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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: September 30, 2009

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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulations S-T (§232.405 of this chapter)
during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes   ̈    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 October 16, 2009 was 32,806,162.









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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 RESULTSOF OPERATIONS |  | 21  
|                                 |  |                                                                                     
|                                 |  | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                           |  | 43  
|                                 |  |                                                                                     
|                                 |  | CONTROLS AND PROCEDURES                                                              |  | 43  
|                                 |  |                                                                                     
|PART II.                         |  | OTHER INFORMATION                                                                    |  | 44  
|                                 |  |                                                                                     
|                                 |  | LEGAL PROCEEDINGS                                                                    |  | 44  
|                                 |  |                                                                                     
|                                 |  | RISK FACTORS                                                                         |  | 44  
|                                 |  |                                                                                     
|                                 |  | PURCHASE OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS                |  | 44  
|                                 |  |                                                                                     
|                                 |  | EXHIBITS                                                                             |  | 44  



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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 31,2008 |          |   | September 30,2009 |  
|ASSETS                                                                                                                       |  |                  |          |   |                   |   |          |  
|CURRENT ASSETS:                                                                                                              |  |                  |          |   |                   |   |          |  
|Cash and cash equivalents                                                                                                    |  | $                | 11,605   |   |                   | $ | 12,091   |  
|Accounts receivable, net                                                                                                     |  |                  | 23,320   |   |                   |   | 22,663   |  
|Inventories                                                                                                                  |  |                  | 3,946    |   |                   |   | 5,527    |  
|Prepayments and other current assets                                                                                         |  |                  | 3,149    |   |                   |   | 5,767    |  
|                                                                                                                             |  |                  |          |   |                   |   |          |  
|Total Current Assets                                                                                                         |  |                  | 42,020   |   |                   |   | 46,048   |  
|                                                                                                                             |  |                  |          |   |                   |   |          |  
|PROPERTY, PLANT AND EQUIPMENT:                                                                                               |  |                  |          |   |                   |   |          |  
|Property, plant and equipment                                                                                                |  |                  | 601,782  |   |                   |   | 664,688  |  
|Accumulated depreciation                                                                                                     |  |                  | (310,936 | ) |                   |   | (350,982 | )
|                                                                                                                             |  |                  |          |   |                   |   |          |  
|Net Property, Plant and Equipment                                                                                            |  |                  | 290,846  |   |                   |   | 313,706  |  
|                                                                                                                             |  |                  |          |   |                   |   |          |  
|GOODWILL                                                                                                                     |  |                  | 473,984  |   |                   |   | 494,400  |  
|INTANGIBLE ASSETS AND OTHER, net                                                                                             |  |                  | 36,904   |   |                   |   | 51,960   |  
|INVESTMENT IN AND RECEIVABLE FROM THE RURAL TELEPHONE FINANCE COOPERATIVE                                                    |  |                  | 16,174   |   |                   |   | 17,036   |  
|                                                                                                                             |  |                  |          |   |                   |   |          |  
|Total Assets                                                                                                                 |  | $                | 859,928  |   |                   | $ | 923,150  |  
|                                                                                                                             |  |                  |          |   |                   |   |          |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                         |  |                  |          |   |                   |   |          |  
|CURRENT LIABILITIES:                                                                                                         |  |                  |          |   |                   |   |          |  
|Revolving credit facility                                                                                                    |  | $                | 39,000   |   |                   | $ | 41,000   |  
|Accounts payable                                                                                                             |  |                  | 11,017   |   |                   |   | 10,026   |  
|Advanced billings and customer deposits                                                                                      |  |                  | 8,615    |   |                   |   | 10,662   |  
|Accrued and other current liabilities                                                                                        |  |                  | 32,429   |   |                   |   | 27,291   |  
|Current maturities of long-term debt                                                                                         |  |                  | 1,219    |   |                   |   | 2,048    |  
|                                                                                                                             |  |                  |          |   |                   |   |          |  
|Total Current Liabilities                                                                                                    |  |                  | 92,280   |   |                   |   | 91,027   |  
|                                                                                                                             |  |                  |          |   |                   |   |          |  
|LONG-TERM DEBT                                                                                                               |  |                  | 489,003  |   |                   |   | 566,940  |  
|DEFERRED TAX LIABILITIES                                                                                                     |  |                  | 47,575   |   |                   |   | 56,296   |  
|OTHER LONG-TERM LIABILITIES                                                                                                  |  |                  | 28,326   |   |                   |   | 27,944   |  
|                                                                                                                             |  |                  |          |   |                   |   |          |  
|Total Liabilities                                                                                                            |  |                  | 657,184  |   |                   |   | 742,207  |  
|                                                                                                                             |  |                  |          |   |                   |   |          |  
|COMMITMENTS AND CONTINGENCIES (Note 10)                                                                                      |  |                  |         |   |                   |   |         |  
|STOCKHOLDERS EQUITY:                                                                                                        |  |                  |          |   |                   |   |          |  
|Iowa Telecommunications Services, Inc. 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, 31,500,687 and 32,046,087 issued and outstanding,
respectively |  |                  | 315      |   |                   |   | 320      |  
|Additional paid-in capital                                                                                                   |  |                  | 327,264  |   |                   |   | 332,156  |  
|Accumulated deficit                                                                                                          |  |                  | (110,814 | ) |                   |   | (138,390 | )
|Accumulated other comprehensive loss                                                                                         |  |                  | (14,308  | ) |                   |   | (13,143  | )
|                                                                                                                             |  |                  |          |   |                   |   |          |  
|Total Iowa Telecommunications Services, Inc. Stockholders Equity                                                            |  |                  | 202,457  |   |                   |   | 180,943  |  
|Noncontrolling interest                                                                                                      |  |                  | 287      |   |                   |   |         |  
|                                                                                                                             |  |                  |          |   |                   |   |          |  
|Total Stockholders Equity                                                                                                   |  |                  | 202,744  |   |                   |   | 180,943  |  
|                                                                                                                             |  |                  |          |   |                   |   |          |  
|Total Liabilities and Stockholders Equity                                                                                   |  | $                | 859,928  |   |                   | $ | 923,150  |  
|                                                                                                                             |  |                  |          |   |                   |   |          |  

See notes to condensed consolidated financial statements.



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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 EndedSeptember 30, |        |   | Nine Months EndedSeptember 30, |  
|                                                                       |  | 2008                            |        |   | 2009                           |   |        | 2008 |  |   | 2009    |  
|REVENUES AND SALES                                                     |  | $                               | 62,923 |   |                                | $ | 68,296 |      |  | $ | 181,945 |   |  | $ | 188,403 |  
|OPERATING COSTS AND EXPENSES:                                          |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Cost of services and sales (exclusive of items shown separately below) |  |                                 | 20,424 |   |                                |   | 22,650 |      |  |   | 57,781  |   |  |   | 61,536  |  
|Selling, general and administrative                                    |  |                                 | 11,965 |   |                                |   | 14,312 |      |  |   | 32,230  |   |  |   | 39,973  |  
|Depreciation and amortization                                          |  |                                 | 13,736 |   |                                |   | 16,412 |      |  |   | 39,006  |   |  |   | 44,730  |  
|                                                                       |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Total Operating Costs and Expenses                                     |  |                                 | 46,125 |   |                                |   | 53,374 |      |  |   | 129,017 |   |  |   | 146,239 |  
|                                                                       |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|OPERATING INCOME                                                       |  |                                 | 16,798 |   |                                |   | 14,922 |      |  |   | 52,928  |   |  |   | 42,164  |  
|                                                                       |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|OTHER INCOME (EXPENSE):                                                |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Interest and dividend income                                           |  |                                 | 179    |   |                                |   | 480    |      |  |   | 729     |   |  |   | 1,742   |  
|Interest expense                                                       |  |                                 | (8,033 | ) |                                |   | (8,333 | )    |  |   | (23,194 | ) |  |   | (23,541 | )
|Other, net                                                             |  |                                 | 1,080  |   |                                |   | 845    |      |  |   | 821     |   |  |   | 576     |  
|                                                                       |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Total Other Expense, net                                               |  |                                 | (6,774 | ) |                                |   | (7,008 | )    |  |   | (21,644 | ) |  |   | (21,223 | )
|                                                                       |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|EARNINGS BEFORE INCOME TAXES                                           |  |                                 | 10,024 |   |                                |   | 7,914  |      |  |   | 31,284  |   |  |   | 20,941  |  
|INCOME TAX EXPENSE                                                     |  |                                 | 4,301  |   |                                |   | 3,341  |      |  |   | 13,311  |   |  |   | 8,938   |  
|                                                                       |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|NET INCOME                                                             |  |                                 | 5,723  |   |                                |   | 4,573  |      |  |   | 17,973  |   |  |   | 12,003  |  
|Net loss attributable to noncontrolling interest                       |  |                                 |       |   |                                |   | 23     |      |  |   |        |   |  |   | 195     |  
|                                                                       |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|NET INCOME ATTRIBUTABLE TO IOWA TELECOMMUNICATIONS SERVICES, INC.      |  | $                               | 5,723  |   |                                | $ | 4,596  |      |  | $ | 17,973  |   |  | $ | 12,198  |  
|                                                                       |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|EARNINGS PER SHARE:                                                    |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|BASIC - Earnings Per Share                                             |  | $                               | 0.18   |   |                                | $ | 0.13   |      |  | $ | 0.55    |   |  | $ | 0.35    |  
|                                                                       |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|BASIC - Weighted Average Number of Shares Outstanding                  |  |                                 | 31,492 |   |                                |   | 32,038 |      |  |   | 31,469  |   |  |   | 31,880  |  
|                                                                       |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|DILUTED - Earnings Per Share                                           |  | $                               | 0.17   |   |                                | $ | 0.13   |      |  | $ | 0.54    |   |  | $ | 0.35    |  
|                                                                       |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|DILUTED - Weighted Average Number of Shares Outstanding                |  |                                 | 32,085 |   |                                |   | 32,239 |      |  |   | 32,043  |   |  |   | 32,187  |  
|                                                                       |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Dividends Declared Per Share                                           |  | $                               | 0.405  |   |                                | $ | 0.405  |      |  | $ | 1.215   |   |  | $ | 1.215   |  
|                                                                       |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  

See notes to condensed consolidated financial statements.



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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 September 30, 2008 and 2009 |    
|                                                           |  | CommonShares |   |  | CommonStock                                    |     | AdditionalPaid-InCapital |   |         | AccumulatedDeficit |  |   | AccumulatedOtherComprehensiveIncome (Loss) |   |  | NoncontrollingInterest |         |   | Total |  
|Balance, June 30, 2008                                     |  | 31,476,776   |   |  | $                                              | 315 |                          | $ | 325,670 |                    |  | $ | (95,816                                    | ) |  | $                      | 304     |   |       | $ |        |   |  |   | 230,473 |  
|Net income                                                 |  |             |   |  |                                                |    |                          |   |        |                    |  |   | 5,723                                      |   |  |                        |        |   |       |   |        |   |  |   | 5,723   |  
|Unrealized loss on derivatives, net of tax effect          |  |             |   |  |                                                |    |                          |   |        |                    |  |   |                                           |   |  |                        | (1,662  | ) |       |   |        |   |  |   | (1,662  | )
|Post retirement benefit plan adjustment, net of tax effect |  |             |   |  |                                                |    |                          |   |        |                    |  |   |                                           |   |  |                        | (149    | ) |       |   |        |   |  |   | (149    | )
|                                                           |  |              |   |  |                                                |     |                          |   |         |                    |  |   |                                            |   |  |                        |         |   |       |   |         |   |  |   |         |  
|Total comprehensive income (loss)                          |  |             |   |  |                                                |    |                          |   |        |                    |  |   | 5,723                                      |   |  |                        | (1,811  | ) |       |   |        |   |  |   | 3,912   |  
|Compensation from compensatory stock plans, net of tax     |  | 35,625       |   |  |                                                |    |                          |   | 890     |                    |  |   |                                           |   |  |                        |        |   |       |   |        |   |  |   | 890     |  
|Shares reacquired                                          |  | (11,714      | ) |  |                                                |    |                          |   | (210    | )                  |  |   |                                           |   |  |                        |        |   |       |   |        |   |  |   | (210    | )
|Dividends declared ($.405 per share)                       |  |             |   |  |                                                |    |                          |   |        |                    |  |   | (12,949                                    | ) |  |                        |        |   |       |   |        |   |  |   | (12,949 | )
|                                                           |  |              |   |  |                                                |     |                          |   |         |                    |  |   |                                            |   |  |                        |         |   |       |   |         |   |  |   |         |  
|Balance, September 30, 2008                                |  | 31,500,687   |   |  | $                                              | 315 |                          | $ | 326,350 |                    |  | $ | (103,042                                   | ) |  | $                      | (1,507  | ) |       | $ |        |   |  | $ | 222,116 |  
|                                                           |  |              |   |  |                                                |     |                          |   |         |                    |  |   |                                            |   |  |                        |         |   |       |   |         |   |  |   |         |  
|Balance, June 30, 2009                                     |  | 32,017,203   |   |  | $                                              | 320 |                          | $ | 329,479 |                    |  | $ | (129,701                                   | ) |  | $                      | (12,721 | ) |       | $ | 365     |   |  | $ | 187,742 |  
|Net income (loss)                                          |  |             |   |  |                                                |    |                          |   |        |                    |  |   | 4,596                                      |   |  |                        |        |   |       |   | (23     | ) |  |   | 4,573   |  
|Unrealized loss on derivatives, net of tax effect          |  |             |   |  |                                                |    |                          |   |        |                    |  |   |                                           |   |  |                        | (422    | ) |       |   |        |   |  |   | (422    | )
|Post retirement benefit plan adjustment, net of tax effect |  |             |   |  |                                                |    |                          |   |        |                    |  |   |                                           |   |  |                        |        |   |       |   |        |   |  |   |        |  
|                                                           |  |              |   |  |                                                |     |                          |   |         |                    |  |   |                                            |   |  |                        |         |   |       |   |         |   |  |   |         |  
|Total comprehensive income (loss)                          |  |             |   |  |                                                |    |                          |   |        |                    |  |   | 4,596                                      |   |  |                        | (422    | ) |       |   | (23     | ) |  |   | 4,151   |  
|Compensation from compensatory stock plans                 |  | 35,625       |   |  |                                                |    |                          |   | 959     |                    |  |   |                                           |   |  |                        |        |   |       |   |        |   |  |   | 959     |  
|Shares reacquired                                          |  | (11,741      | ) |  |                                                |    |                          |   | (146    | )                  |  |   |                                           |   |  |                        |        |   |       |   |        |   |  |   | (146    | )
|Exercise of employee stock options                         |  | 5,000        |   |  |                                                |    |                          |   | 3       |                    |  |   |                                           |   |  |                        |        |   |       |   |        |   |  |   | 3       |  
|Capital contributions from noncontrolling interest         |  |             |   |  |                                                |    |                          |   | (18     | )                  |  |   |                                           |   |  |                        |        |   |       |   | 108     |   |  |   | 90      |  
|Noncontrolling interest in acquired entities               |  |             |   |  |                                                |    |                          |   |        |                    |  |   |                                           |   |  |                        |        |   |       |   | 3,319   |   |  |   | 3,319   |  
|Acquisition of noncontrolling interest                     |  |             |   |  |                                                |    |                          |   | 1,879   |                    |  |   |                                           |   |  |                        |        |   |       |   | (3,769) |   |  |   | (1,890  | )
|Dividends declared ($.405 per share)                       |  |             |   |  |                                                |    |                          |   |        |                    |  |   | (13,285                                    | ) |  |                        |        |   |       |   |        |   |  |   | (13,285 | )
|                                                           |  |              |   |  |                                                |     |                          |   |         |                    |  |   |                                            |   |  |                        |         |   |       |   |         |   |  |   |         |  
|Balance, September 30, 2009                                |  | 32,046,087   |   |  | $                                              | 320 |                          | $ | 332,156 |                    |  | $ | (138,390                                   | ) |  | $                      | (13,143 | ) |       | $ |        |   |  | $ | 180,943 |  
|                                                           |  |              |   |  |                                                |     |                          |   |         |                    |  |   |                                            |   |  |                        |         |   |       |   |         |   |  |   |         |  



