##### Table of Contents

---

---

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, 2007

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

115 S. Second Ave. West

Newton, Iowa 50208

(Former address of principal executive offices)



---

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

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

Large accelerated filer ̈Accelerated filer  x    Non-accelerated filer ̈

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

The number of shares of the registrants common stock, $.01 par value, outstanding as of October 31, 2007 was 31,818,690.

---





---

##### 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 |  | 13  
|         |  | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                           |  | 31  
|         |  | CONTROLS AND PROCEDURES                                                              |  | 31  
|PART II. |  | OTHER INFORMATION                                                                    |  | 32  
|         |  | LEGAL PROCEEDINGS                                                                    |  | 32  
|         |  | RISK FACTORS                                                                         |  | 32  
|         |  | PURCHASE OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS                |  | 32  
|         |  | EXHIBITS                                                                             |  | 32  

i



---

##### Table of Contents

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

Iowa Telecommunications Services, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

(Unaudited)

(Dollars in Thousands, Except Per Share Data)



|                                                                                                                             |  |                   |          |   |                    |   |          |  
|---------------------------------------------------------------------------------------------------------------------------- |  | ----------------- | -------- | - | ------------------ | - | -------- | -
|                                                                                                                             |  | December 31, 2006 |          |   | September 30, 2007 |  
|ASSETS                                                                                                                       |  |                   |          |   |                    |   |          |  
|CURRENT ASSETS:                                                                                                              |  |                   |          |   |                    |   |          |  
|Cash and cash equivalents                                                                                                    |  | $                 | 13,613   |   |                    | $ | 4,475    |  
|Accounts receivable, net                                                                                                     |  |                   | 20,828   |   |                    |   | 21,448   |  
|Inventories                                                                                                                  |  |                   | 3,124    |   |                    |   | 3,335    |  
|Prepayments and other current assets                                                                                         |  |                   | 2,550    |   |                    |   | 3,764    |  
|                                                                                                                             |  |                   |          |   |                    |   |          |  
|Total Current Assets                                                                                                         |  |                   | 40,115   |   |                    |   | 33,022   |  
|                                                                                                                             |  |                   |          |   |                    |   |          |  
|PROPERTY, PLANT AND EQUIPMENT:                                                                                               |  |                   |          |   |                    |   |          |  
|Property, plant and equipment                                                                                                |  |                   | 521,556  |   |                    |   | 537,689  |  
|Accumulated depreciation                                                                                                     |  |                   | (222,581 | ) |                    |   | (253,936 | )
|                                                                                                                             |  |                   |          |   |                    |   |          |  
|Net Property, Plant and Equipment                                                                                            |  |                   | 298,975  |   |                    |   | 283,753  |  
|                                                                                                                             |  |                   |          |   |                    |   |          |  
|GOODWILL                                                                                                                     |  |                   | 466,554  |   |                    |   | 466,554  |  
|INTANGIBLE ASSETS AND OTHER, net                                                                                             |  |                   | 39,982   |   |                    |   | 32,687   |  
|INVESTMENT IN AND RECEIVABLE FROM THE RURAL TELEPHONE FINANCE COOPERATIVE                                                    |  |                   | 13,903   |   |                    |   | 13,869   |  
|                                                                                                                             |  |                   |          |   |                    |   |          |  
|Total Assets                                                                                                                 |  | $                 | 859,529  |   |                    | $ | 829,885  |  
|                                                                                                                             |  |                   |          |   |                    |   |          |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                         |  |                   |          |   |                    |   |          |  
|CURRENT LIABILITIES:                                                                                                         |  |                   |          |   |                    |   |          |  
|Revolving credit facility                                                                                                    |  | $                 | 31,000   |   |                    | $ | 8,000    |  
|Accounts payable                                                                                                             |  |                   | 9,565    |   |                    |   | 10,032   |  
|Advanced billings and customer deposits                                                                                      |  |                   | 8,460    |   |                    |   | 8,653    |  
|Accrued and other current liabilities                                                                                        |  |                   | 32,035   |   |                    |   | 29,056   |  
|                                                                                                                             |  |                   |          |   |                    |   |          |  
|Total Current Liabilities                                                                                                    |  |                   | 81,060   |   |                    |   | 55,741   |  
|LONG-TERM DEBT                                                                                                               |  |                   | 477,778  |   |                    |   | 477,778  |  
|DEFERRED TAX LIABILITIES                                                                                                     |  |                   | 18,716   |   |                    |   | 35,870   |  
|OTHER LONG-TERM LIABILITIES                                                                                                  |  |                   | 14,276   |   |                    |   | 6,838    |  
|                                                                                                                             |  |                   |          |   |                    |   |          |  
|Total Liabilities                                                                                                            |  |                   | 591,830  |   |                    |   | 576,227  |  
|                                                                                                                             |  |                   |          |   |                    |   |          |  
|COMMITMENTS AND CONTINGENCIES (Note 8)                                                                                       |  |                   |         |   |                    |   |         |  
|STOCKHOLDERS EQUITY:                                                                                                        |  |                   |          |   |                    |   |          |  
|Preferred stock, $0.01 par value, 50,000,000 shares authorized, no shares issued and outstanding                             |  |                   |         |   |                    |   |         |  
|Common stock, $0.01 par value, 100,000,000 shares authorized, 31,379,670 and 31,440,215 issued and outstanding, respectively |  |                   | 314      |   |                    |   | 314      |  
|Additional paid-in capital                                                                                                   |  |                   | 322,016  |   |                    |   | 323,429  |  
|Retained deficit                                                                                                             |  |                   | (59,976  | ) |                    |   | (75,244  | )
|Accumulated other comprehensive income                                                                                       |  |                   | 5,345    |   |                    |   | 5,159    |  
|                                                                                                                             |  |                   |          |   |                    |   |          |  
|Total Stockholders Equity                                                                                                   |  |                   | 267,699  |   |                    |   | 253,658  |  
|                                                                                                                             |  |                   |          |   |                    |   |          |  
|Total Liabilities and Stockholders Equity                                                                                   |  | $                 | 859,529  |   |                    | $ | 829,885  |  
|                                                                                                                             |  |                   |          |   |                    |   |          |  

See notes to condensed consolidated financial statements.



1



---

##### Table of Contents

Iowa Telecommunications Services, Inc. and Subsidiaries

Condensed Consolidated Statements of Income

(Unaudited)

(Amounts in Thousands, Except Per Share Data)



|                                                                       |  |                                  |        |   |                                 |   |        |      |  |   |         |   |  |   |         |  
|---------------------------------------------------------------------- |  | -------------------------------- | ------ | - | ------------------------------- | - | ------ | ---- |  | - | ------- | - |  | - | ------- | -
|                                                                       |  | Three Months Ended September 30, |        |   | Nine Months Ended September 30, |  
|                                                                       |  | 2006                             |        |   | 2007                            |   |        | 2006 |  |   | 2007    |  
|REVENUES AND SALES:                                                    |  |                                  |        |   |                                 |   |        |      |  |   |         |   |  |   |         |  
|Local services                                                         |  | $                                | 19,135 |   |                                 | $ | 18,372 |      |  | $ | 57,627  |   |  | $ | 55,964  |  
|Network access services                                                |  |                                  | 23,532 |   |                                 |   | 23,485 |      |  |   | 71,951  |   |  |   | 77,502  |  
|Toll services                                                          |  |                                  | 5,419  |   |                                 |   | 5,185  |      |  |   | 16,421  |   |  |   | 15,860  |  
|Other services and sales                                               |  |                                  | 11,545 |   |                                 |   | 13,738 |      |  |   | 28,243  |   |  |   | 40,685  |  
|                                                                       |  |                                  |        |   |                                 |   |        |      |  |   |         |   |  |   |         |  
|Total Revenues and Sales                                               |  |                                  | 59,631 |   |                                 |   | 60,780 |      |  |   | 174,242 |   |  |   | 190,011 |  
|                                                                       |  |                                  |        |   |                                 |   |        |      |  |   |         |   |  |   |         |  
|OPERATING COSTS AND EXPENSES:                                          |  |                                  |        |   |                                 |   |        |      |  |   |         |   |  |   |         |  
|Cost of services and sales (exclusive of items shown separately below) |  |                                  | 17,836 |   |                                 |   | 19,221 |      |  |   | 49,233  |   |  |   | 57,797  |  
|Selling, general and administrative                                    |  |                                  | 8,437  |   |                                 |   | 10,527 |      |  |   | 27,470  |   |  |   | 32,129  |  
|Depreciation and amortization                                          |  |                                  | 11,695 |   |                                 |   | 12,260 |      |  |   | 35,263  |   |  |   | 36,518  |  
|                                                                       |  |                                  |        |   |                                 |   |        |      |  |   |         |   |  |   |         |  
|Total Operating Costs and Expenses                                     |  |                                  | 37,968 |   |                                 |   | 42,008 |      |  |   | 111,966 |   |  |   | 126,444 |  
|                                                                       |  |                                  |        |   |                                 |   |        |      |  |   |         |   |  |   |         |  
|OPERATING INCOME                                                       |  |                                  | 21,663 |   |                                 |   | 18,772 |      |  |   | 62,276  |   |  |   | 63,567  |  
|                                                                       |  |                                  |        |   |                                 |   |        |      |  |   |         |   |  |   |         |  
|OTHER INCOME (EXPENSE):                                                |  |                                  |        |   |                                 |   |        |      |  |   |         |   |  |   |         |  
|Interest and dividend income                                           |  |                                  | 159    |   |                                 |   | 199    |      |  |   | 527     |   |  |   | 752     |  
|Interest expense                                                       |  |                                  | (7,969 | ) |                                 |   | (7,987 | )    |  |   | (23,577 | ) |  |   | (23,964 | )
|Other, net                                                             |  |                                  | (204   | ) |                                 |   | (210   | )    |  |   | (306    | ) |  |   | (483    | )
|                                                                       |  |                                  |        |   |                                 |   |        |      |  |   |         |   |  |   |         |  
|Total Other Expense, net                                               |  |                                  | (8,014 | ) |                                 |   | (7,998 | )    |  |   | (23,356 | ) |  |   | (23,695 | )
|                                                                       |  |                                  |        |   |                                 |   |        |      |  |   |         |   |  |   |         |  
|EARNINGS BEFORE INCOME TAXES                                           |  |                                  | 13,649 |   |                                 |   | 10,774 |      |  |   | 38,920  |   |  |   | 39,872  |  
|INCOME TAX EXPENSE                                                     |  |                                  | 5,617  |   |                                 |   | 4,483  |      |  |   | 8,374   |   |  |   | 16,534  |  
|                                                                       |  |                                  |        |   |                                 |   |        |      |  |   |         |   |  |   |         |  
|NET INCOME                                                             |  | $                                | 8,032  |   |                                 | $ | 6,291  |      |  | $ | 30,546  |   |  | $ | 23,338  |  
|                                                                       |  |                                  |        |   |                                 |   |        |      |  |   |         |   |  |   |         |  
|EARNINGS PER SHARE:                                                    |  |                                  |        |   |                                 |   |        |      |  |   |         |   |  |   |         |  
|BASIC - Earnings Per Share                                             |  | $                                | 0.26   |   |                                 | $ | 0.20   |      |  | $ | 0.98    |   |  | $ | 0.74    |  
|                                                                       |  |                                  |        |   |                                 |   |        |      |  |   |         |   |  |   |         |  
|BASIC - Weighted Average Number of Shares Outstanding                  |  |                                  | 31,254 |   |                                 |   | 31,432 |      |  |   | 31,170  |   |  |   | 31,406  |  
|                                                                       |  |                                  |        |   |                                 |   |        |      |  |   |         |   |  |   |         |  
|DILUTED - Earnings Per Share                                           |  | $                                | 0.25   |   |                                 | $ | 0.20   |      |  | $ | 0.95    |   |  | $ | 0.73    |  
|                                                                       |  |                                  |        |   |                                 |   |        |      |  |   |         |   |  |   |         |  
|DILUTED - Weighted Average Number of Shares Outstanding                |  |                                  | 32,165 |   |                                 |   | 32,052 |      |  |   | 32,062  |   |  |   | 32,046  |  
|                                                                       |  |                                  |        |   |                                 |   |        |      |  |   |         |   |  |   |         |  
|Dividends Declared Per Share                                           |  | $                                | 0.405  |   |                                 | $ | 0.405  |      |  | $ | 1.215   |   |  | $ | 1.215   |  
|                                                                       |  |                                  |        |   |                                 |   |        |      |  |   |         |   |  |   |         |  

See notes to condensed consolidated financial statements.



