##### Table of Contents





UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549







FORM 10-K







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



For the fiscal year ended December 31, 2009



| ̈ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE 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







Securities registered pursuant to Section 12(b) of the
Act:



|                                        |  |                                          
|--------------------------------------- |  | -----------------------------------------
|Title of each class                     |  | Name of each exchange on which registered
|Common Stock, Par Value $0.01 per share |  | New York Stock Exchange                  







Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities
Act.    Yes   ̈    No  x



Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or
Section 15(d) of the Exchange Act.    Yes   ̈    No  x



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 such shorter period that the registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.    Yes  x    No   ̈



Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for
such shorter period that the registrant was required to submit and post such files).    Yes   ̈    No   ̈



Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrants knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.   ̈



Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):



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



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



The aggregate market value of the shares of all classes of voting stock of the registrant held by
non-affiliates of the registrant as of June 30, 2009, was approximately $396,345,048 computed upon the basis of the closing sales price of those shares on the New York Stock Exchange on that date. For purposes of this computation, shares held
by directors (and shares held by any entities in which they serve as officers) and officers of the registrant have been excluded.



There were 32,940,111 shares of Common Stock, $0.01 par value, outstanding as of February 18, 2010.



DOCUMENTS INCORPORATED BY REFERENCE



The definitive proxy statement relating to the
Registrants 2010 Annual Meeting of Shareholders, which will be filed pursuant to Regulation 14A, is incorporated by reference in Part III to the extent described therein.







---

##### Table of Contents

TABLE OF CONTENTS



|                  |  |                                                                                                              |  |    
|----------------- |  | ------------------------------------------------------------------------------------------------------------ |  | ---
|                  |  | PAGE                                                                                                        
|PART I.           |  | 3                                                                                                           
|                  |  |                                                                                                             
|ITEM 1.           |  | Business                                                                                                     |  | 3  
|ITEM 1A.          |  | Risk Factors                                                                                                 |  | 27 
|ITEM 1B.          |  | Unresolved Staff Comments                                                                                    |  | 40 
|ITEM 2.           |  | Properties                                                                                                   |  | 40 
|ITEM 3.           |  | Legal Proceedings                                                                                            |  | 40 
|ITEM 4.           |  | Submission of Matters to a Vote of Security Holders                                                          |  | 42 
|                  | 
|PART II.          |  | 43                                                                                                          
|                  |  |                                                                                                             
|ITEM 5.           |  | Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |  | 43 
|ITEM 6.           |  | Selected Financial Data                                                                                      |  | 47 
|ITEM 7.           |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                        |  | 49 
|ITEM 7A.          |  | Quantitative and Qualitative Disclosures About Market Risk                                                   |  | 75 
|ITEM 8.           |  | Financial Statements and Supplementary Data                                                                  |  | 77 
|ITEM 9.           |  | Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure                         |  | 112
|ITEM 9A.          |  | Controls and Procedures                                                                                      |  | 112
|ITEM 9B.          |  | Other Information                                                                                            |  | 115
|                  | 
|PART III.         |  | 116                                                                                                         
|                  |  |                                                                                                             
|ITEM 10.          |  | Directors, Executive Officers and Corporate Governance                                                       |  | 116
|ITEM 11.          |  | Executive Compensation                                                                                       |  | 116
|ITEM 12.          |  | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters               |  | 116
|ITEM 13.          |  | Certain Relationships and Related Transactions, and Director Independence                                    |  | 116
|ITEM 14.          |  | Principal Accountant Fees and Services                                                                       |  | 116
|                  | 
|PART IV.          |  | 117                                                                                                         
|                  |  |                                                                                                             
|ITEM 15.          |  | Exhibits and Financial Statement Schedules                                                                   |  | 117
|                  | 
|SIGNATURES        |  | 118                                                                                                         
|                  | 
|INDEX TO EXHIBITS |  | 120                                                                                                         



---

##### Table of Contents

Forward-Looking Statements



The statements contained in this Report on Form 10-K that are
not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including, without limitation, statements regarding our
expectations, objectives, anticipations, plans, hopes, beliefs, intentions or strategies regarding the future.



Forward-looking statements in this report, including without limitation, those set forth under the captions Business,
Dividend Policy and Restrictions, Legal Proceedings and Managements Discussion and Analysis of Financial Condition and Results of Operations, and statements relating to our plans, strategies, objectives,
expectations, intentions and adequacy of resources, are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995.



The words believes, anticipates, expects, intends, plans, estimates,
projects, will, should, continues and similar expressions are intended to identify forward-looking statements. These forward-looking statements reflect our current views with respect to future events
and financial performance and are subject to risks and uncertainties, including those identified under Business, Dividend Policy and Restrictions, Legal Proceedings and Managements Discussion and
Analysis of Financial Condition and Results of Operations, as well as:



| |  |  | technological developments and changes in the telecommunications industry;
| | - |  | --------------------------------------------------------------------------



| |  |  | increased price and service competition;
| | - |  | ----------------------------------------



| |  |  | changes in federal and state legislation and the rules and regulations enacted pursuant to that legislation;
| | - |  | ------------------------------------------------------------------------------------------------------------



| |  |  | regulatory limitations on our ability to change our pricing for communications services;
| | - |  | ----------------------------------------------------------------------------------------



| |  |  | possible changes in the demand for our products and services; and
| | - |  | -----------------------------------------------------------------



| |  |  | the matters described under Item 1A, Risk Factors.
| | - |  | ----------------------------------------------------



In addition to these factors, actual future performance, outcomes and results may differ materially from those
indicated in our forward-looking statements because of other, more general factors, including (without limitation):



| |  |  | changes in general industry and market conditions, and growth rates;
| | - |  | --------------------------------------------------------------------



| |  |  | changes in interest rates or other general national, regional or local economic conditions;
| | - |  | -------------------------------------------------------------------------------------------



| |  |  | governmental and public policy changes;
| | - |  | ---------------------------------------



| |  |  | changes in accounting policies or practices adopted voluntarily or as required by GAAP; and
| | - |  | -------------------------------------------------------------------------------------------



| |  |  | continued availability of financing in the amounts and on the terms and conditions necessary to support our future business.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------



On November 23, 2009, we
entered into a definitive Agreement and Plan of Merger (the Merger Agreement) with Windstream Corporation, a Delaware corporation (Windstream), and Buffalo Merger Sub, Inc., a Delaware corporation and a wholly-owned
subsidiary of Windstream (Newco). The Merger Agreement provides that, upon the terms and subject to the conditions set forth in the Merger Agreement, we will merge with and into Newco, with Newco continuing as the surviving corporation
(the Merger). Unless otherwise stated, the forward-looking information contained in this report does not take into account or give effect to the impact of the proposed Merger. With respect to the forward-looking information contained in
this report relating to the Merger, the following factors, among others, could cause actual results to differ materially from those described in the forward-looking statements relating to the Merger: risks associated with uncertainty as to whether
the Merger will be completed, costs and potential litigation associated with the transaction, the failure to obtain approval of Iowa Telecoms shareholders, the failure of either party to meet the closing conditions set forth in the Merger
Agreement, and the extent and timing of regulatory approvals.



1



---

##### Table of Contents

General Information



We maintain a website at www.iowatelecom.com to provide information to the general public and our shareholders
about our products and services, along with general information about Iowa Telecommunications Services, Inc. (Iowa Telecom) and its management, financial results and press releases. Copies of our most recent Annual Report on Form 10-K,
our Quarterly Reports on Form 10-Q and our other reports filed with the Securities and Exchange Commission, (SEC), can be obtained, free of charge, as soon as reasonably practicable after such material is electronically filed with, or
furnished to, the SEC from our investor relations department by calling (641) 787-2089, through an e-mail request from our website at www.iowatelecom.com, through our website by clicking the direct link from our Investor Relations
page on our website or directly from the SECs website at www.sec.gov. Our website and the information contained therein or connected thereto are not intended to be incorporated into this Annual Report on Form 10-K.



Our Board of Directors has adopted a Code of Business Conduct
and Ethics that is applicable to all of our directors, officers and employees. Any material changes made to our Code of Business Conduct and Ethics or any waivers granted to any of our directors or executive officers will be publicly disclosed by
filing a current report on Form 8-K within four business days of such material change or waiver. There were no material changes to the code or waivers granted during 2009. Our Board of Directors also has adopted Corporate Governance Guidelines and
written charters for its Audit, Compensation, and Nominating and Governance committees that comply with the rules of the New York Stock Exchange. Copies of the Code of Business Conduct and Ethics, our Corporate Governance Guidelines, and the
charters of the Audit, Compensation, and Nominating and Governance committees are available on our website at www.iowatelecom.com. In addition, these documents are available upon request by contacting our investor relations department at
(641) 787-2089 or through an e-mail request from our website at www.iowatelecom.com.



This Annual Report on Form 10-K includes the certifications required of our chief executive officer and our chief financial officer by Section 302 of the Sarbanes-Oxley Act. In addition, the annual
certification of the chief executive officer regarding compliance by the company with the corporate governance listing standards of the New York Stock Exchange was submitted without qualification following the 2009 annual meeting of
shareholders.



2



---

##### Table of Contents

PART I.



ITEM 1. Business



Company Overview



Iowa Telecommunications Services, Inc. (Iowa
Telecom, the Company, we, us, and our) and its subsidiaries provide wireline local exchange telecommunications services to residential and business customers in rural Iowa, Minnesota and
Missouri. We currently operate 298 telephone exchanges serving 428 communities as the incumbent or historical local exchange carrier and are the sole telecommunications company providing wireline services in approximately 67% of these
communities. In addition, we provide service to residential and business customers throughout Iowa and Minnesota as a competitive local exchange carrier. In total, we provide services to approximately 253,000 access lines.



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 64% of our total revenues for the year ended December 31, 2009, we provide long
distance service, dial-up and DSL Internet access, and other communications services. We provide services as the incumbent local exchange carrier (ILEC) through Iowa Telecom and its wholly-owned subsidiaries, Lakedale Telephone Company
and Montezuma Mutual Telephone Company. As part of our strategy of pursuing growth beyond our current service area, we compete for customers in Iowa in mostly adjacent markets through our competitive local exchange carrier subsidiaries, Iowa Telecom
Communications, Inc. (ITC) and IT Communications, LLC (IT Communications). Additionally, Lakedale Link, Inc., Lakedale Link, LLC and EN-TEL Communications LLC (EN-TEL) are competitive local exchange carriers that
provide local and long distance service in Minnesota. Together, ITC, IT Communications, Lakedale Link, Inc., Lakedale Link, LLC and EN-TEL are referred to as the CLEC or our CLEC Operations.



Our History



We were incorporated under the laws of the State of Iowa in
1999. In the late 1990s, several of the Regional Bell Operating Companies and other large telecommunications companies, such as GTE Midwest Incorporated, decided to sell many of their rural assets. We began business on June 30, 2000, when
we acquired the Iowa operations of GTE Midwest Incorporated. Our common stock began trading on the New York Stock Exchange on November 18, 2004, under the trading symbol IWA.



In 2008, we expanded our service territory into Minnesota with
the acquisition of Bishop Communications Corporation (Bishop Communications). In 2009, we expanded our Minnesota operations through our acquisitions of substantially all of the assets of Sherburne Tele Systems, Inc.
(Sherburne), New Ulm Telecom Inc.s ownership interests in EN-TEL, SHAL, LLC and SHAL Networks, Inc. (New Ulm), and substantially all of the assets of WH Comm (WH Comm), a division of Wright-Hennepin
Cooperative Electric Association, resulting in a total of 39,700 access lines for Iowa Telecom in the State of Minnesota as of December 31, 2009, including those acquired in 2008.



Over 99% of the customers we serve are located in rural Iowa or Minnesota communities. Virtually all of our
services are offered in an area that is approximately 21,000 square miles in size, and each of our switching centers is within 30 miles of another of our switching centers.



Windstream Merger Agreement



On November 23, 2009, we entered into a definitive Agreement and Plan of Merger (the Merger Agreement) with Windstream
Corporation, a Delaware corporation (Windstream), and Buffalo Merger Sub, Inc., a Delaware corporation and a wholly-owned subsidiary of Windstream (Newco). The Merger Agreement provides that, upon the terms and subject to the
conditions set forth in the Merger Agreement, we will merge with and into Newco, with Newco continuing as the surviving corporation (the Merger).



3



---

##### Table of Contents

Pursuant to the Merger Agreement, at the effective time and as a result of the Merger, each
share of Iowa Telecom common stock outstanding immediately prior to the effective time of the Merger will be converted into and become exchangeable for (i) shares of common stock of Windstream at a fixed exchange ratio of 0.804 and
(ii) $7.90 in cash. In connection with the Merger, each outstanding stock option under our 2002 Stock Incentive Plan will be converted into the right to receive the merger consideration, less the exercise price of the stock option. Each share
of restricted stock awarded under our 2005 Stock Incentive Plan will be treated the same as any other outstanding share of Company common stock, but the forfeiture provisions and other terms and conditions of the restricted stock will continue to
apply to the merger consideration received for the restricted stock and the cash portion of the consideration will be retained by Windstream until the restrictions have lapsed.



The transaction is expected to close in mid - 2010. Completion of the Merger with Windstream is conditioned
upon the receipt of certain governmental consents and approvals, and our shareholders approval. The special meeting of the Companys shareholders to vote on the Merger has been scheduled for March 25, 2010, and the proxy
statement/prospectus for the special meeting was mailed to shareholders on or about February 22, 2010. No assurance can be given that the required conditions to closing will be satisfied or that the Merger will be completed.



Factors outside of managements control could delay or
prevent completion of the Merger. In the event of a termination of the Merger Agreement, we may be required to pay Windstream a termination fee of $25.0 million in certain circumstances.