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|                                                           |  |              |   |  |                                               |     |                          |   |         |                    |  |   |                                            |   |  |                        |         |   |       |   |        |   |  |   |         |  
|---------------------------------------------------------- |  | ------------ | - |  | --------------------------------------------- | --- | ------------------------ | - | ------- | ------------------ |  | - | ------------------------------------------ | - |  | ---------------------- | ------- | - | ----- | - | ------ | - |  | - | ------- | -
|                                                           |  |              |   |  | Nine Months Ended September 30, 2008 and 2009 |    
|                                                           |  | CommonShares |   |  | CommonStock                                   |     | AdditionalPaid-InCapital |   |         | AccumulatedDeficit |  |   | AccumulatedOtherComprehensiveIncome (Loss) |   |  | NoncontrollingInterest |         |   | Total |  
|Balance, December 31, 2007                                 |  | 31,440,215   |   |  | $                                             | 314 |                          | $ | 324,170 |                    |  | $ | (82,154                                    | ) |  | $                      | 637     |   |       | $ |       |   |  | $ | 242,967 |  
|Net income                                                 |  |             |   |  |                                               |    |                          |   |        |                    |  |   | 17,973                                     |   |  |                        |        |   |       |   |       |   |  |   | 17,973  |  
|Unrealized loss on derivatives, net of tax effect          |  |             |   |  |                                               |    |                          |   |        |                    |  |   |                                           |   |  |                        | (1,702  | ) |       |   |       |   |  |   | (1,702  | )
|Post retirement benefit plan adjustment, net of tax effect |  |             |   |  |                                               |    |                          |   |        |                    |  |   |                                           |   |  |                        | (442    | ) |       |   |       |   |  |   | (442    | )
|                                                           |  |              |   |  |                                               |     |                          |   |         |                    |  |   |                                            |   |  |                        |         |   |       |   |        |   |  |   |         |  
|Total comprehensive income (loss)                          |  |             |   |  |                                               |    |                          |   |        |                    |  |   | 17,973                                     |   |  |                        | (2,144  | ) |       |   |       |   |  |   | 15,829  |  
|Compensation from compensatory stock plans, net of tax     |  | 87,825       |   |  |                                               | 1   |                          |   | 2,668   |                    |  |   |                                           |   |  |                        |        |   |       |   |       |   |  |   | 2,669   |  
|Shares reacquired                                          |  | (27,353      | ) |  |                                               |    |                          |   | (488    | )                  |  |   |                                           |   |  |                        |        |   |       |   |       |   |  |   | (488    | )
|Dividends declared ($1.215 per share)                      |  |             |   |  |                                               |    |                          |   |        |                    |  |   | (38,861                                    | ) |  |                        |        |   |       |   |       |   |  |   | (38,861 | )
|                                                           |  |              |   |  |                                               |     |                          |   |         |                    |  |   |                                            |   |  |                        |         |   |       |   |        |   |  |   |         |  
|Balance, September 30, 2008                                |  | 31,500,687   |   |  | $                                             | 315 |                          | $ | 326,350 |                    |  | $ | (103,042                                   | ) |  | $                      | (1,507  | ) |       | $ |       |   |  | $ | 222,116 |  
|                                                           |  |              |   |  |                                               |     |                          |   |         |                    |  |   |                                            |   |  |                        |         |   |       |   |        |   |  |   |         |  
|Balance, December 31, 2008                                 |  | 31,500,687   |   |  | $                                             | 315 |                          | $ | 327,264 |                    |  | $ | (110,814                                   | ) |  | $                      | (14,308 | ) |       | $ | 287    |   |  | $ | 202,744 |  
|Net income (loss)                                          |  |             |   |  |                                               |    |                          |   |        |                    |  |   | 12,198                                     |   |  |                        |        |   |       |   | (195   | ) |  |   | 12,003  |  
|Unrealized gain on derivatives, net of tax effect          |  |             |   |  |                                               |    |                          |   |        |                    |  |   |                                           |   |  |                        | 1,501   |   |       |   |       |   |  |   | 1,501   |  
|Post retirement benefit plan adjustment, net of tax effect |  |             |   |  |                                               |    |                          |   |        |                    |  |   |                                           |   |  |                        | (336    | ) |       |   |       |   |  |   | (336    | )
|                                                           |  |              |   |  |                                               |     |                          |   |         |                    |  |   |                                            |   |  |                        |         |   |       |   |        |   |  |   |         |  
|Total comprehensive income (loss)                          |  |             |   |  |                                               |    |                          |   |        |                    |  |   | 12,198                                     |   |  |                        | 1,165   |   |       |   | (195   | ) |  |   | 13,168  |  
|Compensation from compensatory stock plans                 |  | 121,075      |   |  |                                               |    |                          |   | 2,802   |                    |  |   |                                           |   |  |                        |        |   |       |   |       |   |  |   | 2,802   |  
|Shares reacquired                                          |  | (41,218      | ) |  |                                               |    |                          |   | (493    | )                  |  |   |                                           |   |  |                        |        |   |       |   |       |   |  |   | (493    | )
|Exercise of employee stock options                         |  | 465,543      |   |  |                                               | 5   |                          |   | 672     |                    |  |   |                                           |   |  |                        |        |   |       |   |       |   |  |   | 677     |  
|Capital contributions from noncontrolling interest         |  |             |   |  |                                               |    |                          |   | 32      |                    |  |   |                                           |   |  |                        |        |   |       |   | 358    |   |  |   | 390     |  
|Noncontrolling interest in acquired entities               |  |             |   |  |                                               |    |                          |   |        |                    |  |   |                                           |   |  |                        |        |   |       |   | 3,319  |   |  |   | 3,319   |  
|Acquisition of noncontrolling interest                     |  |             |   |  |                                               |    |                          |   | 1,879   |                    |  |   |                                           |   |  |                        |        |   |       |   | (3,769 | ) |  |   | (1,890  | )
|Dividends declared ($1.215 per share)                      |  |             |   |  |                                               |    |                          |   |        |                    |  |   | (39,774                                    | ) |  |                        |        |   |       |   |       |   |  |   | (39,774 | )
|                                                           |  |              |   |  |                                               |     |                          |   |         |                    |  |   |                                            |   |  |                        |         |   |       |   |        |   |  |   |         |  
|Balance, September 30, 2009                                |  | 32,046,087   |   |  | $                                             | 320 |                          | $ | 332,156 |                    |  | $ | (138,390                                   | ) |  | $                      | (13,143 | ) |       | $ |       |   |  | $ | 180,943 |  
|                                                           |  |              |   |  |                                               |     |                          |   |         |                    |  |   |                                            |   |  |                        |         |   |       |   |        |   |  |   |         |  

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)



|                                                                              |  |                                |         |   |      |   |         |  
|----------------------------------------------------------------------------- |  | ------------------------------ | ------- | - | ---- | - | ------- | -
|                                                                              |  | Nine Months EndedSeptember 30, |        
|                                                                              |  | 2008                           |         |   | 2009 |  
|CASH FLOWS FROM OPERATING ACTIVITIES:                                         |  |                                |         |   |      |   |         |  
|Net income                                                                    |  | $                              | 17,973  |   |      | $ | 12,003  |  
|Adjustments to reconcile net income to cash provided by operating activities: |  |                                |         |   |      |   |         |  
|Depreciation                                                                  |  |                                | 37,841  |   |      |   | 42,978  |  
|Amortization of intangible assets                                             |  |                                | 1,165   |   |      |   | 1,752   |  
|Amortization of debt issuance costs                                           |  |                                | 466     |   |      |   | 729     |  
|Deferred income taxes                                                         |  |                                | 12,673  |   |      |   | 8,667   |  
|Non-cash stock-based compensation expense                                     |  |                                | 2,660   |   |      |   | 2,802   |  
|Changes in operating assets and liabilities, net of impact of acquisitions:   |  |                                |         |   |      |   |         |  
|Receivables                                                                   |  |                                | 278     |   |      |   | 3,153   |  
|Inventories                                                                   |  |                                | (280    | ) |      |   | (167    | )
|Accounts payable                                                              |  |                                | 528     |   |      |   | (2,430  | )
|Other assets and liabilities                                                  |  |                                | (7,333  | ) |      |   | (5,858  | )
|                                                                              |  |                                |         |   |      |   |         |  
|Net Cash Provided by Operating Activities                                     |  |                                | 65,971  |   |      |   | 63,629  |  
|                                                                              |  |                                |         |   |      |   |         |  
|CASH FLOWS FROM INVESTING ACTIVITIES:                                         |  |                                |         |   |      |   |         |  
|Capital expenditures                                                          |  |                                | (20,122 | ) |      |   | (16,251 | )
|Business acquisitions, net of cash acquired                                   |  |                                | (33,419 | ) |      |   | (80,043 | )
|Purchase of wireless licenses                                                 |  |                                | (5,938  | ) |      |   |        |  
|                                                                              |  |                                |         |   |      |   |         |  
|Net Cash Used in Investing Activities                                         |  |                                | (59,479 | ) |      |   | (96,294 | )
|                                                                              |  |                                |         |   |      |   |         |  
|CASH FLOWS FROM FINANCING ACTIVITIES:                                         |  |                                |         |   |      |   |         |  
|Net change in revolving credit facility                                       |  |                                | 19,000  |   |      |   | 2,000   |  
|Proceeds from exercise of stock options                                       |  |                                |        |   |      |   | 677     |  
|Payment of debt issuance costs                                                |  |                                | (351    | ) |      |   | (2,009  | )
|Issuance of long-term debt                                                    |  |                                |        |   |      |   | 75,000  |  
|Payment on long-term debt                                                     |  |                                | (308    | ) |      |   | (1,087  | )
|Cash contributions from noncontrolling interests                              |  |                                |        |   |      |   | 390     |  
|Acquisition of noncontrolling interests                                       |  |                                |        |   |      |   | (1,890  | )
|Shares reacquired                                                             |  |                                | (488    | ) |      |   | (493    | )
|Dividends paid                                                                |  |                                | (38,799 | ) |      |   | (39,437 | )
|                                                                              |  |                                |         |   |      |   |         |  
|Net Cash Used in or Provided by Financing Activities                          |  |                                | (20,946 | ) |      |   | 33,151  |  
|                                                                              |  |                                |         |   |      |   |         |  
|NET CHANGE IN CASH AND CASH EQUIVALENTS                                       |  |                                | (14,454 | ) |      |   | 486     |  
|CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD                              |  |                                | 21,919  |   |      |   | 11,605  |  
|                                                                              |  |                                |         |   |      |   |         |  
|CASH AND CASH EQUIVALENTS AT END OF PERIOD                                    |  | $                              | 7,465   |   |      | $ | 12,091  |  
|                                                                              |  |                                |         |   |      |   |         |  
|SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:                             |  |                                |         |   |      |   |         |  
|Cash paid for interest                                                        |  | $                              | 23,527  |   |      | $ | 22,719  |  
|                                                                              |  |                                |         |   |      |   |         |  
|Cash paid for income taxes                                                    |  | $                              | 346     |   |      | $ | 71      |  
|                                                                              |  |                                |         |   |      |   |         |  

SUPPLEMENTAL NON-CASH ACTIVITIES:

Dividends on Common Stock of $12,949 were declared on September 15, 2008 for shareholders of record as of September 30, 2008 and
the dividends were paid on October 15, 2008.

Dividends on Common Stock of $13,284 were declared on September 15,
2009 for shareholders of record as of September 30, 2009 and the dividends were paid on October 15, 2009.

In the
nine months ended September 30, 2008, the Company completed the purchase of Bishop Communications Corporation for approximately $33 million net of cash received. See Note 12 for further information on the Companys acquisition of Bishop
Communications Corporation.



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##### Table of Contents

In the nine months ended September 30, 2009, the Company completed the purchase of
substantially all of the assets of Sherburne Tele Systems, Inc. (the Sherburne Assets) for approximately $79.7 million in cash (net of cash acquired), subject to certain tax adjustments, and New Ulm Telecom Inc.s ownership
interests in EN-TEL Communications, LLC, SHAL, LLC and SHAL Networks, Inc. for $1.9 million. See Note 12 for further information on the Companys acquisitions.

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 or Iowa Telecom) 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 consolidated balance sheets,
statements of income and statements of cash flows for the periods presented. The statements of income 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, 2008, that are included in the Companys most recently filed annual report on Form 10-K as filed with the SEC.

Recently Issued Accounting Pronouncements

In December 2007, the Financial Accounting Standards Board
(FASB) issued amended guidance regarding Noncontrolling Interests in Consolidated Financial Statements which establishes new accounting and reporting standards for the noncontrolling interest in a subsidiary and for
the deconsolidation of a subsidiary. The amended guidance 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 amended guidance 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 noncontrolling equity investment on the
deconsolidation date. The amended guidance also includes expanded disclosure requirements regarding the interest of the parent and its noncontrolling interest. The amended guidance is effective for fiscal years, and interim periods within those
fiscal years, beginning on or after December 15, 2008. Adoption of the amended guidance did not have a material impact on the Companys consolidated balance sheets, statements of income or statements of cash flows.

In December 2007, the FASB issued revised guidance regarding Business Combinations. The revised guidance 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. The revised guidance
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. The revised guidance requires acquisition related costs to
be expensed as incurred. During the first quarter of 2009, the Company expensed acquisition related costs of $868,000 that had been deferred pursuant to the prior guidance on acquisitions that did not close before to the adoption date on
January 1, 2009. Other than expensing acquisition costs deferred pursuant to prior guidance as discussed above, the adoption of the revised guidance did not have a material impact on the Companys consolidated balance sheets, statements of
income or statements of cash flows.

In March 2008, the FASB issued amended guidance regarding Disclosures about
Derivative Instruments and Hedging Activities. The amended guidance 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. The amended guidance is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. Adoption of
the amended guidance impacted disclosures only and did not have an impact on the Companys consolidated balance sheets, statements of income or statements of cash flows. See Note 9 to Financial Statements for expanded disclosures related to the
adoption of the amended guidance.



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##### Table of Contents

In December 2008, the FASB amended its prior guidance regarding Employers
Disclosures about Postretirement Benefit Plan Assets. The amended guidance is effective for fiscal years ending after December 15, 2009. The amended guidance will impact disclosures only and will not have an impact on the
Companys consolidated balance sheets, statements of income or statements of cash flows.

In April 2009, the FASB issued
amended guidance regarding Interim Disclosures about Fair Value of Financial Instruments which requires disclosures about fair value of financial instruments in interim financial information. The amended guidance also requires
those disclosures in summarized financial information at interim reporting periods. Under the amended guidance, publicly traded companies must include disclosures about the fair value of their financial instruments whenever summarized financial
information for interim reporting periods is issued. In addition, companies must disclose in the body or in the accompanying notes of their summarized financial information for interim reporting periods and in their financial statements for annual
reporting periods the fair value of all financial instruments for which it is practicable to estimate that value, whether recognized or not recognized in the Companys balance sheet. The amended guidance is effective for interim periods ending
after June 15, 2009. Adoption of the amended guidance impacted disclosures only and did not have an impact on the Companys consolidated balance sheets, statements of income or statements of cash flows. See Note 11 to Financial Statements
for expanded disclosures related to the adoption of the amended guidance.

In May 2009, the FASB issued guidance regarding
Subsequent Events. The new guidance establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued.
Specifically, the new guidance provides: the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements;
the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements; and the disclosures that an entity should make about events or transactions that occurred after the
balance sheet date. The new guidance is effective for interim or annual financial periods ending after June 15, 2009, and shall be applied prospectively. Adoption of the new guidance impacted disclosures only and did not have an impact on the
Companys consolidated balance sheets, statements of income or statements of cash flows. See Note 10 to Financial Statements for expanded disclosures related to the adoption of the new guidance.

In June 2009, the FASB issued FASB Accounting Standards Update 2009-01, Topic 105-Generally Accepted Accounting Principles amendments
based on Statement of Financial Accounting Standards No. 168-The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles(FASB ASU 2009-01). FASB ASU 2009-01establishes the FASB
Accounting Standards Codification (Codification) as the single source of authoritative U.S. generally accepted accounting principles (U.S. GAAP) recognized by the FASB to be applied by nongovernmental entities. Rules and
interpretive releases of the SEC under authority of federal securities laws are also sources of authoritative U.S. GAAP for SEC registrants. The Codification supersedes all existing non-SEC accounting and reporting standards. All other
nongrandfathered, non-SEC accounting literature not included in the Codification will become nonauthoritative. The FASB will not issue new standards in the form of statements, FASB Staff Positions, or Emerging Issues Task Force Abstracts. Instead,
the FASB will issue Accounting Standards Updates, which will serve only to: (a) update the Codification; (b) provide background information about the guidance; and (c) provide the bases for conclusions on the change(s) in the
Codification. FASB ASU 2009-01 is effective for financial statements issued for interim and annual periods ending after September 15, 2009. The adoption of the FASB ASU 2009-01 did not have a material impact on the Companys consolidated
balance sheets, statements of income or statements of cash flows.

2. EARNINGS PER SHARE

Effective January 1, 2009, the Company adopted amended guidance related to Determining Whether Instruments Granted in
Share-Based Payment Transactions Are Participating Securities. Under the amended guidance, unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents are participating securities and,
therefore, are included in computing earnings per share (EPS) pursuant to the two-class method. The two-class method determines earnings per share for each class of common stock and participating securities according to dividends or
dividend equivalents and their respective participation rights in undistributed earnings. Restricted stock granted to employees under the Companys 2005 Stock Incentive



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Plan are considered participating securities as they receive non-forfeitable dividend equivalents at the same rate as common stock. The amended guidance was adopted via retroactive application
for the quarter and nine months ended September 30, 2008, resulting in no change to basic EPS and a $0.01 decrease in diluted EPS for the quarter and a $0.02 decrease to both basic and diluted EPS for the year.

Basic earnings per share is computed based on the weighted average number of common shares issued and outstanding during the period,
including 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. The dilutive effect of stock options is
computed by application of the treasury stock method. The following is a reconciliation between basic and diluted weighted average shares outstanding:



|                                                                                       |  |                                          |        |   |                                |   |        |      |  |   |        |   |  |   |        |  
|-------------------------------------------------------------------------------------- |  | ---------------------------------------- | ------ | - | ------------------------------ | - | ------ | ---- |  | - | ------ | - |  | - | ------ | -
|                                                                                       |  | Three Months EndedSeptember 30,          |        |   | Nine Months EndedSeptember 30, |  
|                                                                                       |  | 2008                                     |        |   | 2009                           |   |        | 2008 |  |   | 2009   |  
|                                                                                       |  | (in thousands, except per share amounts) |       
|Net income attributable to Iowa Telecommunications Services, Inc.                      |  | $                                        | 5,723  |   |                                | $ | 4,596  |      |  | $ | 17,973 |   |  | $ | 12,198 |  
|Net income allocated to unvested compensatory stock                                    |  |                                          | (191   | ) |                                |   | (306   | )    |  |   | (620   | ) |  |   | (898   | )
|                                                                                       |  |                                          |        |   |                                |   |        |      |  |   |        |   |  |   |        |  
|Net income attributable to Iowa Telecommunications Services, Inc. common shares        |  |                                          | 5,532  |   |                                |   | 4,290  |      |  |   | 17,353 |   |  |   | 11,300 |  
|                                                                                       |  |                                          |        |   |                                |   |        |      |  |   |        |   |  |   |        |  
|Basic shares outstanding:                                                              |  |                                          |        |   |                                |   |        |      |  |   |        |   |  |   |        |  
|Weighted average basic shares outstanding                                              |  |                                          | 31,976 |   |                                |   | 32,713 |      |  |   | 31,946 |   |  |   | 32,534 |  
|Less unvested compensatory stock included in weighted average basic shares outstanding |  |                                          | (484   | ) |                                |   | (675   | )    |  |   | (477   | ) |  |   | (654   | )
|                                                                                       |  |                                          |        |   |                                |   |        |      |  |   |        |   |  |   |        |  
|Weighted average shares outstanding for basic earnings per common share                |  |                                          | 31,492 |   |                                |   | 32,038 |      |  |   | 31,469 |   |  |   | 31,880 |  
|                                                                                       |  |                                          |        |   |                                |   |        |      |  |   |        |   |  |   |        |  
|Diluted shares outstanding:                                                            |  |                                          |        |   |                                |   |        |      |  |   |        |   |  |   |        |  
|Weighted average shares outstanding for basic earnings per common share                |  |                                          | 31,492 |   |                                |   | 32,038 |      |  |   | 31,469 |   |  |   | 31,880 |  
|Add shares issuable upon exercise of stock options                                     |  |                                          | 593    |   |                                |   | 201    |      |  |   | 574    |   |  |   | 307    |  
|                                                                                       |  |                                          |        |   |                                |   |        |      |  |   |        |   |  |   |        |  
|Weighted average number of shares outstanding  diluted                                |  |                                          | 32,085 |   |                                |   | 32,239 |      |  |   | 32,043 |   |  |   | 32,187 |  
|                                                                                       |  |                                          |        |   |                                |   |        |      |  |   |        |   |  |   |        |  
|Earnings Per Share:                                                                    |  |                                          |        |   |                                |   |        |      |  |   |        |   |  |   |        |  
|Basic                                                                                  |  | $                                        | 0.18   |   |                                | $ | 0.13   |      |  | $ | 0.55   |   |  | $ | 0.35   |  
|Diluted                                                                                |  | $                                        | 0.17   |   |                                | $ | 0.13   |      |  | $ | 0.54   |   |  | $ | 0.35   |  

As of September 30, 2008 and 2009, total options outstanding were 677,579 and
212,036, respectively.