2



---

##### Table of Contents

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, 2006 and 2007 |  
|                                                           |  | Common Shares                                  |   |  | Common Stock |     | Additional Paid-In Capital |   |         | Retained Deficit |  |   | Accumulated Other Comprehensive Income |   |  | Total |       
|Balance, June 30, 2006                                     |  | 31,177,356                                     |   |  | $            | 312 |                            | $ | 319,705 |                  |  | $ | (45,823                                | ) |  | $     | 9,727  |   |  | $ | 283,921 |  
|Net Income                                                 |  |                                               |   |  |              |    |                            |   |        |                  |  |   | 8,032                                  |   |  |       |       |   |  |   | 8,032   |  
|Unrealized loss on derivatives, net of tax effect          |  |                                               |   |  |              |    |                            |   |        |                  |  |   |                                       |   |  |       | (5,525 | ) |  |   | (5,525  | )
|                                                           |  |                                                |   |  |              |     |                            |   |         |                  |  |   |                                        |   |  |       |        |   |  |   |         |  
|Total comprehensive income                                 |  |                                               |   |  |              |    |                            |   |        |                  |  |   | 8,032                                  |   |  |       | (5,525 | ) |  |   | 2,507   |  
|Compensation from compensatory stock plans                 |  |                                               |   |  |              |    |                            |   | 597     |                  |  |   |                                       |   |  |       |       |   |  |   | 597     |  
|Exercise of employee stock options                         |  | 177,314                                        |   |  |              | 2   |                            |   | 951     |                  |  |   |                                       |   |  |       |       |   |  |   | 953     |  
|Dividends declared ($0.405 per share)                      |  |                                               |   |  |              |    |                            |   |        |                  |  |   | (12,836                                | ) |  |       |       |   |  |   | (12,836 | )
|                                                           |  |                                                |   |  |              |     |                            |   |         |                  |  |   |                                        |   |  |       |        |   |  |   |         |  
|Balance, September 30, 2006                                |  | 31,354,670                                     |   |  | $            | 314 |                            | $ | 321,253 |                  |  | $ | (50,627                                | ) |  | $     | 4,202  |   |  | $ | 275,142 |  
|                                                           |  |                                                |   |  |              |     |                            |   |         |                  |  |   |                                        |   |  |       |        |   |  |   |         |  
|Balance, June 30, 2007                                     |  | 31,416,313                                     |   |  | $            | 314 |                            | $ | 323,000 |                  |  | $ | (68,668                                | ) |  | $     | 10,651 |   |  | $ | 265,297 |  
|Net Income                                                 |  |                                               |   |  |              |    |                            |   |        |                  |  |   | 6,291                                  |   |  |       |       |   |  |   | 6,291   |  
|Unrealized loss on derivatives, net of tax effect          |  |                                               |   |  |              |    |                            |   |        |                  |  |   |                                       |   |  |       | (5,376 | ) |  |   | (5,376  | )
|Post retirement benefit plan adjustment, net of tax effect |  |                                               |   |  |              |    |                            |   |        |                  |  |   |                                       |   |  |       | (116   | ) |  |   | (116    | )
|                                                           |  |                                                |   |  |              |     |                            |   |         |                  |  |   |                                        |   |  |       |        |   |  |   |         |  
|Total comprehensive income                                 |  |                                               |   |  |              |    |                            |   |        |                  |  |   | 6,291                                  |   |  |       | (5,492 | ) |  |   | 799     |  
|Compensation from compensatory stock plans                 |  | 35,625                                         |   |  |              |    |                            |   | 674     |                  |  |   |                                       |   |  |       |       |   |  |   | 674     |  
|Shares reacquired                                          |  | (11,723                                        | ) |  |              |    |                            |   | (245    | )                |  |   |                                       |   |  |       |       |   |  |   | (245    | )
|Dividends declared ($0.405 per share)                      |  |                                               |   |  |              |    |                            |   |        |                  |  |   | (12,867                                | ) |  |       |       |   |  |   | (12,867 | )
|                                                           |  |                                                |   |  |              |     |                            |   |         |                  |  |   |                                        |   |  |       |        |   |  |   |         |  
|Balance, September 30, 2007                                |  | 31,440,215                                     |   |  | $            | 314 |                            | $ | 323,429 |                  |  | $ | (75,244                                | ) |  | $     | 5,159  |   |  | $ | 253,658 |  
|                                                           |  |                                                |   |  |              |     |                            |   |         |                  |  |   |                                        |   |  |       |        |   |  |   |         |  
|                                                           | 
|                                                           |  | Nine Months Ended September 30, 2006 and 2007  |  
|                                                           |  | Common Shares                                  |   |  | Common Stock |     | Additional Paid-In Capital |   |         | Retained Deficit |  |   | Accumulated Other Comprehensive Income |   |  | Total |       
|Balance, December 31, 2005                                 |  | 31,065,963                                     |   |  | $            | 311 |                            | $ | 317,877 |                  |  | $ | (42,874                                | ) |  | $     | 5,217  |   |  | $ | 280,531 |  
|Net Income                                                 |  |                                               |   |  |              |    |                            |   |        |                  |  |   | 30,546                                 |   |  |       |       |   |  |   | 30,546  |  
|Unrealized loss on derivatives, net of tax effect          |  |                                               |   |  |              |    |                            |   |        |                  |  |   |                                       |   |  |       | (3,418 | ) |  |   | (3,418  | )
|Minimum pension liability adjustment, net of tax effect    |  |                                               |   |  |              |    |                            |   |        |                  |  |   |                                       |   |  |       | 2,403  |   |  |   | 2,403   |  
|                                                           |  |                                                |   |  |              |     |                            |   |         |                  |  |   |                                        |   |  |       |        |   |  |   |         |  
|Total comprehensive income                                 |  |                                               |   |  |              |    |                            |   |        |                  |  |   | 30,546                                 |   |  |       | (1,015 | ) |  |   | 29,531  |  
|Compensation from compensatory stock plans                 |  | 779                                            |   |  |              |    |                            |   | 1,762   |                  |  |   |                                       |   |  |       |       |   |  |   | 1,762   |  
|Exercise of employee stock options                         |  | 287,928                                        |   |  |              | 3   |                            |   | 1,614   |                  |  |   |                                       |   |  |       |       |   |  |   | 1,617   |  
|Dividends declared ($1.215 per share)                      |  |                                               |   |  |              |    |                            |   |        |                  |  |   | (38,299                                | ) |  |       |       |   |  |   | (38,299 | )
|                                                           |  |                                                |   |  |              |     |                            |   |         |                  |  |   |                                        |   |  |       |        |   |  |   |         |  
|Balance, September 30, 2006                                |  | 31,354,670                                     |   |  | $            | 314 |                            | $ | 321,253 |                  |  | $ | (50,627                                | ) |  | $     | 4,202  |   |  | $ | 275,142 |  
|                                                           |  |                                                |   |  |              |     |                            |   |         |                  |  |   |                                        |   |  |       |        |   |  |   |         |  
|Balance, December 31, 2006                                 |  | 31,379,670                                     |   |  | $            | 314 |                            | $ | 322,016 |                  |  | $ | (59,976                                | ) |  | $     | 5,345  |   |  | $ | 267,699 |  
|Net Income                                                 |  |                                               |   |  |              |    |                            |   |        |                  |  |   | 23,338                                 |   |  |       |       |   |  |   | 23,338  |  
|Unrealized loss on derivatives, net of tax effect          |  |                                               |   |  |              |    |                            |   |        |                  |  |   |                                       |   |  |       | (3,155 | ) |  |   | (3,155  | )
|Post retirement benefit plan adjustment, net of tax effect |  |                                               |   |  |              |    |                            |   |        |                  |  |   |                                       |   |  |       | 2,969  |   |  |   | 2,969   |  
|                                                           |  |                                                |   |  |              |     |                            |   |         |                  |  |   |                                        |   |  |       |        |   |  |   |         |  
|Total comprehensive income                                 |  |                                               |   |  |              |    |                            |   |        |                  |  |   | 23,338                                 |   |  |       | (186   | ) |  |   | 23,152  |  
|Compensation from compensatory stock plans                 |  | 82,447                                         |   |  |              |    |                            |   | 1,953   |                  |  |   |                                       |   |  |       |       |   |  |   | 1,953   |  
|Shares reacquired                                          |  | (26,902                                        | ) |  |              |    |                            |   | (561    | )                |  |   |                                       |   |  |       |       |   |  |   | (561    | )
|Exercise of employee stock options                         |  | 5,000                                          |   |  |              |    |                            |   | 21      |                  |  |   |                                       |   |  |       |       |   |  |   | 21      |  
|Dividends declared ($1.215 per share)                      |  |                                               |   |  |              |    |                            |   |        |                  |  |   | (38,606                                | ) |  |       |       |   |  |   | (38,606 | )
|                                                           |  |                                                |   |  |              |     |                            |   |         |                  |  |   |                                        |   |  |       |        |   |  |   |         |  
|Balance, September 30, 2007                                |  | 31,440,215                                     |   |  | $            | 314 |                            | $ | 323,429 |                  |  | $ | (75,244                                | ) |  | $     | 5,159  |   |  | $ | 253,658 |  
|                                                           |  |                                                |   |  |              |     |                            |   |         |                  |  |   |                                        |   |  |       |        |   |  |   |         |  

See notes to condensed consolidated financial statements.



3



---

##### Table of Contents

Iowa Telecommunications Services, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(Dollars in Thousands)



|                                                                                      |  |                                 |         |   |      |   |         |  
|------------------------------------------------------------------------------------- |  | ------------------------------- | ------- | - | ---- | - | ------- | -
|                                                                                      |  | Nine Months Ended September 30, |        
|                                                                                      |  | 2006                            |         |   | 2007 |  
|CASH FLOWS FROM OPERATING ACTIVITIES:                                                 |  |                                 |         |   |      |   |         |  
|Net income                                                                            |  | $                               | 30,546  |   |      | $ | 23,338  |  
|Adjustments to reconcile net income to cash provided by operating activities:         |  |                                 |         |   |      |   |         |  
|Depreciation                                                                          |  |                                 | 33,674  |   |      |   | 35,143  |  
|Amortization of intangible assets                                                     |  |                                 | 1,589   |   |      |   | 1,375   |  
|Amortization of debt issuance costs                                                   |  |                                 | 443     |   |      |   | 443     |  
|Gain from sale of exchanges                                                           |  |                                 | (4,180  | ) |      |   |        |  
|Deferred income taxes                                                                 |  |                                 | 7,720   |   |      |   | 15,705  |  
|Non-cash stock based compensation expense                                             |  |                                 | 1,762   |   |      |   | 1,951   |  
|Changes in operating assets and liabilities, net of effects of business dispositions: |  |                                 |         |   |      |   |         |  
|Receivables                                                                           |  |                                 | (321    | ) |      |   | (620    | )
|Inventories                                                                           |  |                                 | (707    | ) |      |   | (211    | )
|Accounts payable                                                                      |  |                                 | (827    | ) |      |   | 467     |  
|Other assets and liabilities                                                          |  |                                 | (36     | ) |      |   | (4,771  | )
|                                                                                      |  |                                 |         |   |      |   |         |  
|Net Cash Provided by Operating activities                                             |  |                                 | 69,663  |   |      |   | 72,820  |  
|                                                                                      |  |                                 |         |   |      |   |         |  
|CASH FLOWS FROM INVESTING ACTIVITIES:                                                 |  |                                 |         |   |      |   |         |  
|Capital expenditures                                                                  |  |                                 | (20,399 | ) |      |   | (19,853 | )
|Business acquisitions, net of cash acquired                                           |  |                                 | (18,126 | ) |      |   |        |  
|Purchase of wireless licenses                                                         |  |                                 | (3,102  | ) |      |   |        |  
|Proceeds from sale of exchanges                                                       |  |                                 | 13,273  |   |      |   |        |  
|                                                                                      |  |                                 |         |   |      |   |         |  
|Net Cash Used in Investing Activities                                                 |  |                                 | (28,354 | ) |      |   | (19,853 | )
|                                                                                      |  |                                 |         |   |      |   |         |  
|CASH FLOWS FROM FINANCING ACTIVITIES:                                                 |  |                                 |         |   |      |   |         |  
|Net change in revolving credit facility                                               |  |                                 | (26,000 | ) |      |   | (23,000 | )
|Proceeds from exercise of stock options                                               |  |                                 | 1,617   |   |      |   | 21      |  
|Shares reacquired                                                                     |  |                                 |        |   |      |   | (561    | )
|Dividends paid                                                                        |  |                                 | (38,143 | ) |      |   | (38,565 | )
|                                                                                      |  |                                 |         |   |      |   |         |  
|Net Cash Used in Financing Activities                                                 |  |                                 | (62,526 | ) |      |   | (62,105 | )
|                                                                                      |  |                                 |         |   |      |   |         |  
|NET CHANGE IN CASH AND CASH EQUIVALENTS                                               |  |                                 | (21,217 | ) |      |   | (9,138  | )
|CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD                                      |  |                                 | 26,782  |   |      |   | 13,613  |  
|                                                                                      |  |                                 |         |   |      |   |         |  
|CASH AND CASH EQUIVALENTS AT END OF PERIOD                                            |  | $                               | 5,565   |   |      | $ | 4,475   |  
|                                                                                      |  |                                 |         |   |      |   |         |  
|SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:                                     |  |                                 |         |   |      |   |         |  
|Cash paid for interest                                                                |  | $                               | 23,140  |   |      | $ | 23,584  |  
|                                                                                      |  |                                 |         |   |      |   |         |  
|Cash paid for income taxes                                                            |  | $                               | 654     |   |      | $ | 494     |  
|                                                                                      |  |                                 |         |   |      |   |         |  

SUPPLEMENTAL NON-CASH ACTIVITIES:

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

Dividends on Common Stock of $12,887 were declared on September 14, 2007 for shareholders of record as of September 28, 2007 and the dividends
were paid on October 15, 2007.

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

See notes to condensed consolidated financial statements.



4



---

##### Table of Contents

Iowa Telecommunications Services, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

1. BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements of
Iowa Telecommunications Services, Inc. and Subsidiaries (the Company) have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (SEC) for interim financial information. Certain
information and disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been omitted or condensed pursuant to such rules and regulations.
In the opinion of the Companys management, all adjustments (consisting of only normal and recurring accruals) have been made to present fairly the financial positions, the results of operations and cash flows for the periods presented. The
results of operations for the periods presented are not necessarily indicative of the results to be expected for the full year. Although the Company believes that the disclosures are adequate to make the information presented not misleading, these
unaudited condensed consolidated financial statements should be read in conjunction with the Companys audited consolidated financial statements as of and for the year ended December 31, 2006, that are included in the Companys most
recently filed annual report on Form 10-K as filed with the SEC.