Iowa Telecom has agreed that until the effective time of the Merger, unless Windstream otherwise consents in
writing, it will, and will cause each of its subsidiaries to, conduct their respective businesses in the ordinary course of business and seek to preserve intact their current business organizations, and keep available the services of their officers
and employees and preserve their relationships with customers, suppliers and other persons with whom they have business relations. In addition, Iowa Telecom has agreed that until the Merger is completed, Iowa Telecom and its subsidiaries will not
take the following actions (each as more fully described, and subject to the exceptions set forth in, the Merger Agreement), without Windstreams prior written consent:



| |  |  | issue, deliver, sell, dispose of, pledge or otherwise encumber its capital stock, or any securities or rights convertible into or exchangeable for any
such shares or ownership interests or permit or authorize any of the above;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | redeem, purchase or otherwise acquire, or propose to redeem, purchase or otherwise acquire, its capital stock;
| | - |  | --------------------------------------------------------------------------------------------------------------



| |  |  | split, combine, subdivide or reclassify any of its capital stock;
| | - |  | -----------------------------------------------------------------



| |  |  | except for regular quarterly cash dividends of $0.405 per share of its common stock and except for a pro-rated portion of such quarterly dividend with
respect to the quarter in which the Merger is completed, declare, set aside for payment or pay any dividend, or make any other actual, constructive or deemed distribution in respect of its capital stock, or otherwise make any payments to its
shareholders in such capacity;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | adopt a plan of complete or partial liquidation, dissolution, merger, consolidation, restructuring, recapitalization or other reorganization of it or
any of its subsidiaries or alter through merger, liquidation, reorganization or restructuring the corporate structure of any of its subsidiaries;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | amend its articles of incorporation or bylaws;
| | - |  | ----------------------------------------------



| |  |  | grant to any current or former director or officer any increase in compensation, bonus or fringe or other benefits or grant any type of compensation or
benefit to any such person not previously receiving or entitled to receive such compensation;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | grant to any current or former employee (other than directors or officers) any increase in compensation, bonus or fringe or other benefits or grant any
type of compensation or benefit to any such person not
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



4



---

##### Table of Contents

| | previously receiving or entitled to receive such compensation, except to employees in the ordinary course of business, or to the extent expressly required under any benefit plan as in effect on
November 23, 2009;
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | grant to any person any severance, retention, change in control or termination compensation or benefits or any increase therein, except with respect to
new hires, in the ordinary course of business, or to the extent expressly required under any benefit plan as in effect on November 23, 2009;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | enter into or adopt any benefit plan or amend in any respect any benefit plan;
| | - |  | ------------------------------------------------------------------------------



| |  |  | amend, change or modify the terms of any existing equity grants;
| | - |  | ----------------------------------------------------------------



| |  |  | enter into or make any loans to any of its officers, directors, employees, affiliates, agents or consultants;
| | - |  | -------------------------------------------------------------------------------------------------------------



| |  |  | make any material change in financial accounting methods, principles or practices, except insofar as may have been required by a change in GAAP after
November 23, 2009;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | directly or indirectly acquire or agree to acquire in any transaction any equity interest in or business of any entity if the aggregate amount of the
consideration paid would exceed $500,000;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | (A) acquire any tangible properties or assets if the aggregate amount of the consideration paid would exceed $500,000, or (B) sell, lease (as
lessor), license, mortgage, sell and leaseback or otherwise dispose of, tangible properties or assets or any interests therein, if the aggregate amount of the consideration paid would exceed $500,000;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | encumber any tangible properties or assets or any interests therein;
| | - |  | --------------------------------------------------------------------



| |  |  | make or change any material tax election or settle or compromise any material tax liability, or change its fiscal year;
| | - |  | -----------------------------------------------------------------------------------------------------------------------



| |  |  | grant or acquire, or dispose of or permit to lapse, any rights to any material intellectual property;
| | - |  | -----------------------------------------------------------------------------------------------------



| |  |  | incur any indebtedness, except for indebtedness incurred in the ordinary course of business under the revolving credit agreements to which Iowa Telecom
was a party on November 23, 2009, guarantees by Iowa Telecom of indebtedness of any of its subsidiaries, or indebtedness of Iowa Telecom to any of its subsidiaries;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | make, or agree or commit to make, any capital expenditure except in accordance with the capital plans for 2009 and 2010 disclosed to Windstream plus a
15% variance on an aggregate and cumulative basis;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | enter into or amend any contract or take any other action if such contract, amendment or action would reasonably be expected to prevent or materially
impede, interfere with, hinder or delay the consummation of the Merger or any of the other transactions contemplated by the Merger Agreement;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | enter into any material contract not in the ordinary course of business or enter into or amend any material contract to the extent consummation of the
Merger or compliance by Iowa Telecom or its subsidiaries with the provisions of the Merger Agreement would reasonably be expected to conflict with such contract;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | enter into, modify, amend or terminate any collective bargaining agreement;
| | - |  | ---------------------------------------------------------------------------



| |  |  | voluntarily contribute or commit cash or funds to any of Iowa Telecoms pension plans or any administrator thereof for purposes of funding
shortfalls in any of Iowa Telecoms pension plans;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | enter into a new line of business or engage in the conduct of any business in any new state which would require the receipt or transfer of governmental
approval;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | file for any permit or approval outside of the ordinary course of business, or the receipt of which would reasonably be likely to prevent or materially
impair or delay the consummation of the Merger;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



5



---

##### Table of Contents

| |  |  | settle, compromise, dismiss, discharge or otherwise dispose of litigation or proceedings;
| | - |  | -----------------------------------------------------------------------------------------



| |  |  | take any action that would reasonably be expected to materially restrict or impede the consummation of the Merger or cause any of the conditions to the
closing of the Merger as set forth in the Merger Agreement to fail to be satisfied as of the closing date;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | approve or authorize any action to be submitted to the shareholders of Iowa Telecom for approval that is intended, or would reasonably be expected, to
prevent, impede, interfere with, delay, postpone or adversely affect the transactions contemplated by the Merger Agreement;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | make any change in its dividend policies other than as permitted by the Merger Agreement; or
| | - |  | --------------------------------------------------------------------------------------------



| |  |  | authorize any of, or commit, resolve or agree to take any of the foregoing actions.
| | - |  | -----------------------------------------------------------------------------------



The Merger Agreement and the Merger are described in greater
detail in Amendment No. 1 to the Registration Statement on Form S-4 filed by Windstream with the Securities and Exchange Commission on February 19, 2010.



Our Strategy



Our objective is to continue to strengthen our position as a leading provider of telecommunications services, focusing primarily on
non-metropolitan markets in the Midwest. Pending completion of the proposed Merger, we are continuing to operate our business with this objective in mind. To achieve this goal, we intend to pursue the following strategies, subject to various
covenants contained in the Merger Agreement:



| |  |  | Maintain Stable Cash Flows from Operations and Disciplined Capital Spending. We have a diverse residential and business customer base that
produces a recurrent revenue stream and relatively predictable cash flows. We intend to maintain our financial performance by growing revenue and improving operating efficiency throughout our businesses. We make disciplined capital expenditure
decisions, focusing on investments made for maintaining high quality service, cost structure improvement and cash flow generation.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Leverage and Enhance Local Presence and Customer Loyalty. We have a strong commitment to local presence and customer relationships. We have a
community relations staff dedicated to maintaining relationships with local leaders and civic organizations. As a result of this and other initiatives, we believe our companies have developed brand identities as responsive, locally oriented service
providers. We intend to use these identities to maintain our competitive market position, cross-sell additional services to our current subscribers and expand our existing customer base.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Increase Revenue per Access Line by Selling Additional and Enhanced Services. We actively market long distance service, dial-up and DSL Internet
access service, satellite and cable video service and enhanced local services (such as call waiting, caller ID and voice mail) to our local customers as bundled services billed on the same monthly statement the customer receives for basic local
service.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Prudent Expansion of Our Service Area Through our Competitive Local Exchange Carrier Subsidiaries. We intend to leverage our strong local
presence, superior customer service and economies of scale to pursue customers in markets in close proximity to our rural local exchange carrier markets through our CLEC Operations. We plan to continue this strategy by seeking growth opportunities
on a low-cost, selective basis, focusing primarily on business customers.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Grow Through Selective Strategic Acquisitions. We have implemented a disciplined process of evaluating select acquisitions of access lines of
local exchange carriers, as well as of evaluating acquisitions of providers of businesses complementary to ours. We also believe there may be attractive opportunities to acquire rural local exchange carriers, which we believe will likely consolidate
as competitive pressures intensify. In Iowa and Minnesota, there are approximately 230 independent rural local exchange carriers serving a fragmented market representing approximately 550,000 access lines. One of our key acquisition criteria has
been the potential of any proposed transaction to increase our free cash flow per share.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



6



---

##### Table of Contents

Products, Services and Revenue Sources



We provide wireline local exchange telecommunications services as the incumbent local exchange carrier to
residential and business customers in 428 communities in Iowa, Minnesota and Missouri. Our CLEC Operations are certified to provide service in all areas served by Qwest in Iowa and certain Qwest, Century Link and Frontier exchanges in Minnesota.
EN-TEL and Lakedale Link, LLC are certified facility-based providers in certain Qwest exchanges in Minnesota. Approximately 69% of our access lines serve residential customers and 31% serve business customers. We generate revenues by providing our
customers:



| |  |  | local services, which include basic local telephone service and enhanced local services like voice mail, caller ID and call forwarding;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------



| |  |  | network access services to interexchange carriers for the origination and termination of interstate and intrastate long distance phone calls on our
network and special access services to carriers and others;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | toll (also known as long distance) services;
| | - |  | --------------------------------------------



| |  |  | data and Internet services, including dial-up and DSL Internet access service and other enhanced data services; and
| | - |  | -------------------------------------------------------------------------------------------------------------------



| |  |  | other services and sales, including the sale, installation and maintenance of customer premise voice and data equipment, satellite and cable video,
inside line care and the leasing of office space.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



We complement our basic local telephone services by actively marketing products under our local brands. We believe that our ability to cross-sell to our customer base in this way is bolstered by the fact
that we are currently the sole local wireline telecommunications provider in approximately 67% of the communities we serve as the incumbent carrier. The following table shows our revenues and sales for each of the years ended December 31, 2007,
2008 and 2009, by category of service:



|                           |  |                         |         |         |      |   |        |      |         |  |     |        |  |         |         |  |     |  
|-------------------------- |  | ----------------------- | ------- | ------- | ---- | - | ------ | ---- | ------- |  | --- | ------ |  | ------- | ------- |  | --- | -
|                           |  | Year Ended December 31, |        
|                           |  | 2007                    |         |         | 2008 |   |        | 2009 |        
|                           |  | Amount                  |         | Percent |      |   | Amount |      | Percent |  |     | Amount |  | Percent |        
|Local services             |  | $                       | 73,918  |         | 29   | % |        | $    | 71,131  |  | 29  | %      |  | $       | 74,859  |  | 29  | %
|Network access services    |  |                         | 100,636 |         | 40   | % |        |      | 89,420  |  | 36  | %      |  |         | 87,690  |  | 35  | %
|Toll services              |  |                         | 21,213  |         | 9    | % |        |      | 23,010  |  | 9   | %      |  |         | 22,234  |  | 9   | %
|Data and Internet services |  |                         | 29,512  |         | 12   | % |        |      | 35,163  |  | 14  | %      |  |         | 43,040  |  | 17  | %
|Other services and sales   |  |                         | 26,122  |         | 10   | % |        |      | 28,241  |  | 12  | %      |  |         | 26,319  |  | 10  | %
|                           |  |                         |         |         |      |   |        |      |         |  |     |        |  |         |         |  |     |  
|Total revenues and sales   |  | $                       | 251,401 |         | 100  | % |        | $    | 246,965 |  | 100 | %      |  | $       | 254,142 |  | 100 | %
|                           |  |                         |         |         |      |   |        |      |         |  |     |        |  |         |         |  |     |  



Local Services



Basic local services enable end user customers to make and
receive telephone calls within a defined local calling area for a flat monthly fee. We also provide extended area service, a mandatory expanded calling service to select nearby communities charged at a flat monthly rate, which is also considered a
basic monthly service.



In addition to subscribing
to basic local telephone services, our customers may choose from a variety of enhanced or non-basic communications services which are also classified as local services. These include call waiting, call forwarding, caller ID, voice mail and three-way
calling, and are billed on the customers monthly bill for basic local service. Offering such services to local customers through bundled service packages is an important part of our strategy to increase average revenue per subscriber.



Network Access Services



We bill access charges to other carriers for the use of our
facilities to terminate or originate long distance calls on our network. These fees relate to interexchange long distance, or toll calls, that involve more than one company in the provision of the service. Network access charges compensate us for
the services we provide to other carriers for completing toll calls for our customers.



7



---

##### Table of Contents

The rates for our network access revenues are determined under either state or federal
jurisdictions depending on the call. We generate intrastate access revenues for providing either switched or special access services when a long distance call is placed or received by a customer in one of our exchanges to or from another party
located within the same state. The toll carrier pays us an intrastate access charge, the level of which is regulated and approved by either the Iowa Utilities Board or the Minnesota Public Utilities Commission. We generate interstate access revenues
for providing either switched or special access services when a long distance call is originated or terminated by a customer calling from one state to a customer in another state and one of the parties is a local service customer of ours. We bill
interstate access charges in the same manner as we bill intrastate access charges. Interstate access charges are regulated and approved by the FCC.



Additionally, we bill subscriber line charges to substantially all of our end user customers for access to the public switched network. The
monthly subscriber line charges are regulated and approved by the FCC.



We bill wireless and landline carriers for use of our transit services and for transport and termination services unrelated to intrastate or interstate access service. These charges are governed by
interconnection agreements with the wireless or landline carriers.



Toll Services



We began offering
toll, or long distance, services in July 2000 through sales to our established customer base. We have leveraged our customer relationships and single billing approach to increase our penetration for toll service with minimal need for additional
capital expenditures. The following table shows our number of toll service subscribers:



|                    |  |                                |   |  |         |   |  |         |  
|------------------- |  | ------------------------------ | - |  | ------- | - |  | ------- | -
|                    |  | Subscribers as of December 31, |  
|                    |  | 2007                           |   |  | 2008    |   |  | 2009    |  
|Subscribers         |  | 143,600                        |   |  | 146,400 |   |  | 158,500 |  
|Penetration rate(1) |  | 60                             | % |  | 60      | % |  | 63      | %



|(1) | Penetration rate is computed by dividing the subscribers of our toll services by the total access lines served at the end of the period.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------



We market long distance service under our local brand names, but
we provide service through resale arrangements we have with a variety of carriers. Long distance revenues are earned as our long distance customers place calls, with charges generally based on the length of the call and the applicable per-minute
rate. Some customers pay a fixed minimum monthly charge for our long distance service independent of calls actually made. In order to offer attractively priced options to our customers, we often bundle long distance service with our local services,
dial-up and DSL Internet access offerings.



8



---

##### Table of Contents

Data and Internet Services



Data and Internet services consist largely of revenues generated by our dial-up and DSL Internet access
services as well as for providing enhanced data solutions to customers. We began offering dial-up Internet access service in 2000, and DSL Internet access service in a few markets in late 2001. We currently have DSL equipment installed in all of our
298 incumbent exchanges. We estimate that we are capable of providing DSL Internet access service to approximately 84% of our ILEC access lines. Approximately 42% of our access line customers subscribe to our dial-up or DSL Internet service. The
following table shows our number of dial-up and DSL Internet access service subscribers:



|                    |  |                                |   |  |        |   |  |         |  
|------------------- |  | ------------------------------ | - |  | ------ | - |  | ------- | -
|                    |  | Subscribers as of December 31, |  
|Service             |  | 2007                           |   |  | 2008   |   |  | 2009    |  
|Dial-up Internet    |  | 22,500                         |   |  | 16,700 |   |  | 10,200  |  
|DSL Internet        |  | 62,800                         |   |  | 75,700 |   |  | 95,200  |  
|                    |  |                                |   |  |        |   |  |         |  
|Total               |  | 85,300                         |   |  | 92,400 |   |  | 105,400 |  
|                    |  |                                |   |  |        |   |  |         |  
|Penetration rate(1) |  | 35                             | % |  | 38     | % |  | 42      | %



|(1) | Penetration rate is computed by dividing the total of our dial-up and DSL Internet access subscribers by the total access lines served at the end of the period.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------



Other Services and Sales



Other services and sales consists largely of revenues generated
by the sale, installation and maintenance of the customer premise voice and data equipment, satellite and cable video, inside line care and leasing of office space. The following table shows our number of satellite and cable video subscribers:



|                    |  |                                |   |  |        |   |  |        |  
|------------------- |  | ------------------------------ | - |  | ------ | - |  | ------ | -
|                    |  | Subscribers as of December 31, |  
|Service             |  | 2007                           |   |  | 2008   |   |  | 2009   |  
|Video               |  | 9,000                          |   |  | 20,300 |   |  | 27,100 |  
|Penetration rate(1) |  | 5                              | % |  | 12     | % |  | 16     | %



|(1) | Penetration rate is computed by dividing the total of our video subscribers by the total residential access lines served at the end of the period.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------



Competitive Local Exchange Carrier Services



We currently provide competitive local exchange
carrier services through our wholly-owned subsidiaries, ITC, IT Communications, Lakedale Link, Inc. and Lakedale Link, LLC and our majority owned subsidiary EN-TEL. ITC, IT Communications, and Lakedale Link, Inc. primarily provide services utilizing
either an unbundled network element or resale platform on which we resell services to end customers. EN-TEL and Lakedale Link, LLC are primarily facilities-based providers. Our CLEC currently offers a broad range of traditional and enhanced wireline
communications services to business and residential customers. Our CLEC Operations are certified in all markets served by Qwest in Iowa and certain Qwest, Century Link and Frontier markets in Minnesota. EN-TEL and Lakedale Link, LLC are certified
facility-based providers in certain Qwest exchanges in Minnesota. As of December 31, 2009, our CLEC Operations served approximately 24,700 business and 18,000 residential access lines and accounted for 17% of our total access lines. We view our
competitive local exchange carrier business as a cost-effective way to leverage our corporate infrastructure and, in Iowa, our Iowa Telecom brand into markets in close proximity to those served by our incumbent local exchange carrier operations. Our
primary strategy has been to target contiguous markets that historically have been underserved and subject to minimal competition. In these markets, we can compete cost effectively through our interconnection agreements with the incumbent provider,
pursuant to which we may lease lines on a wholesale basis.