3. NONCONTROLLING INTEREST

The following table presents the effects of changes in Iowa Telecoms ownership interest in its partially-owned subsidiary on Iowa Telecoms equity:



|                                                                                                                         |  |                                                                                                     |       |      |                                |       |      |  |      |        |  |   |       
|------------------------------------------------------------------------------------------------------------------------ |  | --------------------------------------------------------------------------------------------------- | ----- | ---- | ------------------------------ | ----- | ---- |  | ---- | ------ |  | - | ------
|                                                                                                                         |  | Net Income Attributable toIowa Telecommunicationsand Transfers (to) from theNoncontrolling Interest
|                                                                                                                         |  | Three Months EndedSeptember 30,                                                                     |       |      | Nine Months EndedSeptember 30,
|                                                                                                                         |  | 2008                                                                                                |       | 2009 |                                |       | 2008 |  | 2009
|                                                                                                                         |  | (dollars in thousands)                                                                             
|Net income attributable to Iowa Telecommunications Services, Inc.                                                        |  | $                                                                                                   | 5,723 |      | $                              | 4,596 |      |  | $    | 17,973 |  | $ | 12,198
|Increase (decrease) in Iowa Telecommunications Services, Inc. paid-in capital for issuance of shares                     |  |                                                                                                     |      |      |                                | (18   | )    |  |      |       |  |   | 32    
|Increase in Iowa Telecommunications Services, Inc. paid-in capital due to gain on acquisition of noncontrolling
interest |  |                                                                                                     |      |      |                                | 1,879 |      |  |      |       |  |   | 1,879 
|                                                                                                                         |  |                                                                                                     |       |      |                                |       |      |  |      |        |  |   |       
|Change from net income attributable to Iowa Telecommunications Services, Inc. and transfers from noncontrolling
interest |  | $                                                                                                   | 5,723 |      | $                              | 6,457 |      |  | $    | 17,973 |  | $ | 14,109
|                                                                                                                         |  |                                                                                                     |       |      |                                |       |      |  |      |        |  |   |       



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4. REVENUES AND SALES

The table below sets forth the components of revenues and sales for the three and nine months ended September 30, 2008 and 2009:



|                           |  |                                 |        |                                |   |        |  |      |         |  |   |        
|-------------------------- |  | ------------------------------- | ------ | ------------------------------ | - | ------ |  | ---- | ------- |  | - | -------
|                           |  | Three Months EndedSeptember 30, |        | Nine Months EndedSeptember 30,
|                           |  | 2008                            |        | 2009                           |   | 2008   |  | 2009
|                           |  | (dollars in thousands)         
|Local services             |  | $                               | 18,013 |                                | $ | 19,618 |  | $    | 53,126  |  | $ | 55,538 
|Network access services    |  |                                 | 22,852 |                                |   | 23,306 |  |      | 65,857  |  |   | 64,873 
|Toll services              |  |                                 | 5,845  |                                |   | 5,658  |  |      | 17,394  |  |   | 16,705 
|Data and internet services |  |                                 | 9,129  |                                |   | 11,658 |  |      | 25,615  |  |   | 31,117 
|Other services and sales   |  |                                 | 7,084  |                                |   | 8,056  |  |      | 19,953  |  |   | 20,170 
|                           |  |                                 |        |                                |   |        |  |      |         |  |   |        
|Total revenues and sales   |  | $                               | 62,923 |                                | $ | 68,296 |  | $    | 181,945 |  | $ | 188,403
|                           |  |                                 |        |                                |   |        |  |      |         |  |   |        

5. GOODWILL, INTANGIBLE ASSETS AND OTHER

The Company performed its annual impairment review of goodwill and indefinite-lived intangible assets as required by FASB ASC 350,IntangiblesGoodwill and Other, as of August 31, 2008 and 2009.

Total goodwill at December 31, 2008 was
$474.0 million. During 2009, the Company acquired the Sherburne Assets and a controlling interest in SHAL, LLC and SHAL Networks, Inc. which increased goodwill by $21.0 million, definite-lived intangibles by $15.1 million and wireless licenses by
$1.3 million. The allocation of the purchase price for those assets is preliminary as of September 30, 2009. The Company also recorded a $584,000 purchase accounting adjustment related to the Bishop Communications Corporation acquisition
decreasing goodwill and resulting in a goodwill balance of $494.4 million at September 30, 2009.

Intangible assets and
other consisted of the following:



|                                 |  |                        |  |      |        |                         |   |         |               |  |   |       
|-------------------------------- |  | ---------------------- |  | ---- | ------ | ----------------------- | - | ------- | ------------- |  | - | ------
|                                 |  | September 30, 2009    
|                                 |  | Life                   |  | Cost |        | AccumulatedAmortization |   |         | Net BookValue
|                                 |  | (dollars in thousands)
|Definite-lived intangible assets |  | 6-20 yrs               |  | $    | 32,046 |                         | $ | (8,130  | )             |  | $ | 23,916
|Debt issuance costs              |  | 7 yrs                  |  |      | 6,498  |                         |   | (3,205  | )             |  |   | 3,293 
|Wireless licenses                |  |                       |  |      | 18,987 |                         |   |        |               |  |   | 18,987
|Other assets                     |  | NA                     |  |      | 5,764  |                         |   |        |               |  |   | 5,764 
|                                 |  |                        |  |      |        |                         |   |         |               |  |   |       
|Total                            |  |                        |  | $    | 63,295 |                         | $ | (11,335 | )             |  | $ | 51,960
|                                 |  |                        |  |      |        |                         |   |         |               |  |   |       
|                                 | 
|                                 |  | December 31, 2008     
|                                 |  | Life                   |  | Cost |        | AccumulatedAmortization |   |         | Net BookValue
|                                 |  | (dollars in thousands)
|Definite-lived intangible assets |  | 6-20 yrs               |  | $    | 16,996 |                         | $ | (6,378  | )             |  | $ | 10,618
|Debt issuance costs              |  | 7 yrs                  |  |      | 4,489  |                         |   | (2,476  | )             |  |   | 2,013 
|Wireless licenses                |  |                       |  |      | 17,691 |                         |   |        |               |  |   | 17,691
|Other assets                     |  | NA                     |  |      | 6,582  |                         |   |        |               |  |   | 6,582 
|                                 |  |                        |  |      |        |                         |   |         |               |  |   |       
|Total                            |  |                        |  | $    | 45,758 |                         | $ | (8,854  | )             |  | $ | 36,904
|                                 |  |                        |  |      |        |                         |   |         |               |  |   |       



10



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Amortization expense for definite-lived intangible assets was $936,000 and $1.8 million for
the three and nine months ended September 30, 2009, respectively. Amortization expense for definite-lived intangible assets was $419,000 and $1.2 million for the three and nine months ended September 30, 2008, respectively. Amortization
expense is calculated on the straight-line method unless there is a method that more accurately reflects the consumption of the benefit provided by the intangible asset. Estimated annual amortization expense for definite-lived-intangible assets for
each of the next five years and cumulative thereafter is as follows (in thousands):



|           |  |   |       
|---------- |  | - | ------
|2009       |  | $ | 914   
|2010       |  |   | 3,155 
|2011       |  |   | 2,823 
|2012       |  |   | 2,462 
|2013       |  |   | 2,174 
|Thereafter |  |   | 12,388
|           |  |   |       
|Total      |  | $ | 23,916
|           |  |   |       

6. 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. There were no contributions made to the Plan during the third quarter of 2009. During the nine months ended September 30, 2009 the Company contributed $750,000 to the Plan.

Components of pension benefit cost are as follows:



|                                            |  |                                 |      |   |                                |   |      |      |  |   |      |   |  |   |      |  
|------------------------------------------- |  | ------------------------------- | ---- | - | ------------------------------ | - | ---- | ---- |  | - | ---- | - |  | - | ---- | -
|                                            |  | Three Months EndedSeptember 30, |      |   | Nine Months EndedSeptember 30, |  
|                                            |  | 2008                            |      |   | 2009                           |   |      | 2008 |  |   | 2009 |  
|                                            |  | (dollars in thousands)          |     
|Pension Benefit Cost:                       |  |                                 |      |   |                                |   |      |      |  |   |      |   |  |   |      |  
|Service cost                                |  | $                               | 55   |   |                                | $ | 61   |      |  | $ | 165  |   |  | $ | 183  |  
|Interest cost                               |  |                                 | 189  |   |                                |   | 202  |      |  |   | 563  |   |  |   | 604  |  
|Expected return on plan assets              |  |                                 | (175 | ) |                                |   | (168 | )    |  |   | (525 | ) |  |   | (504 | )
|Amortization of unrecognized actuarial loss |  |                                 | 1    |   |                                |   | 56   |      |  |   | 9    |   |  |   | 170  |  
|Amortization of prior service cost          |  |                                 | 9    |   |                                |   | 7    |      |  |   | 18   |   |  |   | 21   |  
|                                            |  |                                 |      |   |                                |   |      |      |  |   |      |   |  |   |      |  
|Net periodic benefit cost                   |  | $                               | 79   |   |                                | $ | 158  |      |  | $ | 230  |   |  | $ | 474  |  
|                                            |  |                                 |      |   |                                |   |      |      |  |   |      |   |  |   |      |  

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.



11



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##### Table of Contents

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



|                                                      |  |                                 |      |   |                                |   |     |      |  |   |      |   |  |   |      |  
|----------------------------------------------------- |  | ------------------------------- | ---- | - | ------------------------------ | - | --- | ---- |  | - | ---- | - |  | - | ---- | -
|                                                      |  | Three Months EndedSeptember 30, |      |   | Nine Months EndedSeptember 30, |  
|                                                      |  | 2008                            |      |   | 2009                           |   |     | 2008 |  |   | 2009 |  
|                                                      |  | (dollars in thousands)          |     
|Postretirement Benefit Cost (Income):                 |  |                                 |      |   |                                |   |     |      |  |   |      |   |  |   |      |  
|Service cost                                          |  | $                               | 3    |   |                                | $ | 1   |      |  | $ | 10   |   |  | $ | 3    |  
|Interest cost                                         |  |                                 | 46   |   |                                |   | 41  |      |  |   | 143  |   |  |   | 124  |  
|Amortization of unrecognized net actuarial loss       |  |                                 | 1    |   |                                |   |    |      |  |   | 14   |   |  |   |     |  
|Amortization of unrecognized prior service benefit    |  |                                 | (265 | ) |                                |   | (63 | )    |  |   | (794 | ) |  |   | (267 | )
|                                                      |  |                                 |      |   |                                |   |     |      |  |   |      |   |  |   |      |  
|Net periodic benefit income                           |  |                                 | (215 | ) |                                |   | (21 | )    |  |   | (627 | ) |  |   | (140 | )
|Curtailment gain                                      |  |                                 |     |   |                                |   |    |      |  |   |     |   |  |   | (590 | )
|                                                      |  |                                 |      |   |                                |   |     |      |  |   |      |   |  |   |      |  
|Total postretirement benefit income, with adjustments |  | $                               | (215 | ) |                                | $ | (21 | )    |  | $ | (627 | ) |  | $ | (730 | )
|                                                      |  |                                 |      |   |                                |   |     |      |  |   |      |   |  |   |      |  

During the second quarter of 2009, the Company eliminated a portion of the
postretirement welfare benefits. The elimination of life insurance benefits for a significant portion of the total active participants triggered a plan curtailment. The curtailment required the immediate recognition of unrecognized prior service
credit of $590,000.

7. LONG-TERM DEBT AND REVOLVING CREDIT FACILITIES



|                                         |  |                         |         |  
|---------------------------------------- |  | ----------------------- | ------- | -
|                                         |  | As ofSeptember 30, 2009 |        
|                                         |  | (dollars in thousands)  |        
|Total Long-Term Debt:                    |  |                         |         |  
|Iowa Telecom senior secured term loans   |  | $                       | 552,778 |  
|EN-TEL Communications, LLC notes payable |  |                         | 11,538  |  
|SHAL, LLC notes payable                  |  |                         | 4,672   |  
|                                         |  |                         |         |  
|Total Debt                               |  |                         | 568,988 |  
|Current maturities of long-term debt     |  |                         | (2,048  | )
|                                         |  |                         |         |  
|Long-Term Debt                           |  | $                       | 566,940 |  
|                                         |  |                         |         |  

Iowa Telecom Credit Facilities

As of September 30, 2009, the Company had outstanding $552.8 million of senior debt under the Iowa Telecom term loan facilities and had
$41.0 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
September 30, 2009, $41.0 million was outstanding on the revolving credit facility and $59.0 million was available. Borrowings under the revolving credit facility bear interest per annum at either (a) the London inter-bank offered rate, or
LIBOR, plus 2.0% or (b) a base rate plus 1.0%. As of September 30, 2009, the Company had $41.0 million outstanding under LIBOR elections at an average all-in rate of 2.25%.

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 September 30, 2009, $350.0 million of Term Loan B was based upon a LIBOR election effective through December 30, 2009 at an all-in rate of 2.04%. As of September 30, 2009, the interest
rate on the remaining $50.0 million was based upon a LIBOR election effective through October 19, 2009 at an all-in rate of 2.00%.

On July 1, 2009, Iowa Telecom entered into an Incremental Loan Amendment (the Incremental Amendment) to the Amended and Restated Credit Agreement dated as of November 23, 2004 (as
amended from time to time, the Credit Agreement), among Iowa Telecom, the lenders party thereto and Rural Telephone Finance Cooperative, as administrative agent. Pursuant to the Incremental Amendment, Iowa Telecom borrowed $75.0 million
in incremental loans under the incremental loan facility provided



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##### Table of Contents

under the Credit Agreement. The incremental loans bear interest at either a base rate plus 1.00% (in the case of base rate loans) or LIBOR plus 2.00% (in the case of Eurodollar loans), at the
election of Iowa Telecom. The incremental loans are subject to the terms and conditions of the Credit Agreement and are entitled to the benefits of the collateral security provided to the other loans made pursuant to the Credit Agreement. The
maturity date of the incremental loans is November 23, 2011. As of September 30, 2009, the interest rate on the $75.0 million was based upon a LIBOR election effective through October 5, 2009 at all-in-rate of 2.26%.

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%. 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%. 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.

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 wholly-owned 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 Iowa Telecom 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 Iowa Telecom credit facilities require us, subject to certain exceptions, to prepay outstanding loans under the credit facilities to the
extent of net cash proceeds received from the following: issuance of certain indebtedness; proceeds of certain asset sales; and casualty insurance proceeds. The credit facilities further require us, subject to certain exceptions, to make prepayments
under the credit facilities equal to 50% of any net increase in the following: distributable cash during a dividend suspension period, as defined; and cumulative distributable cash, as defined, during the fiscal year less the cumulative reductions
of revolving loans (adjusted to exclude the effects of borrowings to fund permitted acquisitions) through such period, with reductions to the percentage to be determined based on improvements in certain credit ratios. As of September 30, 2009,
no prepayment amounts were due under these provisions.

The Iowa Telecom 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 Iowa Telecom 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 September 30, 2009.



13



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##### Table of Contents

EN-TEL Communications, LLC Notes Payable

On July 18, 2008, the Company acquired Bishop Communications Corporation (Bishop Communications). As part of the
acquisition, the Company assumed $13.0 million of debt of EN-TEL Communications, LLC (EN-TEL), a majority-owned subsidiary of Bishop Communications. The assumed debt is represented by promissory notes payable to the Rural Telephone
Finance Cooperative which have quarterly installments of principal and interest. The notes currently bear interest at an average all-in fixed rate of 7.02%. The notes have a fixed interest rate for specific periods of time ranging from December 2009
through December 2013 and will thereafter be either at a variable interest rate or renegotiated at a fixed rate at the end of the specified period. The promissory notes mature in 2015 and 2018. Principal payments of $308,000 and $906,000 were made
during the three and nine months ended September 30, 2009. The remaining scheduled payments are $313,000 in 2009, $1.3 million in 2010, $1.4 million in 2011, $1.5 million in 2012, $1.6 million in 2013, and $5.3 million thereafter.

The notes are secured by the assets of EN-TEL. The debt agreements restrict dividends paid by EN-TEL and no amounts are currently
available for dividends.

SHAL, LLC Notes Payable

On July 1, 2009, the Company acquired substantially all of the assets of Sherburne Tele Systems, Inc. (Sherburne). As part of the acquisition, the Company became the majority owner of
SHAL, LLC. As a result, the Company began reflecting the results of operations, cash flows and financial position of SHAL, LLC on a consolidated basis. At the time of the acquisition of the Sherburne Assets, SHAL, LLC had debt outstanding of $4.9
million. The debt is represented by promissory notes payable to the Rural Telephone Finance Cooperative which have quarterly installments of principal and interest. The notes currently bear interest at an average all-in fixed rate of 7.25%. The
notes have a fixed interest rate for specific periods of time ranging from January 2010 through January 2012 and will thereafter be either at a variable interest rate or renegotiated at a fixed rate at the end of the specified period. The promissory
notes mature in January 2015. A principal payment of $181,000 was made during the quarter ended September 30, 2009. The remaining scheduled payments are $184,000 in 2009, $772,000 in 2010, $830,000 in 2011, $893,000 in 2012, $960,000 in 2013,
and $1.0 million thereafter.

The notes are secured by the assets of SHAL, LLC and SHAL Networks, Inc. The debt agreements
restrict dividends paid by SHAL, LLC and $950,000 is currently available for dividends.