2. EARNINGS PER SHARE

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



|                                                        |  |                                          |        |                                 |   |        |  |      |        |  |   |       
|------------------------------------------------------- |  | ---------------------------------------- | ------ | ------------------------------- | - | ------ |  | ---- | ------ |  | - | ------
|                                                        |  | Three Months Ended September 30,         |        | Nine Months Ended September 30,
|                                                        |  | 2006                                     |        | 2007                            |   | 2006   |  | 2007
|                                                        |  | (in thousands, except per share amounts)
|Net Income                                              |  | $                                        | 8,032  |                                 | $ | 6,291  |  | $    | 30,546 |  | $ | 23,338
|                                                        |  |                                          |        |                                 |   |        |  |      |        |  |   |       
|Weighted average shares outstanding - basic             |  |                                          | 31,254 |                                 |   | 31,432 |  |      | 31,170 |  |   | 31,406
|                                                        |  |                                          |        |                                 |   |        |  |      |        |  |   |       
|Diluted shares outstanding:                             |  |                                          |        |                                 |   |        |  |      |        |  |   |       
|Weighted average shares outstanding                     |  |                                          | 31,254 |                                 |   | 31,432 |  |      | 31,170 |  |   | 31,406
|Add shares issuable upon exercise of stock options, net |  |                                          | 576    |                                 |   | 546    |  |      | 602    |  |   | 538   
|Add unvested compensatory stock shares                  |  |                                          | 335    |                                 |   | 74     |  |      | 290    |  |   | 102   
|                                                        |  |                                          |        |                                 |   |        |  |      |        |  |   |       
|Weighted average number of shares outstanding - diluted |  |                                          | 32,165 |                                 |   | 32,052 |  |      | 32,062 |  |   | 32,046
|                                                        |  |                                          |        |                                 |   |        |  |      |        |  |   |       
|Earnings Per Share:                                     |  |                                          |        |                                 |   |        |  |      |        |  |   |       
|Basic                                                   |  | $                                        | 0.26   |                                 | $ | 0.20   |  | $    | 0.98   |  | $ | 0.74  
|Diluted                                                 |  | $                                        | 0.25   |                                 | $ | 0.20   |  | $    | 0.95   |  | $ | 0.73  

As of September 30, 2006 and 2007, total options outstanding were 707,579 and 677,579,
respectively.

3. EMPLOYEE BENEFIT PLANS

Retirement
Pension Plan

The Company sponsors the Iowa Telecom Pension Plan (the Plan), a defined benefit pension plan that covers many
former GTE Midwest Incorporated (GTE) employees and many 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 to the plan made during the third quarter of 2007.



5



---

##### Table of Contents

Components of pension benefit cost are as follows:



|                                            |  |                                 |      |   |                                |   |      |      |  |   |       |   |  |   |      |  
|------------------------------------------- |  | ------------------------------- | ---- | - | ------------------------------ | - | ---- | ---- |  | - | ----- | - |  | - | ---- | -
|                                            |  | Three Months EndedSeptember 30, |      |   | Nine Months EndedSeptember 30, |  
|                                            |  | 2006                            |      |   | 2007                           |   |      | 2006 |  |   | 2007  |  
|                                            |  | (dollars in thousands)          |     
|Pension Benefit Cost:                       |  |                                 |      |   |                                |   |      |      |  |   |       |   |  |   |      |  
|Service cost                                |  | $                               | 58   |   |                                | $ | 59   |      |  | $ | 174   |   |  | $ | 177  |  
|Interest cost                               |  |                                 | 327  |   |                                |   | 185  |      |  |   | 981   |   |  |   | 554  |  
|Expected return on plan assets              |  |                                 | (178 | ) |                                |   | (154 | )    |  |   | (534  | ) |  |   | (461 | )
|Amortization of unrecognized actuarial loss |  |                                 | 124  |   |                                |   | 42   |      |  |   | 372   |   |  |   | 126  |  
|                                            |  |                                 |      |   |                                |   |      |      |  |   |       |   |  |   |      |  
|Net periodic benefit cost                   |  |                                 | 331  |   |                                |   | 132  |      |  |   | 993   |   |  |   | 396  |  
|Settlement cost                             |  |                                 |     |   |                                |   |     |      |  |   | 320   |   |  |   |     |  
|                                            |  |                                 |      |   |                                |   |      |      |  |   |       |   |  |   |      |  
|Net periodic benefit cost, with adjustments |  | $                               | 331  |   |                                | $ | 132  |      |  | $ | 1,313 |   |  | $ | 396  |  
|                                            |  |                                 |      |   |                                |   |      |      |  |   |       |   |  |   |      |  

During the second quarter of 2005, the Company amended the defined benefit pension plan to freeze
the accrued benefit for all salaried participants and for certain hourly participants, and to permit certain other hourly participants to elect to discontinue further benefit accruals. As a result of the amendment, the benefits to be paid to
salaried participants at their normal retirement age of 65 are fixed. The accrued benefits for hourly employees subject to the mandatory benefit freeze and for those who elected to discontinue further benefit accruals were transferred to a separate
plan (the Spin-Off Plan). The Spin-Off Plan was terminated during the third quarter of 2006, with almost all benefits distributed in the fourth quarter. As a result of the amendment and Spin-Off Plan termination, the number of employees
accruing further benefits under the Plan has been reduced to approximately 40 from 175.

Postretirement Benefits

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

During the second quarter of 2007, the Company amended its post retirement welfare plan. The amendment eliminated medical benefits for certain
retirees and reduced benefits for others. Life insurance benefits were eliminated for most retirees covered under the agreement. At the time of the plan amendment, approximately 58% of employees covered under the plan chose to opt out of the
postretirement welfare plan. The significant change in the number of plan participants required a re-measurement of both the plan assets and benefit obligations. The re-measurement resulted in a one time curtailment gain of $247,000 and reduction in
the liability recorded for prior service costs of $5.6 million which will be amortized over 5.31 years as a component of the annual cost.

Components of postretirement benefit cost are as follows:



|                                                |  |                                 |     |   |                                |   |      |      |  |   |      |   |  |   |      |  
|----------------------------------------------- |  | ------------------------------- | --- | - | ------------------------------ | - | ---- | ---- |  | - | ---- | - |  | - | ---- | -
|                                                |  | Three Months EndedSeptember 30, |     |   | Nine Months EndedSeptember 30, |  
|                                                |  | 2006                            |     |   | 2007                           |   |      | 2006 |  |   | 2007 |  
|                                                |  | (dollars in thousands)          |    
|Postretirement Benefit Cost:                    |  |                                 |     |   |                                |   |      |      |  |   |      |   |  |   |      |  
|Service cost                                    |  | $                               | 46  |   |                                | $ | 7    |      |  | $ | 138  |   |  | $ | 68   |  
|Interest cost                                   |  |                                 | 128 |   |                                |   | 51   |      |  |   | 384  |   |  |   | 255  |  
|Amortization of unrecognized net actuarial loss |  |                                 | 35  |   |                                |   | 25   |      |  |   | 105  |   |  |   | 63   |  
|Amortization of unrecognized prior service cost |  |                                 | (39 | ) |                                |   | (264 | )    |  |   | (117 | ) |  |   | (492 | )
|                                                |  |                                 |     |   |                                |   |      |      |  |   |      |   |  |   |      |  
|Net periodic benefit cost (income)              |  |                                 | 170 |   |                                |   | (181 | )    |  |   | 510  |   |  |   | (106 | )
|Curtailment gain                                |  |                                 |    |   |                                |   |     |      |  |   |     |   |  |   | (247 | )
|                                                |  |                                 |     |   |                                |   |      |      |  |   |      |   |  |   |      |  
|                                                |  |                                 |     |  
|Total cost (income) recognized                  |  | $                               | 170 |   |                                | $ | (181 | )    |  | $ | 510  |   |  | $ | (353 | )
|                                                |  |                                 |     |   |                                |   |      |      |  |   |      |   |  |   |      |  



6



---

##### Table of Contents

4. LONG-TERM DEBT AND REVOLVING CREDIT FACILITIES

Credit Facilities

As of September 30, 2007, the Company had outstanding $477.8 million
of senior debt under the term facilities, and had $8.0 million drawn under the $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, 2007, $8.0 million was outstanding on the revolving credit facility and $92.0 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, 2007, the Company had $8.0 million outstanding under LIBOR elections at an average all-in
rate of 7.13%.

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, 2007, $350.0 million of the Term Loan B was based
upon a LIBOR election effective through December 28, 2007, at an all-in rate of 6.95%. 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, 2007, the interest rate on the remaining $50.0 million was based upon a LIBOR election effective through March 12, 2008 at an all-in rate of 7.23%.

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

Term Loan D is a $7.8 million senior secured term facility maturing in November 2011, bearing interest per annum at either (a) a fixed rate or
(b) a Rural Telephone Finance Cooperative variable rate plus 0.85%. The interest rate on Term Loan D was fixed at 6.65% until November 2007. Effective August 1, 2007 the Company elected a new all-in fixed interest rate of 6.95% through
June 2011 on Term Loan D. Upon the expiration of the fixed interest rate period, the term loan will convert to the Rural Telephone Finance Cooperative variable rate plus 0.85%.

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

The credit facilities are secured by substantially all of the Companys tangible and intangible assets, properties and revenues. The credit facilities are guaranteed by all of our subsidiaries.

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

The credit facilities require us, subject to
certain exceptions, to prepay outstanding loans under the credit facilities to the extent of net cash proceeds received from the following: issuance of certain indebtedness; proceeds of certain asset sales; and casualty



7



---

##### Table of Contents

insurance proceeds. The credit facilities further require us, subject to certain exceptions, to make prepayments under the credit facilities equal to 50% of
any net increase in the following: distributable cash during a dividend suspension period, as defined; and cumulative distributable cash, as defined, during the fiscal year less the cumulative reductions of revolving loans through such period, with
reductions to the percentage to be determined based on improvements in certain credit ratios. As of September 30, 2007, no prepayment amounts were due under these provisions.

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

In addition, the financial covenants under the credit facilities specify, among other things, certain fixed
charge coverage ratios and a maximum total leverage ratio, as defined, all of which the Company was in compliance as of September 30, 2007.

Interest Rate Swaps

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

5. STOCK INCENTIVE PLANS

2002 Stock Incentive Plan

The Iowa
Telecommunications, Inc. 2002 Stock Incentive Plan (the 2002 Incentive Plan) allows for the issuance of incentive stock options or nonqualified stock options. Under the 2002 Incentive Plan, options have been granted for the purchase of
2,227,714 shares of which 1,031,795 were redeemed for cash in 2004 in conjunction with the Companys initial public offering, 518,340 have been exercised and 677,579 remain outstanding as of September 30, 2007. No new options will be
granted under the 2002 Incentive Plan. The term of each option did not exceed 10 years from the date of grant. Options granted to employees vested over 3 to 5 years from the date of the grant. All unvested options outstanding at the time of the
closing of the initial public offering vested pursuant to the terms of the 2002 Incentive Plan. The exercise price for unexercised options is automatically decreased by the amount of dividends that would have been paid on the shares issuable upon
exercise.

The Company recorded $252,000 and $744,000 of stock-based compensation expense during the three and nine month periods ended
September 30, 2007, respectively, to reflect the change in the fair value of the options from the reduction of the exercise price resulting from the declaration of cash dividends. During the three and nine month periods ended September 30,
2006, the Company recorded $259,000 and $883,000 of stock-based compensation expense, respectively, to reflect the change in the fair value of the options from 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 Ended September 30, |  | Nine Months Ended September 30,
|                                          |  | 2006                             |  | 2007                            |  | 2006   |  | 2007  
|Weighted Average Expected Life (in years) |  | 2.15 yr                          |  | 2.2yr                           |  | 3.0 yr |  | 2.33yr
|Risk free interest rate                   |  | 4.65%                            |  | 3.93%                           |  | 4.91%  |  | 4.45% 
|Volatility(1)                             |  | 21%                              |  | 23%                             |  | 22%    |  | 20%   
|Dividend yield                            |  | 0%                               |  | 0%                              |  | 0%     |  | 0%    

---

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



8



---

##### Table of Contents

A summary of the status of options granted under the 2002 Incentive Plan as of September 30, 2006
and 2007, and the changes during the three and nine month periods then ended, is presented below:



|                                     |  |                                       |   |                                       |                                           |      |        |         |   |                                           |   |     
|------------------------------------ |  | ------------------------------------- | - | ------------------------------------- | ----------------------------------------- | ---- | ------ | ------- | - | ----------------------------------------- | - | ----
|                                     |  | Three Months Ended September 30, 2006 |   | Three Months Ended September 30, 2007
|Fixed Options                        |  | Shares                                |   |                                       | Weighted Average Exercise Price per Share |      | Shares |         |   | Weighted Average Exercise Price per Share
|OUTSTANDING AT JUNE 30,              |  | 884,893                               |   |                                       | $                                         | 5.50 |        | 677,579 |   |                                           | $ | 3.91
|Granted                              |  |                                      |   |                                       |                                           |     |        |        |   |                                           |   |    
|Exercised                            |  | (177,314                              | ) |                                       |                                           | 5.38 |        |        |   |                                           |   |    
|                                     |  |                                       |   |                                       |                                           |      |        |         |   |                                           |   |     
|OUTSTANDING AT SEPTEMBER 30,         |  | 707,579                               |   |                                       | $                                         | 5.12 |        | 677,579 |   |                                           | $ | 3.51
|                                     |  |                                       |   |                                       |                                           |      |        |         |   |                                           |   |     
|                                     |  |                                      
|                                     |  | Nine Months Ended September 30, 2006  |   | Nine Months Ended September 30, 2007 
|Fixed Options                        |  | Shares                                |   |                                       | Weighted Average Exercise Price
per Share |      | Shares |         |   | Weighted Average Exercise Price per Share
|OUTSTANDING AT BEGINNING OF YEAR     |  | 995,507                               |   |                                       | $                                         | 6.29 |        | 682,579 |   |                                           | $ | 4.72
|Granted                              |  |                                      |   |                                       |                                           |     |        |        |   |                                           |   |    
|Exercised                            |  | (287,928                              | ) |                                       |                                           | 5.61 |        | (5,000  | ) |                                           |   | 4.14
|                                     |  |                                       |   |                                       |                                           |      |        |         |   |                                           |   |     
|OUTSTANDING AT SEPTEMBER 30,         |  | 707,579                               |   |                                       | $                                         | 5.12 |        | 677,579 |   |                                           | $ | 3.51
|                                     |  |                                       |   |                                       |                                           |      |        |         |   |                                           |   |     
|Options exercisable at SEPTEMBER 30, |  | 707,579                               |   |                                       | $                                         | 5.12 |        | 677,579 |   |                                           | $ | 3.51
|                                     |  |                                       |   |                                       |                                           |      |        |         |   |                                           |   |     

The following table summarizes information about stock options outstanding at September 30,
2007:



|                               |  |                     |  |                                                      |  |         |  |                                           |      |                                            |   |          
|------------------------------ |  | ------------------- |  | ---------------------------------------------------- |  | ------- |  | ----------------------------------------- | ---- | ------------------------------------------ | - | ---------
|                               |  | Options Outstanding |  | Options Exercisable                                 
|Exercise Price per Share Range |  | Number              |  | Weighted Average Remaining Contractual Life In Years |  | Number  |  | Weighted Average Exercise Price per Share |      | Weighted Average Aggregate Intrinsic Value
|$3.00 to $3.50                 |  | 533,005             |  | 4.6                                                  |  | 533,005 |  | $                                         | 3.33 |                                            | $ | 8,803,000
|$3.51 to $4.00                 |  | 129,379             |  | 5.0                                                  |  | 129,379 |  | $                                         | 3.88 |                                            | $ | 2,066,000
|$6.00 to $6.50                 |  | 15,195              |  | 6.3                                                  |  | 15,195  |  | $                                         | 6.47 |                                            | $ | 203,000  

The weighted average exercise price of options exercisable at September 30, 2007 reflects the
reductions required by the plan, as a result of the declaration of cash dividends. Pursuant to the 2002 Incentive Plan, all options became fully vested on November 23, 2004 as a result of the change in share ownership resulting from the
Companys initial public offering of common stock.