9



---

##### Table of Contents

We have historically entered selected exchanges by utilizing a low-risk unbundled network
element platform. This entry strategy permitted us to use the incumbent carriers existing loop and switches and thus required minimal upfront capital investment on our part. Although the FCC has revised the rules that govern the availability
of the unbundled network element platform, we believe we can continue to profitably provide competitive local exchange services as a result of contractual arrangements entered into with the incumbent provider for switching services and leased lines.
The majority of the customers served utilizing the unbundled network element platform are in exchanges in which Qwest is the incumbent local exchange carrier. Our current contracted monthly rates with Qwest, which include volume discounts and are
effective until December 2010, range from $13.10 to $29.84 per line for residential customers and $16.05 to $39.64 per line for business customers. Our agreements with Qwest expire in 2011. We intend to consider installing owned communications
equipment in these communities only after we have achieved sufficient scale to make such investment cost effective. The cost to expand our CLEC Operations is predominantly comprised of variable expenses such as marketing and sales expenses, which
allows us to more readily control the level of cash flow required to support expansion of this business and provides the opportunity to lower spending levels if necessary. Subject to the restrictions contained in the Merger Agreement, in 2010, we
plan to maintain this limited investment approach as we continue to grow our competitive local exchange carrier business, focusing primarily on business customers.



Sales and Marketing



We have established sales and marketing organizations that centralize marketing strategies and deploy sales and customer service resources
locally. We have a dedicated sales force for business customers and have 27 local offices at which customers can contact us in person to address their needs.



We believe that customers in rural communities are concerned that historically they have had access to less sophisticated telecommunications
products and services than consumers in urban locations. We believe these concerns have increased in recent years as advanced telecommunications services, such as readily available broadband Internet access, have come to be seen as essential to
economic growth. We believe that residential and business end-users will be more likely to increase the use of our products and services if we are perceived as a locally managed provider, committed to delivering advanced telecommunications services
to the communities we serve.



To address our
customers needs, we have established in-state support operations, including 27 customer offices and six customer contact centers. These customer offices and contact centers provide us with a significant degree of customer contact, thereby
affording us an opportunity to offer and sell additional and enhanced services to our subscribers. In addition, we have a community relations department whose purpose is to maintain an ongoing relationship with community leaders and organizations
throughout our service area, with a view to continue developing our brand identities as responsive, locally-oriented providers. We believe this reputation also enhances our potential to cross-sell additional services to our existing subscriber base.



We also offer local telephone services in bundled
packages including long distance, enhanced local services, dial-up and DSL Internet access services, satellite and cable video services. We believe bundled services are popular with customers because they permit the purchase of a number of services
at a discount to the pricing that would not be available on an individual service basis. We intend to continue to expand this marketing strategy, which we expect will increase average revenue per access line. We also believe that integrated packages
of quality services result in a more loyal and satisfied customer base, thereby reducing subscriber turnover.



Competition



Local Service. We currently face competition from other providers of local services in approximately 141 of the 428 communities our incumbent local exchange carriers serve. Of these 141
communities, we believe 109 communities have some voice service offered by Mediacoms telephony affiliates, MCC Telephony of Iowa, Inc. and MCC Telephony of Minnesota, LLC (MCC), which initiated service in most of these markets
during the



10



---

##### Table of Contents

second quarter of 2007. Additionally, we believe that in approximately 42 of these communities, independent local exchange carriers operating in mostly adjacent exchanges and municipal utilities
have constructed networks to provide competitive local exchange carrier services.



MCC is offering voice services through a business arrangement with Sprint Communications L.P. (Sprint). On June 23, 2006, we filed a complaint against the Iowa Utilities Board and Sprint
in the U.S. District Court for the Southern District of Iowa asking the court to rule that the Iowa Utilities Board acted unlawfully when it required us to enter into an interconnection agreement with Sprint and asking the court to invalidate the
agreement. On April 15, 2008, the court issued a ruling in favor of the Iowa Utilities Board and Sprint, therefore maintaining the status quo in which we are obligated to enter into an interconnection agreement with Sprint. On April 28, 2009,
the U.S. Court of Appeals for the Eighth Circuit affirmed the lower courts decision (and, ultimately, the Iowa Utilities Boards decision).



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, in the manner requested by Sprint. On June 12, 2009, the District Court held
that the Iowa Utilities Board acted improperly by requiring us to serve as a traffic-switching intermediary between Sprint and third-party long distance carriers.



On July 31, 2006, MCC filed a complaint 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 proceeding was stayed while our first federal complaint was pending but the stay was lifted after
issuance of the Eighth Circuits April 28, 2009 decision. On January 20, 2010, we executed an interconnection agreement with MCC that envisions MCC connecting directly to us rather than through Sprint and on February 5, 2010, MCC
dismissed its Iowa District Court complaint.



Wireless and Emerging Technology Competition. We estimate that wireless service providers served approximately 6.4 million subscribers in Iowa and Minnesota as of June 2008, based on the most recent FCC data available. We expect
that wireless providers will continue to provide services that compete with ours. Technological developments in cellular telephone features, personal communications services, telephone services over cable television systems, satellite, voice over
Internet protocol, high-speed fiber optic networks and other technologies will continue to provide our customers with alternatives to the traditional local telephone services we provide.



Iowa Communications Network. The Iowa Communications Network is a state-owned communications network
consisting of more than 3,000 miles of fiber optic cable extending into all 99 Iowa counties and capable of providing a variety of voice, data and video communications services. The Iowa Communications Network currently provides certain voice, data
and video communications services to authorized educational and governmental institutions, including accredited public and private schools and colleges, public libraries, state and federal agencies and the United States Postal Service, and to
authorized hospitals and physician clinics. Current state law does not allow the Iowa Communications Network to provide its services to other public or private entities, and prohibits the sale, lease or other disposition of the Iowa Communications
Network without prior authorization of a majority of each house of the Iowa legislature and approval by the governor. The Iowa legislature has previously considered modifying state law to allow for sale of the Iowa Communications Network to a
private party but has not done so.



Our
Competitive Local Exchange Carrier Subsidiaries. We have five competitive local exchange carrier subsidiariesITC, IT Communications, Lakedale Link, Inc., Lakedale Link, LLC and EN-TEL. Through ITC, ITC Communications, Lakedale Link, Inc.
and Lakedale Link, LLC are authorized to provide services in all of Qwests Iowa exchanges as well as certain Qwest, Century Link and Frontier exchanges in Minnesota, and generally offer the same local exchange services as those offered by the
local incumbent provider. These CLEC subsidiaries also provide DSL Internet access service in all exchanges in which they operate, using either



11



---

##### Table of Contents

Qwests, Century Links or Frontiers wholesale service or owned facilities. EN-TEL is an authorized reseller in Century Link, Frontier and Qwest exchanges in Minnesota, and
generally offers the same local exchange services as those offered by the local incumbent provider. EN-TEL is also an authorized facility-based provider in certain Qwest exchanges and offers cable video and high-speed broadband services in these
exchanges.



Long Distance. We face
significant competition in the long distance market. AT&T, Sprint, Qwest and Verizon Business currently are the other major long distance providers in our service territories. We believe that wireless service also competes with the traditional
wireline long distance service that we provide. Although the long distance market is competitive, we believe we are in a good position relative to our competitors given our local presence, strong brand and ability to offer both long distance and
local services in a single bill. Approximately 63% of our local access lines also subscribe to one of our long distance services.



Dial-up and DSL Internet Access. In many markets we face competition from other dial-up and broadband Internet access service
providers. Many dial-up competitors are neighboring incumbent local exchange carriers or small proprietors with service in only a few communities. In some of our markets, broadband competition exists from cable television providers (principally
Mediacom), wireless broadband providers using non-licensed spectrum and competitive local exchange carriers that either have their own facilities or have co-located DSL equipment in our central offices. We believe our ability to sell dial-up or
broadband services on a bundled basis with local and long distance service enhances our competitive position for continued growth in sales of Internet access service.



Customers



Our incumbent local exchange carriers currently operate 298 local telephone exchanges in 428 rural communities. Our business is largely
concentrated in the eastern and southern portions of Iowa and the central portion of Minnesota. According to the 2000 U.S. Census, our ILEC service area includes four communities with a population over 9,000; 11 communities with a population between
5,001 and 9,000; 29 communities with a population between 2,000 and 5,000; and 384 communities with a population under 2,000. The largest five communities in our ILEC service area are (2000 population figures in parentheses): Newton, Iowa (15,579);
Pella, Iowa (9,832); Fairfield, Iowa (9,509); Grinnell, Iowa (9,105); and Mount Pleasant, Iowa (8,751). These five communities represent approximately 10% of the access lines we serve.



Approximately 74% of our incumbent local exchange carrier access lines serve residential customers. We also
provide services to several large businesses in our service area including, Pella Corporation and Vermeer Manufacturing Company, both headquartered in Pella, Iowa. In addition, Grinnell and Pella are each home to four-year colleges, namely Grinnell
College and Central College. No single local service customer represented more than 5% of our revenues from 2007 to 2009.



As a competitive local exchange carrier, we are authorized to provide services in all Iowa local telephone exchanges served by Qwest, and to
certain Qwest, Century Link and Frontier telephone exchanges in Minnesota. In addition, EN-TEL and Lakedale Link, LLC are authorized facility based providers in certain Qwest exchanges. Approximately 58% of the access lines in our competitive local
exchange carrier markets serve business customers and approximately 42% serve residential customers.



Network access charges historically have been one of our largest sources of revenues. The Company did not have any customer that represented
more than 10% of total revenue and sales from 2007 to 2009.



Network Facilities



All of our
exchanges in which we are the incumbent local exchange carrier are served by digital switches that we own and are capable of providing one-plus equal access for long distance service. The switches are linked through a combination of aerial,
underground and buried cable, including approximately 4,800 miles of fiber



12



---

##### Table of Contents

optic cable. Most of our primary network routes utilize fiber optic cable. The majority of our switches in Iowa were manufactured by Nortel Networks. Our network operations and monitoring
services for our Iowa properties are provided on a contract basis by a third party, which also provides those services for its own network and for other local exchange carriers in Iowa. Our switches in Minnesota were manufactured by various
entities. Our network operations and monitoring services for our Minnesota properties are provided by company personnel. Automated alarm systems are in place to alert us to problems with our facilities, and our own technicians are available to make
any necessary repairs to the network.



The network
facility upgrades we have completed in recent years include the following:



| |  |  | We have deployed DSL Internet access service to all of our exchanges. Approximately 84% of our access lines are DSL eligible.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------



| |  |  | We have built a data network to support our dial-up and DSL Internet access services customers.
| | - |  | -----------------------------------------------------------------------------------------------



| |  |  | We have reduced the number of access lines utilizing analog carrier technology to less than 1% of total access lines. Analog carrier lines are not
fully compatible with advanced telephone services such as high-speed Internet.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We have deployed voice-mail services to additional exchanges and are now able to offer voice-mail services to all exchanges.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------



| |  |  | We have entered into a long-term lease to acquire fiber transport facilities between Chicago and Omaha, utilizing facilities which cross the State of
Iowa. This network was put into service in the second quarter of 2008. In 2009, lateral connections to Iowa Telecom exchanges were made which provided redundancy and increased bandwidth to these exchanges.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Existing fiber network routes have received upgrades to the electronics that provide greater redundancy and traffic capacity.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------



| |  |  | Additional backup generator capacity has been added within our network to enhance our ability to provide a stable network in the event of commercial
power interruptions.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | In 2009, we upgraded 26 locations with gigabit ethernet (GigE) backhaul, which allows us to offer Xstream DSL with download speeds up to 15
megabits per second. At the close of 2009, we had approximately 70 locations served with GigE transport.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Employees



We employ approximately 800 full-time employees, of which approximately 625 are based in Iowa. We have a collective bargaining agreement with
the Communications Workers of America, or CWA, which covers 171 of our employees and expires in May 2012. We also have a collective bargaining agreement with the International Brotherhood of Electrical Workers, or IBEW, which covers 22 of our
employees and expires in June 2014. There have been no work stoppages or strikes by our IBEW or CWA employees in the past nine years, and we consider our labor relations to be good.



Intellectual Property



We believe we have the trademarks, trade names and licenses that are necessary for the operation of our business. The Iowa Telecom logo is a
registered trademark in the United States. We do not consider our trademarks, trade names or licenses to be material to the operation of our business.



Regulation



The following summary does not describe all present and proposed federal, state and local legislation and regulations affecting us or the
telecommunications industry. Some laws and regulations are currently the subject



13



---

##### Table of Contents

of judicial proceedings, legislative hearings and administrative proceedings that could change the manner in which our company or our industry operates. We cannot predict the outcome of any of
these developments or their potential impact on us. Regulation can change rapidly in the telecommunications industry, and such changes may adversely affect us in the future. Our business is subject to extensive regulation that could change in a
manner adverse to us.



Overview



We are subject to federal, state and local government
regulation. We hold various authorizations for our service offerings. At the federal level, the FCC has jurisdiction over common carriers, such as us, to the extent that their facilities are used to originate, terminate or provide interstate and
international telecommunications services. The Iowa Utilities Board and the Minnesota Public Utilities Commission exercise jurisdiction over our intrastate telecommunications services within Iowa and Minnesota, respectively. The Missouri Public
Service Commission exercises similar jurisdiction over the intrastate telecommunications services we provide to a small number of customers in Missouri. In addition, under the Telecommunications Act of 1996, or the Telecom Act, federal
and state regulators share responsibility for regulating such matters as interconnection between carriers. Municipalities and other local government agencies regulate certain aspects of our business, such as our use of public rights-of-way, and
require that we obtain construction permits and comply with building codes. The following description discusses some of the major telecommunications related regulations that affect us, but numerous other substantive areas of regulation not discussed
here may influence our business. When we refer to our incumbent local exchange carrier, we mean Iowa Telecommunications Services, Inc., and when we refer to our independent incumbent local exchange carriers, we mean our
incumbent local exchange carrier operations other than those of Iowa Telecommunications Services, Inc., such as Lakedale Telephone Company (including the operating assets of Sherburne County Rural Telephone Company as of July 1, 2009) and
Montezuma Mutual Telephone Company, which are subsidiaries of Iowa Telecommunication Services Inc. When we refer to our competitive local exchange carriers, we mean our Iowa Telecom Communications, Inc., IT Communications, LLC, Lakedale
Link, Inc. (including the operating assets of WH Comm as of November 1, 2009), Lakedale Link, LLC (entirely comprising the operating assets of NorthStar Access, L.L.C. as of July 1, 2009), as well as our interest in EN-TEL Communications,
LLC.



Federal Regulation



We are subject to, and must comply with, the federal
Communications Act of 1934, as amended by, among other things, the Telecom Act (the Communications Act). Under the Communications Act, we must obtain FCC approval before we transfer control of our company, assign, acquire, or transfer
licenses or authorizations issued by the FCC or before we discontinue our interstate service in any area.



Access Charges. The FCC regulates the prices that incumbent local exchange carriers charge for the use of their local networks in
originating or terminating interstate and international transmissions. State regulatory commissions, such as the Iowa Utilities Board, regulate prices for access provided in connection with the origination and termination of intrastate
transmissions. The prices that we and other incumbent local exchange carriers charge for use of local telephone networks to complete interexchange callsaccess servicesare called access charges.



We provide two types of access services: special access and
switched access. The rates for special access, which is provided via dedicated circuits connecting long distance carriers, other carriers and certain end users to our network, are structured as flat-rate monthly charges. Rates for switched access
are structured as a combination of flat-rate monthly charges, which are paid by end users, and per-minute traffic sensitive charges, which are paid by long distance carriers. A significant amount of our revenues come from access charges derived from
intrastate, interstate and international transmissions.