Interest Rate Swaps

On August 26, 2005, the Company amended an interest rate swap agreement that was originally entered into on November 4, 2004. The
amended swap arrangement resulted in two identical swap agreements which each fixed the interest rate the Company will pay on $175.0 million of indebtedness under Term Loan B, for a total swap notional value of $350.0 million. Effective
September 26, 2008, the Company terminated one of its swap agreements which the Company designated as a hedge against the variability in future interest payments due on $175.0 million of Term Loan B. The Company entered into a new swap
agreement effective September 30, 2008 to replace the terminated swap agreement. The amended terms of the new swap agreement and the remaining swap agreement effective August 31, 2005, effectively convert the variable rate interest
payments due on $350.0 million of Term Loan B to a fixed rate of 5.87% through maturity at November 23, 2011.

8. 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, 983,883 have been exercised and 212,036 remained outstanding as
of September 30, 2009. No new options will be granted under the 2002 Incentive Plan. The term of each option did not exceed 10 years from the date of grant. Options granted to employees vested over 3 to 5 years from the date of the grant. All
unvested options outstanding at the time of the closing of the 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.



14



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##### Table of Contents

The Company recorded $86,000 and $278,000 of stock-based compensation expense during the
three and nine month periods ended September 30, 2009, 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 nine
month periods ended September 30, 2008, the Company recorded $269,000 and $803,000 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 EndedSeptember 30, |   |  | Nine Months EndedSeptember 30, |  
|                                          |  | 2008                            |   |  | 2009                           |   |  | 2008   |   |  | 2009   |  
|Weighted Average Expected Life (in years) |  | 1.2 yr                          |   |  | 0.1 yr                         |   |  | 1.4 yr |   |  | 0.5 yr |  
|Risk free interest rate                   |  | 1.50                            | % |  | 0.03                           | % |  | 1.79   | % |  | 0.12   | %
|Volatility                                |  | 32                              | % |  | 31                             | % |  | 31     | % |  | 39     | %
|Dividend yield                            |  | 0                               | % |  | 0                              | % |  | 0      | % |  | 0      | %

A summary of the status of options granted under the 2002 Incentive Plan as of
September 30, 2008 and 2009, and the changes during the three and nine month periods then ended, is presented below:



|                                 |  |                                      |  |                                        |      |        |          |   |                                        |   |     
|-------------------------------- |  | ------------------------------------ |  | -------------------------------------- | ---- | ------ | -------- | - | -------------------------------------- | - | ----
|                                 |  | Three Months EndedSeptember 30, 2008 |  | Three Months EndedSeptember 30, 2009  
|Fixed Options                    |  | Shares                               |  | WeightedAverageExercise Priceper Share |      | Shares |          |   | WeightedAverageExercise Priceper Share
|OUTSTANDING AT JUNE 30,          |  | 677,579                              |  | $                                      | 2.29 |        | 217,036  |   |                                        | $ | 0.64
|Granted                          |  |                                     |  |                                        |     |        |         |   |                                        |   |    
|Exercised                        |  |                                     |  |                                        |     |        | (5,000   | ) |                                        |   | 0.50
|                                 |  |                                      |  |                                        |      |        |          |   |                                        |   |     
|OUTSTANDING AT SEPTEMBER 30,     |  | 677,579                              |  | $                                      | 1.89 |        | 212,036  |   |                                        | $ | 0.24
|                                 |  |                                      |  |                                        |      |        |          |   |                                        |   |     
|                                 |  |                                     
|                                 |  | Nine Months EndedSeptember 30, 2008  |  | Nine Months EndedSeptember 30, 2009   
|Fixed Options                    |  | Shares                               |  | WeightedAverageExercise Priceper Share |      | Shares |          |   | WeightedAverageExercise Priceper Share
|OUTSTANDING AT BEGINNING OF YEAR |  | 677,579                              |  | $                                      | 3.10 |        | 677,579  |   |                                        | $ | 1.08
|Granted                          |  |                                     |  |                                        |     |        |         |   |                                        |   |    
|Exercised                        |  |                                     |  |                                        |     |        | (465,543 | ) |                                        |   | 1.45
|                                 |  |                                      |  |                                        |      |        |          |   |                                        |   |     
|OUTSTANDING AT SEPTEMBER 30,     |  | 677,579                              |  | $                                      | 1.89 |        | 212,036  |   |                                        | $ | 0.24
|                                 |  |                                      |  |                                        |      |        |          |   |                                        |   |     

The following table summarizes information about stock options outstanding at
September 30, 2009:



|                               |  |                     |  |                                                  |  |         |  |                                        |      |                                         |   |          
|------------------------------ |  | ------------------- |  | ------------------------------------------------ |  | ------- |  | -------------------------------------- | ---- | --------------------------------------- | - | ---------
|                               |  | Options Outstanding |  | Options Exercisable                             
|Exercise Price per Share Range |  | Number              |  | WeightedAverageRemainingContractualLife In Years |  | Number  |  | WeightedAverageExercise Priceper Share |      | WeightedAverageAggregateIntrinsic Value
|$0.01 to $0.50                 |  | 156,102             |  | 2.6                                              |  | 156,102 |  | $                                      | 0.09 |                                         | $ | 1,952,173
|$0.51 to $1.00                 |  | 55,934              |  | 2.6                                              |  | 55,934  |  | $                                      | 0.64 |                                         | $ | 668,921  

The weighted average exercise prices of options exercisable at September 30,
2009 reflect the reductions required by the plan as a result of the declaration of cash dividends.



15



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##### Table of Contents

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 1,033,800 shares of restricted stock, net of forfeitures and cancellations, have been awarded to various officers and employees of the Company, and 14,757 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 September 30, 2008 and 2009, and the changes during the three and nine month periods then ended, is presented below:



|                                 |  |                                      |     |                                      |                                     |       |        |          |     |                                     |   |      
|-------------------------------- |  | ------------------------------------ | --- | ------------------------------------ | ----------------------------------- | ----- | ------ | -------- | --- | ----------------------------------- | - | -----
|                                 |  | Three Months EndedSeptember 30, 2008 |     | Three Months EndedSeptember 30, 2009
|                                 |  | Shares                               |     |                                      | WeightedAverageGrant DateFair Value |       | Shares |          |     | WeightedAverageGrant DateFair Value
|OUTSTANDING AT JUNE 30,          |  | 506,775                              |     |                                      | $                                   | 18.76 |        | 690,700  |     |                                     | $ | 16.49
|Granted                          |  |                                     |     |                                      |                                     |      |        | 100,000  | (1) |                                     |   | 13.22
|Vested                           |  | (35,625                              | )   |                                      |                                     | 18.66 |        | (35,625  | )   |                                     |   | 18.66
|                                 |  |                                      |     |                                      |                                     |       |        |          |     |                                     |   |      
|OUTSTANDING AT SEPTEMBER 30,     |  | 471,150                              |     |                                      | $                                   | 18.77 |        | 755,075  |     |                                     | $ | 15.95
|                                 |  |                                      |     |                                      |                                     |       |        |          |     |                                     |   |      
|                                 |  |                                     
|                                 |  | Nine Months EndedSeptember 30, 2008  |     | Nine Months EndedSeptember 30, 2009 
|                                 |  | Shares                               |     |                                      | WeightedAverageGrant DateFair Value |       | Shares |          |     | WeightedAverageGrant DateFair Value
|OUTSTANDING AT BEGINNING OF YEAR |  | 378,475                              |     |                                      | $                                   | 19.64 |        | 471,150  |     |                                     | $ | 18.77
|Granted                          |  | 174,500                              | (2) |                                      |                                     | 16.73 |        | 399,000  | (3) |                                     |   | 13.63
|Vested                           |  | (81,825                              | )   |                                      |                                     | 18.47 |        | (115,075 | )   |                                     |   | 19.43
|                                 |  |                                      |     |                                      |                                     |       |        |          |     |                                     |   |      
|OUTSTANDING AT SEPTEMBER 30,     |  | 471,150                              |     |                                      | $                                   | 18.77 |        | 755,075  |     |                                     | $ | 15.95
|                                 |  |                                      |     |                                      |                                     |       |        |          |     |                                     |   |      



|(1) | Weighted average vesting period at grant date for shares granted is 36 months.
|--- | ------------------------------------------------------------------------------



|(2) | Weighted average vesting period at grant date for shares granted is 61 months.
|--- | ------------------------------------------------------------------------------



|(3) | Weighted average vesting period at grant date for shares granted is 46 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 $872,000 and $2.4 million of stock-based compensation expense during the three and nine month periods ended September 30, 2009, respectively. The Company recorded $620,000 and $1.8 million of
stock-based compensation expense during the three and nine month periods ended September 30, 2008, respectively. The remaining amount to be charged to expense for the unvested awards over the remaining service periods is $9.2 million as of
September 30, 2009. The Company also recorded zero and $77,000 of expense during the three and nine month periods ended September 30, 2009, respectively, related to the unrestricted shares issued to members of its Board of Directors.
During the three and nine month periods ended September 30, 2008, the Company recorded zero and $93,000, 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 nine months periods ended September 30, 2009 was $437,000 and $1.4 million, respectively.

9. DISCLOSURES
ABOUT FAIR VALUE OF INTEREST RATE SWAPS

The Company is exposed to interest rate risk associated with the Companys
floating rate debt. The Company entered into interest rate swaps in order to manage interest rate risk and adjust the interest rate profile of the Companys debt to achieve a target mix of floating and fixed rate debt.



16



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On August 26, 2005, the Company amended the interest rate swap agreement that was
originally entered into on November 4, 2004. The amended swap agreement resulted in two identical swap agreements which each fixed the interest rate the Company will pay on $175.0 million of indebtedness under Term Loan B for a total swap
notional value of $350.0 million.

The guarantor of a floating rate payer under one of the interest rate swap agreements
declared bankruptcy during the third quarter of 2008 resulting in a default of the agreement. In accordance with the agreement, the Company elected to terminate the agreement effective September 26, 2008. The swap agreement had been designated
as a hedge against the variability in future interest payments due on $175.0 million of Term Loan B. Accumulated Other Comprehensive Income (Accumulated OCI) of $870,000 related to the terminated hedge recorded in the Companys
Consolidated Statements of Stockholders Equity will be amortized as an expense in the Other Income (Expense) section of the Companys Condensed Consolidated Statements of Income throughout the remaining term of the terminated hedge
transaction on November 23, 2011.

The Company entered into a new interest rate swap agreement effective
September 30, 2008, which the Company designated as a hedge against the variability in future interest payments due on $175.0 million of Term Loan B. The terms of the new swap agreement, coupled with the remaining August 2005 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 5.87% through maturity on November 23, 2011.

The fair values of the interest rate swaps have been calculated by discounting the future cash flows of both the fixed rate and variable
rate interest payments using discount rates appropriate with consideration given to the Companys non-performance risk. The inputs used in determining the fair value fall within Level 2 of the fair value hierarchy, as defined in FASB ASC
820, Fair Value Measurements and Disclosures. See Note 11 for further information regarding the fair value measurement of the interest rate swaps.



|                             |  |                             |  |                        |        |                        |   |       
|---------------------------- |  | --------------------------- |  | ---------------------- | ------ | ---------------------- | - | ------
|                             |  |                             |  | Fair Value            
|                             |  | Balance Sheet               |  | As ofDecember 31,2008  |        | As ofSeptember 30,2009
|                             |  |                             |  | (dollars in thousands)
|Interest rate swap contracts |  | Other long-term liabilities |  | $                      | 22,155 |                        | $ | 20,126

FASB ASC 815,Derivatives and Hedging, requires companies to recognize all
derivative instruments as either assets or liabilities at fair value in the balance sheet. In accordance with FASB ASC 815, the interest rate swaps held by the Company are designated and qualify as cash flow hedges of fixed-rate borrowings. The
effective portion of the gain or loss on the derivative is reported as a component of other comprehensive income and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. Gains and losses on
the derivative representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness are recognized in current earnings.



17



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|                                                     |  |                                 |                                                                      |   |      |                                                |                                 |                  |  |                 |  |                                 |        |   |  |                  |        |      |  |              |      |   |      |      |  |   |      |     
|---------------------------------------------------- |  | ------------------------------- | -------------------------------------------------------------------- | - | ---- | ---------------------------------------------- | ------------------------------- | ---------------- |  | --------------- |  | ------------------------------- | ------ | - |  | ---------------- | ------ | ---- |  | ------------ | ---- | - | ---- | ---- |  | - | ---- | ----
|Gain Recognized in OCI (effective portion)           |  |                                 | Loss Reclassified fromAccumulated OCI into Income(effective portion) |   |      | Loss Recognized in Income(ineffective
portion) |                                
|                                                     |  | Three Months EndedSeptember 30, |                                                                      |   |      |                                                | Three Months EndedSeptember 30, |                  |  |                 |  | Three Months EndedSeptember 30, |       
|                                                     |  | 2008                            |                                                                      |   | 2009 |                                                |                                 | Income Statement |  | 2008            |  |                                 | 2009   |   |  | Income Statement |        | 2008 |  |              | 2009 |  
|                                                     |  | (dollars in thousands)          |                                                                      |   |      |                                                | (dollars in thousands)          |                  |  |                 |  | (dollars in thousands)          |       
|Other comprehensive income (loss)                    |  | $                               | (2,894                                                               | ) |      | $                                              | (788                            | )                |  | Interestexpense |  | $                               | (1,175 | ) |  | $                | (3,153 | )    |  | Otherexpense |      | $ | (144 | )(1) |  | $ | (236 | )(2)
|                                                     |  |                                
|Gain or (Loss) Recognized in
OCI (effective portion) |  |                                 | Loss Reclassified fromAccumulated OCI
into Income(effective portion) |   |      | Loss Recognized in Income(ineffective
portion) |                                
|                                                     |  | Nine Months EndedSeptember 30,  |                                                                      |   |      |                                                | Nine Months EndedSeptember 30,  |                  |  |                 |  | Nine Months EndedSeptember 30,  |       
|                                                     |  | 2008                            |                                                                      |   | 2009 |                                                |                                 | Income Statement |  | 2008            |  |                                 | 2009   |   |  | Income Statement |        | 2008 |  |              | 2009 |  
|                                                     |  | (dollars in thousands)          |                                                                      |   |      |                                                | (dollars in thousands)          |                  |  |                 |  | (dollars in thousands)          |       
|Other comprehensive income (loss)                    |  | $                               | (2,962                                                               | ) |      | $                                              | 2,377                           |                  |  | Interestexpense |  | $                               | (1,805 | ) |  | $                | (8,052 | )    |  | Otherexpense |      | $ | (403 | )(3) |  | $ | (540 | )(4)



|(1) | The amount of loss recognized in income includes $79,000 related to the ineffective portion of the hedging relationship and $65,000 related to the
amortization of Accumulated OCI on the terminated hedge discussed above.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(2) | The amount of loss recognized in income includes $171,000 related to the ineffective portion of the hedging relationship and $65,000 related to the
amortization of Accumulated OCI on the terminated hedge discussed above.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(3) | The amount of loss recognized in income includes $338,000 related to the ineffective portion of the hedging relationship and $65,000 related to the
amortization of Accumulated OCI on the terminated hedge discussed above.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(4) | The amount of loss recognized in income includes $348,000 related to the ineffective portion of the hedging relationship and $192,000 related to the
amortization of Accumulated OCI on the terminated hedge discussed above.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

In addition to the amounts shown
above, the Condensed Consolidated Statements of Income for the three and nine months ended September 30, 2008 include certain amounts related to the termination of an interest rate swap agreement. The guarantor of a floating rate payer under an
interest rate swap agreement declared bankruptcy during the third quarter of 2008 resulting in a default of the agreement. In accordance with the agreement, the Company elected to terminate the agreement effective September 26, 2008. The swap
agreement had been designated as a hedge against the variability in future interest payments due on $175.0 million of Term Loan B. The following impacts are included in the Condensed Consolidated Statements of Income for the three and nine months
ended September 30, 2008 (in thousands):



|                                                         |  |   |       |  
|-------------------------------------------------------- |  | - | ----- | -
|Interest rate swap not qualifying as hedging instrument: |  |   |       |  
|Hedge ineffectiveness on interest rate swap              |  | $ | (676  | )
|Termination of interest rate swap                        |  |   | 1,848 |  
|                                                         |  |   |       |  
|Total adjustments to Other Income (Expense)              |  | $ | 1,172 |  
|                                                         |  |   |       |  

10. COMMITMENTS, CONTINGENCIES AND SUBSEQUENT EVENTS

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 consolidated balance sheets, statements of income or statements of cash flows.

In accordance with FASB ASC 855, Subsequent Events, the Company has evaluated and disclosed subsequent events through
October 29, 2009, the date the financial statements were issued.

Asset acquisition of WH Comm. (WH
Comm). On June 23, 2009, the Company announced a definitive agreement to acquire substantially all the assets of WH Comm for $1.1 million, subject to regulatory approval. WH Comm is a division of Wright-Hennepin Cooperative
Electric Association based in Rockford, MN. WH Comm, a Competitive Local Exchange Carrier (CLEC), provides voice and high speed DSL Internet in several communities near the western suburbs of Minneapolis, Minnesota. As of September 30 , 2009,
WH Comm had approximately 2,000 access lines and 700 DSL subscribers.

11. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS

Fair Value of Financial Instruments

FASB ASC 820, Fair Value Measurements and Disclosures, 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.



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##### Table of Contents

Interest Rate SwapsThese included the Companys interest rate swap
derivative instruments. The fair value of the interest rate swaps was determined based on the present value of expected future cash flows using discount rates appropriate with consideration given to the Companys non-performance risk utilizing
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. Deducted from the September 30, 2009, interest
rate swap fair value calculation was a $680,000 adjustment in consideration of the Companys non-performance risk. The Companys non-performance risk is assessed based on the current trading discount of its Term Loan B debt as the swap
agreements are secured by the same collateral. The fair value of the interest rate swaps is recorded in the Other Long-Term Liabilities section of the Companys Consolidated Balance Sheets.

Cash Equivalents and InvestmentsCash equivalents consist of funds invested in money market funds that have daily
liquidity. Investments held in rabbi trust account consist of investments in stock and mutual funds with quoted market prices that are actively traded. Therefore, cash equivalents and investments held in rabbi trust account are categorized as
Level 1. The following table presents the fair value of the Companys financial instruments:



|                                        |  |                                                  |        |        |   |         |  |         |       |         |   |        |  |   |  
|--------------------------------------- |  | ------------------------------------------------ | ------ | ------ | - | ------- |  | ------- | ----- | ------- | - | ------ |  | - | -
|                                        |  | Fair Value Measurements as of September 30, 2009
|                                        |  | CarryingAmount                                   |        | Totals |   | Level 1 |  | Level 2 |       | Level 3
|                                        |  | (dollars in thousands)                          
|Cash equivalents                        |  | $                                                | 9,941  |        | $ | 9,941   |  | $       | 9,941 |         | $ |       |  | $ | 
|Investments held in rabbi trust account |  | $                                                | 880    |        | $ | 880     |  | $       | 880   |         | $ |       |  | $ | 
|Interest rate swaps                     |  | $                                                | 20,126 |        | $ | 20,126  |  | $       |      |         | $ | 20,126 |  | $ | 

See Note 9 for additional information regarding the fair value of the Companys
interest rate swap agreements.