The total intrinsic value of options exercised during the three and nine month
periods ended September 30, 2007 was $0 and $93,000, respectively. The Company received total cash proceeds of $0 and $21,000, respectively, related to the exercise of options during the three and nine month periods ended September 30,
2007. The total intrinsic value of options exercised during the three and nine month periods ended September 30, 2006 was $2.5 million and $3.8 million, respectively. The Company received total cash proceeds of $953,000 and $1.6 million,
respectively, related to the exercise of options during the three and nine month periods ended September 30, 2006.

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 460,300 shares of restricted stock have been awarded to various officers and employees of the Company and 2,757 shares of unrestricted stock have been
issued to members of the Companys Board of Directors.



9



---

##### Table of Contents

A summary of the status of the restricted shares awarded pursuant to the 2005 Incentive Plan as of
September 30, 2006 and 2007, and the changes during the three and nine month periods then ended is presented below:



|                                 |  |                                       |     |                                       |                                        |       |        |         |     |                                        |   |      
|-------------------------------- |  | ------------------------------------- | --- | ------------------------------------- | -------------------------------------- | ----- | ------ | ------- | --- | -------------------------------------- | - | -----
|                                 |  | Three Months Ended September 30, 2006 |     | Three Months Ended September 30, 2007
|                                 |  | Shares                                |     |                                       | Weighted Average Grant Date Fair Value |       | Shares |         |     | Weighted Average Grant Date Fair Value
|OUTSTANDING AT JUNE 30,          |  | 327,300                               |     |                                       | $                                      | 18.47 |        | 416,100 |     |                                        | $ | 19.53
|Granted                          |  | 12,000                                | (1) |                                       |                                        | 19.32 |        | 10,000  | (2) |                                        |   | 20.56
|Vested                           |  |                                      |     |                                       |                                        |      |        | (35,625 | )   |                                        |   | 18.66
|Cancelled/Forfeited              |  |                                      |     |                                       |                                        |      |        | (12,000 | )   |                                        |   | 19.32
|                                 |  |                                       |     |                                       |                                        |       |        |         |     |                                        |   |      
|OUTSTANDING AT SEPTEMBER 30,     |  | 339,300                               |     |                                       | $                                      | 18.50 |        | 378,475 |     |                                        | $ | 19.64
|                                 |  |                                       |     |                                       |                                        |       |        |         |     |                                        |   |      
|                                 |  |                                      
|                                 |  | Nine Months Ended September 30, 2006  |     | Nine Months Ended September 30, 2007 
|                                 |  | Shares                                |     |                                       | Weighted Average Grant Date Fair Value |       | Shares |         |     | Weighted Average Grant Date Fair Value
|OUTSTANDING AT BEGINNING OF YEAR |  | 242,500                               |     |                                       | $                                      | 18.66 |        | 339,300 |     |                                        | $ | 18.50
|Granted                          |  | 96,800                                | (3) |                                       |                                        | 18.10 |        | 133,000 | (4) |                                        |   | 21.80
|Vested                           |  |                                      |     |                                       |                                        |      |        | (81,825 | )   |                                        |   | 18.47
|Cancelled/Forfeited              |  |                                      |     |                                       |                                        |      |        | (12,000 | )   |                                        |   | 19.32
|                                 |  |                                       |     |                                       |                                        |       |        |         |     |                                        |   |      
|OUTSTANDING AT SEPTEMBER 30,     |  | 339,300                               |     |                                       | $                                      | 18.50 |        | 378,475 |     |                                        | $ | 19.64
|                                 |  |                                       |     |                                       |                                        |       |        |         |     |                                        |   |      

---

|(1) | Weighted average vesting period at grant date for shares granted is 41 months.
|--- | ------------------------------------------------------------------------------

|(2) | Weighted average vesting period at grant date for shares granted is 56 months.
|--- | ------------------------------------------------------------------------------

|(3) | Weighted average vesting period at grant date for shares granted is 47 months.
|--- | ------------------------------------------------------------------------------

|(4) | Weighted average vesting period at grant date for shares granted is 59 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 $422,000 and $1.2 million of
stock-based compensation expense during the three and nine month periods ended September 30, 2007, respectively. The Company recorded $338,000 and $866,000 of stock-based compensation expense during the three and nine month periods ended
September 30, 2006, respectively. The remaining amount to be charged to expense for unvested awards over the remaining service periods is $6.2 million. The Company also recorded $3,000 and $9,000, respectively, of expense during the three and
nine month periods ended September 30, 2007 related to the unrestricted shares issued to members of its Board of Directors. During the three and nine month periods ended September 30, 2006, the Company recorded $0 and $13,000,
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 month periods ended September 30, 2007 was $745,000 and $1.7 million
respectively. No shares vested during the three or nine month periods ended September 30, 2006.

The Company has a policy that permits
the repurchase of a portion of vested shares from participants upon their vesting in order to satisfy tax withholding obligations. The aggregate fair market value of such repurchases may not exceed the participants minimum statutory tax
withholding obligation due upon vesting. During the three and nine month periods ended September 30, 2007, the Company reacquired 11,723 and 26,902 shares, respectively, for this purpose. No additional shares are expected to be reacquired
during the remainder of the year and no shares were reacquired by the Company during 2006.

6. DISCLOSURES ABOUT FAIR VALUE OF INTEREST RATE SWAP

Effective August 31, 2005, the Company amended the terms of its interest rate swap agreement which the Company designated as a hedge
against the variability in future interest payments due on $350.0 million of Term Loan B. The amended terms of the interest rate swap agreement effectively convert the variable rate interest payments due on $350.0 million of Term Loan B to a fixed
rate of 5.865% through maturity on November 23, 2011. The purpose of the swap agreement is to adjust the interest rate profile of the Companys debt obligations and to achieve a targeted mix of floating and fixed rate debt.



10



---

##### Table of Contents

During the three and nine month periods ended September 30, 2007, the fair market value of the swap
instrument decreased by $9.4 million and $5.9 million, respectively. The portion of the change in fair value attributable to hedge ineffectiveness, which for the three and nine months ended September 30, 2007 was $162,000 and $336,000,
respectively, was recorded in the Other Income section of the Companys Condensed Consolidated Statements of Income. The portion of the change in fair value attributable to hedge effectiveness is recorded, net of income tax effects, in the
Accumulated Other Comprehensive Income section of the Companys Condensed Consolidated Statements of Stockholders Equity. In assessing hedge effectiveness, no portion of the gain or loss from the swap is excluded.

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

The fair value of our interest rate swap has been calculated by discounting the future cash flows of both the fixed rate and variable rate interest payments. The discount rate was derived from a yield curve created by
a nationally recognized financial institution. The fair value of the interest rate swap was $7.7 million as of September 30, 2007 and $13.6 million as of December 31, 2006. The swap was recorded in the Intangible Assets and Other section
of our Condensed Consolidated Balance Sheets.

7. INCOME TAXES

Income tax expense consists of the following for the three and nine month periods ended September 30:



|                                |  |                                 |       |                                |   |       |  |   |        |   |  |   |       
|------------------------------- |  | ------------------------------- | ----- | ------------------------------ | - | ----- |  | - | ------ | - |  | - | ------
|                                |  | Three Months EndedSeptember 30, |       | Nine Months EndedSeptember 30,
|                                |  | 2006                            |       | 2007                           |   | 2006  |  |   | 2007  
|                                |  | (dollars in thousands)         
|Current Tax Expense:            |  |                                 |       |                                |   |       |  |   |        |   |  |   |       
|Federal                         |  | $                               | 220   |                                | $ | 37    |  | $ | 480    |   |  | $ | 607   
|State                           |  |                                 | 90    |                                |   | 15    |  |   | 174    |   |  |   | 222   
|                                |  |                                 |       |                                |   |       |  |   |        |   |  |   |       
|Total                           |  |                                 | 310   |                                |   | 52    |  |   | 654    |   |  |   | 829   
|Deferred Tax Expense            |  |                                 |       |                                |   |       |  |   |        |   |  |   |       
|Federal                         |  |                                 | 4,502 |                                |   | 3,760 |  |   | 12,680 |   |  |   | 13,403
|State                           |  |                                 | 805   |                                |   | 671   |  |   | 2,240  |   |  |   | 2,302 
|                                |  |                                 |       |                                |   |       |  |   |        |   |  |   |       
|Total                           |  |                                 | 5,307 |                                |   | 4,431 |  |   | 14,920 |   |  |   | 15,705
|Valuation Allowance Adjustments |  |                                 |      |                                |   |      |  |   | (7,200 | ) |  |   |      
|                                |  |                                 |       |                                |   |       |  |   |        |   |  |   |       
|Income Tax Expense              |  | $                               | 5,617 |                                | $ | 4,483 |  | $ | 8,374  |   |  | $ | 16,534
|                                |  |                                 |       |                                |   |       |  |   |        |   |  |   |       

Current income tax expense for 2006 and 2007 is primarily due to the alternative minimum tax
requirements.

A valuation allowance had been provided at December 31, 2005 for the deferred tax assets that expire over time to the
extent that they exceeded the net deferred tax assets and liabilities resulting from reversing temporary differences. The Company determined that, based upon the evidence available as of June 30, 2006, and as of the end of each period
thereafter, the combination of the continued generation of taxable income and the taxable income generated from reversing temporary differences will more likely than not, be sufficient to utilize the entire deferred tax asset. As such, the Company
determined that no valuation allowance was required for its deferred tax assets, and reversed the remaining valuation allowance during 2006.

As of September 30, 2007, the Company had unused tax net operating loss carryforwards of approximately $158.1 million which expire between 2021 and 2024. The amount of net operating loss allowable to offset income after a change in
ownership is limited under Internal Revenue Code (IRC) Section 382. However, IRC Section 338 allows for an increase in this allowance by an



11



---

##### Table of Contents

additional $762,000, $37.4 million, $26.3 million, $18.7 million, and $17.2 million, for tax periods ending in 2005 through 2009, respectively. The IRC
Section 382 limitation of approximately $19.4 million will continue to apply to any remaining unreleased net operating losses after 2009. Additionally, the Company expects continued goodwill amortization for tax purposes at the rate of
approximately $40 million per year through June 2015.

8. COMMITMENTS AND CONTINGENCIES

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

9.
NEW ACCOUNTING PRONOUNCEMENTS

In July 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation
No. 48, Accounting for Uncertainty in Income Taxesan interpretation of FASB Statement No. 109 (FIN 48). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in accordance with
Statement of Financial Accounting Standards (SFAS) No. 109, Accounting for Income Taxes (SFAS 109). Guidance is provided on derecognition, classification, interest and penalties accounting in interim periods,
disclosure and transition. FIN 48 requires that we recognize in our financial statements the impact of a tax position, if that position is more likely than not of being sustained on audit, based on the technical merits of the position. The
provisions of FIN 48 are effective as of the beginning of our 2007 fiscal year, with the cumulative effect of the change in accounting principle recorded as an adjustment to opening retained earnings. Adoption of FIN 48 on January 1, 2007, had
no effect on our financial position, results of operations or cash flows.

In September 2006, the FASB issued SFAS No. 157, Fair Value
Measurements (SFAS 157). SFAS 157 defines fair value, establishes a framework for measuring fair value and expands disclosure of fair value measurements. SFAS 157 applies under other accounting pronouncements that require or permit fair
value measurements and accordingly, does not require any new fair value measurements. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007. The Company is currently evaluating the impact of
this pronouncement on its consolidated financial statements.

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option
for Financial Assets and Financial Liabilities (SFAS 159). SFAS 159 permits entities to choose, at specified election dates, to measure eligible items at fair value and to report in earnings unrealized gains and losses on those items for
which the fair value option has been elected. SFAS 159 also requires entities to display the fair value of those assets and liabilities on the face of the balance sheet. SFAS 159 establishes presentation and disclosure requirements designed to
facilitate comparisons between entities that choose different measurement attributes for similar types of assets and liabilities. SFAS 159 is effective as of the beginning of an entitys first fiscal year beginning after November 15, 2007.
Early adoption is permitted as of the beginning of the previous fiscal year provided that the entity makes that choice in the first 120 days of that fiscal year and also elects to apply the provisions of SFAS 159. The Company has not elected to
early adopt the standard and is currently evaluating the impact of this pronouncement on its consolidated financial statements.