14



---

##### Table of Contents

Since 1991, the FCC has administered a system of price cap regulation for interstate access
charges applicable to the largest incumbent local exchange carriers, as well as for any other, smaller incumbent local exchange carriers that choose to be subject to price cap regulation. Our incumbent local exchange carrier has operated under the
price cap regime since July 2000 as a result of our acquiring GTE Midwest Incorporateds Iowa exchanges and succeeding to GTEs obligations to price its access charges in accordance with price cap regulation. We believe our incumbent local
exchange carrier is the smallest carrier in the nation operating under the FCCs price cap rules.



Since July 1, 2000, our incumbent local exchange carriers interstate access charges have been established in accordance with an
order adopted by the FCC in response to a proposal put forth by members of The Coalition for Affordable Local and Long Distance Service (CALLS Order). The CALLS Order reformed access charge regulation for carriers subject to price caps.
It implemented a system for reducing per-minute traffic sensitive rates for switched access services to specific target levels that the FCC believed more closely approximated the cost of providing those services. We met the target rates for switched
access in our access charge filings made with the FCC in July 2001. In September 2003, the FCC permitted our incumbent local exchange carrier to increase our rates for switched access to more closely reflect our forward-looking economic costs.



The CALLS Order also permitted us to recover a
greater proportion of our local costs by increasing the subscriber line charge levied on end users. In June 2002, the FCC adopted an order that permitted all price cap-regulated carriers, including us, to increase subscriber line charges to their
current levels.



Our incumbent local exchange
carrier files tariffs for its interstate access charges with the FCC annually. Our 2009 filing became effective on June 30, 2009, without objection.



In addition to the access charge system, our incumbent local exchange carrier also is subject to the requirements of the Communications Act
and the FCC that impose on local telecommunications carriers a duty to establish reciprocal compensation arrangements for the transport and termination of non-toll telecommunications between telecommunications carriers. See Interconnection
with Local Telephone Companies and Access to Other Facilities. Under these rules, the calling partys carrier must compensate the called partys carrier for costs associated with transporting and terminating the call. At present, we
only charge interconnecting wireless carriers for the transport and termination of calls bound for our network because Iowa Utilities Board rules impose a bill-and-keep regime for local traffic transport and termination when exchanged
traffic is at least roughly balanced, as is the case for exchanged wireline traffic.



Our competitive local exchange carriers also charge for interstate access in accordance with FCC requirements. These rules allow ITC and EN-TEL to set their rates at the current National Exchange Carrier
Association rates for switched access. IT Communications, by the nature of the larger markets it serves, is required to mirror the interstate access rates of the ILEC with which it competes (Qwest). To the extent that Lakedale Link, Inc. operates
through total service resale, which it did entirely until the acquisition of WH Comms operating assets as of November 1, 2009, Lakedale Link, Inc. does not assess access charges. Lakedale Link, Inc. assesses access charges when and to the
extent that it is operating WH Comms former operating assets.



In April 2001, the FCC released a Notice of Proposed Rulemaking to determine whether to adopt a unified regime that would apply to all of these intercarrier compensation arrangements; such a regime could
be a successor to the five-year transitional access charge system established by the CALLS Order, as well as the rules applicable to non-price-cap ILECs (such as our independent incumbent local exchange carrierssee Regulation of Our
Independent Incumbent Local Exchange Carriers) and by competitive local exchange carriers (such as ITC, IT Communications, Lakedale Link, Inc. and EN-TEL).



Universal service reform and, to a somewhat lesser extent, intercarrier compensation reform, continue to be debated at the FCC. At
present, the universal service reform discussion has focused on broadband deployment,



15



---

##### Table of Contents

particularly in the context of the National Broadband Plan report that the FCC is required to provide to Congress early this year. Most proposals for intercarrier compensation reform entail
reducing intrastate access rates to interstate levels over a period of years with some sort of funding mechanism to meet a substantial amount of the revenue shortfall created by such a reduction. Some proposals also included reform of universal
service distribution that could lead to our ILEC becoming eligible for a greater amount of high-cost funding. We cannot predict when the FCC will take global action to reform universal service and intercarrier compensation or how the FCC may do so.
There is also a potential for Congress to legislate in such areas, the likelihood, timing, and nature of which we cannot predict.



The Telecommunications Act of 1996. The Telecom Act changed the regulatory and competitive landscape in which we operate. The most
important of these changes were: removing most legal barriers to market entry into local telephone services; requiring that incumbent local exchange carriers, such as our incumbent local exchange carrier, interconnect with competitors and offer
unbundled network elements; establishing procedures for the Regional Bell Operating Companies to provide long distance services within their home regions; and creating greater opportunities for competitive providers, such as our competitive local
exchange carriers, to compete with other incumbent local exchange carriers. These changes are discussed below:



Removal of Entry Barriers. Following the passage of the Telecom Act, the level of competition in the local markets served by our
incumbent local exchange carrier has increased and is expected to increase. See BusinessCompetition. The requirements of the Telecom Act also effectively remove or prevent legal barriers to market entry, and thereby permit our
competitive local exchange carriers to provide competitive local exchange service in areas in which we are not the incumbent provider.



Interconnection with Local Telephone Companies and Access to Other Facilities. The Telecom Act imposes several requirements on all
local exchange carriers, including competitive local exchange carriers, with additional requirements imposed on incumbent local exchange carriers. These requirements are intended to promote competition in the local exchange market by, in part,
ensuring that a carrier seeking interconnection will have access to the interconnecting carriers network functionalities under reasonable rates, terms and conditions.



All local exchange carriers, including both our incumbent local exchange carrier and our competitive local
exchange carriers, must comply with the following requirements:



| |  |  | Resale. Local exchange carriers generally may not prohibit or place unreasonable restrictions on the resale of their local services at retail
rates.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Telephone Number Portability. Local exchange carriers must provide for telephone number portability, allowing a customer to keep the same
telephone number even when switching service providers.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Dialing Parity. Local exchange carriers must provide dialing parity, which allows customers to route their calls to another local service
provider without having to dial special access codes.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Access to Rights-of-Way. Local exchange carriers must provide access to their poles, ducts, conduits and rights-of-way on a reasonable,
nondiscriminatory basis.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Reciprocal Compensation. Each local exchange carrier on whose network a call originates must reasonably compensate each telecommunications
carrier on whose network the call terminates.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Under the Telecom Act, all incumbent local exchange carriers, including our incumbent local exchange carrier, but excluding certain exempt rural telephone companies, must comply with the
following additional requirements:



| |  |  | Duty to Negotiate. Negotiate in good faith with any carrier requesting interconnection.
| | - |  | ---------------------------------------------------------------------------------------



| |  |  | Interconnection. Provide interconnection for the transmission and routing of telecommunications at any technically feasible point in the
network, equal to interconnection provided to an affiliate or other party, and on just, reasonable and nondiscriminatory rates, terms and conditions.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



16



---

##### Table of Contents

| |  |  | Unbundling of Network Elements. Provide nondiscriminatory access to unbundled network elements or combinations of unbundled network elements at
cost-based rates.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Resale. Offer its retail local telephone services to resellers at a wholesale rate that is less than the retail rate charged to end users.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Notice of Changes. Provide notice of changes in information needed for another carrier to transmit and route services using the incumbent local
exchange carriers facilities.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Collocation. Provide physical collocation, which allows competitive local exchange carriers to install and maintain their own network
termination equipment in incumbent local exchange carriers central offices, or to obtain functionally equivalent forms of interconnection.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Our incumbent local exchange carrier is a rural telephone company, as defined by the Communications
Act. In 1997, however, the Iowa Utilities Board removed the rural telephone company exemption applicable to what were then GTE Midwest Incorporateds Iowa exchanges, which we later acquired. As a result, this exemption does not apply to Iowa
Telecommunications Services, Inc., our largest incumbent local exchange carrier.



The Telecom Act affords small local exchange carriers (those with less than two percent of the nations access lines) the opportunity to petition the state regulatory agency for suspension or
modification of any of the requirements imposed on local exchange carriers. In March 2004, we filed with the Iowa Utilities Board a request for permission to delay implementation of thousand block number pooling in certain switch locations. On
September 17, 2004, the Iowa Utilities Board extended the deadline for Iowa Telecom to complete its implementation of thousand block number pooling to May 2008, which we met. We believe we are otherwise in compliance with all other
interconnection requirements of the Telecom Act.



As of December 31, 2009, our incumbent local exchange carrier and our independent incumbent local exchange carriers had interconnection agreements with 44 of the competitive local exchange carriers authorized to offer local service in
our service area, and 31 active interconnection agreements in force with wireless carriers. Forty competitive local exchange carrier agreements and 19 wireless agreements are with firms operating in Iowa. The remainder operate in Minnesota.



Unbundling of Network Elements. To
implement the interconnection requirements of the Telecom Act, incumbent local exchange carriers, including our incumbent local exchange carrier (See Regulation of our Independent Incumbent Local Exchange Carriers for discussion of Lakedale
and Montezuma Telephone), are required to provide unbundled network elements to competitors based on forward-looking economic costs, using the total element long-run incremental cost, or TELRIC, methodology. Our incumbent local exchange carrier is
in compliance with these requirements and is meeting its obligations to unbundle its network. Our competitive local exchange carriers entered some local markets where Qwest is the incumbent local exchange carrier by initially obtaining a combination
of unbundled network elements, including unbundled switching and local loops (known as the unbundled network platform), from Qwest.



Under the FCCs current unbundled network element rules, which became effective March 11, 2005, an incumbent local exchange
carriers obligation to provide access to high capacity loops and dark fiber is eliminated immediately, and the obligation to provide access to unbundled switching and, by implication, to the unbundled network element platform was phased-out.
The new rules, however, continue to impose an obligation to provide unbundled access to DS-1 loops and certain forms of dedicated transport, although carriers may seek exemption from such obligations in particular geographic areas based on the
presence of competition, relief that Qwest is currently seeking before the Iowa Utilities Board.



In light of the phase-out of incumbent local exchange carrier obligations to provide access to the unbundled network element platform, we
entered into arrangements with Qwest in which our Iowa CLECs have continuing



17



---

##### Table of Contents

access to equivalent Qwest products for current and new customers regardless of future FCC or judicial action regarding the availability of unbundled network elements. However, the rates we must
pay under the agreements are somewhat higher than before we entered into the agreements. The agreements with Qwest expire in 2011.



The FCC may, in the future, reconsider various aspects of its local competition rules, such as rules for seeking exemption from certain
unbundling requirements, the manner in which unbundled network elements are priced, and the rate for terminating local interconnected traffic, such as certain wireless traffic. Congress may consider legislation that would affect local competition
and these rules. We cannot predict the outcome of any of these proceedings, or of any action or decision taken by the FCC, the Iowa Utilities Board, Minnesota Public Utilities Commission, any legislative body or court concerning the rules regarding
local competition, and how any changes would affect either our incumbent local exchange carrier, our independent incumbent local exchange carrier or our competitive local exchange carriers.



Bell Operating Company Entry into Long Distance Services.
Qwest is our competitive local exchange carriers principal competitor in regions in which Qwest is the incumbent local exchange carrier. Pursuant to provisions of the Telecom Act, in December 2002, the FCC authorized Qwest to provide in-region
long distance services, a line of business from which Qwest was previously prohibited from entering. Now that Qwest, a Regional Bell Operating Company, is authorized to provide long distance services, it competes more directly with providers of
integrated communications services, such as our competitive local exchange carriers.



Regulation of Interstate and International Services. The Communications Act requires that we offer interstate and international common carrier services at just and reasonable rates and on terms and
conditions that are not unreasonably discriminatory. In general, our interstate and international long distance services are not subject to rate regulation but are subject to the FCCs complaint procedures. Pursuant to the FCCs rules, we
disclose the terms and conditions of our long distance services on our web site.



Universal Service. Pursuant to federal statute, the FCC maintains a universal service program, to ensure that affordable, quality telecommunications services are available to all
Americans. The program at the federal level has several components, including one that pays support to high cost areas, including certain areas served by rural local exchange carriers for which the costs of providing basic telephone
service are significantly higher than the national average. The Telecom Act altered the framework for providing and funding universal service by:



| |  |  | requiring the FCC to make implicit subsidies explicit;
| | - |  | ------------------------------------------------------



| |  |  | expanding the types of telecommunications carriers that are required to pay universal service support; and
| | - |  | ----------------------------------------------------------------------------------------------------------



| |  |  | allowing telecommunications carriers to apply to state regulators for, and be eligible for, universal service support, including where they serve
customers formerly served by an incumbent local exchange carrier.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



These and other provisions were intended to make the provision of and contributions to universal service compatible with a competitive market.



Universal service funds are only available to carriers designated as eligible telecommunications carriers by
the state regulatory commission. Although our incumbent local exchange carrier is certified as an eligible communications carrier by the Iowa Utilities Board with respect to the exchanges that we operate, under current FCC rules it is not eligible
to receive any high-cost support because the historical cost of relevant portions of our network, largely based on the recorded amounts that transferred with our acquisition of exchanges from GTE Midwest Incorporated, are lower than the national
average. Under the FCCs rules, support for rural carriers, such as our incumbent local exchange carrier, is only available to carriers with historical loop costs above the national average.



18



---

##### Table of Contents

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.



The CALLS Order also provided for a phase-out of implicit universal service support mechanisms (which had, in part, relied on setting rates
for interstate access above cost), to be replaced with more explicit subsidy mechanisms. The CALLS Order created an Interstate Access Support fund as part of the Universal Service Fund to accomplish this objective. For 2009, our incumbent local
exchange carriers received approximately $7.8 million in universal service support from this portion of the fund. Because of the substantially different

origin and basis for Interstate Access Support, we do not include such support when discussing high-cost universal service support, despite the fact that Interstate Access Support is part of such program.



Our Iowa competitive local exchange carriers are
certified to offer service in all Iowa exchanges served by Qwest and have been certified as eligible telecommunications carriers in all such areas by the Iowa Utilities Board. In addition, IT Communications, LLC is certified to offer service in all
exchanges in Nebraska in which the ILEC is not subject to the rural interconnection exemption discussed above. ITC receives no high-cost or Interstate Access Support for the Qwest markets it has entered because Qwest currently receives no high cost
support and only nominal Interstate Switched Access Support for the exchanges served by ITC. Qwest receives no high cost support and no Interstate Switched Access Support for the exchanges served by IT Communications, and therefore IT Communications
receives no universal service support. Neither Lakedale Link, Inc., Lakedale Link, LLC, nor EN-TEL operate as eligible telecommunications carriers.



Our incumbent local exchange carrier, independent incumbent local exchange carriers and competitive local exchange carriers are required to
make contributions to the federal universal service program based on methodologies and procedures established by the FCC. Contributions to the federal Universal Service Fund are based on revenues from interstate and international services. In
accordance with FCC rules, we recover our contributions from our customers through a surcharge on interstate and international revenues. The surcharge is adjusted each quarter and, in the fourth quarter of 2009, the surcharge was 12.3% of interstate
and international revenues. In 2009, our incumbent local exchange carriers and competitive local exchange carriers collected and contributed to the Universal Service Fund approximately $2.7 million and $360,000, respectively.



As of October 1, 2004, the Universal Service Administrative
Company (USAC) has been subject to the federal Anti-Deficiency Act (ADA), the effect of which could have caused delays in payments to Universal Service Fund (USF) program recipients from high-cost programs,
including Interstate Access Support (to our incumbent local exchange carrier), Interstate Common Line Support (to our independent incumbent local exchange carriers), Local Switching Support (to Lakedale Telephone and Montezuma Telephone) and
High-Cost Loop Support (to Montezuma Telephone and Lakedale Telephone), as well as significantly increased the amount of USF regulatory fees charged to consumers. In April 2005, the FCC tentatively concluded that the high-cost and low-income
universal service programs of the Universal Service Fund were compliant with ADA requirements, and asked the Office of Management and Budget (OMB) to make a final determination on this issue, which has not yet occurred. In September
2008, Congress passed legislation to exempt the USF from ADA requirements until March 6, 2009. We cannot predict whether and for how long USF payments might be delayed or suspended or how actions to address this problem may affect us.