Carrying Amount and Fair Value of Other Financial Instruments

The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable
to estimate that value:

Cash and Cash EquivalentsThe carrying amount approximates fair value because of
the short maturity of these instruments.

Long-Term InvestmentsLong-term investments consist primarily of
Rural Telephone Finance Cooperative (RTFC) Subordinated Capital Certificates. It is not practicable to estimate the fair value of the RTFC Subordinated Capital Certificates because there is no quoted market price for these instruments.
Therefore, the RTFC Subordinated Capital Certificates are recorded at cost. Ownership of RTFC Subordinated Capital Certificates is a requirement of the Companys debt agreement with the RTFC.

DebtThe fair value of the Term Loan C, Term Loan D, EN-TEL debt and SHAL debt was estimated using discounted cash flow
calculations and current market interest rates. The fair value of the Term Loan B debt was estimated based upon recent observable transactions for the Term Loan B debt. See Note 7 for additional information regarding the Companys long-term
debt.

The estimated fair value of the Companys financial instruments as of September 30, 2009, was as follows:



|                           |  |                        |         |            |   |        
|-------------------------- |  | ---------------------- | ------- | ---------- | - | -------
|                           |  | CarryingAmount         |         | Fair Value
|                           |  | (dollars in thousands)
|Financial Assets:          |  |                        |         |            |   |        
|Cash and Cash equivalents  |  | $                      | 12,091  |            | $ | 12,091 
|Financial Liabilities:     |  |                        |         |            |   |        
|Fixed Rate long-term debt: |  |                        |         |            |   |        
|Term Loan C                |  | $                      | 70,000  |            | $ | 73,002 
|Term Loan D                |  | $                      | 7,778   |            | $ | 8,111  
|EN-TEL debt                |  | $                      | 11,538  |            | $ | 11,958 
|SHAL, LLC debt             |  | $                      | 4,672   |            | $ | 4,895  
|Floating rate debt:        |  |                        |         |            |   |        
|Term Loan B                |  | $                      | 475,000 |            | $ | 460,750



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Certain financial instruments potentially subject the Company to concentrations of credit
risk. These financial instruments consist primarily of trade receivables, cash and temporary cash investments and interest rate swaps.

The Company places its cash and cash equivalents with high credit quality financial institutions. The Company also periodically evaluates the credit-worthiness of the institutions with which it invests.

12. BUSINESS ACQUISITIONS

Bishop Communications. On July 18, 2008, the Company acquired 100% of the outstanding stock of Bishop Communications, a provider of telecommunications, video, and high speed Internet services to customers in portions of
rural Minnesota. The acquisition of Bishop Communications expanded the Companys service area and customer base. The purchase price was approximately $33 million in cash, net of cash received, and assumed debt of $13.0 million, subject to
working capital adjustments. The transaction did not result in a tax basis step-up, as such, the goodwill acquired is not deductible for tax purposes. The allocation of the purchase price of Bishop Communication includes amortizable intangible
assets consisting primarily of customer relationship intangibles which have a weighted average useful life of 11.6 years.

The
results of operations for the acquired company are included in the Condensed Consolidated Statements of Income beginning on the acquisition date.

Sherburne Tele Systems, Inc. Assets. On July 1, 2009, the Company acquired substantially all of the assets of Sherburne Tele Systems, Inc., a provider of telecommunications services to
nine communities adjacent to the Minneapolis/St. Paul Metropolitan Area. The acquisition of the Sherburne Assets expanded the Companys service area and customer base. The purchase price was approximately $79.7 million in cash (net of cash
acquired), subject to certain tax adjustments. The transaction may result in a tax basis step-up.

Included in the assets of
Sherburne was a one-third interest in certain joint ventures including SHAL, LLC and SHAL Networks, Inc. The Company had previously owned a one-third interest in these entities. As a result of the acquisition of the Sherburne Assets, the Company
became the majority owner and began accounting for its ownership interest in these entities on a consolidated basis. As such, the Company has reflected the outstanding balance of the SHAL, LLC debt of $4.9 million in its consolidated balance sheet
as of July 1, 2009.

The results of operations for the acquired assets are included in the Condensed Consolidated
Statements of Income beginning on the acquisition date. The purchase price allocations for this acquisition are preliminary and subject to revision as more detailed analyses are completed and additional information on the fair value of acquired
assets and liabilities is developed.

New Ulm Telecom Inc.s Ownership Interests.On September 24,
2009, the Company acquired New Ulm Telecom Inc.s ownership interests in EN-TEL, SHAL, LLC and SHAL Networks, Inc. for a purchase price of $1.9 million. In addition, the Company assumed New Ulm Telecom Inc.s debt guarantee obligations on
the SHAL, LLC and EN-TEL debt. The outstanding balances due on the SHAL and EN-TEL debt as of September 30, 2009 are reflected in the consolidated financial statements.



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##### Table of Contents

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

Information contained herein contains forward-looking statements which can be identified by the use of forward-looking
terminology such as believes, expects, may, will, should, 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, 2008 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

Iowa Telecommunications Services, Inc. (Iowa Telecom) and its subsidiaries provide wireline local exchange telecommunications
services to residential and business customers in rural Iowa, Minnesota and Missouri. We currently operate 298 telephone exchanges serving 428 communities as the incumbent or historical local exchange carrier and are the sole
telecommunications company providing wireline services in approximately 67% of these communities. In addition, we provide service to residential and business customers throughout Iowa and portions of Minnesota as a competitive local exchange
carrier. In total, we provide services to approximately 255,600 access lines.

Our core business is the provision of local
telephone service to end users and network access to other telecommunications carriers for calls originated or terminated on our network. In addition to these core activities, which generated 64% of our total revenues in the first nine months of
2009, we provide long distance service, dial-up and DSL Internet access and other communications services. We provide services as the incumbent local exchange carrier (ILEC) through Iowa Telecom and its wholly-owned subsidiaries:
Lakedale Telephone Company (Lakedale Telephone) and Montezuma Mutual Telephone Company (Montezuma Telephone). On July 1, 2009, the Company, through its subsidiaries, acquired substantially all of the assets of Sherburne
Tele Systems, Inc. (Sherburne or the Sherburne Assets). As of July 1, 2009 Lakedale Telephone includes the acquired ILEC assets of Sherburne. As part of our strategy of pursuing growth beyond our current service area, we
compete for customers in Iowa in mostly adjacent markets through our competitive local exchange carrier subsidiaries Iowa Telecom Communications, Inc. (ITC) and IT Communications, LLC (IT Communications). Additionally, EN-TEL
Communications LLC (EN-TEL) Lakedale Link, Inc., and Lakedale Link, LLC are competitive local exchange carriers that provide local and long distance services in Minnesota. Together, ITC, IT Communications, EN-TEL, Lakedale Link, Inc.,
and Lakedale Link, LLC are referred to as the CLEC or our CLEC Operations. As of July 1, 2009 Lakedale Link, LLC includes the Sherburne CLEC assets.

Factors Affecting Our Operating Performance

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



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



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



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



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



| |  |  | our success integrating acquired operations.
| | - |  | --------------------------------------------



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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 substantially all 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 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 and for the periods shown:



|                                                   |  |                     |  |        
|-------------------------------------------------- |  | ------------------- |  | -------
|                                                   |  | As of September 30,
|                                                   |  | 2008                |  | 2009(4)
|Incumbent local exchange access lines(1)           |  | 213,700             |  | 214,100
|Competitive local exchange carrier access lines(2) |  | 32,100              |  | 41,500 
|                                                   |  |                     |  |        
|Total access lines                                 |  | 245,800             |  | 255,600
|                                                   |  |                     |  |        
|Long distance subscribers                          |  | 147,600             |  | 160,100
|Dial-up Internet subscribers                       |  | 18,500              |  | 11,800 
|DSL subscribers                                    |  | 74,500              |  | 94,500 
|Video subscribers(3)                               |  | 18,500              |  | 26,400 



|(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 2,400 wholesale lines subscribed at September 30, 2008 and 1,900 at
September 30, 2009.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

|(3) | Includes subscribers served via our facilities as well as subscribers of satellite service which we resell.
|--- | -----------------------------------------------------------------------------------------------------------

|(4) | Includes units
acquired from Sherburne:
|--- | ---------------------------------------



|                                                |  |                    
|----------------------------------------------- |  | -------------------
|                                                |  | As of September 30,
|                                                |  | 2009               
|Incumbent local exchange access lines           |  | 14,300             
|Competitive local exchange carrier access lines |  | 9,600              
|                                                |  |                    
|Total access lines                              |  | 23,900             
|                                                |  |                    
|Long distance subscribers                       |  | 18,600             
|Dial-up Internet subscribers                    |  | 500                
|DSL subscribers                                 |  | 14,600             
|Video subscribers                               |  | 3,600              



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##### Table of Contents

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 141 of the 428
communities our incumbent local exchange carriers serve. Of these 141 communities, we believe 109 communities have some voice service offered by Mediacoms telephony affiliates, MCC Telephony of Iowa, Inc. and MCC Telephony of Minnesota, LCC
(MCC), which initiated service in most of these markets during the second quarter of 2007. Additionally, we believe that in approximately 41 of these communities, independent local exchange carriers operating in mostly adjacent exchanges
and municipal utilities have constructed networks to provide competitive local exchange carrier services to customers in our exchanges.

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.

The jurisdiction of the Iowa Utilities Board
(Board) over our local retail rates changed dramatically as a result of state deregulatory legislation that became effective on July 1, 2005. Pursuant to this legislation, each telephone utility then subject to rate regulation, such
as Iowa Telecom, was permitted to elect to deregulate its charges for all of its retail business and residential local exchange services except single line flat-rated residential and business service and extended area services (EAS),
which remained rate-regulated until June 30, 2008, after which such authority expired. The Board could have extended such sunset to no later than June 30, 2010, but determined on June 27, 2008, not to impose such an extension based on
the level of competition in local telecommunications markets. The Board, through its jurisdiction to deregulate services based on the existence of effective competition, had already deregulated all of our rates for local exchange in 14 exchanges
pursuant to a December 23, 2004 order, and after the July 1, 2005, legislation took effect, another 14 exchanges pursuant to a December 5, 2005, order, the latter order focusing only on single-line flat-rated service due to the
July 1, 2005, deregulation of all other local exchange service rates statewide.

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 Board and Sprint in the U.S. District Court for the Southern District of Iowa asking the court to rule that the 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 in favor of the Board and Sprint, therefore maintaining
the status quo in which we are obligated to enter into an interconnection agreement with Sprint. We appealed this decision to the U.S. Court of Appeals for the Eighth Circuit on May 14, 2008. The Eighth Circuit issued an opinion on
April 28, 2009 affirming the lower courts decision (and, ultimately, the Boards decision). We elected not to seek further review of the Eighth Circuits decision.

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 Board and Sprint in U.S. District Court asking the court to rule that
the 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. On June 12, 2009, the District Court held that the Board
acted improperly by requiring us to serve as a traffic-switching intermediary between Sprint and third-party long distance carriers and vacated that part of the order, although the District Court did find that the Board acted properly with regard to
another interconnection-related issue. No party appealed this decision, the deadline for which was August 17, 2009.

In
addition to the disputes pending in federal district court and before the 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 but the stay was lifted on June 23, 2009 based on the Eighth Circuits April 28, 2009 decision. We are currently considering our options in light of the District Courts
June 12, 2009 decision holding partially in our favor. We cannot predict how or when this litigation will be resolved.



23



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##### Table of Contents

Business Acquisitions: On July 1, 2009 we acquired the Sherburne Assets.
Sherburne currently serves approximately 14,300 incumbent local exchange carrier access lines, 9,600 competitive local exchange carrier lines, 14,600 DSL high-speed Internet customers and 3,600 video customers, primarily in communities and rural
areas adjacent to the Minneapolis/St. Paul Metropolitan Area. Sherburnes operations include its incumbent local exchange carrier services, marketed as Connections. Etc., and competitive local exchange carrier services provided through its
wholly-owned subsidiary, NorthStar Access.

On September 24, 2009, the Company completed the acquisition of New Ulm
Telecom Inc.s ownership interests in EN-TEL, SHAL, LLC, SHAL Networks, Inc., and Direct Communications, LLC (collectively referred to as Joint Ventures) for $1.9 million and the assumption of New Ulms related debt guarantees.

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 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 decreases accordingly because DSL Internet access service often
replaces a second line dedicated to Internet usage. We believe that the revenue generated by our dial-up and DSL Internet access services outweighs the effect of these types of access line losses.

Our Retail Local Rate and Pricing Structure

As described under OverviewCompetition above, effective July 1, 2005, the rates for all of our Iowa retail local exchange service except for single line flat-rated business and
residential service and EAS were deregulated. Beginning July 1, 2005, monthly rates for single line services remaining under price regulation 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. These rate caps did not, however, include charges for EAS. The remaining retail local exchange service rate regulation in our
then-rate-regulated exchanges, with the arguable exception of EAS, expired effective July 1, 2008. The 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.

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 CLEC operations 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 September 30, 2009,
our CLEC served 41,500 access lines and accounted for 16.2% 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.



24



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##### Table of Contents

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 3% of our total revenue in the first nine months of 2009, 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
Telephone and Lakedale Telephone (through the Sherburne County Rural Telephone study area) received high cost loop universal service support amounting to less than 1% of our revenue. Our incumbent local exchange carrier (Iowa Telecommunications,
Inc.) and our independent incumbent local exchange carriers (Lakedale Telephone and Montezuma Telephone) switched access charges are based on rates approved by applicable state regulatory agencies. Our incumbent local exchange carrier and our
independent incumbent local exchange carriers 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 to our incumbent
local exchange 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, satellite and cable video, and the sale, installation and maintenance of customer premise voice and data equipment (CPE), and the lease of office space to third parties.

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



|                           |  |                                |         |                                                                     |   |         |  |     |      |  |     |  
|-------------------------- |  | ------------------------------ | ------- | ------------------------------------------------------------------- | - | ------- |  | --- | ---- |  | --- | -
|                           |  | Nine Months EndedSeptember 30, |         | % of Total Revenues andSales for the Nine MonthsEnded September 30, |  
|                           |  | 2008                           |         | 2009                                                                |   | 2008    |  |     | 2009 | 
|                           |  | (dollars in thousands)         |         |                                                                     |   |         |  |    
|Local services             |  | $                              | 53,126  |                                                                     | $ | 55,538  |  | 29  | %    |  | 29  | %
|Network access services    |  |                                | 65,857  |                                                                     |   | 64,873  |  | 36  | %    |  | 34  | %
|Toll services              |  |                                | 17,394  |                                                                     |   | 16,705  |  | 10  | %    |  | 9   | %
|Data and internet services |  |                                | 25,615  |                                                                     |   | 31,117  |  | 14  | %    |  | 17  | %
|Other services and sales   |  |                                | 19,953  |                                                                     |   | 20,170  |  | 11  | %    |  | 11  | %
|                           |  |                                |         |                                                                     |   |         |  |     |      |  |     |  
|Total revenues and sales   |  | $                              | 181,945 |                                                                     | $ | 188,403 |  | 100 | %    |  | 100 | %
|                           |  |                                |         |                                                                     |   |         |  |     |      |  |     |  



25



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##### Table of Contents

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 paid to other carriers; bad debt expense; operating tax expense; and cost of sales for our dial-up and DSL Internet access services, video services and customer premise equipment
products and services.

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

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 EndedSeptember 30, |   |  | Nine Months EndedSeptember 30, |  
|                                                                        |  | 2008                            |   |  | 2009                           |   |  | 2008 |   |  | 2009 |  
|Revenues and sales                                                      |  | 100                             | % |  | 100                            | % |  | 100  | % |  | 100  | %
|Cost of services and sales (excluding expenses listed separately below) |  | 32                              | % |  | 33                             | % |  | 32   | % |  | 33   | %
|Selling, general and administrative                                     |  | 19                              | % |  | 21                             | % |  | 18   | % |  | 21   | %
|Depreciation and amortization                                           |  | 22                              | % |  | 24                             | % |  | 21   | % |  | 24   | %
|                                                                        |  |                                 |   |  |                                |   |  |      |   |  |      |  
|Operating income                                                        |  | 27                              | % |  | 22                             | % |  | 29   | % |  | 22   | %
|Total other expenses, net                                               |  | 11                              | % |  | 10                             | % |  | 12   | % |  | 11   | %
|                                                                        |  |                                 |   |  |                                |   |  |      |   |  |      |  
|Earnings before income taxes                                            |  | 16                              | % |  | 12                             | % |  | 17   | % |  | 11   | %
|Income tax expense                                                      |  | 7                               | % |  | 5                              | % |  | 7    | % |  | 5    | %
|                                                                        |  |                                 |   |  |                                |   |  |      |   |  |      |  
|Net income                                                              |  | 9                               | % |  | 7                              | % |  | 10   | % |  | 6    | %
|                                                                        |  |                                 |   |  |                                |   |  |      |   |  |      |  

The results of operations for the three and nine months ended September 30, 2009
include the results from the Sherburne Assets which were acquired July 1, 2009.