In May
2007, the FASB issued FASB Staff Position (FSP) No. FIN 48-1, Definition of Settlement in FASB Interpretation No. 48 which provides guidance on how an enterprise should determine whether a tax position is effectively settled for the
purpose of recognizing previously unrecognized tax benefits. The amendment had no impact on our financial position, results of operations or cash flows.

In June 2007, the EITF reached consensus on Issue No. 06-11, Accounting for Income Tax Benefits of Dividends on Share-Based Payment Awards. EITF Issue No. 06-11 requires that the tax benefit
related to dividend equivalents paid on restricted stock units that are expected to vest be recorded as an increase to additional paid-in capital. The Company currently accounts for this tax benefit as a reduction to its income tax provision. EITF
Issue No. 06-11 is to be applied prospectively for tax benefits on dividends declared in fiscal years beginning after December 15, 2007. The Company does not expect the adoption of EITF Issue No. 06-11 to have a material impact on its
financial position, results of operations or cash flows.



12



---

##### 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, 2006 constitute cautionary statements identifying factors with
respect to such forward-looking statements, including certain risks and uncertainties, that could cause actual results to vary materially from the future results indicated in such forward-looking statements. Other factors could also cause actual
results to vary materially from the future results indicated in such forward-looking statements.

Overview

General

We are the largest provider of wireline local
exchange telecommunications services to residential and business customers in rural Iowa, serving over 450 communities across the state. We are the second-largest local exchange carrier in Iowa. Iowa Telecom currently operates 288 telephone
exchanges serving 418 communities as the incumbent or historical local exchange carrier and is the sole telecommunications company providing wireline services in approximately 70% of those communities. Together with our competitive local
exchange carrier subsidiaries, we provide services to approximately 243,700 access lines in Iowa.

Our core business is the provision of
local telephone service and network access to other telecommunications carriers for calls originated or terminated on our network. In addition to these core activities, which generated 70% of our total revenues in the first nine months of 2007, we
provide long distance service, dial-up and DSL Internet access and other communications services. As part of our strategy of pursuing growth beyond our current service area, we compete for customers in adjacent markets in Iowa through our
competitive local exchange carrier subsidiaries, Iowa Telecom Communications, Inc. (ITC) and IT Communications, LLC (IT Communications). Together, ITC and IT Communications are referred to as the CLEC or our
CLEC Operations.

Factors Affecting Our Operating Performance

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



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



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



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



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



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

Access Line Trends

The number of access lines served is a factor that can affect a
telecommunications providers revenues. Consistent with a general trend in the rural local exchange carrier industry in the past few years, the number of access lines we serve as an incumbent local exchange carrier has been decreasing. We
expect that this trend will continue. Because most of our revenues result from our relationships with customers who utilize our access lines and the level of activity utilized on those lines, the access line trend has an



13



---

##### Table of Contents

adverse impact on our revenues. Our response to this trend will have an important impact on our future revenues. Our primary strategy to respond to this
trend is to leverage our strong incumbent market position to increase our revenue per access line by selling additional services to our customer base and to promote our DSL Internet access service offering. 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 number of long distance,
and dial-up and DSL Internet subscribers are also meaningful indicators for us.

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



|                                                   |  |                     |  |        
|-------------------------------------------------- |  | ------------------- |  | -------
|                                                   |  | As of September 30,
|                                                   |  | 2006                |  | 2007   
|Incumbent local exchange access lines(1)           |  | 230,600             |  | 218,100
|Competitive local exchange carrier access lines(2) |  | 23,000              |  | 25,600 
|                                                   |  |                     |  |        
|Total access lines                                 |  | 253,600             |  | 243,700
|                                                   |  |                     |  |        
|Long distance subscribers                          |  | 145,900             |  | 145,400
|Dial-up Internet subscribers                       |  | 33,700              |  | 24,200 
|DSL subscribers                                    |  | 45,000              |  | 60,600 

---

|(1) | Includes lines subscribed by our incumbent local exchange carrier retail customers and lines subscribed by our wholesale customers who are competing local exchange
carriers. Wholesale access lines include: lines subscribed by our local exchange carrier competitors pursuant to interconnection agreements on an unbundled network element basis, for which the competitive local exchange carrier pays us a monthly
fee; lines that we provide to competitive local exchange carriers for resale to their subscribers, for which the competitive local exchange carrier pays us a monthly fee equal to what we would charge our customers for local service less an agreed
discount; and shared lines, for which a competitive local exchange carrier pays us a monthly fee to provide DSL service to its customers. We had 3,200 wholesale lines subscribed at September 30, 2006 and 3,000 at September 30, 2007.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

We intend to continue our strategy of increasing revenues by cross-selling additional services to our existing customer base, in the form of both bundled
service packages and individual additional services. Between September 30, 2006 and September 30, 2007, total long distance service subscribers decreased by 500, total DSL Internet access service subscribers increased by 15,600, and total
dial-up Internet access service subscribers decreased by 9,500, with much of the decrease in total dial-up subscribers being a reflection of customer migration from dial-up to DSL service.

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

Competition. Competitive local exchange carriers are offering service in approximately 126 of the 418 incumbent local exchange communities that we
serve. Of these 126 communities, we believe 101 communities have some voice service offered by Mediacoms telephony affiliate, MCC Telephony of Iowa, Inc. (MCC), which initiated service in these markets during the second quarter of
this year.

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

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



14



---

##### Table of Contents

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

MCC is offering voice services through a business arrangement with Sprint Communications L. P. (Sprint) pursuant to an interconnection agreement approved by the Iowa Utilities Board on April 24, 2006.
On June 23, 2006, we filed a complaint against the Iowa Utilities Board and Sprint in the U.S. District Court for the Southern District of Iowa asking the court to rule that the Iowa Utilities Board acted unlawfully when it required us to enter
into the agreement with Sprint and asking the court to invalidate the agreement. Notwithstanding the filing of our federal complaint, we have negotiated, mediated and litigated with Sprint and, at times, with MCC to resolve issues relating to
interpretation and implementation of the interconnection agreement. On January 22, 2007, we filed a second complaint against the Iowa Utilities Board and Sprint in U.S. District Court asking the court to rule that the Iowa Utilities Board acted
unlawfully when it interpreted the interconnection agreement to require Iowa Telecom to provide certain services to Sprint, particularly in the manner requested by Sprint. In addition to the disputes pending in federal district court and before the
Iowa Utilities Board, we are also defending a complaint filed by MCC on July 31, 2006, in the Iowa District Court for Polk County alleging that our refusal to accede to Sprints negotiation demands improperly interfered with MCCs
contracts and prospective customer relationships. The state court complaint seeks unspecified damages and costs and additional relief as warranted. This state court proceeding is currently stayed pending resolution of the federal complaints. How and
when the disputes regarding interpretation and implementation of the interconnection agreement are ultimately resolved is uncertain, as is the ultimate outcome of the federal and state litigation.

Exchange Sales. On February 28, 2006, we closed a transaction for the sale of one exchange with less than 20 access lines. On April 28,
2006 we closed a transaction for the sale of three exchanges, representing approximately 600 access lines. On July 1, 2006, we closed a transaction for the sale of four exchanges, representing approximately 2,000 access lines.

Exchange Purchase. During July 2006, we completed the purchase of the Montezuma Mutual Telephone Company (Montezuma Telephone).
Montezuma Telephone provides telecommunications services to 2,100 access lines, cable television service to approximately 1,350 subscribers and Internet access service to more than 950 subscribers, most of which are located in Montezuma, Iowa.

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

Our Retail Local Rate and Pricing Structure

As described under Overview  Competition above, effective
July 1, 2005, the rates for all of our retail local exchange services except for single line flat-rated business and residential service and EAS were deregulated. Beginning July 1, 2005, monthly rates for single line services remaining
under price regulation may be adjusted annually by one dollar for residential lines and two dollars for business lines, plus an inflation increment, up to a monthly rate cap of $19.00 for residential lines and $38.00 for business lines. Pursuant to
a January 25, 2007 interpretation by the Iowa Utilities Board, the $19.00 and $38.00 limits are inclusive of any incremental inflationary adjustments and, therefore, once met, do not permit further inflationary adjustments. These rates do not,
however, include charges for Extended Area Services, which, to the extent that they are offered in conjunction with single line



15



---

##### Table of Contents

flat-rate service, remain regulated by the Iowa Utilities Board. Single line flat-rated business and residential service and EAS will also be
deregulated as of July 1, 2008 unless the Iowa Utilities Board determines that the public interest requires it to extend its jurisdiction over such services to July 1, 2010. If the Iowa Utilities Board decides to continue price regulation
to 2010, both residential and business monthly rates may be increased up to two dollars plus inflation during each twelve-month period of the extension and the overall rate caps of $19.00 and $38.00 will be eliminated.

Effective January 1, 2007, our regulated monthly single line flat-rated business rate became $37.96. Effective February 1, 2007, our regulated
monthly single line flat-rated residential rate became $18.99. Both rates are exclusive of EAS, taxes, fees and regulatory surcharges.

Deregulation of
Retail Local Service Rates

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

Our Ability to Control Operating Expenses

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

Development of our Competitive Local Exchange Carrier Strategy

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

As of September 30, 2007, our CLEC served 25,600 access lines and accounted for 10.5% of Iowa Telecoms total access lines. We plan to maintain a limited investment approach as we continue to grow our competitive local exchange
carrier business.

Revenues

We derive
our revenues from four 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 selected nearby communities at a flat monthly rate), local private line services and enhanced calling
features, such as voice mail, caller ID and 3-way calling.

Network Access Services. We receive revenues from charges established to
compensate us for the origination, transport and termination of calls generated by the customers of long distance carriers and for calls transported and terminated for the customers of wireless carriers. These include subscriber line charges imposed
on end users, and switched and special access charges paid by carriers and others. We receive federally administered universal service support, representing approximately 2% of our total revenue in the first nine months of 2007, as a result of the
interstate switched access support provisions of the FCCs CALLS Order to which the Company became subject to in 2000. In addition, Montezuma Telephone received high cost loop universal service support amounting to less than 1% of our revenue.
Switched access charges for services within Iowa are based on rates approved by the Iowa Utilities Board. Switched and special access charges for interstate and international services are based on rates approved by the FCC. The transport and
termination charges paid by wireless carriers are specified in interconnection agreements negotiated with each individual wireless carrier.



16



---

##### Table of Contents

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

Other Services and Sales. We receive revenues from monthly recurring charges for dial-up and DSL Internet access services. Other services and sales also include revenues from directory publishing, inside line
care and the sale, installation and maintenance of customer premise voice and data equipment, or CPE, and the lease of space in our corporate headquarters facilities.

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



|                         |  |                                 |         |                                                                       |   |         |  |     |      |  |     |  
|------------------------ |  | ------------------------------- | ------- | --------------------------------------------------------------------- | - | ------- |  | --- | ---- |  | --- | -
|                         |  | Nine Months Ended September 30, |         | % of Total Revenues and Sales for the Nine Months Ended September 30, |  
|                         |  | 2006                            |         | 2007                                                                  |   | 2006    |  |     | 2007 | 
|                         |  | (dollars in thousands)          |        
|Local services           |  | $                               | 57,627  |                                                                       | $ | 55,964  |  | 33  | %    |  | 30  | %
|Network access services  |  |                                 | 71,951  |                                                                       |   | 77,502  |  | 41  | %    |  | 41  | %
|Toll services            |  |                                 | 16,421  |                                                                       |   | 15,860  |  | 10  | %    |  | 8   | %
|Other services and sales |  |                                 | 28,243  |                                                                       |   | 40,685  |  | 16  | %    |  | 21  | %
|                         |  |                                 |         |                                                                       |   |         |  |     |      |  |     |  
|Total                    |  | $                               | 174,242 |                                                                       | $ | 190,011 |  | 100 | %    |  | 100 | %
|                         |  |                                 |         |                                                                       |   |         |  |     |      |  |     |  

Operating Expenses

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

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

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

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



17



---

##### Table of Contents

Results of Operations

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



|                                                                        |  |                                  |   |  |                                 |   |  |      |   |  |      |  
|----------------------------------------------------------------------- |  | -------------------------------- | - |  | ------------------------------- | - |  | ---- | - |  | ---- | -
|                                                                        |  | Three Months Ended September 30, |   |  | Nine Months Ended September 30, |  
|                                                                        |  | 2006                             |   |  | 2007                            |   |  | 2006 |   |  | 2007 |  
|Total revenues and sales                                                |  | 100                              | % |  | 100                             | % |  | 100  | % |  | 100  | %
|Cost of services and sales (excluding expenses listed separately below) |  | 30                               | % |  | 32                              | % |  | 28   | % |  | 31   | %
|Selling, general and administrative                                     |  | 14                               | % |  | 17                              | % |  | 16   | % |  | 17   | %
|Depreciation and amortization                                           |  | 20                               | % |  | 20                              | % |  | 20   | % |  | 19   | %
|                                                                        |  |                                  |   |  |                                 |   |  |      |   |  |      |  
|Operating income                                                        |  | 36                               | % |  | 31                              | % |  | 36   | % |  | 33   | %
|Total other expenses, net                                               |  | 13                               | % |  | 13                              | % |  | 14   | % |  | 12   | %
|                                                                        |  |                                  |   |  |                                 |   |  |      |   |  |      |  
|Income before income taxes                                              |  | 23                               | % |  | 18                              | % |  | 22   | % |  | 21   | %
|Income taxes                                                            |  | 9                                | % |  | 8                               | % |  | 5    | % |  | 9    | %
|                                                                        |  |                                  |   |  |                                 |   |  |      |   |  |      |  
|Net income                                                              |  | 14                               | % |  | 10                              | % |  | 17   | % |  | 12   | %
|                                                                        |  |                                  |   |  |                                 |   |  |      |   |  |      |  

Three Months Ended September 30, 2007 and 2006

Revenues and Sales

The table below sets forth the
components of our revenues and sales for the three months ended September 30, 2007 compared to the same period in 2006:



|                         |  |                                  |        |        |   |        |  |   |         |   |  |      |  
|------------------------ |  | -------------------------------- | ------ | ------ | - | ------ |  | - | ------- | - |  | ---- | -
|                         |  | Three Months Ended September 30, |        | Change |  
|                         |  | 2006                             |        | 2007   |   | Amount |  |   | Percent |  
|                         |  | (dollars in thousands)           |       
|Revenues and Sales       |  |                                  |        |        |   |        |  |   |         |   |  |      |  
|Local services           |  | $                                | 19,135 |        | $ | 18,372 |  | $ | (763    | ) |  | -4.0 | %
|Network access services  |  |                                  | 23,532 |        |   | 23,485 |  |   | (47     | ) |  | -0.2 | %
|Toll services            |  |                                  | 5,419  |        |   | 5,185  |  |   | (234    | ) |  | -4.3 | %
|Other services and sales |  |                                  | 11,545 |        |   | 13,738 |  |   | 2,193   |   |  | 19.0 | %
|                         |  |                                  |        |        |   |        |  |   |         |   |  |      |  
|Total revenues and sales |  | $                                | 59,631 |        | $ | 60,780 |  | $ | 1,149   |   |  | 1.9  | %
|                         |  |                                  |        |        |   |        |  |   |         |   |  |      |  

Local Services. Local services revenues decreased $763,000, or 4.0%, for the three months
ended September 30, 2007 as compared to 2006. The decrease was primarily due to access line erosion. From September 30, 2006 to September 30, 2007, total access lines decreased by 9,900 including the loss of 12,500 incumbent local
exchange carrier lines and an increase in lines served by our competitive local exchange carriers of 2,600. The decrease in revenue resulting from the access line erosion was partially offset by local rate increases combined with higher revenue from
enhanced calling features due to greater bundled offering sales.