In 2000, the FCC implemented new rules requiring
the high-cost universal service support received by non-rural telephone companies to be based on forward-looking costs. In May 2001, the FCC adopted a proposal



19



---

##### Table of Contents

from the Rural Task Force to reform universal service support for rural areas. Although the rules adopted in response to the Rural Task Force proposal were to expire July 1, 2006, no
replacement rules have been established, leaving the current regime temporarily in place. Under the currently-effective rules, eligible rural carriers continue to receive support based on a modified embedded cost mechanism.



The FCC continues to consider various proposals for changing the
manner in which universal service funds are distributed, some in the context of intercarrier compensation reform and some independently. The FCC also continues to consider the extent to which its universal service programs should be more targeted at
broadband deployment. The FCC has a variety of proposals before it on which it could act and others on which it may seek comment. We cannot predict if, when, or how the FCC will change its non-rural or rural universal service programs, which may
include combining such programs. Congressional action in this area is also a possibility. We cannot predict if, when, or how Congress may change the universal service program.



Internet. We provide Internet access services as an Internet service provider (ISP).
Historically, the FCC has regulated wireline carrier provision of broadband Internet service as comprising two componentsa telecommunications component representing the transmission function that is subject to common carrier
regulation, including contributing to the Universal Service Fund, and an information service component, which is not regulated (either with respect to price or the terms and conditions of service). The FCC concluded in an order effective
November 16, 2005, that wireline carrier provision of broadband Internet access service comprises only information service and does not include a regulated telecommunications component. Therefore, pursuant to a regulatory election
by our incumbent local exchange carrier, effective November 16, 2005, all portions of our DSL service are now deregulated and detariffed, which provides us with enhanced pricing flexibility. We cannot predict the outcome or the effect of FCC or
judicial decisions on our ISP business, our incumbent local exchange carrier or competitive local exchange carrier businesses. Our ISP business is, and may become, subject to a variety of other legal requirements relating to privacy, copyrights, the
conveyance of obscenity, indecent speech, unsolicited electronic messages and taxation. In February 2004, the FCC determined that a particular type of entirely Internet-based voice over Internet protocol service is also an information service and
exempt from such regulatory obligations, and in November 2004, determined that another, more widely used, version of voice over Internet protocol service is an interstate service, and therefore, outside the jurisdiction of state telecommunications
regulations. Certain aspects of the FCCs determination have been challenged in judicial proceedings. The FCC is currently considering the regulatory status of a variety of voice over Internet protocol service configurations in the context of a
comprehensive proceeding launched in February 2004, as well as in several other application and issue-specific proceedings. The FCC is also in the process of developing a National Broadband Plan which it expects to release during the first quarter
of 2010 and from which we expect several rulemakings to be developed. Current proceedings do concern and future proceedings are likely to concern, among other things, what, if any, intercarrier compensation must be paid by providers of such service
and what, if any, universal service contributions must be made by such providers. We cannot predict the outcome of these proceedings or the effect of FCC or judicial decisions on any of our ISP, incumbent local exchange carrier or competitive local
exchange carrier businesses.



Customer
Information. Companies such as our incumbent local exchange carrier and competitive local exchange carriers are subject to statutory and regulatory limitations on the use of customer information we acquire by virtue of providing
telecommunications services, including information related to the quantity, technical configuration, type, destination and amount of a customers use of services. Under these rules, we may not use such information acquired through one of our
service offerings to market other service offerings without the approval of the affected customers. New FCC rules requiring carriers to take additional measures to protect customer data became effective on December 6, 2007. We believe that we
are in compliance with these obligations, which may affect our incumbent local exchange carriers ability to market some services to our customers.



Communications Assistance for Law Enforcement Act. Under the Communications Assistance for Law Enforcement Act (CALEA) and
related federal statutes, we are required to provide law enforcement officials



20



---

##### Table of Contents

with call content and call identifying information under a valid electronic surveillance warrant and to reserve a sufficient number of circuits for use by law enforcement officials in executing
court-authorized electronic surveillance. We believe we are in compliance with the laws and regulations, including those relating to broadband service with which we have been required to comply since May 14, 2007. We cannot predict whether and
when the FCC might modify such regulations or any other rules, or what compliance with new rules might cost.



Preferred Carrier Selection Changes. A customer may change his or her preferred long distance carrier at any time, but the FCC, Iowa
Utilities Board and Minnesota Public Utilities Commission regulate this process and require that specific procedures be followed. The FCC, Iowa Utilities Board and Minnesota Public Utilities Commission have levied substantial fines for unauthorized
changes and have recently increased the penalties for such conduct. We believe we are in compliance with the required processes and procedures, and no such fines have been assessed against us.



Service Outage Reporting. 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 rings. 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.



Emergency Back-up Power. In response to the Independent Panel Reviewing the Impact of Hurricane Katrina on Communications Networks,
the FCC adopted rules on May 31, 2007, requiring incumbent local exchange carriers, competitive local exchange carriers and wireless carriers to, among other things, maintain emergency back-up power for a minimum of eight hours for cell sites,
remote switches and digital loop carrier system remote terminals that normally are powered from local AC commercial power. Five days prior to the new rules taking effect, on October 4, 2007 the FCC released an order amending some of these new
requirements to provide greater compliance flexibility. After having its back-up power reporting requirements rejected by the Office of Management and Budget, effectively staying the FCCs rules, the FCC has indicated that it will conduct a
proceeding in the future to reconsider its not-yet-effective rules so as to provide greater flexibility.



Regulation of Our Independent Incumbent Local Exchange Carriers. Our independent incumbent local exchange carriers, Lakedale Telephone
and Montezuma Telephone, which for regulatory purposes are treated as independent of our incumbent local exchange carrier, are generally subject to the same federal regulation as our incumbent local exchange carrier, with certain exceptions. First,
their interstate access charges are subject to historical investment-based regulation applicable to non-price-cap carriers, that is, rate-of-return regulation. Montezuma Telephone, in particular, falls into the category of non-price-cap carriers
known as average schedule companies, whose historic costs are simulated through formulae, individual company data and pooled data from companies nationwide. Lakedale Telephone, on the other hand, is known as a cost company,
whose historic costs are based on actual accounting figures. Second, Montezuma Telephone, but not Lakedale Telephone, continues to maintain the rural exemption from certain interconnection obligations. Third, because, as a general matter,
rate-of-return carriers have been unable to remove the assets and expenses attributable to DSL transmission from their rate bases, our independent incumbent local exchange carriers, like most other rate-of-return carriers, continue to offer DSL
transmission on a regulated common carrier basis. Lakedale Telephone Company, through the former operations of Sherburne County Rural Telephone Company, currently receives approximately $850,000 in quarterly federal high-cost loop support.



Lakedale Telephone (through its affiliates) and
Montezuma Telephone provide commercial mobile radio service in their incumbent local exchange carrier service territories and are subject to provisions of the Communications Act and FCC rules concerning wireless carriers. Lakedale Telephone provides
service through a resale agreement. Montezuma, through a management agreement with Iowa Wireless Services, LLC (Iowa



21



---

##### Table of Contents

Wireless), provides mobile wireless service in its incumbent local exchange carrier service territory. Lakedale Telephone (either directly, including through the former operating assets of
Sherburne County Rural Telephone Company, or through its affiliates) and Montezuma Telephone also provide television service in all of their incumbent local exchange carrier service territories. EN-TEL also provides television service in its
competitive local exchange carrier territory. Neither Lakedale Telephone, EN-TEL or Montezuma Telephones mobile wireless nor television service are subject to federal rate regulation.



Just as we are unable to predict the outcome of pending and
potential proceedings affecting the federal regulation of our incumbent local exchange carrier, we are unable to predict the outcome of such proceedings, such as intercarrier compensation reform, on our independent incumbent local exchange carriers
and competitive local exchange carrier subsidiaries.



Regulation Applicable to our Advanced Wireless Service and 700 Band MHz Licenses



We currently hold 15 FCC Advanced Wireless Service and three 700 MHz Band licenses in Iowa. Our ownership of these licenses subjects us to
FCC regulation of the wireless services we may choose to provide and the technical operating characteristics of the network equipment we may utilize. In addition, our right to renew these licenses depends on our compliance with build-out
requirements promulgated by the FCC. For the 700 MHz licenses, we must begin meeting such requirements in stages prior to the expiration of the initial 10-year license term. For our Advanced Wireless Service licenses, we must meet the FCCs
build-out requirements by the end of such licenses 15-year initial term. We cannot predict changes that may occur in the FCCs regulation of our Advanced Wireless Services or 700 MHz licenses, the network we may build or the services we
may provide over the period of time we may hold the licenses.



Environmental Regulation



We are
subject to federal, state and local laws and regulations governing the use, storage, disposal of, and exposure to, hazardous materials, the release of pollutants into the environment and the remediation of contamination. As an owner or operator of
property and a generator of hazardous wastes, we could be subject to certain environmental laws that impose liability for the entire cost of cleanup at a contaminated site, regardless of fault or the lawfulness of the activity that resulted in
contamination. We believe, however, that our operations are in substantial compliance with applicable environmental laws and regulations.



State Regulation



Incumbent Local Exchange Carrier. The Iowa Utilities Board is responsible for regulating the rates, terms and conditions pursuant to
which our incumbent local exchange carrier provides basic intrastate local telephone service and switched access service for intrastate transmissions within Iowa. The Iowa Utilities Board also has jurisdiction over the service quality of the
incumbent local exchange carriers intrastate services and relationships with its customers. As required by the Iowa Utilities Board, our incumbent local exchange carrier files and receives approval of tariffs for local telephone and switched
access service. These tariff filings are available on our web site. The Iowa Utilities Board does not regulate the rates our incumbent local exchange carrier charges for any service other than, arguably, extended area service.



The Iowa Utilities Board has granted a certificate of public
convenience and necessity to our incumbent local exchange carrier to provide local telephone service in Iowa. We may not transfer our certificate, transfer control of our company or discontinue providing local services in any of the exchanges we
serve without first obtaining the Iowa Utilities Boards approval. The Iowa Utilities Board has the power to penalize us or revoke our certificate if we are in material violation of any law or regulation. We also must obtain the Iowa Utilities
Boards approval to acquire the whole or any substantial part of the assets or the controlling capital stock of any public utility in Iowa, or to sell or otherwise dispose of the whole or any substantial part of our assets. In addition, the
Iowa Utilities Board is responsible for implementing some of the state and federal laws and



22



---

##### Table of Contents

regulations intended to promote competition. It also has authority under the Telecom Act to establish the rates and terms on which competitive local exchange carriers can interconnect with and
obtain unbundled access to incumbent local exchange carrier networks.



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



We believe that the rates, terms and conditions governing our incumbent local exchange carriers provision of intrastate switched access
service, which is not a local retail service, continue to be regulated by the Iowa Utilities Board in the same manner as prior to July 1, 2005. That is, intrastate switched access service is provided subject to a statutory price regulation plan
that applied to the GTE Midwest Incorporated exchanges at the time we acquired them on June 30, 2000. Under the terms of the price regulation plan, intrastate switched access service is provided pursuant to a tariff approved by the Iowa
Utilities Board containing rates described in the statute that authorized GTE Midwest Incorporated to elect price regulation. In accordance with the price regulation statute, our local incumbent exchange carrier may not increase its intrastate
switched access service rates and cannot be required to decrease them.



The Iowa Utilities Board took the position in the fourth quarter of 2008 that our incumbent local exchange carriers intrastate access rates have ceased to be subject to the intrastate switched
access rate freeze since July 1, 2005, and are subject to challenge. The Iowa Utilities Board recently considered such a challenge based on a February 20, 2008, MCImetro Transmission Access Transmission Services LLC (d/b/a Verizon Access
Transmission Services) and MCI Communications Services, Inc. (d/b/a Verizon Business Services) complaint filed with the Iowa Utilities Board against our local incumbent exchange carrier, our Iowa competitive local exchange carriers, Frontier
Communication of Iowa, Inc., and Citizens Mutual Telephone Company alleging that such companies tariffed originating and terminating intrastate switched access rates are not just and reasonable and should be lowered by the Iowa Utilities Board
to mirror the rates contained in Qwest Corporations Iowa tariff. The complaint appears to be similar to others asserted by these or related entities against the intrastate access charges of mid-sized incumbent local exchange
companies in several other states. We filed a motion to dismiss the complaint in light of our legislated price plan, and believe the substance of the complaint to be without merit given the absence of any rationale for the proposed decrease. The
Iowa Utilities Board denied our motion to dismiss on November 14, 2008, a decision we could not appeal until the Iowa Utilities Board issued a decision on the merits.



Following the filing of all rounds of testimony but prior to the hearing, Iowa Telecom and Verizon reached a tentative
settlement of Verizons complaint on October 23, 2009 and successfully requested the proceeding to be stayed until a settlement agreement had been executed. Iowa Telecom and Verizon executed the settlement agreement on December 7,
2009 and jointly filed for approval of the same on December 11, 2009, which the Iowa Utilities Board granted on February 4, 2010. By the terms of the settlement, Iowa Telecom and its Iowa CLECs agreed to decrease their current intrastate
switched access rates for the local switching element to $0.01508, $0.021780, and $0.021780, respectively, in three steps via a single tariff filing to be made by each Iowa Telecom company. As required by the settlement agreement, these tariff
revisions were filed on February 11, 2010 with a requested effective date of March 13, 2010. Approval of such filing is currently



23



---

##### Table of Contents

pending. The settlement agreement requires Verizon to request dismissal of its complaint with prejudice no later than five business days after the effective date of the currently-pending tariff
filing. Further, Verizon agreed that it would not seek to reduce any element of Iowa Telecoms ILEC or CLEC intrastate switching rates before January 1, 2012. The settlement also provides for mutual releases of all claims set forth in
Verizons Complaint and Iowa Telecoms Answer in this docket. In addition, the settlement provides that it shall not limit or affect: Verizons right to seek to reduce, eliminate or otherwise challenge the approximately
three-cent-per-minute carrier common line charges (CCLCs) of Iowa Telecom in any rulemaking proceedings of general applicability; Iowa Telecoms right to implement switched access rate increases or decreases ordered or permitted by
the Iowa Utilities Board or the FCC in proceedings to reform intercarrier compensation; and Iowa Telecoms right to seek to maintain the CCLCs of Iowa Telecom in rulemaking proceedings of general applicability.



On September 12, 2008, the Iowa Utilities Board issued an
order commencing an inquiry into whether the Iowa Utilities Board should create an Iowa Universal Service Fund (USF). At this point, the Iowa Utilities Board is seeking comment on preliminary issues, such as how it should determine
whether an Iowa USF is needed, and on certain policy and implementation issues assuming that an Iowa USF will be established. Comments were filed on October 27, 2008. Eventually, the Iowa Utilities Board may issue an order commencing
rulemaking. Sprint filed a petition for rulemaking on July 6, 2009 requesting that the Iowa Utilities Board eliminate the CCLC, which the Iowa Utilities Board denied on September 4, 2009 and again on October 13, 2009 following
Sprints request for reconsideration. In so doing, the Iowa Utilities Board stated that CCLC matters were best considered in the context of universal service issues. We cannot predict whether the Iowa Utilities Board will establish a rulemaking
as a result of its pending inquiry or, assuming it does, the result of such rulemaking.



The new law that became effective July 1, 2005 also gives the Iowa Utilities Board jurisdiction to entertain a complaint by certain local exchange carriers that other carriers have engaged in
activity that is inconsistent with the antitrust laws and the policies underlying them, and allows the Iowa Utilities Board to punish such behavior by adjusting retail rates in an amount sufficient to correct the antitrust activity, ordering the
local exchange carrier engaging in such activity to pay costs incurred by the complainant in pursuing the complaint, imposing civil penalties against the local exchange carrier engaging in such activity, and ordering either the complainant or the
other local exchange carrier to pay the costs of the complaint proceeding including the other partys reasonable attorney fees.