Three Months Ended September 30, 2009 and 2008

Revenues and Sales

The table below sets forth the components of our revenues and sales for the three months ended September 30, 2009 compared to the same period in 2008:



|                           |  |                            |        |        |   |        |  |   |         |   |  |      |  
|-------------------------- |  | -------------------------- | ------ | ------ | - | ------ |  | - | ------- | - |  | ---- | -
|                           |  | Three Months EndedJune 30, |        | Change |  
|                           |  | 2008                       |        | 2009   |   | Amount |  |   | Percent |  
|                           |  | (dollars in thousands)     |       
|Revenues and Sales:        |  |                            |        |        |   |        |  |   |         |   |  |      |  
|Local services             |  | $                          | 18,013 |        | $ | 19,618 |  | $ | 1,605   |   |  | 8.9  | %
|Network access services    |  |                            | 22,852 |        |   | 23,306 |  |   | 454     |   |  | 2.0  | %
|Toll services              |  |                            | 5,845  |        |   | 5,658  |  |   | (187    | ) |  | -3.2 | %
|Data and internet services |  |                            | 9,129  |        |   | 11,658 |  |   | 2,529   |   |  | 27.7 | %
|Other services and sales   |  |                            | 7,084  |        |   | 8,056  |  |   | 972     |   |  | 13.7 | %
|                           |  |                            |        |        |   |        |  |   |         |   |  |      |  
|Total revenues and sales   |  | $                          | 62,923 |        | $ | 68,296 |  | $ | 5,373   |   |  | 8.5  | %
|                           |  |                            |        |        |   |        |  |   |         |   |  |      |  



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##### Table of Contents

Local Services. Local services revenues increased $1.6 million, or 8.9%, for the
three months ended September 30, 2009 as compared to the same period in 2008. The increase was primarily due to higher access lines resulting from the acquisition of the Sherburne Assets and higher vertical services revenue resulting from our
bundled offerings. From September 30, 2008 to September 30, 2009, total access lines increased by 9,800, or 4.0%, including an increase of 400 incumbent local exchange carrier lines and an increase in lines served by our competitive local
exchange carriers of 9,400. Excluding the lines acquired in the Sherburne transaction, incumbent local exchange carrier lines decreased by 13,900, while lines served by our competitive local exchange carriers decreased by 200 lines from
September 30, 2008 to September 30, 2009.

Network Access Services. Our network access services revenues
increased $454,000, or 2.0%, for the three months ended September 30, 2009 as compared to the same period in 2008. The increase was primarily due to the acquisition of the Sherburne Assets partially offset by lower minutes of use per access
line and a decrease in the switched access rates for the CLEC operations in Iowa and at Montezuma Telephone.

Toll
Services. Our toll services revenues decreased by $187,000, or 3.2%, for the three months ended September 30, 2009 as compared to the same period in 2008. The decrease in revenue was due to the decrease in minutes of use per line partially
offset by the acquisition of the Sherburne Assets.

Data and Internet Services. Data and Internet services revenues
increased by $2.5 million, or 27.7%, for the three months ended September 30, 2009 as compared to the same period in 2008. The increase was primarily a result of growth in revenue from our existing DSL Internet access service of $648,000,
combined with the growth in our data solutions products of $543,000 and $1.6 million from the acquisition of the Sherburne Assets. This increase was partially offset by decreases in our existing dial-up Internet revenue of $324,000.

Other Services and Sales. Other services and sales revenues increased by $972,000, or 13.7%, for the three months ended
September 30, 2009 as compared to the same period in 2008. The revenue increase was primarily due to the acquisition of the Sherburne Assets and increased revenue from video services.

Operating Costs and Expenses

The table below sets forth the components of our operating costs and expenses for the three months ended September 30, 2009 compared to the same period in 2008:



|                                                                       |  |                            |        |        |   |        |  |         |       |  |      |  
|---------------------------------------------------------------------- |  | -------------------------- | ------ | ------ | - | ------ |  | ------- | ----- |  | ---- | -
|                                                                       |  | Three Months EndedJune 30, |        | Change |  
|                                                                       |  | 2008                       |        | 2009   |   | Amount |  | Percent |      
|                                                                       |  | (dollars in thousands)     |       
|Operating Costs and Expenses:                                          |  |                            |        |        |   |        |  |         |       |  |      |  
|Cost of services and sales (exclusive of items shown separately below) |  | $                          | 20,424 |        | $ | 22,650 |  | $       | 2,226 |  | 10.9 | %
|Selling, general and administrative                                    |  |                            | 11,965 |        |   | 14,312 |  |         | 2,347 |  | 19.6 | %
|Depreciation and amortization                                          |  |                            | 13,736 |        |   | 16,412 |  |         | 2,676 |  | 19.5 | %
|                                                                       |  |                            |        |        |   |        |  |         |       |  |      |  
|Total operating costs and expenses                                     |  | $                          | 46,125 |        | $ | 53,374 |  | $       | 7,249 |  | 15.7 | %
|                                                                       |  |                            |        |        |   |        |  |         |       |  |      |  

Cost of Services and Sales. Cost of services and sales increased $2.2 million,
or 10.9%, for the three months ended September 30, 2009 as compared to the same period in 2008. The increase was principally due to the operating costs of the Sherburne Assets and including the expenses from the Joint Ventures, excluding
EN-TEL, which became consolidated subsidiaries as a result of the acquisition of the additional ownership interest as a part of the acquisition of the Sherburne Assets on July 1, 2009, partially offset by lower access expense and operating
taxes.

Selling, General and Administrative. Selling, general and administrative costs increased $2.3 million, or
19.6%, for the three months ended September 30, 2009 as compared to the same period in 2008. The increase was primarily due to additional operating expenses of $2.3 million related to the Sherburne Assets and acquisition related costs of
$766,000 that are now charged to expense in accordance with FASB ASC 805, Business Combinations. These increases were partially offset by lower contract services expense, and other savings realized from the integration of Bishop Companies
into the Companys systems and processes.



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##### Table of Contents

Depreciation and Amortization. Depreciation and amortization increased $2.7 million,
or 19.5%, for the three months ended September 30, 2009 as compared to the same period in 2008. The increase was primarily due to $1.7 million of depreciation and amortization expense related to the Sherburne Assets (including the effects of
consolidating SHAL, LLC, SHAL Networks, Inc. and Direct Communications, LLC) and higher plant balances.

Other Income (Expense)

The table below sets forth the components of other income (expense) for the three months ended September 30, 2009
compared to the same period in 2008:



|                             |  |                                 |        |   |        |   |        |        |  |   |         |   |  |       |  
|---------------------------- |  | ------------------------------- | ------ | - | ------ | - | ------ | ------ |  | - | ------- | - |  | ----- | -
|                             |  | Three Months EndedSeptember 30, |        |   | Change |  
|                             |  | 2008                            |        |   | 2009   |   |        | Amount |  |   | Percent |  
|                             |  | (dollars in thousands)          |       
|Other Income (Expense):      |  |                                 |        |   |        |   |        |        |  |   |         |   |  |       |  
|Interest and dividend income |  | $                               | 179    |   |        | $ | 480    |        |  | $ | 301     |   |  | 168.2 | %
|Interest expense             |  |                                 | (8,033 | ) |        |   | (8,333 | )      |  |   | (300    | ) |  | 3.7   | %
|Other, net                   |  |                                 | 1,080  |   |        |   | 845    |        |  |   | (235    | ) |  | -21.8 | %
|                             |  |                                 |        |   |        |   |        |        |  |   |         |   |  |       |  
|Total other expense, net     |  | $                               | (6,774 | ) |        | $ | (7,008 | )      |  | $ | 234     |   |  | 3.5   | %
|                             |  |                                 |        |   |        |   |        |        |  |   |         |   |  |       |  

Interest and Dividend Income. Interest and dividend income increased $301,000
for the three months ended September 30, 2009 as compared to the same period in 2008. The increase was due to higher patronage income in 2009.

Interest Expense. Interest expense was $8.0 and $8.3 million for the three months ended September 30, 2008 and 2009, respectively. Interest expense remained steady year over year due to lower
interest rates, which offset a higher average balance on the revolving line of credit in 2009, the debt of SHAL, LLC, and the additional $75 million of Term Loan B debt that was issued to acquire the Sherburne Assets.

Other, Net. Other, net was income of $845,000 resulting principally from a gain of $1.0 million on the previously owned one-third
interest in the Joint Ventures. The gain was recorded as part of the acquisition of the Sherburne Assets and was partially off set by the ineffective portion of an interest rate swap agreement during the three months ended September 30, 2009.
The $1.1 million net income for the three months ended September 30, 2008 resulted principally from the ineffectiveness and termination of an interest rate swap agreement during the three months ended September 30, 2008.

Income Tax Expense

Income
tax expense decreased by $960,000 to $3.3 million for the three months ended September 30, 2009 as compared to $4.3 million for the same period in 2008 due to lower income before taxes. Income tax expense is being booked at an estimated rate of
approximately 42%.

During the three months ended September 30, 2008 and 2009, cash income taxes paid were $199,000 and
zero, respectively, and relate primarily to payments of alternative minimum tax (AMT) during 2008.



28



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##### Table of Contents

Nine Months Ended September 30, 2009 and 2008

Revenues and Sales

The
table below sets forth the components of our revenues and sales for the nine months ended September 30, 2009 compared to the same period in 2008:



|                           |  |                                |         |        |   |         |  |   |         |   |  |      |  
|-------------------------- |  | ------------------------------ | ------- | ------ | - | ------- |  | - | ------- | - |  | ---- | -
|                           |  | Nine Months EndedSeptember 30, |         | Change |  
|                           |  | 2008                           |         | 2009   |   | Amount  |  |   | Percent |  
|                           |  | (dollars in thousands)         |        
|Revenues and Sales:        |  |                                |         |        |   |         |  |   |         |   |  |      |  
|Local services             |  | $                              | 53,126  |        | $ | 55,538  |  | $ | 2,412   |   |  | 4.5  | %
|Network access services    |  |                                | 65,857  |        |   | 64,873  |  |   | (984    | ) |  | -1.5 | %
|Toll services              |  |                                | 17,394  |        |   | 16,705  |  |   | (689    | ) |  | -4.0 | %
|Data and internet services |  |                                | 25,615  |        |   | 31,117  |  |   | 5,502   |   |  | 21.5 | %
|Other services and sales   |  |                                | 19,953  |        |   | 20,170  |  |   | 217     |   |  | 1.1  | %
|                           |  |                                |         |        |   |         |  |   |         |   |  |      |  
|Total revenues and sales   |  | $                              | 181,945 |        | $ | 188,403 |  | $ | 6,458   |   |  | 3.5  | %
|                           |  |                                |         |        |   |         |  |   |         |   |  |      |  

Local Services. Local services revenues increased $2.4 million, or 4.5%, for
the nine months ended September 30, 2009 as compared to the same period in 2008. The increase was primarily due to $1.9 million from the purchase of the Sherburne Assets and increased revenue from vertical services which offset other line
losses as further described under Results of Operations  Three Months Ended September 30, 2009 and 2008.

Network Access Services. Network access services revenues decreased $984,000, or 1.5%, for the nine months ended September 30, 2009 as compared to the same period in 2008. The decrease was primarily due to lower minutes of use
per access line and a decrease in switched access rates for the CLEC operations in Iowa and at Montezuma Telephone, partially offset by the acquisition of the Sherburne Assets.

Toll Services. Toll services revenues decreased by $689,000, or 4.0%, for the nine months ended September 30, 2009 as compared
to the same period in 2008. The decrease in revenue was due to a decrease in the average minutes of use per customer partially offset by the acquisition of the Sherburne Assets.

Data and Internet Services. Data and Internet Services revenues increased by $5.5 million, or 21.5%, for the nine months ended
September 30, 2009 as compared to the same period in 2008. The increase was primarily a result of growth in our DSL Internet access service revenue of $3.2 million, $1.6 million of DSL Internet access service revenue from the Sherburne Assets,
and growth in our data solutions products revenue of $1.5 million. This increase was partially offset by decreases in dial-up Internet revenue of $855,000.

Other Services and Sales. Other services and sales revenues increased by $217,000, or 1.1%, for the nine months ended September 30, 2009 as compared to the same period in 2008. The revenue
increase was primarily due to $1.8 million in revenue from video services, which includes $546,000 from the acquired Sherburne Assets, partially offset by lower CPE sales.

Operating Costs and Expenses

The table below sets forth the components of
our operating costs and expenses for the nine months ended September 30, 2008 compared to the same period in 2009:



|                                                                       |  |                           |         |        |   |         |  |         |        |  |      |  
|---------------------------------------------------------------------- |  | ------------------------- | ------- | ------ | - | ------- |  | ------- | ------ |  | ---- | -
|                                                                       |  | Nine Months EndedJune 30, |         | Change |  
|                                                                       |  | 2008                      |         | 2009   |   | Amount  |  | Percent |       
|                                                                       |  | (dollars in thousands)    |        
|Operating Costs and Expenses:                                          |  |                           |         |        |   |         |  |         |        |  |      |  
|Cost of services and sales (exclusive of items shown separately below) |  | $                         | 57,781  |        | $ | 61,536  |  | $       | 3,755  |  | 6.5  | %
|Selling, general and administrative                                    |  |                           | 32,230  |        |   | 39,973  |  |         | 7,743  |  | 24.0 | %
|Depreciation and amortization                                          |  |                           | 39,006  |        |   | 44,730  |  |         | 5,724  |  | 14.7 | %
|                                                                       |  |                           |         |        |   |         |  |         |        |  |      |  
|Total operating costs and expenses                                     |  | $                         | 129,017 |        | $ | 146,239 |  | $       | 17,222 |  | 13.3 | %
|                                                                       |  |                           |         |        |   |         |  |         |        |  |      |  



29



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##### Table of Contents

Cost of Services and Sales. Cost of services and sales increased $3.8 million, or
6.5%, for the nine months ended September 30, 2009 as compared to the same period in 2008. The increase was principally due to operating costs for the Sherburne Assets of $3.4 million, higher operating taxes and nine months of operating
expenses for Bishop Communications in 2009 (compared to only a partial quarter in the prior year), partially offset by lower network access costs and a curtailment gain of $590,000 in 2009 resulting from changes to a postretirement benefit plan.

Selling, General and Administrative. Selling, general and administrative costs increased $7.7 million, or 24.0%, for
the nine months ended September 30, 2009 as compared to the same period in 2008. The increase was primarily due to additional operating expenses of $2.3 million from our acquisition of the Sherburne Assets, $2.2 million of acquisition related
costs that were charged to expense in accordance with FASB ASC 805, Business Combinations, a $1.8 million one-time charge related to a network access matter and nine months of operating expenses for Bishop Communication in 2009 compared to
only a partial quarter in the prior year.

Depreciation and Amortization. Depreciation and amortization increased $5.7
million, or 14.7%, for the nine months ended September 30, 2009 as compared to the same period in 2008. The increase was primarily due to $1.7 million of depreciation and amortization expense for the Sherburne Assets, and higher plant balances
on the previously owned operations.

Other Income (Expense)

The table below sets forth the components of other income (expense) for the nine months ended September 30, 2009 compared to the same
period in 2008:



|                             |  |                                |         |   |        |   |         |        |  |   |         |   |  |       |  
|---------------------------- |  | ------------------------------ | ------- | - | ------ | - | ------- | ------ |  | - | ------- | - |  | ----- | -
|                             |  | Nine Months EndedSeptember 30, |         |   | Change |  
|                             |  | 2008                           |         |   | 2009   |   |         | Amount |  |   | Percent |  
|                             |  | (dollars in thousands)         |        
|Other Income (Expense):      |  |                                |         |   |        |   |         |        |  |   |         |   |  |       |  
|Interest and dividend income |  | $                              | 729     |   |        | $ | 1,742   |        |  | $ | 1,013   |   |  | 139.0 | %
|Interest expense             |  |                                | (23,194 | ) |        |   | (23,541 | )      |  |   | (347    | ) |  | 1.5   | %
|Other, net                   |  |                                | 821     |   |        |   | 576     |        |  |   | (245    | ) |  | -29.8 | %
|                             |  |                                |         |   |        |   |         |        |  |   |         |   |  |       |  
|Total other expense, net     |  | $                              | (21,644 | ) |        | $ | (21,223 | )      |  | $ | 421     |   |  | -1.9  | %
|                             |  |                                |         |   |        |   |         |        |  |   |         |   |  |       |  

Interest and Dividend Income. Interest and dividend income increased $1.0
million, or 139.0%, as compared to the same period in 2008. The increase was due to higher patronage income in 2009.

Interest Expense. Interest expense increased $347,000, or 1.5%, for the nine months ended September 30, 2009 as compared to the same period in 2008. The increase was due to a higher average balance on the revolving credit
facility, interest on the debt of EN-TEL for nine months in 2009 as compared to two and one half months in 2008, the SHAL, LLC debt for one quarter in 2009 and the additional Term Loan B debt of $75 million for one quarter in 2009 partially offset
by lower interest rates on the Companys variable rate debt.

Other, Net. Other, net was income of $576,000
related primarily to a gain of $1.0 million on the previously owned one-third interest in the Joint Ventures. The gain was recorded as part of the acquisition of the Sherburne Assets and was partially offset by the ineffective portion of the
interest rate swap for the nine months ended September 30, 2009. The $821,000 of expense in the same period in 2008 resulted principally from the ineffectiveness and subsequent termination of an interest rate swap agreement.

Income Tax Expense

Income
tax expense decreased $4.4 million to $8.9 million for the nine months ended September 30, 2009 as compared to $13.3 million for the same period in 2008 due to lower income before taxes. During the nine months ended September 30, 2008 and
2009, cash income taxes paid were $346,000 and $71,000, respectively.



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Liquidity and Capital Resources

Our short-term and long-term liquidity requirements arise primarily from: (i) principal and 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 2008 and 2009:



|                   |  |                    |       |             |                    |              |                 
|------------------ |  | ------------------ | ----- | ----------- | ------------------ | ------------ | ----------------
|Date Declared      |  | Dividend Per Share |       | Record Date |                    | Payment Date
|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   
|September 15, 2008 |  | $                  | 0.405 |             | September 30, 2008 |              | October 15, 2008
|December 15, 2008  |  | $                  | 0.405 |             | December 31, 2008  |              | January 15, 2009
|March 16, 2009     |  | $                  | 0.405 |             | March 31, 2009     |              | April 15, 2009  
|June 15, 2009      |  | $                  | 0.405 |             | June 30, 2009      |              | July 15, 2009   
|September 15, 2009 |  | $                  | 0.405 |             | September 30, 2009 |              | October 15, 2009

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 our cash needs for operations, interest and principal payments on our indebtedness, and capital expenditures.

We intend to fund our operations, interest expense, principal payments, capital expenditures, working capital requirements and dividend
payments on our common stock with cash from operations. For the nine months ended September 30, 2008 and 2009, cash provided by operating activities was $66.0 million and $63.6 million, respectively.

The purchase price of any significant future acquisitions may be paid in the form of equity securities, including common stock, and/or cash.
To the extent cash is used, 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.

On July 1, 2009 Iowa Telecom completed its acquisition
of substantially all of the assets of Sherburne Tele Systems, Inc. for a purchase price of approximately $79.7 million in cash (net of cash acquired), subject to certain tax adjustments. Approximately $10.9 million of the purchase price was
deposited into escrow accounts to satisfy, among other things, potential balance sheet purchase price adjustments, tax adjustments and potential indemnification claims by Iowa Telecom, if any. The purchase price was funded by an incremental term
loan of $75.0 million under Iowa Telecoms credit facilities, with the balance from borrowings under Iowa Telecoms revolving credit facility.