Network Access Services. Our network access services revenues
decreased $47,000, or 0.2%, for the three months ended September 30, 2007 as compared to the same period in 2006. The decrease was primarily due to access line erosion combined with a decrease in USF revenue. These were partially offset by an
increase in switched access revenue.

Toll Services. Our toll services revenues decreased by $234,000, or 4.3%, for the three months
ended September 30, 2007 as compared to the same period in 2006. The decrease in revenue was due to fewer long distance customers, which decreased by approximately 500, or 0.3%, combined with a decrease in the average minutes of use per
customer.

Other Services and Sales. Other services and sales revenues increased by $2.2 million, or 19.0%, for the three months
ended September 30, 2007 as compared to the same period in 2006. DSL Internet access service revenues increased $1.5 million, or 33.6%, due primarily to customer growth. This increase was partially offset by decreases in dial-up Internet
revenue of $503,000. We believe the decline in dial-up Internet access service customers was the result of customer migration to broadband products such as our DSL service. Additionally, the revenue increase was in part due to growth in our CPE and
data business, primarily as a result of our acquisition of Baker Communications in August 2006. Also contributing to the increase was $813,000 of revenue from the lease of space in our new corporate headquarters facilities to another entity during
2007.



18



---

##### Table of Contents

Operating Costs and Expenses

The table below sets forth the components of our operating costs and expenses for the three months ended September 30, 2007 compared to the same period in 2006:



|                                                                       |  |                                  |        |        |   |        |  |         |       |  |      |  
|---------------------------------------------------------------------- |  | -------------------------------- | ------ | ------ | - | ------ |  | ------- | ----- |  | ---- | -
|                                                                       |  | Three Months Ended September 30, |        | Change |  
|                                                                       |  | 2006                             |        | 2007   |   | Amount |  | Percent |      
|                                                                       |  | (dollars in thousands)           |       
|Operating Costs and Expenses:                                          |  |                                  |        |        |   |        |  |         |       |  |      |  
|Cost of services and sales (exclusive of items shown separately below) |  | $                                | 17,836 |        | $ | 19,221 |  | $       | 1,385 |  | 7.8  | %
|Selling, general and administrative                                    |  |                                  | 8,437  |        |   | 10,527 |  |         | 2,090 |  | 24.8 | %
|Depreciation and amortization                                          |  |                                  | 11,695 |        |   | 12,260 |  |         | 565   |  | 4.8  | %
|                                                                       |  |                                  |        |        |   |        |  |         |       |  |      |  
|Total operating costs and expenses                                     |  | $                                | 37,968 |        | $ | 42,008 |  | $       | 4,040 |  | 10.6 | %
|                                                                       |  |                                  |        |        |   |        |  |         |       |  |      |  

Cost of Services and Sales. Cost of services and sales increased $1.4 million, or 7.8%, for
the three months ended September 30, 2007 as compared to the same period in 2006. The increase was principally due to growth of our CPE and data business, primarily as a result of our acquisition of Baker Communications in August 2006.
Additionally, the operating costs for the newly acquired corporate headquarters facilities contributed to the increase in cost of services and sales.

Selling, General and Administrative. Selling, general and administrative costs increased $2.1 million or 24.8%, for the three months ended September 30, 2007 as compared to the same period in 2006. The
three months ended September 30, 2006 reflect the benefit of a $2.9 million gain on the sale of exchanges.

Depreciation and
Amortization. Depreciation and amortization increased $565,000 or 4.8%, for the three months ended September 30, 2007 as compared to the same period in 2006. The increase was primarily due to higher plant balances.

Other Income (Expense)

The table below sets forth
the components of other income (expense) for the three months ended September 30, 2007 compared to the same period in 2006:



|                             |  |                                  |        |   |        |   |        |        |  |   |         |   |  |      |  
|---------------------------- |  | -------------------------------- | ------ | - | ------ | - | ------ | ------ |  | - | ------- | - |  | ---- | -
|                             |  | Three Months Ended September 30, |        |   | Change |  
|                             |  | 2006                             |        |   | 2007   |   |        | Amount |  |   | Percent |  
|                             |  | (dollars in thousands)           |       
|Other Income (Expense):      |  |                                  |        |   |        |   |        |        |  |   |         |   |  |      |  
|Interest and dividend income |  | $                                | 159    |   |        | $ | 199    |        |  | $ | 40      |   |  | 25.2 | %
|Interest expense             |  |                                  | (7,969 | ) |        |   | (7,987 | )      |  |   | (18     | ) |  | 0.2  | %
|Other, net                   |  |                                  | (204   | ) |        |   | (210   | )      |  |   | (6      | ) |  | 2.9  | %
|                             |  |                                  |        |   |        |   |        |        |  |   |         |   |  |      |  
|Total other expense          |  | $                                | (8,014 | ) |        | $ | (7,998 | )      |  | $ | 16      |   |  | -0.2 | %
|                             |  |                                  |        |   |        |   |        |        |  |   |         |   |  |      |  

Interest and Dividend Income. Interest and dividend income increased $40,000, or 25.2%,
primarily due to higher dividend income.

Interest Expense. Interest expense increased $18,000, or 0.2%, for the three months ended
September 30, 2007 as compared to the same period in 2006. The increase was due to higher interest rates on the Term Loans C and D partially offset by a lower average balance on the revolving credit facility.

Other, Net. Other, net was a net expense of $210,000 for the three months ended September 30, 2007 as compared to $204,000 in the same period
in 2006.



19



---

##### Table of Contents

Income Tax Expense

Income tax expense decreased $1.1 million to $4.5 million for the three months ended September 30, 2007 as compared to $5.6 million for the same period in 2006 due to lower income before taxes.

During the three months ended September 30, 2006 and 2007, cash income taxes paid were $482,000, and $52,000, respectively, and relate to payments
of alternative minimum tax (AMT).

Nine Months Ended September 30, 2007 and 2006

Revenues and Sales

The table below sets forth the components of our revenues and sales for the nine
months ended September 30, 2007 compared to the same period in 2006:



|                         |  |                                 |         |        |   |         |  |   |         |   |  |      |  
|------------------------ |  | ------------------------------- | ------- | ------ | - | ------- |  | - | ------- | - |  | ---- | -
|                         |  | Nine Months Ended September 30, |         | Change |  
|                         |  | 2006                            |         | 2007   |   | Amount  |  |   | Percent |  
|                         |  | (dollars in thousands)          |        
|Revenues and Sales       |  |                                 |         |        |   |         |  |   |         |   |  |      |  
|Local services           |  | $                               | 57,627  |        | $ | 55,964  |  | $ | (1,663  | ) |  | -2.9 | %
|Network access services  |  |                                 | 71,951  |        |   | 77,502  |  |   | 5,551   |   |  | 7.7  | %
|Toll services            |  |                                 | 16,421  |        |   | 15,860  |  |   | (561    | ) |  | -3.4 | %
|Other services and sales |  |                                 | 28,243  |        |   | 40,685  |  |   | 12,442  |   |  | 44.1 | %
|                         |  |                                 |         |        |   |         |  |   |         |   |  |      |  
|Total revenues and sales |  | $                               | 174,242 |        | $ | 190,011 |  | $ | 15,769  |   |  | 9.1  | %
|                         |  |                                 |         |        |   |         |  |   |         |   |  |      |  

Local Services. Local services revenues decreased $1.7 million, or 2.9%, for the nine
months ended September 30, 2007 as compared to 2006. The decrease was primarily due to access line erosion. From September 30, 2006 to September 30, 2007, total access lines decreased by 9,900 including the loss of 12,500 incumbent
local exchange carrier lines, and an increase in lines served by our competitive local exchange carriers of 2,600. The decrease in revenue resulting from the access line erosion was partially offset by local rate increases combined with higher
revenue from enhanced calling features due to greater bundled product offering sales.

Network Access Services. Our network access
services revenues increased $5.6 million, or 7.7%, for the nine months ended September 30, 2007 as compared to the same period in 2006. The increase was primarily due to $5.8 million of revenue from certain non-recurring network access billing
matters with connecting carriers.

Toll Services. Our toll services revenues decreased by $561,000, or 3.4%, for the nine months
ended September 30, 2007 as compared to the same period in 2006. The decrease in revenue was due to fewer long distance customers, which decreased by approximately 500, or 0.3% combined with a decrease in the average minutes of use per
customer.

Other Services and Sales. Other services and sales revenues increased by $12.4 million, or 44.1%, for the nine months
ended September 30, 2007 as compared to the same period in 2006. A significant portion of the revenue increase was due to growth in our CPE and data business, primarily as a result of our acquisition of Baker Communications in August 2006.
Additionally, DSL Internet access service revenues increased $4.6 million, or 38.7%, due primarily to customer growth. This increase was partially offset by decreases in dial-up Internet revenue of $1.5 million. We believe the decline in dial-up
Internet access service customers was the result of customer migration to broadband products such as our DSL service. Also contributing to the increase was $2.6 million of revenue from the lease of space in our new corporate headquarters facilities
to another entity during 2007.



20



---

##### Table of Contents

Operating Costs and Expenses

The table below sets forth the components of our operating costs and expenses for the nine months ended September 30, 2007 compared to the same period in 2006:



|                                                                       |  |                                 |         |        |   |         |  |         |        |  |      |  
|---------------------------------------------------------------------- |  | ------------------------------- | ------- | ------ | - | ------- |  | ------- | ------ |  | ---- | -
|                                                                       |  | Nine Months Ended September 30, |         | Change |  
|                                                                       |  | 2006                            |         | 2007   |   | Amount  |  | Percent |       
|                                                                       |  | (dollars in thousands)          |        
|Operating Costs and Expenses:                                          |  |                                 |         |        |   |         |  |         |        |  |      |  
|Cost of services and sales (exclusive of items shown separately below) |  | $                               | 49,233  |        | $ | 57,797  |  | $       | 8,564  |  | 17.4 | %
|Selling, general and administrative                                    |  |                                 | 27,470  |        |   | 32,129  |  |         | 4,659  |  | 17.0 | %
|Depreciation and amortization                                          |  |                                 | 35,263  |        |   | 36,518  |  |         | 1,255  |  | 3.6  | %
|                                                                       |  |                                 |         |        |   |         |  |         |        |  |      |  
|Total operating costs and expenses                                     |  | $                               | 111,966 |        | $ | 126,444 |  | $       | 14,478 |  | 12.9 | %
|                                                                       |  |                                 |         |        |   |         |  |         |        |  |      |  

Cost of Services and Sales. Cost of services and sales increased $8.6 million, or 17.4%, for
the nine months ended September 30, 2007 as compared to the same period in 2006. The increase was principally due to growth of our CPE and data revenue, primarily as a result of our acquisition of Baker Communications in August 2006.
Additionally, the operating costs for the newly acquired corporate headquarters facilities contributed to the increase in cost of services and sales.

Selling, General and Administrative. Selling, general and administrative costs increased $4.7 million, or 17.0%, for the nine months ended September 30, 2007 as compared to the same period in 2006. The
nine months ended September 30, 2006 reflect the benefit of a $4.2 million gain from the sale of exchanges. The remaining increase was primarily due to our acquisition of Baker Communications in August 2006.

Depreciation and Amortization. Depreciation and amortization increased $1.3 million, or 3.6%, for the nine months ended September 30, 2007 as
compared to the same period in 2006. The increase was primarily due to depreciation and amortization related to Montezuma Mutual Telephone Company and Baker Communications which were acquired in July 2006 and August 2006, respectively.

Other Income (Expense)

The table below sets forth
the components of other income (expense) for the nine months ended September 30, 2007 as compared to the same period in 2006:



|                             |  |                                |         |   |        |   |         |        |  |   |         |   |  |      |  
|---------------------------- |  | ------------------------------ | ------- | - | ------ | - | ------- | ------ |  | - | ------- | - |  | ---- | -
|                             |  | Nine Months EndedSeptember 30, |         |   | Change |  
|                             |  | 2006                           |         |   | 2007   |   |         | Amount |  |   | Percent |  
|                             |  | (dollars in thousands)         |        
|Other Income (Expense):      |  |                                |         |   |        |   |         |        |  |   |         |   |  |      |  
|Interest and dividend income |  | $                              | 527     |   |        | $ | 752     |        |  | $ | 225     |   |  | 42.7 | %
|Interest expense             |  |                                | (23,577 | ) |        |   | (23,964 | )      |  |   | (387    | ) |  | 1.6  | %
|Other, net                   |  |                                | (306    | ) |        |   | (483    | )      |  |   | (177    | ) |  | 57.8 | %
|                             |  |                                |         |   |        |   |         |        |  |   |         |   |  |      |  
|Total other expense          |  | $                              | (23,356 | ) |        | $ | (23,695 | )      |  | $ | (339    | ) |  | 1.5  | %
|                             |  |                                |         |   |        |   |         |        |  |   |         |   |  |      |  

Interest and Dividend Income. Interest and dividend income increased $225,000, or 42.7%,
primarily due to higher dividend income.