Iowa Competitive Local Exchange Carriers. We have two Iowa competitive local exchange carrier subsidiariesITC and IT
Communications. ITC and IT Communications offer services in all of Qwests Iowa exchanges and generally offer the same local exchange services as those offered by Qwest, using unbundled network facilities provided by Qwest pursuant to our
commercial agreements with them, and provides DSL Internet access service in all the exchanges in which it operates, using either Qwests wholesale service or owned facilities. IT Communications began operations in January 2006. IT
Communications operates similarly to ITC, but is focused on larger markets in Iowa. The Iowa Utilities Board does not have jurisdiction over the rates for local basic communications service of our competitive local exchange carriers, but ITC and IT
Communications do file tariffs regarding the terms and conditions for such service with the Iowa Utilities Board.



The Iowa Utilities Board has jurisdiction over our Iowa competitive local exchange carriers switched access rates. The Iowa Utilities
Board rules allow our competitive local exchange carriers to adopt the tariffs of any other carrier providing switched access service in Iowa. Our Iowa competitive local exchange carriers, like a majority of competitive local exchange carriers in
the state, have adopted the switched access rates contained in the access tariff of the Iowa Telecommunications Association, although, as discussed above, the terms of our settlement of Verizons intrastate switched access charge complaint
controls our Iowa CLECs end office switched access rates. See the discussion of Montezuma Telephone below for developments regarding such access rates. The Iowa Utilities Board also has jurisdiction over the service quality of our competitive
local exchange carriers intrastate services and relationships with their customers.



24



---

##### Table of Contents

Minnesota Competitive Local Exchange Carriers. We have three Minnesota competitive
local exchange carrier subsidiaries: Lakedale Link, Inc., which is engaged in total service resale of Qwest, Frontier, and Century Link products in certain of their respective exchanges and also, to the extent that it is operating WH Comms
former operating assets, through its own facilities in certain Qwest exchanges; Lakedale Link, LLC, which is engaged in facilities-based competition with Qwest in certain of Qwests exchanges; and EN-TEL, a majority owned subsidiary that
provides facility-based service in certain Qwest exchanges. Competitive local exchange carriers in Minnesota are not subject to rate-of-return regulation or earnings investigation, and their retail rates are generally subject to investigation only
to prevent unreasonable discrimination. The intrastate access rates of Minnesota competitive local exchange carriers remain subject to regulation and adjustment by the Minnesota Public Utilities Commission. The Minnesota Public Utilities Commission
also has jurisdiction over the service quality of competitive local exchange carriers intrastate services and relationships with their customers.



Independent Incumbent Local Exchange Carriers. Lakedale Telephone has made an election of alternative regulation under the Minnesota
statute that is available to a local exchange telephone company with fewer than 50,000 subscribers. Pursuant to this election, Lakedale Telephone is not subject to rate-of-return regulation or earnings investigation, but its retail rates remain
subject to review and adjustment upon petition or complaint under certain conditions. Lakedale Telephones intrastate access rates also remain subject to regulation and adjustment by the Minnesota Public Utilities Commission. The Minnesota
Public Utilities Commission also has jurisdiction over the service quality of Lakedale Telephones intrastate services and relationships with its customers. Lakedale Telephones operations in the exchanges formerly served by Sherburne
County Rural Telephone Company are subject to a similar election.



Montezuma Telephone, as an Iowa provider of fewer than 15,000 access lines, is not subject to the retail and, arguably, access rate regulation of the Iowa Utilities Board, although it is subject to the
Iowa Utilities Boards complaint jurisdiction. Montezuma Telephone and our Iowa competitive local exchange carriers concur in the Iowa Telecommunications Association (ITA) intrastate access charge tariff. On May 30, 2008, the
Iowa Utilities Board issued an order rejecting ITAs proposed tariff revision, and requiring ITA to make certain significant changes to its tariff by June 30, 2008. These changes include lowering the originating and terminating local
switching rate from 4.04 to 2.44 cents-per-minute and removing the separate 1.5 cent-per-minute Transport Interconnection Charge. ITA filed a request for stay pending rehearing on a variety of issues, including the appropriate transition period for
implementation. Sprint also filed a rehearing request regarding the Iowa Utilities Boards decision not to issue refunds back to September 1, 2007, the date of Sprints objection. Following granting ITAs request for stay, the
Iowa Utilities Board, on January 8, 2009, denied all requests for reconsideration and required ITA to implement the ordered tariff revisions effective February 9, 2009, a requirement with which ITA complied. The Iowa Utilities Boards
May 30, 2008, order also indicated that it might institute a proceeding that could lead to removal of the three cents-per-minute carrier common line charge in the ITA tariff, which would apply to Montezuma but not to our CLEC because our CLEC
does not assess the originating and terminating carrier common line (CCL) charge. We discuss a petition for rulemaking on this issue in RegulationUniversal Service above. Montezuma and perhaps our Iowa CLECs
could also be affected by any Iowa universal service fund program.



Neither Lakedale Telephones nor Montezuma Telephones mobile wireless, television, or data services are subject to state rate regulation.



Other



Our incumbent local exchange carrier provides local exchange services from three exchanges in Iowa that include
approximately 100 access lines that serve customers physically located in Missouri. With regard to these access lines, our incumbent local exchange carrier is subject to the jurisdiction of the Missouri Public Service Commission, which is
responsible for granting operating certificates to local service providers and regulating the intrastate access service, local service, the service quality and relationships with customers of incumbent local exchange carriers operating in Missouri.
Our incumbent local exchange carrier is certified to operate in Missouri



25



---

##### Table of Contents

and, as such, has approved tariffs on file with the Missouri Public Service Commission. Our incumbent local exchange carrier contributes to the Missouri Universal Service Fund and also files
service quality and financial monitoring reports with the Missouri Public Service Commission on an annual and quarterly basis.



Neither the Iowa Utilities Board, Minnesota Public Utilities Commission, nor the Missouri Public Service Commission regulate dial-up Internet
access or, high-speed Internet access services to customers of either our incumbent local exchange carrier or our competitive local exchange carriers. Further, none of the regulatory agencies regulates the intrastate long distance rates of any
carrier.



Local Government Authorizations



In some communities, our incumbent local exchange carriers are
required to obtain certain authorizations from municipal authorities, such as permits, licenses or easements to install and maintain the facilities and equipment necessary to provide telecommunications services. We believe we are in compliance with
all such requirements. Some jurisdictions where we may provide service may require license or franchise fees based on criteria established by Iowa statute. These amounts are not material to our incumbent local exchange carrier operations.



To the extent our competitive local exchange
carriers provide service through facilities or services purchased from Qwest, no local government authorizations are required. If our competitive local exchange carriers were to construct their own facilities, they may be subject to the requirements
of local governments in such markets. Currently, our competitive local exchange carriers pay no local license or franchise fees.



Lakedale Telephone, Montezuma Telephone, and EN-TEL provide cable television service pursuant to franchise agreements which include certain
operational requirements.



26



---

##### Table of Contents

ITEM 1A. Risk Factors



Set forth below are risks and uncertainties that could cause
actual future results to differ materially from those described herein.



Risk Related to the Proposed Merger with Windstream Corporation



Our proposed Merger with Windstream may be delayed or may not occur at all, which could negatively affect the market price of our common stock and our business and financial results.



Completion of the proposed Merger with Windstream is
conditioned upon the receipt of certain governmental consents and approvals, and our shareholders approval. However, no assurance can be given that the required conditions to closing will be satisfied or that the Merger will be completed. If
the proposed Merger is not consummated, it could adversely affect the market price of our common stock or our business and financial results.



In the event of a termination of the Merger Agreement, we may be required to pay Windstream a termination fee of $25.0 million in certain
circumstances.



The Merger Agreement contains various covenants
which severely restrict our ability to operate outside the ordinary course of business, which could have an adverse effect on our business and financial results and future prospects.



The Merger Agreement contains various covenants that restrict our ability to execute many of our strategies or
undertake certain corporate initiatives. If the proposed Merger is not consummated, in the interim these covenants could preclude us from pursuing other business opportunities that could be beneficial to the Company.



Whether or not the proposed Merger with Windstream is completed, the
uncertainty of the transaction could create disruptions in our business, which could have an adverse effect on our business and financial results.



Prior to the completion of the proposed Merger with Windstream, our business will be subject to disruptions relating to the transaction. The
disruptions could include the following:



| |  |  | the attention of our management may be diverted from the operations of the business toward the completion of the proposed Merger;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------



| |  |  | current and prospective employees may experience uncertainty about their future roles with the combined company following the Merger, which could
adversely affect our ability to retain or attract key personnel; and
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | customers may delay or defer decisions or even choose to discontinue their service with us which could negatively impact revenues, earnings and cash
flows, regardless of whether the Merger is completed.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Any of these disruptions could have an adverse effect on our business and financial results.



We and Windstream are exposed to several additional risks relating to the Merger.



In addition to the risks described above, we and our shareholders and Windstream are exposed to several risks
relating to the proposed Merger, including the following:



| |  |  | The exchange ratio for the stock portion of the merger consideration will not be adjusted in the event that the price of Windstream common stock
declines before the Merger is completed. As a result, the value of the shares of Windstream common stock at the time Iowa Telecom shareholders receive them could be less than the value of those shares today.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



27



---

##### Table of Contents

| |  |  | Regulators may impose conditions that could prevent completion of the Merger or reduce the anticipated benefits from the Merger. As a result, the price
of Windstream common stock may be adversely affected.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Windstream may not realize the anticipated synergies, cost savings and growth opportunities from the Merger.
| | - |  | ------------------------------------------------------------------------------------------------------------



| |  |  | Failure to quickly and efficiently integrate Iowa Telecoms technology, products and services could reduce Windstreams profitability, affect
its stock price, and either delay or prevent realization of many of the potential benefits of the Merger.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Windstreams management may be required to dedicate significant time and effort to the integration of Iowa Telecom into Windstream which could
divert their attention from other business concerns.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Windstream expects to incur significant non-recurring expenses related to the Merger.
| | - |  | -------------------------------------------------------------------------------------



| |  |  | The market price of Windstream common stock may decline as a result of the Merger.
| | - |  | ----------------------------------------------------------------------------------



| |  |  | The price of Windstream common stock and Windstreams results of operations may be affected by factors different from those affecting the price of
Iowa Telecom common stock and Iowa Telecoms results of operations.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Iowa Telecom shareholders will have reduced ownership and voting interests after the Merger and will exercise less influence over management of
Windstream than currently exercised over management of Iowa Telecom.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Iowa Telecom shareholders will have substantively different rights with respect to their holdings following the Merger.
| | - |  | -----------------------------------------------------------------------------------------------------------------------



| |  |  | Certain executive officers of Iowa Telecom, including one who is a director of Iowa Telecom, may have potential conflicts of interest in recommending
that Iowa Telecom shareholders vote in favor of the approval and adoption of the Merger Agreement.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The Merger Agreement limits Iowa Telecoms ability to pursue alternatives to the Merger, and in certain instances requires payment of a
termination fee, which could deter a third party from proposing an alternative transaction to the Merger.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Iowa Telecom, its directors, and Windstream are defendants in purported class action lawsuits seeking to enjoin the Merger.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------



Each of the risks mentioned
above is described in detail in Amendment No. 1 to the Form S-4 filed by Windstream with the Securities and Exchange Commission on February 18, 2010 (the Windstream S-4), under the heading RISK FACTORSRisk Factors
Related to the Merger.



In addition, in the
event that the Merger is consummated, Iowa Telecom stockholders who continue to hold the Windstream stock they receive as merger consideration will be subject to the risks related to Windstream described in the Windstream S-4 under the heading
RISK FACTORSRisk Factors Related to Windstream after the Merger.



Risks Related to Our Capital Structure and Ownership



Our dividend policy may limit our ability to pursue growth opportunities.



Our board of directors adopted a dividend policy, effective upon closing of our initial public offering in
November 2004, which reflects an intention to distribute a substantial portion of the cash generated by our business in excess of operating needs, interest and principal payments on our indebtedness and capital expenditures as regular quarterly
dividends to our shareholders. As a result, we may not retain a sufficient amount of cash to finance a material expansion of our business, or to fund our operations consistent with past



28



---

##### Table of Contents

levels of funding in the event of a significant business downturn. In addition, because a significant portion of cash available to pay dividends will be distributed to holders of our common stock
under our dividend policy, our ability to pursue any material expansion of our business, through acquisitions or increased capital spending, will depend more than it otherwise would on our ability to obtain third party financing. We cannot assure
you that such financing will be available to us at all, or at an acceptable cost. The Merger Agreement prohibits the payment of dividends other than regular quarterly dividends of $0.405 per share in accordance with past dividend policy and
practice.



Our equity owners may not receive any dividends.



We are not obligated to pay dividends.
Dividend payments are not guaranteed and are within the absolute discretion of our board of directors, subject to the restrictions contained in the Merger Agreement and applicable law. Future dividends with respect to shares of our common stock, if
any, will depend on, among other things, our results of operations, working capital requirements, financial condition, contractual restrictions, business opportunities, anticipated cash needs, provisions of applicable law and other factors that our
board of directors may deem relevant. In addition, we have reported a loss from continuing operations in the past.



We might not generate sufficient cash from operations in the future to pay dividends on our common stock in the intended amounts or at all.
Our board of directors may decide not to pay dividends at any time and for any reason. Our dividend policy is based upon our directors current assessment of our business and the environment in which we operate, and that assessment could change
based on competitive or technological developments (which could, for example, increase our need for capital expenditures), new growth opportunities or other factors. If our cash flows from operations for future periods were to fall below our minimum
expectations, we would need either to reduce or eliminate dividends or, to the extent permitted under the terms of our credit facilities, fund a portion of our dividends with borrowings or from other sources. If we were to use working capital or
permanent borrowings to fund dividends, we would have less cash and/or borrowing capacity available for future dividends and other purposes, which could negatively affect our financial condition, our results of operations, our liquidity and our
ability to maintain or expand our business. Our board is free to depart from or change our dividend policy at any time and could do so, for example, if it were to determine that we had insufficient cash to take advantage of growth opportunities. In
addition, our credit facilities contain limitations on our ability to pay dividends. See Dividend Policy and Restrictions in Item 5 of this report. The reduction or elimination of dividends may negatively affect the market price of
our common stock.



We have substantial indebtedness and may
incur additional indebtedness in the future, which could restrict our ability to pay dividends.



Our ability to make distributions, pay dividends or make other payments will be subject to applicable law and contractual restrictions
contained in the instruments governing any indebtedness of ours and our subsidiaries, including our credit facilities. The degree to which we are leveraged on a consolidated basis could have important consequences to the holders of our common stock,
including the following:



| |  |  | our ability in the future to obtain additional financing for working capital, capital expenditures or acquisitions may be limited;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------



| |  |  | a significant portion of our cash flow from operations is likely to be dedicated to the payment of the principal of and interest on our indebtedness,
thereby reducing funds available for future operations, capital expenditures and/or dividends on our common stock;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | we may be more vulnerable to economic downturns and be limited in our ability to withstand competitive pressures; and
| | - |  | ---------------------------------------------------------------------------------------------------------------------



| |  |  | we may have limited flexibility to plan for and react to changes in our business or strategy.
| | - |  | ---------------------------------------------------------------------------------------------



In addition, we may incur substantial additional indebtedness in
the future, subject to the restrictions contained in the Merger Agreement. Any additional debt incurred by us could increase the risks associated with our substantial leverage.



29



---

##### Table of Contents

We are subject to restrictive debt covenants and other requirements related to our outstanding debt that
limit our business flexibility by imposing operating and financial restrictions on us.