On July 1, 2009, Iowa Telecom entered into an Incremental Loan Amendment (the Incremental Amendment) to the Amended and Restated Credit Agreement dated as of November 23, 2004 (as
amended from time to time, the Credit Agreement), among Iowa Telecom, the lenders party thereto and the Rural Telephone Finance Cooperative, as administrative agent. Pursuant to the Incremental Amendment, Iowa Telecom borrowed $75.0
million in incremental loans under the incremental loan facility provided under the Credit Agreement. Interest accrues on the incremental loans at either a base rate plus 1.00% (in the case of base rate loans) or LIBOR plus 2.00% (in the case of
Eurodollar loans), at the election of Iowa Telecom. The incremental loans are subject to the terms and conditions of the Credit Agreement and are entitled to the benefits of the collateral security provided to the other loans made pursuant to the
Credit Agreement. The maturity date of the incremental loans is November 23, 2011.

On September 24, 2009, the
Company completed the acquisition of New Ulm Telecom Inc.s ownership interests in EN-TEL, SHAL, LLC, SHAL Networks, Inc., and Direct Communications, LLC for $1.9 million and the assumption of New Ulms related debt guarantees.



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SHAL, LLC and SHAL Networks, Inc. own and lease a 2,500-mile fiber-optic network throughout
Minnesota that provides low cost, high quality transport facilities. EN-TEL is a CLEC based in Willmar, Minnesota, providing local voice, DSL and digital video services. This acquisition resulted in Iowa Telecom owning all of the outstanding equity
in the SHAL, LLC, SHAL Networks, Inc., Direct Communications, LLC and substantially all of EN-TEL.

On June 23, 2009, the
Company announced a definitive agreement to acquire substantially all the assets of WH Comm for $1.1 million, subject to regulatory approval. WH Comm is a division of Wright-Hennepin Cooperative Electric Association based in Rockford, MN. WH Comm, a
Competitive Local Exchange Carrier (CLEC), provides voice and high speed DSL Internet in several communities near the western suburbs of Minneapolis, Minnesota. As of September 30, 2009, WH Comm had approximately 2,000 access lines and 700 DSL
subscribers. The Company expects to close the transaction during the fourth quarter of 2009.

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 November 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. Debt issued by EN-TEL, of approximately $11.5 million, will have principal
payments of $313,000 in 2009, $1.3 million in 2010, $1.4 million in 2011, $1.5 million in 2012, $1.6 million in 2013, and $5.3 million thereafter. Debt issued by SHAL, LLC of approximately $4.7 million will have scheduled principal payments of
$184,000 in 2009, $772,000 in 2010, $830,000 in 2011, $893,000 in 2012, $960,000 in 2013 and $1.0 million thereafter.

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 consolidated balance sheets, statements of income 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.

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, 2008 and September 30, 2009:



|                                       |  |                        |         |   |                   |   |         |  
|-------------------------------------- |  | ---------------------- | ------- | - | ----------------- | - | ------- | -
|                                       |  | As of                  |        
|                                       |  | December 31,2008       |         |   | September 30,2009 |  
|                                       |  | (dollars in thousands) |        
|Short-Term Liquidity:                  |  |                        |         |   |                   |   |         |  
|Current assets                         |  | $                      | 42,020  |   |                   | $ | 46,048  |  
|Current liabilities                    |  |                        | (92,280 | ) |                   |   | (91,027 | )
|                                       |  |                        |         |   |                   |   |         |  
|Net working capital deficit            |  | $                      | (50,260 | ) |                   | $ | (44,979 | )
|                                       |  |                        |         |   |                   |   |         |  
|Cash and cash equivalents              |  | $                      | 11,605  |   |                   | $ | 12,091  |  
|Available on revolving credit facility |  | $                      | 61,000  |   |                   | $ | 59,000  |  
|Adjusted Total Debt:                   |  |                        |         |   |                   |   |         |  
|Long-term debt                         |  | $                      | 489,003 |   |                   | $ | 566,940 |  
|Current maturities of long-term debt   |  |                        | 1,219   |   |                   |   | 2,048   |  
|Revolving credit facility              |  |                        | 39,000  |   |                   |   | 41,000  |  
|                                       |  |                        |         |   |                   |   |         |  
|Total debt                             |  |                        | 529,222 |   |                   |   | 609,988 |  
|Minus:                                 |  |                        |         |   |                   |   |         |  
|RTFC Capital Certificates              |  |                        | (7,778  | ) |                   |   | (7,778  | )
|Cash and cash equivalents              |  |                        | (11,605 | ) |                   |   | (12,091 | )
|                                       |  |                        |         |   |                   |   |         |  
|Adjusted Total Debt                    |  | $                      | 509,839 |   |                   | $ | 590,119 |  
|                                       |  |                        |         |   |                   |   |         |  

The change in net working capital deficit from December 31, 2008 to
September 30, 2009 is primarily due to the cash flow from operations.



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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 nine month periods ended September 30, 2008 and 2009:



|                                                         |  |                                 |        |   |                                |   |        |      |  |   |        |   |  |   |        |  
|-------------------------------------------------------- |  | ------------------------------- | ------ | - | ------------------------------ | - | ------ | ---- |  | - | ------ | - |  | - | ------ | -
|                                                         |  | Three Months EndedSeptember 30, |        |   | Nine Months EndedSeptember 30, |  
|                                                         |  | 2008                            |        |   | 2009                           |   |        | 2008 |  |   | 2009   |  
|Adjusted EBITDA:                                         |  |                                 |        |   |                                |   |        |      |  |   |        |   |  |   |        |  
|Net income                                               |  | $                               | 5,723  |   |                                | $ | 4,573  |      |  | $ | 17,973 |   |  | $ | 12,003 |  
|Income tax expense                                       |  |                                 | 4,301  |   |                                |   | 3,341  |      |  |   | 13,311 |   |  |   | 8,938  |  
|Interest expense                                         |  |                                 | 8,033  |   |                                |   | 8,333  |      |  |   | 23,194 |   |  |   | 23,541 |  
|Depreciation and amortization                            |  |                                 | 13,736 |   |                                |   | 16,412 |      |  |   | 39,006 |   |  |   | 44,730 |  
|Unrealized (gains) losses on financial derivatives       |  |                                 | (1,028 | ) |                                |   | 236    |      |  |   | (769   | ) |  |   | 540    |  
|Non-cash stock-based compensation expense                |  |                                 | 890    |   |                                |   | 959    |      |  |   | 2,660  |   |  |   | 2,802  |  
|Extraordinary or unusual (gains) losses                  |  |                                 |       |   |                                |   |       |      |  |   |       |   |  |   |       |  
|Non-cash portion of RTFC Capital Allocation              |  |                                 | (45    | ) |                                |   | (165   | )    |  |   | (191   | ) |  |   | (674   | )
|Other non-cash losses (gains)                            |  |                                 |       |   |                                |   | (1,036 | )    |  |   |       |   |  |   | (1,036 | )
|Loss (gain) on disposal of assets not in ordinary course |  |                                 |       |   |                                |   |       |      |  |   |       |   |  |   |       |  
|Transaction costs                                        |  |                                 |       |   |                                |   | 766    |      |  |   |       |   |  |   | 2,226  |  
|                                                         |  |                                 |        |   |                                |   |        |      |  |   |        |   |  |   |        |  
|Adjusted EBITDA                                          |  | $                               | 31,610 |   |                                | $ | 33,419 |      |  | $ | 95,184 |   |  | $ | 93,070 |  
|                                                         |  |                                 |        |   |                                |   |        |      |  |   |        |   |  |   |        |  

The following table summarizes our sources and uses of cash for the nine months ended
September 30, 2008 and 2009:



|                             |  |                                |         |   |      |   |         |  
|---------------------------- |  | ------------------------------ | ------- | - | ---- | - | ------- | -
|                             |  | Nine Months EndedSeptember 30, |        
|                             |  | 2008                           |         |   | 2009 |  
|                             |  | (dollars in thousands)         |        
|Net Cash Provided (Used) By: |  |                                |         |   |      |   |         |  
|Operating activities         |  | $                              | 65,971  |   |      | $ | 63,629  |  
|Investing activities         |  | $                              | (59,479 | ) |      | $ | (96,294 | )
|Financing activities         |  | $                              | (20,946 | ) |      | $ | 33,151  |  

Cash Provided by Operating Activities

Net cash provided by operating activities of $63.6 million for the nine months ended September 30, 2009 decreased $2.3 million from
2008.

Cash Used in Investing Activities

The table below sets forth the components of cash used in investing activities for the nine months ended September 30, 2008 and 2009:



|                                            |  |                                |        |      |   |       
|------------------------------------------- |  | ------------------------------ | ------ | ---- | - | ------
|                                            |  | Nine Months EndedSeptember 30,
|                                            |  | 2008                           |        | 2009
|                                            |  | (dollars in thousands)        
|Network and support assets                  |  | $                              | 16,189 |      | $ | 12,538
|Other                                       |  |                                | 3,933  |      |   | 3,713 
|                                            |  |                                |        |      |   |       
|Total capital expenditures                  |  |                                | 20,122 |      |   | 16,251
|Business acquisitions, net of cash acquired |  |                                | 33,419 |      |   | 80,043
|Purchase of wireless licenses               |  |                                | 5,938  |      |   |      
|                                            |  |                                |        |      |   |       
|Total                                       |  | $                              | 59,479 |      | $ | 96,294
|                                            |  |                                |        |      |   |       

We expect that total capital expenditures in fiscal 2009, including those associated
with the Sherburne acquisition, will be at the lower end of a range of between $26 million and $28 million in fiscal 2009, however we expect it to be on the lower end of the range. 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.



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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 the 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, although these obligations do not apply until the current holders of the spectrum (television
broadcasters that continue to use such spectrum for their digital broadcasts while they continue analog broadcasting) have vacated the spectrum. 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.

On July 1, 2009, we completed the purchase of Sherburne for a total purchase price of
approximately $79.7 million in cash (net of cash acquired), and assumed debt of $4.9 million, subject to certain tax adjustments. The purchase price was funded by an incremental term loan of $75.0 million under Iowa Telecoms credit facilities,
with the balance from borrowings under Iowa Telecoms revolving credit facility.

Cash Provided by (Used in) Financing Activities

For the nine months ended September 30, 2008 and 2009, net cash used in financing activities was $20.9 million and cash
provided by financing was $33.2 million, respectively. The increase in net cash provided by financing activities of $54.1 million was the result of incremental Term Loan B utilized in the acquisition of Sherburne and advances on the revolving credit
facility in conjunction with acquisitions. The cash flows from financing activities for the nine months ended September 30, 2008, included advances on the revolving line of credit to fund business acquisitions of $33.4 million.

Long-Term Debt and Revolving Credit Facilities



|                                         |  |                         |         |  
|---------------------------------------- |  | ----------------------- | ------- | -
|                                         |  | As ofSeptember 30, 2009 |        
|                                         |  | (dollars in thousands)  |        
|Total Long-Term Debt:                    |  |                         |         |  
|Iowa Telecom senior secured term loans   |  | $                       | 552,778 |  
|EN-TEL Communications, LLC notes payable |  |                         | 11,538  |  
|SHAL, LLC notes payable                  |  |                         | 4,672   |  
|                                         |  |                         |         |  
|Total Debt                               |  |                         | 568,988 |  
|Current Maturities of long-term debt     |  |                         | (2,048  | )
|                                         |  |                         |         |  
|Long-Term Debt                           |  | $                       | 566,940 |  
|                                         |  |                         |         |  

Iowa Telecom Credit Facilities

As of September 30, 2009, we had outstanding $552.8 million of senior debt under the Iowa Telecom term loan facilities, and had $41.0
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 September 30,
2009, $41.0 million was outstanding on the revolving credit facility and $59.0 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 September 30, 2009, we had $41.0 million outstanding under LIBOR elections at an average all-in rate of 2.25%.

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 September 30, 2009, $350.0 million was outstanding under Term Loan B based upon a LIBOR election effective through December 30, 2009 at an all-in
rate of 2.04%. We have entered into interest rate swap agreements to fix the rate on



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$350.0 million of Term Loan B as more fully described below. As of September 30, 2009, the interest rate on the remaining $50.0 million was based upon a LIBOR election effective through
October 19, 2009 at an all-in rate of 2.00%.

On July 1, 2009, Iowa Telecom entered into an Incremental Loan
Amendment (the Incremental Amendment) to the Amended and Restated Credit Agreement dated as of November 23, 2004 (as amended from time to time, the Credit Agreement), among Iowa Telecom, the lenders party thereto and
Rural Telephone Finance Cooperative, as administrative agent. Pursuant to the Incremental Amendment, Iowa Telecom borrowed $75.0 million in incremental loans under the incremental loan facility provided under the Credit Agreement. Interest will
accrue on the incremental loans at either a base rate plus 1.00% (in the case of base rate loans) or LIBOR plus 2.00% (in the case of Eurodollar loans), at the election of Iowa Telecom. The incremental loans are subject to the terms and conditions
of the Credit Agreement and are entitled to the benefits of the collateral security provided to the other loans made pursuant to the Credit Agreement. The maturity date of the incremental loans is November 23, 2011. As of September 30,
2009, the interest rate on the $75.0 million was based upon a LIBOR election effective through October 5, 2009 at all-in-rate of 2.26%.

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%. 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%. 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 wholly-owned 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 Iowa Telecom 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 Iowa Telecom credit facilities require us, subject to certain
exceptions, to prepay outstanding loans under the credit facilities to the extent of net cash proceeds received from the following: issuance of certain indebtedness; proceeds of certain asset sales; and casualty insurance proceeds. The credit
facilities further require us, subject to certain exceptions, to make prepayments under the credit facilities equal to 50% of any net increase in the following: distributable cash during a dividend suspension period, as defined; and cumulative
distributable cash, as defined, during the fiscal year less the cumulative reductions of revolving loans (adjusted to exclude the effects of borrowings to fund permitted acquisitions) through such period, with reductions to the percentage to be
determined based on improvements in certain credit ratios. As of September 30, 2009, no prepayment amounts were due under these provisions.



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The Iowa Telecom 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 Iowa Telecom credit facilities specify, among other things, certain fixed charge coverage ratios and a maximum total leverage ratio, as defined, all of which we were in compliance with as of September 30, 2009.

EN-TEL Communications, LLC Notes Payable

On July 18, 2008, the Company acquired Bishop Communications Corporation (Bishop Communications). As part of the acquisition, the Company assumed debt of $13.0 million. The assumed debt
is represented by promissory notes payable to the Rural Telephone Finance Cooperative which have quarterly installments of principal and interest. The notes currently bear interest at an average all-in fixed rate of 7.02%. The notes have a fixed
interest rate for specific periods of time ranging from December 2009 through December 2013 and will thereafter be either at a variable interest rate or renegotiated at a fixed rate at the end of the specified period. The promissory notes mature in
2015 and 2018. Principal payments of $308,000 and $906,000 were made during the three and nine months ended September 30, 2009. The remaining scheduled payments are $313,000 in 2009, $1.3 million in 2010, $1.4 million in 2011, $1.5 million in
2012, $1.6 million in 2013, and $5.3 million thereafter.

The notes are secured by the assets of EN-TEL, a majority-owned
subsidiary of Bishop Communications. The debt agreements restrict dividends paid by EN-TEL and no amounts are currently available for dividends.

SHAL, LLC Notes Payable

On July 1, 2009, the Company acquired the Sherburne Assets. As part of the
acquisition, the Company became the majority owner of SHAL, LLC. As a result, the Company began reflecting the results of operations, cash flows and financial position of SHAL, LCC on a consolidated basis. At the time of the acquisition of the
Sherburne Assets, SHAL LLC had debt outstanding of $4.9 million. The debt is represented by promissory notes payable to the Rural Telephone Finance Cooperative which have quarterly installments of principal and interest. The notes currently bear
interest at an average all-in fixed rate of 7.25%. The notes have a fixed interest rate for specific periods of time ranging from January 2010 through January 2012 and will thereafter be either at a variable interest rate or renegotiated at a fixed
rate at the end of the specified period. The promissory notes mature in January 2015. A principal payment of $181,000 was made during the quarter ended September 30, 2009. The remaining scheduled payments are $184,000 in 2009, $772,000 in 2010,
$830,000 in 2011, $893,000 in 2012, $960,000 in 2013, and $1.0 million thereafter.

The notes are secured by assets SHAL, LLC
and SHAL Networks, Inc. While the debt agreements restrict dividends paid by SHAL, LLC, and $950,000 is currently available for dividends.

Interest Rate Swaps

On August 26, 2005, the Company amended an interest rate swap agreement that was
originally entered into on November 4, 2004. The amended swap arrangement resulted in two identical swap agreements which each fixed the interest rate the Company will pay on $175.0 million of indebtedness under Term Loan B, for a total swap
notional value of $350.0 million. Effective September 26, 2008, the Company terminated one of its swap agreements which the Company designated as a hedge against the variability in future interest payments due on $175.0 million of Term Loan B.
The Company entered into a new swap agreement effective September 30, 2008, to replace the terminated swap agreement. The terms of the new swap agreement and the remaining swap agreement effective August 31, 2005, effectively convert the
variable rate interest payments due on $350.0 million of Term Loan B to a fixed rate of 5.87% through maturity of November 23, 2011.

Other Items

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



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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.

The Board took the position in the fourth quarter of 2008 that our incumbent local exchange carriers intrastate access rates have
ceased to be subject to the intrastate switched access rate freeze since July 1, 2005, and are subject to challenge. The Board is currently considering such a challenge based on a 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 complaint filed with the Board against our local incumbent exchange carrier, our Iowa competitive local exchange carriers, Frontier
Communication of Iowa, Inc., and Citizens Mutual Telephone Company alleging that such companies tariffed originating and terminating intrastate switched access rates are not just and reasonable and should be lowered by the 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 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. The Board denied
our motion to dismiss on November 14, 2008, a decision we cannot appeal until the Board issues a decision on the merits. In our initial round of testimony on March 5, 2009, we estimated that the potential annual effect of Verizons complaint on
the incumbent local exchange carrier operations of Iowa Telecommunications Services, Inc. was $16 million based on levels of access service demand at that time. The final round of pre-filed testimony was filed on August 31, 2009. On October 26,
2009, the Company and Verizon filed a joint motion with the Board stating that they had reached a tentative settlement on October 23, 2009 and requested that the hearing otherwise scheduled to start October 27, 2009 be postponed so that the Company
and Verizon can draft and execute a formal settlement agreement. This motion was granted on October 27, 2009. The Company cannot predict whether it will be able to arrive at a formal executed settlement agreement with Verizon, or whether the Board
will accept such settlement agreement. Further, if the proceeding continues, the Company cannot predict when or how it will conclude or what the outcome may be. This proceeding has been stayed with respect to Frontier and Citizens since May 21, 2009
at the request of Verizon, Frontier, and Citizens due to pending settlement negotiations between the parties.