Interest Expense. Interest expense increased $387,000, or 1.6%, for the nine months ended
September 30, 2007 as compared to the same period in 2006. The increase was due to a higher average balance on the revolving credit facility and higher interest rates on our variable rate debt.

Other, Net. Other, net was a net expense of $483,000 for the nine months ended September 30, 2007 as compared to $306,000 in the same period
in 2006.



21



---

##### Table of Contents

Income Tax Expense

Income tax expense increased $8.2 million to $16.5 million for the nine months ended September 30, 2007 as compared to the same period in 2006. Income tax expense for the nine months ended September 30,
2006, before adjustments to the deferred tax valuation allowance, was $15.6 million. As a result of reversing the remaining valuation allowance during 2006, income tax expense during the nine month period was reduced by $7.2 million, resulting in a
net expense for the period of $8.4 million.

A valuation allowance had been recorded at December 31, 2005 for our deferred tax assets
that expire over time to the extent that they exceeded the net deferred tax assets and liabilities resulting from reversing temporary differences. We determined that, based upon the evidence available as of June 30, 2006 and as of the end of
each period thereafter, 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 determined that
no valuation allowance was required for our deferred tax assets, and we reversed the remaining allowance during 2006. During the nine months ended September 30, 2006 and 2007, cash income taxes paid were $654,000, and $494,000, respectively,
and relate to payments of alternative minimum tax (AMT).

Liquidity and Capital Resources

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

The table below reflects the dividends declared or paid by the Company during 2006 and 2007:



|                   |  |                    |       |             |                    |              |                 
|------------------ |  | ------------------ | ----- | ----------- | ------------------ | ------------ | ----------------
|Date Declared      |  | Dividend Per Share |       | Record Date |                    | Payment Date
|December 16, 2005  |  | $                  | 0.405 |             | December 30, 2005  |              | January 17, 2006
|March 17, 2006     |  | $                  | 0.405 |             | March 31, 2006     |              | April 17, 2006  
|June 15, 2006      |  | $                  | 0.405 |             | June 30, 2006      |              | July 17, 2006   
|September 15, 2006 |  | $                  | 0.405 |             | September 29, 2006 |              | October 16, 2006
|December 15, 2006  |  | $                  | 0.405 |             | December 29, 2006  |              | January 16, 2007
|March 15, 2007     |  | $                  | 0.405 |             | March 30, 2007     |              | April 16, 2007  
|June 15, 2007      |  | $                  | 0.405 |             | June 29, 2007      |              | July 16, 2007   
|September 14, 2007 |  | $                  | 0.405 |             | September 28, 2007 |              | October 15, 2007

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

We intend to fund our operations, interest expense, capital expenditures, working capital requirements and dividend payments on our common stock with
cash from operations.

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

Our ability to service our indebtedness will depend on our ability to generate cash in the future. We are not required to make any scheduled principal
payments under our credit facilities, which will mature in 2011. However, we may be required to make annual mandatory prepayments under our 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.

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



22



---

##### Table of Contents

We have historically funded our operations and capital expenditure requirements primarily with cash from
operations and our revolving line of credit. The following table summarizes our short-term liquidity and Adjusted Total Debt, as defined in our credit agreement, as of December 31, 2006 and September 30, 2007:



|                                       |  |                   |         |   |                    |   |         |  
|-------------------------------------- |  | ----------------- | ------- | - | ------------------ | - | ------- | -
|                                       |  | As of             |        
|                                       |  | December 31, 2006 |         |   | September 30, 2007 |  
|                                       |  | (in thousands)    |        
|Short-Term Liquidity:                  |  |                   |         |   |                    |   |         |  
|Current assets                         |  | $                 | 40,115  |   |                    | $ | 33,022  |  
|Current liabilities                    |  |                   | (81,060 | ) |                    |   | (55,741 | )
|                                       |  |                   |         |   |                    |   |         |  
|Net working capital deficit            |  | $                 | (40,945 | ) |                    | $ | (22,719 | )
|                                       |  |                   |         |   |                    |   |         |  
|Cash and cash equivalents              |  | $                 | 13,613  |   |                    | $ | 4,475   |  
|Available on revolving credit facility |  | $                 | 69,000  |   |                    | $ | 92,000  |  
|Adjusted Total Debt:                   |  |                   |         |   |                    |   |         |  
|Long-term debt                         |  | $                 | 477,778 |   |                    | $ | 477,778 |  
|Revolving credit facility              |  |                   | 31,000  |   |                    |   | 8,000   |  
|                                       |  |                   |         |   |                    |   |         |  
|Total debt                             |  |                   | 508,778 |   |                    |   | 485,778 |  
|Minus:                                 |  |                   |         |   |                    |   |         |  
|RTFC Capital Certificates              |  |                   | (7,778  | ) |                    |   | (7,778  | )
|Cash and cash equivalents              |  |                   | (13,613 | ) |                    |   | (4,475  | )
|                                       |  |                   |         |   |                    |   |         |  
|Adjusted Total Debt                    |  | $                 | 487,387 |   |                    | $ | 473,525 |  
|                                       |  |                   |         |   |                    |   |         |  

The change in net working capital deficit from December 31, 2006 to September 30, 2007
is primarily due to the cash flow from operations. The reductions in current assets and current liabilities are primarily due to the use of cash and cash equivalents to reduce the balance outstanding on the revolving credit facility.

The following table summarizes our Adjusted EBITDA, as defined in our credit agreement, for the three and nine month periods ended September 30,
2006 and 2007:



|                                                         |  |                                  |        |   |                                 |   |        |      |  |   |        |   |  |   |         |  
|-------------------------------------------------------- |  | -------------------------------- | ------ | - | ------------------------------- | - | ------ | ---- |  | - | ------ | - |  | - | ------- | -
|                                                         |  | Three Months Ended September 30, |        |   | Nine Months Ended September 30, |  
|                                                         |  | 2006                             |        |   | 2007                            |   |        | 2006 |  |   | 2007   |  
|Adjusted EBITDA:                                         |  |                                  |        |   |                                 |   |        |      |  |   |        |   |  |   |         |  
|Net income                                               |  | $                                | 8,032  |   |                                 | $ | 6,291  |      |  | $ | 30,546 |   |  | $ | 23,338  |  
|Income tax expense                                       |  |                                  | 5,617  |   |                                 |   | 4,483  |      |  |   | 8,374  |   |  |   | 16,534  |  
|Interest expense                                         |  |                                  | 7,969  |   |                                 |   | 7,987  |      |  |   | 23,577 |   |  |   | 23,964  |  
|Depreciation and amortization                            |  |                                  | 11,695 |   |                                 |   | 12,260 |      |  |   | 35,263 |   |  |   | 36,518  |  
|Unrealized losses on financial derivatives               |  |                                  | 204    |   |                                 |   | 210    |      |  |   | 306    |   |  |   | 483     |  
|Non-cash stock-based compensation expense                |  |                                  | 597    |   |                                 |   | 678    |      |  |   | 1,762  |   |  |   | 1,951   |  
|Extraordinary or unusual (gains) losses                  |  |                                  |       |   |                                 |   |       |      |  |   |       |   |  |   |        |  
|Non-cash portion of RTFC Capital Allocation              |  |                                  | (33    | ) |                                 |   | (42    | )    |  |   | (99    | ) |  |   | (241    | )
|Other non-cash losses (gains)                            |  |                                  |       |   |                                 |   |       |      |  |   |       |   |  |   |        |  
|Loss (gain) on disposal of assets not in ordinary course |  |                                  | (2,888 | ) |                                 |   |       |      |  |   | (4,180 | ) |  |   |        |  
|Transaction costs                                        |  |                                  |       |   |                                 |   |       |      |  |   |       |   |  |   |        |  
|                                                         |  |                                  |        |   |                                 |   |        |      |  |   |        |   |  |   |         |  
|Adjusted EBITDA                                          |  | $                                | 31,193 |   |                                 | $ | 31,867 |      |  | $ | 95,549 |   |  | $ | 102,547 |  
|                                                         |  |                                  |        |   |                                 |   |        |      |  |   |        |   |  |   |         |  

The following table summarizes our sources and uses of cash for the nine months ended
September 30, 2006 and 2007:



|                            |  |                                         |         |   |      |   |         |  
|--------------------------- |  | --------------------------------------- | ------- | - | ---- | - | ------- | -
|                            |  | For the Nine months ended September 30, |        
|Description                 |  | 2006                                    |         |   | 2007 |  
|                            |  | (in thousands)                          |        
|Net Cash Provided (Used) By |  |                                         |         |   |      |   |         |  
|Operating activities        |  | $                                       | 69,663  |   |      | $ | 72,820  |  
|Investing activities        |  | $                                       | (28,354 | ) |      | $ | (19,853 | )
|Financing activities        |  | $                                       | (62,526 | ) |      | $ | (62,105 | )



23



---

##### Table of Contents

Cash Provided by Operating Activities

For the nine months ended September 30, 2006, and 2007, cash provided by operating activities was $69.7 million and $72.8 million, respectively. The
increase in cash provided by operating activities is primarily due to the funds received related to the resolution of certain network access disputes.

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, 2006 and 2007:



|                                            |  |                                         |         |   |      |   |       
|------------------------------------------- |  | --------------------------------------- | ------- | - | ---- | - | ------
|                                            |  | For the Nine months ended September 30,
|                                            |  | 2006                                    |         |   | 2007
|                                            |  | (in thousands)                         
|Network and support assets                  |  | $                                       | 18,264  |   |      | $ | 15,808
|Other                                       |  |                                         | 2,135   |   |      |   | 4,045 
|                                            |  |                                         |         |   |      |   |       
|Total capital expenditures                  |  |                                         | 20,399  |   |      |   | 19,853
|Business acquisitions, net of cash acquired |  |                                         | 18,126  |   |      |   |      
|Purchase of wireless licenses               |  |                                         | 3,102   |   |      |   |      
|Proceeds from sale of exchanges             |  |                                         | (13,273 | ) |      |   |      
|                                            |  |                                         |         |   |      |   |       
|Total                                       |  | $                                       | 28,354  |   |      | $ | 19,853
|                                            |  |                                         |         |   |      |   |       

Capital expenditures in 2007 included approximately $3.4 million incurred to acquire, refurbish
and provide network facilities for our new headquarters facility.

In April 2004, our incumbent local exchange carrier entered into a
settlement agreement with the Iowa Utilities Board and other parties pursuant to which we are obligated to invest substantially all additional revenues generated by the allowed increase in our rates, except for revenues resulting from inflation
adjustments, on capital improvements identified in our network improvement plan. This investment is in addition to our baseline level of network capital expenditures, which was assumed to be $16.0 million per year during the initial period of the
plan. The initial period continued until we had spent $38.9 million of cumulative capital expenditures in excess of our assumed baseline investment level, a requirement that was satisfied in 2006. Beginning in 2007, both the baseline and the
incremental investment levels will increase or decrease consistent with access line changes and further deregulation. We expect that a minimum annual capital investment of approximately $19 million will satisfy the ongoing commitments in 2007.

We expect that total capital expenditures will be between approximately $25.0 million and $27.0 million in fiscal 2007. We expect to fund
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.

Cash Used in Financing Activities

For the nine months ended September 30, 2006 and 2007, net cash used in financing activities was $62.5 million and $62.1 million.

Regulatory Items

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

In response to the Independent Panel Reviewing the Impact of Hurricane Katrina on Communications Networks, the FCC



24



---

##### Table of Contents

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

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

Long-Term Debt and Revolving Credit Facilities

Credit Facilities

As of September 30, 2007, we
had outstanding $477.8 million of senior debt under our term facilities, and had $8.0 million drawn under the $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, 2007, $8.0 million was outstanding on the revolving credit facility and $92.0 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, 2007, we had $8.0 million outstanding under LIBOR elections at an average all-in rate of
7.13%.

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, 2007, $350.0 million was outstanding under Term Loan B based
upon a LIBOR election effective through December 28, 2007, at an all-in rate of 6.95%. We have entered into interest rate swap agreements to fix the rate on $350.0 million of Term Loan B as more fully described below. As of September 30,
2007, the interest rate on the remaining $50.0 million was based upon a LIBOR election effective through March 12, 2008 at an all-in rate of 7.23%.

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

Term Loan D is a $7.8 million
senior secured term facility maturing in November 2011, bearing interest per annum at either (a) a fixed rate or (b) a Rural Telephone Finance Cooperative variable rate plus 0.85%. The interest rate on Term Loan D was fixed at 6.65% until
November 2007. Effective August 1, 2007 we elected a new all-in fixed interest rate of 6.95% through June 2011 on Term Loan D. Upon the expiration of the fixed interest rate period, the term loan will convert to the Rural Telephone Finance
Cooperative variable rate plus 0.85%.

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



25



---

##### Table of Contents

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

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

The credit facilities require us, subject to certain exceptions, to prepay outstanding loans under the credit facilities to the extent of net cash
proceeds received from the following: issuance of certain indebtedness; proceeds of certain asset sales; and casualty insurance proceeds. The credit facilities further require us, subject to certain exceptions, to make prepayments under the credit
facilities equal to 50% of any net increase in the following: distributable cash during a dividend suspension period, as defined; and cumulative distributable cash, as defined, during the fiscal year less the cumulative reductions of revolving loans
through such period, with reductions to the percentage to be determined based on improvements in certain credit ratios. As of September 30, 2007, no prepayment amounts were due under these provisions.