Covenants in our credit facilities impose significant operating and financial restrictions on us. These restrictions prohibit or limit, among other things:



| |  |  | the incurrence of additional indebtedness and the issuance of preferred stock and certain redeemable capital stock;
| | - |  | -------------------------------------------------------------------------------------------------------------------



| |  |  | the payment of dividends on, and purchase or redemption of, capital stock;
| | - |  | --------------------------------------------------------------------------



| |  |  | a number of other restricted payments, including investments and acquisitions;
| | - |  | ------------------------------------------------------------------------------



| |  |  | specified sales of assets;
| | - |  | --------------------------



| |  |  | specified transactions with affiliates;
| | - |  | ---------------------------------------



| |  |  | the creation of liens on our assets;
| | - |  | ------------------------------------



| |  |  | consolidations, mergers and transfers of all or substantially all of our assets;
| | - |  | --------------------------------------------------------------------------------



| |  |  | our ability to change the nature of our business; and
| | - |  | -----------------------------------------------------



| |  |  | our ability to make capital expenditures.
| | - |  | -----------------------------------------



These restrictions could limit our ability to obtain future financing, make acquisitions, fund capital expenditures, withstand downturns in
our business or take advantage of business opportunities. Furthermore, the credit facilities also require us to maintain specified total leverage and fixed charge coverage ratios, to satisfy specified financial condition tests and may require us to
make annual mandatory prepayments with a portion of our available cash. See Long-Term Debt and Revolving Credit Facilities in Item 7 of this report. Our ability to comply with the ratios or tests may be affected by events beyond our
control, including prevailing economic, financial and industry conditions.



A breach of any of these covenants, ratios or tests could result in a default under the credit facilities. Upon the occurrence of an event of default under the credit facilities, the lenders could elect
to declare all amounts outstanding under the credit facilities to be immediately due and payable. If the lenders accelerate the payment of the indebtedness under the credit facilities, our assets may not be sufficient to repay in full this
indebtedness and our other indebtedness.



We may not be able to
refinance our credit facilities at maturity on favorable terms or at all.



Our credit facilities will mature in full on November 23, 2011. We may not be able to renew or refinance the credit facilities, or any renewal or refinancing may occur on less favorable terms. If we
are unable to refinance or renew our credit facilities, our failure to repay all amounts due on the maturity date would cause a default under the credit facilities. In addition, given the current credit environment, our ability to access the capital
markets may be restricted and our interest expense may increase significantly if we refinance our credit facilities on terms that are less favorable to us than the terms of our existing credit facilities, which could impair our ability to pay
dividends.



Due to recent financial market conditions, we may
seek funding under our revolving credit facility or a commitment to lend incremental term loans and learn that our lenders cannot fulfill our request for cash.



We have an agreement with the Rural Telephone Finance Cooperative, which we depend upon for our revolving
credit needs. In spite of the contractual obligation of the institution to perform under the financing agreement, and in spite of our attempts to remain informed of the capability of any institution to perform their functions for us, we may learn
that our request for cash on any given day cannot be fulfilled.



30



---

##### Table of Contents

We will require a significant amount of cash, which may not be available to us, to service our debt, pay
dividends and fund our other liquidity needs.



Our ability to make payments, refinance or repay our debt, to fund planned capital expenditures, pay dividends and to expand our business will depend largely upon our future operating performance. Our future operating performance is subject
to general economic, financial, competitive, legislative and regulatory factors, as well as other factors that are beyond our control. Our business may not generate enough cash flow and future borrowings may not be available to us under our credit
facilities or otherwise, sufficient to enable us to pay our debt, pay dividends or fund our other liquidity needs. If we are unable to generate sufficient cash to service our debt requirements, we will be required to refinance our credit facilities.
We may not be able to refinance any of our debt, including the credit facilities, under such circumstances, on commercially reasonable terms or at all. If we were unable to refinance our debt or obtain new financing under these circumstances, we
would have to consider other options, including:



| |  |  | sales of certain assets to meet our debt service requirements;
| | - |  | --------------------------------------------------------------



| |  |  | sales of equity; and
| | - |  | --------------------



| |  |  | negotiations with our lenders to restructure the applicable debt.
| | - |  | -----------------------------------------------------------------



Our credit facilities could restrict our ability to do some of these things. If we are forced to pursue any of
the above options under distressed conditions, our business and/or the value of our common stock could be adversely affected.



There may be volatility in the trading price of our common stock, which could negatively affect the value of an investment in our common stock.



The market price of our common stock may
fluctuate widely as a result of various factors, such as period-to-period fluctuations in our operating results, sales of our common stock by significant shareholders, developments in the telecommunications industry, the failure of securities
analysts to cover our common stock or changes in financial estimates or opinions by analysts, competitive factors, regulatory developments, economic and other external factors, interest rates, general market conditions and market conditions
affecting the stock of telecommunications companies in particular. Telecommunications companies have in the past experienced extreme volatility in the trading prices and volumes of their securities, which has often been unrelated to operating
performance. Any such market volatility may have a significant adverse effect on the market price of our common stock.



Future sales, or the possibility of future sales, of a substantial amount of our common stock may depress the price of the shares of our common stock.



Future sales, or the availability for sale
in the public market, of substantial amounts of our common stock could adversely affect the prevailing market price of our common stock, and could impair our ability to raise capital through future sales of equity securities.



Members of our management and other employees held fully vested
options to purchase a total of 38,141 shares of our common stock as of December 31, 2009, all of which have been registered under the Securities Act of 1933 and may be exercised and sold at any time.



We may issue shares of our common stock, or other securities,
from time to time as consideration for future acquisitions and investments, subject to the restrictions contained in the Merger Agreement. In the event any such acquisition or investment is significant, the number of shares of our common stock, or
the number or aggregate principal amount, as the case may be, of other securities that we may issue, may in turn be significant. We may also register, or grant registration rights covering, those shares or other securities in connection with any
such acquisitions and investments.



31



---

##### Table of Contents

If the Merger with Windstream is not completed, our organizational documents could limit another
partys ability to acquire us and therefore could deprive our investors of the opportunity to obtain a takeover premium for their shares.



If the Merger with Windstream is not completed, a number of provisions in our articles of incorporation and bylaws will make it difficult for
another company to acquire us and, therefore, for investors to receive any related takeover premium for their shares. For example, our articles of incorporation provide for a classified board of directors, prohibit removal of directors without cause
and authorize the issuance of preferred stock without shareholder approval and upon such terms as the board of directors may determine. The rights of the holders of shares of our common stock will be subject to, and may be adversely affected by, the
rights of holders of any class or series of preferred stock that may be issued in the future.



We are also subject to laws that may have a similar effect. For example, federal and state telecommunications laws and regulations generally prohibit a direct or indirect transfer of control over our
business without prior regulatory approval. Section 490.1110 of the Iowa Business Corporation Act prohibits us from engaging in a business combination with an interested shareholder for a period of three years from the date the person became an
interested shareholder unless certain conditions are met. The Iowa Business Corporation Act also provides that only shareholders representing at least 50% of our shares entitled to vote may request that our board of directors call a special meeting
of shareholders and that, in evaluating any acquisition offer, our board of directors may consider the interests of our employees, suppliers, creditors and customers, the interests of the communities in which we operate, and the long-term interests
of our company and the shareholders, in addition to the financial interests of shareholders.



Factors requiring us to pay cash taxes in future periods may affect our ability to pay dividends.



We currently are able to take deductions of approximately $44 million from taxable income associated with the amortization of intangibles
through June 2015. In addition, as of December 31, 2009, we had net operating losses to offset taxable income of $154 million, which will expire in 2021 through 2024. Consequently, in the future we may be required to pay cash income taxes
because all of our net operating losses have been used or have expired, or because our intangible assets have been fully amortized. Any of the foregoing would have the effect of increasing our taxable income and potentially reducing our after-tax
cash flow available for payment of dividends in future periods, and may require us to reduce dividend payments on our common stock in such future periods.



Risks Relating to Our Business and Industry



Competition in the telecommunications industry could result in access line losses or reduce our customer base, possibly requiring that we lower our rates,
increase marketing expenditures, invest in new technologies or capabilities or use discounting and promotional campaigns that adversely affect our margins.



We face actual or potential competition from other telecommunications service providers, including wireless service providers, who have
entered and may continue to enter our service areas. Such competition has resulted in access line losses. In general, when we lose a customer to a competitor for local service we also lose that customer for all related services, such as long
distance and Internet service, and may also lose the access charge revenues for that customer. We have interconnection agreements with 44 of the competitive local exchange carriers and 31 wireless carriers authorized to offer local service in our
service area. Because we have multiple subsidiaries, we have multiple interconnection agreements with some competitors.



Six of the 44 competitive local exchange carriers are municipal telephone utilities. Other communities we serve may in the future evaluate
and decide to establish a municipal telephone utility. We cannot predict the likelihood of further competition from municipal telecommunications utilities on our business.



MCC is offering voice services through a business arrangement with Sprint Communications L.P. (Sprint). On
June 23, 2006, we filed a complaint against the Iowa Utilities Board and Sprint in the U.S. District



32



---

##### Table of Contents

Court for the Southern District of Iowa asking the court to rule that the Iowa Utilities Board acted unlawfully when it required us to enter into an interconnection agreement with Sprint and
asking the court to invalidate the agreement. On April 15, 2008, the court issued a ruling in favor of the Iowa Utilities Board and Sprint, therefore maintaining the status quo in which we are obligated to enter into an interconnection
agreement with Sprint. On April 28, 2009, the U.S. Court of Appeals for the Eighth Circuit affirmed the lower courts decision (and, ultimately, the Iowa Utilities Boards decision).



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 in the
manner requested by Sprint. On June 12, 2009, the District Court held that the Iowa Utilities Board acted improperly by requiring us to serve as a traffic-switching intermediary between Sprint and third-party long distance carriers.



On July 31, 2006, MCC filed a complaint 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 proceeding was stayed while our first federal
complaint was pending but the stay was lifted after issuance of the Eighth Circuits April 28, 2009 decision. On January 20, 2010, we executed an interconnection agreement with MCC that envisions MCC connecting directly to us rather
than through Sprint and on February 5, 2010, MCC dismissed its Iowa District Court complaint.



We also face competition from sources other than wireline competition and wireline competitive local exchange carriers. Wireless providers,
for example, currently compete in most of our markets. We expect this competition to continue, and likely become more acute, in the future. We also compete, or may in the future compete, with companies that provide other close substitutes for the
traditional telephone services we provide, like cable television, voice over Internet protocol, high-speed fiber optic networks or satellite telecommunications services, and companies that might provide traditional telephone services over
nontraditional network infrastructures, like electric utilities. We are subject to regulations, like those requiring us to provide number portability for wireless carriers, that reduce the barriers to entry faced by some providers of substitute
services, and may be subject to other regulations favoring substitute services in the future.



We may lose access lines due to general economic conditions and competition.



Our business generates revenue by delivering voice and data services over access lines. In the past, we have experienced net access line loss
due to challenging economic conditions and increased competition. Our total access line count increased by 0.6% during 2008 and increased 4.5% during 2009. Access lines decreased 7.5% for 2008, and 6.5% for 2009, if we exclude lines served by our
competitive local exchange carrier and access lines acquired during 2008 and 2009, respectively. We are affected both by the economic effects of general demographic trends in the rural Midwest as well as, to some extent, more general economic
downturns. Continued access line losses could adversely affect our revenues and earnings.



The recent severe contraction in the global financial markets may have an impact on our business and financial condition



Diminished availability of credit and liquidity due to the recent severe contraction in the global financial
markets may impact the financial health of the Companys customers, vendors and partners, which in turn may negatively impact the Companys revenues and operating expenses.



We may lose access lines due to the economic conditions and a declining population in many rural Midwest communities.



Virtually all of our customers and operations
are located in Iowa and Minnesota. Due to our geographic concentration, the successful operation and growth of our businesses is dependent on economic conditions in



33



---

##### Table of Contents

Iowa and Minnesota. The Iowa and Minnesota economies, in turn, are dependent upon many factors, including the strength of the agricultural economy along with the manufacturing and service
industries.



Furthermore, the economies of rural
communities, such as those that we serve, are affected by many of the same factors as the Iowa and Minnesota economies in general. In addition, rural communities face additional challenges to their economic stability and growth. The populations of
many rural communities in Iowa and Minnesota, particularly smaller towns, have been declining. Any deterioration in general economic conditions in Iowa and Minnesota are likely to result in lower demand for our services, which would reduce our
revenues.



We may in the future compete with the Iowa
Communications Network or with a future purchaser of the assets now owned by the Iowa Communications Network.



The Iowa Communications Network, a state-owned limited use network with more than 3,000 miles of fiber optic cable extending into all 99 Iowa
counties, and capable of providing a variety of voice, data and video communication services, currently is prohibited by state law from providing telephone service to parties other than school districts, higher education institutions, state and
federal agencies, the United States Postal Service, hospitals, physicians clinics and public libraries. The assets now owned by the Iowa Communications Network could be used to provide voice, data and video communications to other users. The
State of Iowa has previously considered modifying state law to remove some of the usage restrictions applicable to the Iowa Communications Network and/or to permit the sale of the Iowa Communications Network to a private party. A sale of the Iowa
Communications Network or its assets, or a change in the law permitting broader use of the Iowa Communications Network, could provide additional competition for us.



We may not be able to integrate future technologies, respond effectively to customer requirements or provide new services.



The communications industry is subject to
rapid and significant changes in technology, frequent new service introductions and evolving industry standards. We cannot predict the effect of these technological changes on our business. New technologies and products may not be compatible with
our existing technologies and systems. In addition, our existing technologies and systems may not be competitive with new superior technologies and products, which may reduce service prices. These developments could require us to incur costs for
equipment upgrades or to procure additional products that could be expensive. If we do not adequately replace or upgrade our technology and equipment that becomes obsolete, we may not be able to compete effectively. Technological changes in the
communications industry may have a material adverse effect on our business or financial results. We may not be able to obtain timely access to new technology on satisfactory terms or incorporate new technology into our systems in a cost effective
manner, or at all.



In addition to technological
advances, other factors could require us to further expand or adapt our network, including an increasing number of customers, demand for greater data transmission capacity, failure of our technology and equipment to support operating results
anticipated in our business plan and changes in our customers service requirements. Expanding or adapting our network could require substantial additional financial, operational and managerial resources, any of which may not be available to
us.



Network failures and other disruptions could adversely
affect our operating results.



To be
successful, we will need to continue providing our customers with a high capacity, reliable and secure network. Some of the risks to our network and infrastructure and the networks and infrastructures of our third party service providers include:



| |  |  | physical damage to access lines, central offices, central office equipment, or equipment used in our underlying voice and data networks or to our
corporate headquarters;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | power loss from, among other things, adverse weather conditions;
| | - |  | ----------------------------------------------------------------



34



---

##### Table of Contents

| |  |  | capacity limitations;
| | - |  | ---------------------



| |  |  | software and hardware defects and malfunctions;
| | - |  | -----------------------------------------------



| |  |  | breaches of security, including sabotage, tampering, computer viruses and break-ins; and
| | - |  | ----------------------------------------------------------------------------------------



| |  |  | other disruptions that are beyond our control.
| | - |  | ----------------------------------------------



Disruptions or system failures may cause interruptions in service or reduced capacity for customers. If service
is not restored in a timely manner, agreements with our customers or service standards set by the Iowa Utilities Board may obligate us to provide credits or other remedies, which would reduce our revenues or increase our costs. Service disruptions
could also damage our reputation with customers, causing us to lose existing customers or have difficulty attracting new ones.



We may not be able to maintain the necessary rights-of-way for our network.



We are dependent on rights-of-way and other permits from railroads, utilities, state highway authorities, local
governments and transit authorities to install conduit and related telecommunications equipment for any expansion of our network. We may need to renew current rights-of-way for our network and cannot assure you that we would be successful in
renewing these agreements on acceptable terms. Some of our agreements may be short-term, revocable at will or subject to termination upon customary default provisions, and we may not have access to existing rights-of-way after they have expired or
terminated. If any of these agreements were terminated or could not be renewed, we may be required to remove our existing facilities from existing locations such as under the streets or be forced to abandon our networks. Similarly, we may not be
able to obtain right-of-way agreements on favorable terms, or at all, in new service areas, and, if we are unable to do so, our ability to expand our network, if we decide to do so, could be impaired. In addition, we may be required to relocate our
facilities to comply with state or local laws or to allow for public infrastructure changes. Such relocations may require significant expenditures by us that are not reimbursed.



Our competitive local exchange carrier strategy may adversely affect our profitability.