On
September 12, 2008, the Board issued an order commencing an inquiry into whether the Board should create an Iowa universal service fund (USF). At this point, the Board is seeking comment on preliminary issues, such as how it should
determine whether an Iowa USF is needed, although the Board is also inquiring into certain broad policy and implementation issues assuming that an Iowa USF will be established. Comments were due October 27, 2008. The Board held an initial
informal workshop on March 25, 2009 to discuss issues. This workshop may be followed by other workshops and/or an order commencing rulemaking. At this time, the Board has yet to state formally whether its Iowa USF inquiry is tied to any
potential charges to other rates or any other matter. We cannot predict whether the Board will establish a rulemaking as a result of its pending inquiry and, if assuming it does, the result of such rulemaking or its potential effect on our
operations.

On August 18, 2009, Iowa Telecom filed eleven applications with the National Telecommunications and
Information Administration (NTIA) and the U.S. Department of Agricultures Rural Utilities Service (RUS) seeking Broadband Infrastructure grants to fund 80% of $8.6 million of broadband projects in and between 46
communities or localities that are within Iowa Telecoms service territory. If some, or all, of these applications are granted and Iowa Telecom accepts, Iowa Telecom will provide 20% matching funds. On October 28, 2009, Iowa
Telecom filed comments with NTIA and RUS opposing certain requests filed by other carriers which seek funds for competing projects. Iowa Telecom expects to learn in mid-November whether any of its applications were accepted for further review.
Funds for successful applications are currently scheduled to be released by the end of 2009.

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



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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.

Obligations and Commitments

Our ongoing capital commitments include
capital expenditures, debt service requirements and acquisition commitments. For the nine months ended September 30, 2009, capital expenditures were $16.3 million; see Liquidity and Capital ResourcesCash Used in Investing
Activities.

The following table sets forth our contractual obligations as of September 30, 2009, together with
cash payments due in each period indicated:



|                                     |  |                        |         |                 |   |            |  |            |         |               |   |       |  |   |      
|------------------------------------ |  | ---------------------- | ------- | --------------- | - | ---------- |  | ---------- | ------- | ------------- | - | ----- |  | - | -----
|                                     |  | Payments Due by Period
|Obligation                           |  | Total                  |         | Oct. Dec. 2009 |   | 2010 2011 |  | 2012 2013 |         | 2014and after
|                                     |  | (dollars in thousands)
|Current Debt:                        |  |                        |         |                 |   |            |  |            |         |               |   |       |  |   |      
|Revolving credit facility(1)         |  | $                      | 41,000  |                 | $ |           |  | $          | 41,000  |               | $ |      |  | $ |     
|Current maturities of long-term debt |  |                        | 2,048   |                 |   | 498        |  |            | 1,550   |               |   |      |  |   |     
|Long-Term Debt:                      |  |                        |         |                 |   |            |  |            |         |               |   |       |  |   |      
|Senior debt payments                 |  |                        | 552,778 |                 |   |           |  |            | 552,778 |               |   |      |  |   |     
|Interest payments on senior debt(2)  |  |                        | 53,555  |                 |   | 6,490      |  |            | 47,065  |               |   |      |  |   |     
|EN-TEL debt payments                 |  |                        | 10,248  |                 |   |           |  |            | 1,755   |               |   | 3,175 |  |   | 5,318
|SHAL, LLC debt payments              |  |                        | 3,914   |                 |   |           |  |            | 1,028   |               |   | 1,853 |  |   | 1,033
|Operating Lease Payments             |  |                        | 7,939   |                 |   | 1,494      |  |            | 2,497   |               |   | 2,060 |  |   | 1,888
|                                     |  |                        |         |                 |   |            |  |            |         |               |   |       |  |   |      
|Total Contractual Obligations        |  | $                      | 671,482 |                 | $ | 8,482      |  | $          | 647,673 |               | $ | 7,088 |  | $ | 8,239
|                                     |  |                        |         |                 |   |            |  |            |         |               |   |       |  |   |      



|(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.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------

As of September 30, 2009, no letters of credit were outstanding under the Revolving
Credit facility.

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, and 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, 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.



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We perform an impairment review of goodwill and indefinite lived intangible assets annually
and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount as required by Financial Accounting Standards Board Accounting Standards
Codification (FASB ASC) 350, Intangibles-Goodwill and Other. We performed an annual impairment review of goodwill and indefinite lived intangible assets as of August 31, 2009 primarily using discounted cash flow and market
capitalization methodologies. No impairment of goodwill or other long lived assets resulted from the annual valuation.

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 December 31, 2008, our unused tax net operating loss carry forwards were $157 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 $43 million per year through June
2015. Based upon the evidence available as of September 30, 2009, the combination of the continued generation of taxable income from operations and reversing temporary differences will, more likely than not, be sufficient to utilize the entire
deferred tax asset. As such, we have determined that no valuation allowance was required for our deferred tax assets.

Interest Rate Swap Agreements. The Company has entered into interest rate swap agreements which the Company designated as a hedge against the variability in future interest payments due on $350.0 million of Term Loan B. The purpose
of the swap agreements 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.

The swap agreements are accounted for in accordance with FASB ASC 815, Derivatives and Hedging, and qualify for cash flow hedge accounting of a variable-rate debt. In accordance with this standard,
all changes in fair market value of the swap instruments attributable to hedge ineffectiveness are reported currently in earnings and are recorded in the Other Income (Expense) section of the Companys Consolidated Statements of Income. Changes
in fair market value of the swap instruments attributable to hedge effectiveness are recorded, net of income tax effects, in the Accumulated Other Comprehensive Income section of the Companys Consolidated Statements of Stockholders
Equity and Comprehensive Income.

In the event that the swap agreements no longer qualify for cash flow hedge accounting
treatment, all changes in fair market value would be reported currently in earnings and would be recorded in the Other Income (Expense) section of the Companys Consolidated Statements of Income. Additionally, the net gain or loss remaining in
accumulated other comprehensive income would be reclassified into earnings over the remainder of the term of the swap agreements. For the three months ended September 30, 2009, the Company would have recognized in earnings a loss of $959,000
had the interest rate swaps ceased to qualify for hedge accounting.



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The fair values of the interest rate swaps have been calculated by discounting the future
cash flows of both the fixed rate and variable rate interest payments using discount rates appropriate with the consideration given to the Companys non-performance risk. The fair value of the interest rate swap is recorded in the Other
Long-Term Liabilities section of the Companys Consolidated Balance Sheets.

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 guarantor of one of the floating rate payers under the interest rate swap agreements declared bankruptcy during the third quarter of 2008 resulting in a default of
the agreement. In accordance with our agreement, we elected to terminate the agreement and entered into a new interest rate swap agreement for the same notional amount and approximate rate with another party. The floating rate payers under our
current interest rate swap agreements are nationally recognized counterparties and are believed to be of strong credit. 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 consolidated balance sheets or statements of income.

New Accounting Pronouncements

In December 2007, the Financial Accounting
Standards Board (FASB) issued amended guidance regarding Noncontrolling Interests in Consolidated Financial Statements which establishes new accounting and reporting standards for the noncontrolling interest in a subsidiary
and for the deconsolidation of a subsidiary. The amended guidance 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 noncontrolling equity investment on the
deconsolidation date. The amended guidance also includes expanded disclosure requirements regarding the interest of the parent and its noncontrolling interest. The amended guidance is effective for fiscal years, and interim periods within those
fiscal years, beginning on or after December 15, 2008. Adoption of the amended guidance did not have a material impact on the Companys consolidated balance sheets, statements of income or statements of cash flows.

In December 2007, the FASB issued revised guidance regarding Business Combinations. The revised guidance 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. The revised guidance 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. The revised guidance requires acquisition related costs to be
expensed as incurred. During the first quarter of 2009, the Company expensed acquisition related costs of $868,000 that had been deferred pursuant to the prior guidance on acquisitions that did not close before the adoption date on January 1,
2009. Other than expensing acquisition costs deferred pursuant to prior guidance as discussed above, the adoption of the revised guidance did not have a material impact on the Companys consolidated balance sheets, statements of income or
statements of cash flows.

In March 2008, the FASB issued amended guidance regarding Disclosures about Derivative
Instruments and Hedging Activities. The amended guidance 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. The amended guidance is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. Adoption of the amended
guidance impacted disclosures only and did not have an impact on the Companys consolidated balance sheets, statements of income or statements of cash flows. See Note 9 to Financial Statements for expanded disclosures related to the adoption of
the amended guidance.



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In December 2008, the FASB amended its prior guidance regarding Employers
Disclosures about Postretirement Benefit Plan Assets. The amended guidance is effective for fiscal years ending after December 15, 2009. The amended guidance will impact disclosures only and will not have an impact on the Companys
consolidated balance sheets, statements of income or statements of cash flows.

Effective January 1, 2009, the Company
adopted amended guidance related to Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities. Under the amended guidance, unvested share-based payment awards that contain non-forfeitable
rights to dividends or dividend equivalents are participating securities and, therefore, are included in computing earnings per share (EPS) pursuant to the two-class method. The two-class method determines earnings per share for each
class of common stock and participating securities according to dividends or dividend equivalents and their respective participation rights in undistributed earnings. Restricted stock granted to employees under the Companys 2005 Stock
Incentive Plan are considered participating securities as they receive non-forfeitable dividend equivalents at the same rate as common stock. The amended guidance was adopted via retroactive application for the quarter and nine months ended
September 30, 2008, resulting in no change to basic EPS and a $0.01 decrease in diluted EPS for the quarter and a $0.02 decrease to both basic and diluted EPS for the year.

In April 2009, the FASB issued amended guidance regarding Interim Disclosures about Fair Value of Financial Instruments which
requires disclosures about fair value of financial instruments in interim financial information. The amended guidance also requires those disclosures in summarized financial information at interim reporting periods. Under the amended guidance,
publicly traded companies must include disclosures about the fair value of their financial instruments whenever summarized financial information for interim reporting periods is issued. In addition, companies must disclose in the body or in the
accompanying notes of their summarized financial information for interim reporting periods and in their financial statements for annual reporting periods the fair value of all financial instruments for which it is practicable to estimate that value,
whether recognized or not recognized in the Companys balance sheet. The amended guidance is effective for interim periods ending after June 15, 2009. Adoption of the amended guidance impacted disclosures only and did not have an impact on
the Companys consolidated balance sheets, statements of income or statements of cash flows. See Note 11 to Financial Statements for expanded disclosures related to the adoption of the amended guidance.

In May 2009, the FASB issued guidance regarding Subsequent Events. The new guidance establishes general standards of accounting
for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. Specifically, the new guidance provides: the period after the balance sheet date during which management
of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements; the circumstances under which an entity should recognize events or transactions occurring after the
balance sheet date in its financial statements; and the disclosures that an entity should make about events or transactions that occurred after the balance sheet date. The new guidance is effective for interim or annual financial periods ending
after June 15, 2009, and shall be applied prospectively. Adoption of the new guidance impacted disclosures only and did not have an impact on the Companys consolidated balance sheets, statements of income or statements of cash flows. See
Note 10 to Financial Statements for expanded disclosures related to the adoption of the new guidance.

In June 2009, the FASB
issued FASB Accounting Standards Update 2009-01, Topic 105-Generally Accepted Accounting Principles amendments based on Statement of Financial Accounting Standards No. 168-The FASB Accounting Standards Codification and the Hierarchy of
Generally Accepted Accounting Principles (FASB ASU 2009-01). FASB ASU 2009-01 establishes the FASB Accounting Standards Codification (Codification) as the single source of authoritative U.S. generally accepted accounting
principles (U.S. GAAP) recognized by the FASB to be applied by nongovernmental entities. Rules and interpretive releases of the SEC under authority of federal securities laws are also sources of authoritative U.S. GAAP for SEC
registrants. The Codification supersedes all existing non-SEC accounting and reporting standards. All other nongrandfathered, non-SEC accounting literature not included in the Codification will become nonauthoritative. The FASB will not issue new
standards in the form of statements, FASB Staff Positions, or Emerging Issues Task Force Abstracts. Instead, the FASB will issue Accounting



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Standards Updates, which will serve only to: (a) update the Codification; (b) provide background information about the guidance; and (c) provide the bases for conclusions on the
change(s) in the Codification. FASB ASU 2009-01 is effective for financial statements issued for interim and annual periods ending after September 15, 2009. The adoption of the FASB ASU 2009-01 did not have a material impact on the
Companys consolidated balance sheets, statements of income or statements of 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 money market funds. 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 annual interest at either (a) LIBOR plus 1.75% or (b) a base rate plus 0.75%. Our $75 million of indebtedness under incremental
borrowing portion of our Term Loan B, maturing in 2011 bears annual interest at either (a) LIBOR plus 2.00% or (b) a base rate plus 1.00%. On August 26, 2005, we entered into two identical interest rate swap agreements with nationally
recognized counterparties for the purpose of fixing the interest on a portion of these borrowings. On September 26, 2008, we terminated one of our swap agreements and entered into a new swap agreement effective September 30, 2008. Pursuant
to the current swap agreements, we will pay a fixed rate of interest of 5.87% on a $350.0 million notional of Term Loan B from September 30, 2008 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 $125.0 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 $41.0 million of borrowings drawn under the revolving credit facility at September 30, 2009. 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.

With respect to our $11.5 million of borrowings at EN-TEL, we are exposed to interest rate risk, resulting primarily from fluctuations in
the Rural Telephone Finance Cooperation variable rate, from the dates on which the current fixed interest rates expire (December 2009 through December 2013) until the notes mature in 2015 and 2018.

With respect to the $4.7 million of borrowings at SHAL, LLC, we are exposed to interest rate risk, resulting primarily from fluctuations in
the Rural Telephone Finance Cooperation variable rate, from the dates on which the current fixed interest rates expire (January 2010 through January 2012) until the notes mature in January 2015.

As of September 30, 2009, 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 $1.7 million per year on our interest expense while our fixed rates and swaps are in place.



|ITEM 4. | CONTROLS AND PROCEDURES
|------- | -----------------------

Disclosure
Controls and Procedures

Under the supervision and with the participation of our management, including our Chief Executive
Officer and Chief Financial Officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) as of September 30, 2009 (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 other then as described below.

The Iowa Utilities Board (Board) took the position
in the fourth quarter of 2008 that our incumbent local exchange carriers intrastate access rates have ceased to be subject to the intrastate switched access rate freeze since July 1, 2005, and are subject to challenge. The Board is currently
considering such a challenge based on a 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 complaint filed with
the Board against our local incumbent exchange carrier, our Iowa competitive local exchange carriers, Frontier Communication of Iowa, Inc., and Citizens Mutual Telephone Company alleging that such companies tariffed originating and terminating
intrastate switched access rates are not just and reasonable and should be lowered by the 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 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. The Board denied our motion to dismiss on November 14, 2008, a decision we cannot appeal until the Board issues a decision on the merits. In our initial
round of testimony on March 5, 2009, we estimated that the potential annual effect of Verizons complaint on the incumbent local exchange carrier operations of Iowa Telecommunications Services, Inc. was $16 million based on levels of access
service demand at that time. The final round of pre-filed testimony was filed on August 31, 2009. On October 26, 2009, the Company and Verizon filed a joint motion with the Board stating that they had reached a tentative settlement on October 23,
2009 and requested that the hearing otherwise scheduled to start October 27, 2009 be postponed so that the Company and Verizon can draft and execute a formal settlement agreement. This motion was granted on October 27, 2009. The Company cannot
predict whether it will be able to arrive at a formal executed settlement agreement with Verizon, or whether the Board will accept such settlement agreement. Further, if the proceeding continues, the Company cannot predict when or how it will
conclude or what the outcome may be. This proceeding has been stayed with respect to Frontier and Citizens since May 21, 2009 at the request of Verizon, Frontier, and Citizens due to pending settlement negotiations between the parties.



|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, 2008, 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 September 30, 2009, 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 8 to Consolidated Financial Statements above):

ISSUER PURCHASES OF EQUITY SECURITIES



|                                  |  |                                              |  |                                          |       |                                                                                             |   |                                                                                                                         |  
|--------------------------------- |  | -------------------------------------------- |  | ---------------------------------------- | ----- | ------------------------------------------------------------------------------------------- | - | ----------------------------------------------------------------------------------------------------------------------- | -
|Periods                           |  | (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
|July 1 to July 31, 2009           |  |                                             |  | $                                        |      |                                                                                             |  |                                                                                                                         | 
|August 1 to August 31, 2009       |  | 11,741                                       |  | $                                        | 12.26 |                                                                                             |  |                                                                                                                         | 
|September 1 to September 30, 2009 |  |                                             |  | $                                        |      |                                                                                             |  |                                                                                                                         | 
|                                  |  |                                              |  |                                          |       |                                                                                             |   |                                                                                                                         |  
|Total                             |  | 11,741                                       |  | $                                        | 12.26 |                                                                                             |  |                                                                                                                         | 
|                                  |  |                                              |  |                                          |       |                                                                                             |   |                                                                                                                         |  



|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.



|                       |  |                                                                                   
|---------------------- |  | ----------------------------------------------------------------------------------
|Date: October 29, 2009 |  | /s/ Alan L. Wells                                                                 
|                       |  | Alan L. Wells                                                                     
|                       |  | President, Chief Executive Officer and Director Principal Executive Officer       
|                       |  | Iowa Telecommunications Services, Inc.                                            
|                       | 
|Date: October 29, 2009 |  | /s/ Craig A. Knock                                                                
|                       |  | Craig A. Knock                                                                    
|                       |  | Vice President, Chief Financial Officer and Treasurer Principal Accounting Officer
|                       |  | Iowa Telecommunications Services, Inc.                                            



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##### Table of Contents

EXHIBIT INDEX

IOWA TELECOMMUNICATIONS SERVICES, INC.

FORM 10-Q FOR QUARTER ENDED
SEPTEMBER 30, 2009



|               |  |                                                                                                                                                                                                                               
|-------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|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 Bylaws 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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