowings under Term Loan C and D, we are exposed to interest rate risk, resulting primarily from fluctuations in the Rural Telephone Finance Cooperatives variable rate, from July 2011 through maturity in November 2011. As of
June 30, 2008, a one percent change in the underlying interest rates for all of the variable rate debt that was outstanding would have an impact of approximately $510,000 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 June 30, 2008 (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 significant change in the Companys internal control over financial
reporting (as defined in Exchange Act Rules 13a  15(f) and 15d  15(f)) during our most recently completed fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Companys 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.

On February 20, 2008, MCImetro Transmission Access Transmission Services LLC, d/b/a Verizon Access Transmission Services and MCI
Communications Services, Inc. d/b/a Verizon Business Services filed a complaint with the Iowa Utilities Board against our local incumbent exchange carrier, our CLEC, Frontier Communication of Iowa, Inc., and Citizens Mutual Telephone Company
alleging that the tariffed intrastate switched access rates of each are not just and reasonable and should be lowered by the Iowa Utilities Board to mirror the rates contained in Qwest Corporations Iowa tariff. The complaint
appears to be similar to others asserted by these or related entities against the intrastate access charges of mid-sized incumbent local exchange companies in several other states. We have filed a motion to dismiss the complaint in light of our
legislated price plan and believe the substance of the complaint to be without merit given the absence of any rationale for the proposed decrease. Briefing on our pending motion to dismiss will conclude August 4, 2008. We cannot predict how and
when our motion to dismiss will be resolved. Further, we cannot predict the outcome of Verizons complaint on its merits in the event our motion to dismiss is denied.



|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, 2007, 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 2. | PURCHASE OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
|------- | ---------------------------------------------------------------------

During the quarter ended June 30, 2008, the Company reacquired the following number of shares of its common stock from recipients of restricted stock awards under the Companys 2005 Stock Incentive Plan in
order to satisfy tax withholding obligations due upon vesting of such restricted stock (see also Note 6 to Consolidated Financial Statements above):

ISSUER PURCHASES OF EQUITY SECURITIES



|                          |  |                                              |  |                                          |       |                                                                                             |   |                                                                                                                         |  
|------------------------- |  | -------------------------------------------- |  | ---------------------------------------- | ----- | ------------------------------------------------------------------------------------------- | - | ----------------------------------------------------------------------------------------------------------------------- | -
|Period                    |  | (a) TotalNumber
ofShares (or Units)Purchased |  | (b) AveragePrice Paid perShare (or Unit) |       | (c) Total Number ofShares (or
Units)Purchased as Part ofPublicly AnnouncedPlans or Programs |   | (d) Maximum Number (orApproximate Dollar Value) ofShares (or Units) that May YetBe Purchased Under the Plansor Programs
|April 1 to April 30, 2008 |  | 8,584                                        |  | $                                        | 17.73 |                                                                                             |  |                                                                                                                         | 
|May 1 to May 31, 2008     |  | 7,055                                        |  | $                                        | 17.92 |                                                                                             |  |                                                                                                                         | 
|June 1 to June 30, 2008   |  |                                             |  |                                          |      |                                                                                             |  |                                                                                                                         | 
|                          |  |                                              |  |                                          |       |                                                                                             |   |                                                                                                                         |  
|Total                     |  | 15,639                                       |  | $                                        | 17.82 |                                                                                             |  |                                                                                                                         | 



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

(a) The registrant held its 2008 Annual Meeting of the Shareholders on June 12, 2008.

(b) Proxies for the Annual Meeting
were solicited pursuant to Regulation 14A; there was no solicitation in opposition to managements nominees for directors as listed in the Proxy Statement. All such nominees were elected pursuant to the following votes:



|                |  |                 |  |         
|--------------- |  | --------------- |  | --------
|                |  | Number of Votes
|                |  | FOR             |  | WITHHELD
|DIRECTORS       |  |                 |  |         
|Brian G. Hart   |  | 29,053,190      |  | 387,793 
|Alan L. Wells   |  | 29,058,691      |  | 382,292 
|Kenneth R. Cole |  | 29,078,207      |  | 362,776 

The Companys other directors whose terms of office continued after the Annual Meeting are Norman C. Frost,
H. Lynn Horak, Craig A. Lang, and Kendrik E. Packer.

(c) Other matters voted upon:

Ratification of appointment of Deloitte & Touche LLP as the Companys independent registered public accountants for 2008:



|                                 |  |           
|-------------------------------- |  | ----------
|Number of votes FOR              |  | 29,212,817
|Number of votes AGAINST/WITHHELD |  | 134,622   
|Number of votes ABSTAINING       |  | 93,544    
|Number of BROKER NON-VOTES       |  |          



|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.



|               |  |  |  |                                                             
|-------------- |  |  |  | ------------------------------------------------------------
|August 1, 2008 |  |  |  | /s/ Alan L. Wells                                           
|               |  |  |  | Alan L. Wells                                               
|               |  |  |  | President, Chief Executive Officer and Chairman of the Board
|               |  | 
|August 1, 2008 |  |  |  | /s/ Craig A. Knock                                          
|               |  |  |  | Craig A. Knock                                              
|               |  |  |  | Vice President,                                             
|               |  |  |  | Chief Financial Officer and Treasurer                       
|               |  |  |  | (Principal Accounting Officer)                              



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EXHIBIT INDEX

IOWA TELECOMMUNICATIONS SERVICES, INC.

FORM 10-Q FOR QUARTER ENDED JUNE 30, 2008



|               |  |                                                                                                                                                                                                                               
|-------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit Number |  | 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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