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

In addition, the financial covenants under the credit facilities specify, among other things, certain fixed
charge coverage ratios and a maximum total leverage ratio, as defined, all of which with we were in compliance as of September 30, 2007.

Interest
Rate Swaps

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

Obligations and Commitments

Our ongoing capital commitments include capital expenditures and debt service requirements. For the nine months ended September 30, 2007, capital
expenditures were $19.9 million; see Liquidity and Capital ResourcesCash Used in Investing Activities.

The
following table sets forth our contractual obligations as of September 30, 2007, together with cash payments due in each period indicated:



|                              |  |                        |         |                  |   |       |  |             |        |                |   |        |  |   |        
|----------------------------- |  | ---------------------- | ------- | ---------------- | - | ----- |  | ----------- | ------ | -------------- | - | ------ |  | - | -------
|                              |  | Payments Due by Period
|Obligation                    |  | Total                  |         | Oct.  Dec. 2007 |   | 2008  |  | 2009  2010 |        | 2011 and after
|                              |  | (dollars in thousands)
|Current Debt:                 |  |                        |         |                  |   |       |  |             |        |                |   |        |  |   |        
|Revolving credit facility(1)  |  | $                      | 8,000   |                  | $ |      |  | $           |       |                | $ |       |  | $ | 8,000  
|Long-Term Debt:               |  |                        |         |                  |   |       |  |             |        |                |   |        |  |   |        
|Senior debt payments          |  |                        | 477,778 |                  |   |      |  |             |       |                |   |       |  |   | 477,778
|Interest Payments(2)          |  |                        | 105,505 |                  |   | 6,627 |  |             | 25,933 |                |   | 51,866 |  |   | 21,079 
|Operating Lease Payments      |  |                        | 544     |                  |   | 77    |  |             | 230    |                |   | 190    |  |   | 47     
|                              |  |                        |         |                  |   |       |  |             |        |                |   |        |  |   |        
|Total Contractual Obligations |  | $                      | 591,827 |                  | $ | 6,704 |  | $           | 26,163 |                | $ | 52,056 |  | $ | 506,904
|                              |  |                        |         |                  |   |       |  |             |        |                |   |        |  |   |        

---

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



26



---

##### Table of Contents

As of September 30, 2007, no letters of credit were outstanding.

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

Critical Accounting Policies

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

Impairment of Long-Lived Assets (Including Property, Plant and Equipment), Goodwill and Identifiable Intangible Assets. We reduce the carrying
amounts of long-lived assets to their fair values when the carrying amounts are not recoverable from estimated future cash flows on an undiscounted basis. The impairment test compares the fair value of an intangible asset to its carrying value. We
reduce the carrying amounts of goodwill and identifiable intangible assets to their fair values when the fair value of such assets is determined to be less than their carrying amounts. Fair value is typically estimated using a discounted cash flow
analysis, which requires us to estimate the future cash flows anticipated to be generated by the particular asset being tested for impairment, and to select a discount rate to measure the present value of the anticipated cash flows. When determining
future cash flow estimates, we consider historical operating results, as adjusted to reflect current and anticipated operating conditions. Estimating future cash flows requires significant judgment by us in such areas as future economic conditions,
industry specific conditions and necessary capital expenditures. The use of different assumptions or estimates for future cash flows could produce different impairment amounts (or none at all) for long-lived assets, goodwill and identifiable
intangible assets.

We performed an annual impairment review of goodwill and indefinite lived intangible assets as required by Statement of
Financial Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible Assets as of August 31, 2007.

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.



27



---

##### Table of Contents

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

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

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

As of
September 30, 2007, our unused tax net operating loss carry forward was $158.1 million, and will expire between 2021 and 2024. The amount of net operating loss allowable to offset income after a change in ownership is limited under Internal
Revenue Code (IRC) Section 382. However, IRC Section 338 allows for an increase in this allowance by an additional $762,000, $37.4 million, $26.3 million, $18.7 million, and $17.2 million, for tax periods ending in 2005 through
2009, respectively. The IRC Section 382 limitation of approximately $19.4 million will continue to apply to any remaining unreleased net operating losses after 2009. Additionally, the Company expects continued goodwill amortization at the rate
of approximately $40.0 million per year through June 2015.

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



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



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



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

The following table presents the key assumptions used to measure pension and OPEB expense for 2007 and the estimated impact on the continuing pension
plan and OPEB expense relative to changes in those assumptions:



|                                                 |  |                                                                  |      |   |      |   |      |  
|------------------------------------------------ |  | ---------------------------------------------------------------- | ---- | - | ---- | - | ---- | -
|                                                 |  | Pension                                                          |      |   | OPEB |  
|Assumptions                                      |  |                                                                  |      |   |      |   |      |  
|Discount rate                                    |  |                                                                  | 5.75 | % |      |   | 5.50 | %
|Expected return on plan assets                   |  |                                                                  | 7.00 | % |      |   | NA   |  
|Healthcare costs trend rate                      |  |                                                                  |      |   |      |   |      |  
|Current                                          |  |                                                                  | NA   |   |      |   | 9.50 | %
|Level in 2012                                    |  |                                                                  | NA   |   |      |   | 7.00 | %
|                                                 | 
|                                                 |  | Increase in expense for the Nine months ended September 30, 2007 |     
|                                                 |  | Pension                                                          |      |   | OPEB |  
|                                                 |  | (in thousands)                                                   |     
|Sensitivities                                    |  |                                                                  |      |   |      |   |      |  
|0.25% decrease in discount rate                  |  | $                                                                | 14   |   |      | $ | 1    |  
|0.25% decrease in expected return on plan assets |  |                                                                  | 6    |   |      |   | NA   |  
|1% increase in healthcare costs trend rate       |  |                                                                  | NA   |   |      |   | 15   |  



28



---

##### Table of Contents

During the second quarter of 2007, we amended our postretirement welfare plan. The amendment eliminated
medical benefits for certain retirees and reduced benefits for others. Life insurance benefits were eliminated for most retirees covered under the plan. At the time of the plan amendment, approximately 58% of employees covered under the plan chose
to opt out of the postretirement welfare plan. The significant change in the number of plan participants required a re-measurement of both the plan assets and benefit obligations. The re-measurement resulted in a one time curtailment gain of
$247,000 and reduction in the liability recorded for prior service costs of $5.6 million which will be amortized over 5.31 years as a component of the annual cost.

Off-Balance Sheet Risk and Concentration of Credit Risk

The Company has no known off-balance sheet exposure or risk.

Certain financial instruments potentially subject us to concentrations of credit risk. These financial instruments consist primarily of
trade receivables, interest rate swap agreements, cash, and cash equivalents.

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

New Accounting Pronouncements

In July 2006, the
Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxesan interpretation of FASB Statement No. 109 (FIN 48). FIN 48 clarifies
the accounting for uncertainty in income taxes recognized in accordance with Statement of Financial Accounting Standards (SFAS) No. 109, Accounting for Income Taxes (SFAS 109). Guidance is provided on
derecognition, classification, interest and penalties accounting in interim periods, disclosure and transition. FIN 48 requires that we recognize in our financial statements the impact of a tax position, if that position is more likely than not of
being sustained on audit, based on the technical merits of the position. The provisions of FIN 48 are effective as of the beginning of our 2007 fiscal year, with the cumulative effect of the change in accounting principle recorded as an adjustment
to opening retained earnings. Adoption of FIN 48 on January 1, 2007, had no effect on our financial position, results of operations or cash flows.

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (SFAS 157). SFAS 157 defines fair value, establishes a framework for measuring fair value and expands disclosure of fair value
measurements. SFAS 157 applies under other accounting pronouncements that require or permit fair value measurements and accordingly, does not require any new fair value measurements. SFAS 157 is effective for financial statements issued for fiscal
years beginning after November 15, 2007. The Company is currently evaluating the impact of this pronouncement on its consolidated financial statements.



29



---

##### Table of Contents

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and
Financial Liabilities (SFAS 159). SFAS 159 permits entities to choose, at specified election dates, to measure eligible items at fair value and to report in earnings unrealized gains and losses on those items for which the fair value option has been
elected. SFAS 159 also requires entities to display the fair value of those assets and liabilities on the face of the balance sheet. SFAS 159 establishes presentation and disclosure requirements designed to facilitate comparisons between entities
that choose different measurement attributes for similar types of assets and liabilities. SFAS 159 is effective as of the beginning of an entitys first fiscal year beginning after November 15, 2007. Early adoption is permitted as of the
beginning of the previous fiscal year provided that the entity makes that choice in the first 120 days of that fiscal year and also elects to apply the provisions of SFAS 159. The Company has not elected to early adopt the standard and is currently
evaluating the impact of this pronouncement on its consolidated financial statements.

In May 2007, the FASB issued FASB Staff Position
(FSP) No. FIN 48-1, Definition of Settlement in FASB Interpretation No. 48 which provides guidance on how an enterprise should determine whether a tax position is effectively settled for the purpose of recognizing previously
unrecognized tax benefits. The amendment had no impact on our financial position, results of operations or cash flows.

In June 2007, the
EITF reached consensus on Issue No. 06-11, Accounting for Income Tax Benefits of Dividends on Share-Based Payment Awards. EITF Issue No. 06-11 requires that the tax benefit related to dividend equivalents paid on restricted
stock units that are expected to vest be recorded as an increase to additional paid-in capital. The Company currently accounts for this tax benefit as a reduction to its income tax provision. EITF Issue No. 06-11 is to be applied prospectively
for tax benefits on dividends declared in fiscal years beginning after December 15, 2007. The Company does not expect the adoption of EITF Issue No. 06-11 to have a material impact on its financial position, results of operations or cash
flows.

Inflation

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



30



---

##### Table of Contents

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

Under the terms of our credit facilities as amended, our long-term secured debt facilities will mature in November 2011. Our $400.0 million of
indebtedness under Term Loan B, maturing in 2011, bears an annual interest at either (a) LIBOR plus 1.75% or (b) a base rate plus 0.75%. On August 26, 2005, we entered into interest rate swap agreements with nationally recognized
counterparties for the purpose of fixing the interest on a portion of these borrowings. Pursuant to the swap agreements, we will pay a fixed rate of interest of 5.865% on a notional $350.0 million of Term Loan B from August 31, 2005 through
November 23, 2011.

We pay interest at a fixed rate on all borrowings under Term Loans C and D through June 2011. Thereafter, we
expect our interest rates under Term Loans C and D to convert to the Rural Telephone Finance Cooperative variable rate then in effect, as provided in the credit facilities.

We are exposed to interest rate risk, resulting primarily from fluctuations in LIBOR, with respect to $50.0 million of borrowings under Term Loan B
through November 2011. Similarly, changes in LIBOR will be the primary source of interest rate risk we face with respect to the $8.0 million of borrowings drawn under the revolving credit facility at September 30, 2007. With respect to our
$77.8 million of borrowings under Terms Loan C and D, we are exposed to interest rate risk, resulting primarily from fluctuations in the Rural Telephone Finance Cooperatives variable rate, from July 2011 through maturity in November 2011. A
one percent change in the underlying interest rates for the variable rate debt that was outstanding on September 30, 2007 would have an impact of approximately $580,000 per year on our interest expense while our fixed rates and swaps are in
place.

ITEM 4. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we evaluated the
effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) as of September 30, 2007 (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.



31



---

##### Table of Contents

PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

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

ITEM 1A. RISK FACTORS

In addition to the other information set forth in this report, you should carefully
consider the factors discussed in Part I, Item 1A. Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2006, 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, 2007, 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 5 to Consolidated Financial Statements above):

ISSUER PURCHASES OF EQUITY SECURITIES

|                                  |  |                                                 |  |                                            |       |                                                                                                 |   |                                                                                                                             |  
|--------------------------------- |  | ----------------------------------------------- |  | ------------------------------------------ | ----- | ----------------------------------------------------------------------------------------------- | - | --------------------------------------------------------------------------------------------------------------------------- | -
|Period                            |  | (a) Total Number of Shares (or Units) Purchased |  | (b) Average Price Paid per Share
(or Unit) |       | (c) Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs |   | (d) Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs
|July 1 to July 31, 2007           |  |                                                |  | $                                          |      |                                                                                                 |  |                                                                                                                             | 
|August 1 to August 31, 2007       |  | 11,723                                          |  | $                                          | 20.91 |                                                                                                 |  |                                                                                                                             | 
|September 1 to September 30, 2007 |  |                                                |  | $                                          |      |                                                                                                 |  |                                                                                                                             | 
|Total                             |  | 11,723                                          |  | $                                          | 20.91 |                                                                                                 |  |                                                                                                                             | 

ITEM 6. EXHIBITS

See Exhibit Index following the signature page of this Report.



32



---

##### Table of Contents

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.



|                 |  |  |  |                                                             
|---------------- |  |  |  | ------------------------------------------------------------
|November 7, 2007 |  |  |  | /s/ Alan L. Wells                                           
|                 |  |  |  | Alan L. Wells                                               
|                 |  |  |  | President, Chief Executive Officer and Chairman of the Board
|                 |  | 
|November 7, 2007 |  |  |  | /s/ Craig A. Knock                                          
|                 |  |  |  | Craig A. Knock                                              
|                 |  |  |  | Vice President,                                             
|                 |  |  |  | Chief Financial Officer and Treasurer                       
|                 |  |  |  | (Principal Accounting Officer)                              



33



---

##### Table of Contents

EXHIBIT INDEX

IOWA TELECOMMUNICATIONS SERVICES, INC.

FORM 10-Q FOR QUARTER ENDED SEPTEMBER 30, 2007



|              |   |  |                                                                                                                                                                                                                               
|------------- | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |   |  | Description                                                                                                                                                                                                                   
|              |  
|3.1           |   |  | Amended and Restated Articles of Incorporation of Iowa Telecommunications Services, Inc. - incorporated by reference to Exhibit 3.1 to Iowa Telecoms Registration Statement on Form
S-1/Amendment No. 6 (File No. 333-114349)
|              |  
|3.2           |   |  | Amended and Restated Articles of Incorporation 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.
|- | ---------------



34