We intend to expand our operations in both telephone and
Internet services through our four competitive local exchange carrier subsidiaries into areas in close proximity to our incumbent local exchange carrier territory. As of December 31, 2009, we had approximately 42,700 competitive local exchange
carrier access lines focusing primarily on business customers. Competitive local exchange carrier profitability is contingent on obtaining customers in competition with the incumbent local exchange service provider in a cost-effective manner. Our
wholly-owned CLEC subsidiaries utilize wholesale contracts with Qwest, Century Link and Frontier to purchase certain services from these providers. CLEC profitability could be negatively impacted if such wholesale contracts were either not
available, or available only at a higher cost than we incur today. Either an incumbent provider or another competitive local exchange carrier may diminish our profitability by expanding its marketing efforts or offering additional products.
Furthermore, as a result of the statutory provisions enacted in 2005 regarding deregulation of basic local services in some markets, the incumbent provider will have greater flexibility to respond to competition from our competitive local exchange
carriers, which may reduce our margins and have other negative impacts on our profitability.



We face risks associated with our strategy of growth through acquisitions.



Any future acquisitions will depend on our ability to identify suitable acquisition candidates, negotiate acceptable terms for their
acquisition and finance those acquisitions. In addition, future acquisitions by us could result in the incurrence of indebtedness or contingent liabilities, which could have a material adverse effect on our business, and our ability to achieve
sufficient cash flow, provide adequate working capital and service our indebtedness. Any future acquisitions could also expose us to increased risks, including:



| |  |  | the difficulty of integrating the acquired personnel, network, operations and other support systems;
| | - |  | ----------------------------------------------------------------------------------------------------



35



---

##### Table of Contents

| |  |  | the potential disruption of our ongoing business and diversion of resources and management time;
| | - |  | ------------------------------------------------------------------------------------------------



| |  |  | the inability to generate revenues from acquired businesses sufficient to offset acquisition costs;
| | - |  | ---------------------------------------------------------------------------------------------------



| |  |  | the inability of management to maintain uniform standards, controls, procedures and policies;
| | - |  | ---------------------------------------------------------------------------------------------



| |  |  | the risks of entering markets in which we have little or no direct prior experience;
| | - |  | ------------------------------------------------------------------------------------



| |  |  | the difficulty in enhancing our customer support resources to adequately service our existing customers and acquired customers; and
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------



| |  |  | the impairment of relationships with suppliers, employees or unions as a result of changes in management of the acquired company.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------



Any future acquisitions of
access lines will likely be subject to prior approvals from the Federal Communications Commission, the Iowa Utilities Board, the Minnesota Public Utilities Commission and other applicable state and federal agencies. We may not be able to obtain such
approvals, in which case the acquisition could be delayed or not consummated.



We may not be able to raise the capital to grow through acquisitions.



We may need additional capital to continue growing through acquisitions. Such additional capital may be in the form of additional debt, which
would increase our leverage or equity, which would increase our dividends paid. We may not be able to raise sufficient additional capital at all or on terms that we consider acceptable.



We may not be successful in efficiently managing the growth of our business.



Our business plan will, if successfully implemented, result in
growth of our operations, which may place a significant strain on our management, financial and other resources. To achieve and sustain growth we must, among other things, monitor operations, control costs, maintain regulatory compliance, maintain
effective quality controls and maintain adequate internal management, technical, provisioning, information, billing, customer service and accounting systems. We may not be able to successfully integrate, obtain and use the employee, management,
operational and financial resources necessary to manage a developing and expanding business in an evolving, regulated and increasingly competitive industry.



Our relationships with other telecommunications companies are material to our operations and their financial difficulties may affect our business.



We originate and terminate calls for long
distance carriers and other interexchange carriers over our network and for that service we receive payments called access charges. Some of the carriers that pay us these access charges are our largest customers in terms of revenues. Several such
carriers have declared bankruptcy in recent years. Our inability to collect access charges from these bankrupt or financially distressed carriers has had a negative effect on our financial results and cash flows, as would any subsequent bankruptcies
or disruptions in the businesses of these or other interexchange carriers. Our ability to collect past due amounts of access billings from carriers is hampered by federal and state regulations governing business relationships of these bankrupt or
financially distressed carriers.



We use many
vendors and suppliers that derive significant amounts of business from customers in the telecommunications business. Associated with the difficulties facing many service providers, some of these vendors and suppliers recently have experienced
substantial financial difficulties, in some cases leading to bankruptcies and liquidations. Any disruptions experienced by these vendors and suppliers as a result of their own financial difficulties may affect their ability to deliver products or
services to us on a timely basis or at all, which could have an adverse affect on our business.



36



---

##### Table of Contents

We face risks associated with our reliance on third party telecommunications service providers.



We currently rely on a combination of
interexchange carriers to provide long distance service and local exchange carriers to provide service in the communities served by our CLEC. These third party service providers could cancel or not renew our current agreements or require significant
price increases to continue providing services. Any increase in costs from these carriers or an inability to obtain service from these carriers could have an adverse impact on our business.



We face risks associated with our reliance on our information and billing
systems.



We currently rely on a combination
of internal systems and licenses with third party vendors for our information and billing systems. These systems are vital to our growth and our ability to monitor and control costs, bill customers, process orders, and provide customer service. If
our information and billing systems fail or do not perform as expected, our ability to collect revenues, provide adequate customer service and accurately track our expenses and revenues would be impaired, with potentially materially adverse effects
on our business and operations. In addition, if our third party vendors cancel or do not renew our license agreements, we could face disruption in our operations, as well as unforeseen expense for obtaining suitable replacement services from other
vendors.



Labor disputes with our employees could interrupt our
operations and adversely affect our business.



We have a collective bargaining agreement with the Communications Workers of America, or CWA, which covers 171 of our employees and expires in May 2012. We also have a collective bargaining agreement with the International Brotherhood of
Electrical Workers, or IBEW, which covers 22 of our employees and expires in June 2014. If we negotiate acceptable terms with the CWA or IBEW at the expiration of the current agreements, our operating costs could increase as a result of higher wages
or benefits paid to union members, and if we fail to reach an agreement with the unions our operations could be disrupted. Also, we may experience labor disputes over recognition of types of work performed or additional organizing efforts. Any of
these events could have a material adverse effect on our business, results of operations or financial condition.



We depend on key members of our senior management team.



Our success depends largely on the skills, experience and performance of key members of our senior management team, including Alan L. Wells,
our President, CEO and Chairman. Competition for senior management in our industry is intense, and we may have difficulty retaining our current managers or attracting new managers in the event of termination or resignation.



Risks Related to Our Regulatory Environment



Our business is subject to extensive regulation that could change in
a manner adverse to us.



We operate in a
heavily regulated industry, and most of our revenues come from providing services regulated by the Federal Communications Commission, or FCC, the Iowa Utilities Board, and the Minnesota Public Utilities Commission. Federal and state communications
laws and regulations may be amended in the future, and other laws or regulations may be enacted which will affect our business. The FCC, Iowa Utilities Board and Minnesota Public Utilities Commission may add new rules, amend their rules or change
the interpretation of their rules at any time. Laws and regulations applicable to us and our competitors may be, and have been, challenged in the courts, and could be changed at any time. We cannot predict future developments or changes to the
regulatory environment, or the impact such developments or changes would have on us.



37



---

##### Table of Contents

FCC, Iowa Utilities Board and Minnesota Public Utilities Commission decisions concerning
telecommunications policy and judicial review of such decisions may adversely affect our business.



Federal telecommunications policy continues to evolve through further proposed statutory amendments, changing and implementing new
regulations, and judicial review. These continuing potential and actual changes make it difficult to predict what effect such changes will have on us, our operations and our competitors. For example, as discussed in more detail under
Regulation-Federal Regulation, the FCC has recently been considering changes to intercarrier compensation applicable to local exchange carriers and wireless providers that could adversely affect the access revenues of our incumbent local exchange
carrier and competitive local exchange carrier operations, and the manner in which we will be compensated for terminating calls originating on other carriers networks and will compensate other carriers for handling calls that originate on our
network. The FCC is also examining its universal service policies, including policies with respect to both contribution and disbursement that could have an effect on the amount and timing of our receipt of universal service funds. Further, many FCC
telecommunications decisions are subject to substantial judicial review and delay. These delays and related litigation create uncertainty over federal policies and rules, and may affect our business plans, investments and operations. The Iowa
Utilities Board and Minnesota Public Utilities Commission establish state telecommunications policies, including in the area of discretionary deregulation, both on a service type and geographic basis, and the consequences thereof. Orders of the Iowa
Utilities Board and Minnesota Public Utilities Commission are also subject to judicial review.



New regulations and changes in existing regulations may force us to incur significant expenses.



Our business may be adversely affected by laws and regulations that impose new or greater obligations related to assisting in law
enforcement, bolstering homeland security, reducing environmental impacts or other aspects of our business. For example, existing provisions of the Communications Assistance for Law Enforcement Act and FCC regulations implementing the Communications
Assistance for Law Enforcement Act require telecommunications carriers to ensure that their equipment, facilities, and services are able to facilitate authorized electronic surveillance. We cannot predict whether and when the FCC or other state or
federal agencies might modify such regulations or any other rules, or what compliance with new rules might cost. Similarly, we cannot predict whether or when federal or state legislators or regulators might impose new security, environmental or
other obligations on our business. Such new obligations include FCC outage reporting obligations, stayed by the FCC on December 20, 2004, but pending reconsideration that may, if enacted, require substantial compliance expenditures.



Our incumbent local exchange carrier is subject to regulation that is not
applicable to our competitors.



Federal and
state rules impose obligations and limitations on our incumbent local exchange carrier that are not imposed on some of our competitors. Federal obligations require us to, among other things, share facilities, allow unbundled access to our network
and resale of our services purchased at wholesale rates, file tariffs for access charges, maintain certain types of accounts and file certain types of reports. Similarly, Iowa and Minnesota law impose, among other things, accounting and reporting
requirements and service obligations on us that do not exist for our competitors. As our business becomes increasingly competitive, these regulatory disparities could impede our incumbent local exchange carrier businesses and our ability to compete
in the marketplace, which, in turn, could have a material adverse effect on our business.



Changes to existing regulations may reduce the revenue we receive from network access charges.



Network access charges, which include charges that we assess carriers for originating, terminating or transporting services for their
interchange calls on our local network (governed by tariffs), as well as charges for transit services and transport and termination services billed to wireless and landline carriers (governed by interconnection agreements) accounted for
approximately 35% of our revenues in 2009.



38



---

##### Table of Contents

Large long distance providers have advocated in the past, and continue to advocate, that
access charges they are required to pay should be reduced and the revenues replaced, perhaps only in part, by raising the fees charged to business and residential customers or by receipts from a universal service fund. Large long-haul network
providers have also argued and continue to argue that access charges do not apply to specific types of traffic. The combined or individual results of these long distance carrier efforts could reduce the amount of access charge revenue we receive.
Access charge reform is a key element of the universal service and intercarrier compensation issues under review by state and federal regulators and legislators. We cannot predict whether or when action may be taken on any of these issues, or what
effect any action may have on revenues and costs of our incumbent local exchange carrier and competitive local exchange carrier operations.



To the extent that services that compete with ours are subject to different regulatory regimes, our revenues, particularly from network access charges,
may be reduced.



The emerging technology
known as voice over Internet protocol can be used to carry user-to-user voice communications over dial-up or broadband service. The FCC has determined that a particular type of entirely Internet-based voice over Internet protocol service is an
information service and exempt from such regulatory obligations, but that another, more widely-used, version of voice over Internet protocol service is an interstate service, and therefore, outside the jurisdiction of state telecommunications
regulations. Certain aspects of the FCCs determination have been challenged in judicial proceedings. The FCC is currently considering the regulatory status of a variety of voice over Internet protocol service configurations in the context of a
comprehensive proceeding launched in February 2004 as well as several more application and issue-specific proceedings. These proceedings concern, among other things, what, if any, intercarrier compensation must be paid by providers of such service
and what, if any, universal service contributions such providers must make. Expanded use of voice over Internet protocol technology could reduce the access revenues received by local exchange carriers like us. We cannot predict the outcome of these
proceedings or the effect of FCC or judicial decisions on any of our incumbent local exchange carrier or competitive local exchange carrier businesses, or on our Internet operations.



Because we are subject to extensive laws and regulations relating to the protection of the environment, natural resources
and worker health and safety, we may face significant liabilities or compliance costs in the future.



Our operations and properties are subject to federal, state and local laws and regulations relating to protection of the environment, natural
resources and worker health and safety, including laws and regulations governing and creating liability relating to the management, storage and disposal of hazardous materials, asbestos, petroleum products and other regulated materials. As a result,
we face several risks, including but not limited to the following:



| |  |  | Under certain environmental laws, we could be held liable, jointly and severally and without regard to fault, for the costs of investigating and
remediating any actual or threatened environmental contamination at currently and formerly owned or operated properties, and those of our predecessors, and for contamination associated with disposal by us or our predecessors of hazardous materials
at third party disposal sites. Hazardous materials may have been released at certain current or formerly owned properties as a result of historic operations.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The presence of contamination can adversely affect the value of our properties and our ability to sell any such affected property or to use it as
collateral.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We could be held responsible for third party property damage claims, personal injury claims or natural resource damage claims relating to any such
contamination.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The cost of complying with existing environmental requirements could be significant.
| | - |  | ------------------------------------------------------------------------------------



| |  |  | Adoption of new environmental laws or regulations or changes in existing laws or regulations or their interpretations could result in significant
compliance costs or as yet unidentified environmental liabilities.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



39



---

##### Table of Contents

| |  |  | Future acquisitions of businesses or properties subject to environmental requirements or affected by environmental contamination could require us to
incur substantial costs relating to such matters.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | In addition, environmental laws regulating wetlands, endangered species and other land use and natural resource issues may increase costs associated
with future business or expansion opportunities, delay, alter or interfere with such plans, or otherwise adversely affect such plans.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



As a result of the above, we may face significant liabilities and compliance costs in the future.



ITEM 1B. Unresolved Staff Comments



None.



ITEM 2. Properties



We own most of our administrative and maintenance facilities,
central offices and remote switching platforms, and transport and distribution network facilities. Our corporate headquarters is located in Newton, Iowa in a complex consisting of 11 buildings with approximately 509,000 square feet of office space
that we own. We are currently using approximately half of the space for our corporate headquarters, including our customer contact centers, and intend to lease the remainder to third parties. We also own a 41,600 square foot facility in Newton,
Iowa; a 63,100 square foot building in Grinnell, Iowa, of which approximately 20% is leased to a third party; a 35,900 square foot warehouse and distribution center in Grinnell, Iowa; a 41,000 square foot combined office and warehouse in Annandale,
Minnesota; and a 43,000 square foot combined office, garage, and warehouse in Big Lake, Minnesota.



Our transport and distribution network facilities include a fiber optic and copper wire backbone, and a distribution network that connects
customers both to remote switch locations or the central office in their exchange and to network points of presence or interconnections with interexchange carriers. These facilities are located on land either owned by us or used by us pursuant to
permits, rights-of-way, easements or other authorizations.



ITEM 3. Legal Proceedings



We currently, and from time to time, are involved in litigation and regulatory proceedings incidental to the conduct of our
business. See Business-Regulation. We are not a party to any lawsuit or proceeding that, in the opinion of our management, is likely to have a material adverse effect on us.



Iowa Utilities Board Proceedings



The Iowa Utilities Board took the position in the fourth quarter of 2008 that our incumbent local exchange
carriers intrastate access rates have ceased to be subject to the intrastate switched access rate freeze since July 1, 2005, and are subject to challenge. The Iowa Utilities Board recently considered such a challenge based on a
February 20, 2008, MCImetro Transmission Access Transmission Services LLC, (d/b/a Verizon Access Transmission Services) and MCI Communications Services, Inc. (d/b/a Verizon Business Services) complaint filed with the Iowa Utilities Board
against our primary Iowa incumbent local exchange carrier, our Iowa competitive local exchange carriers, Frontier Communication of Iowa, Inc., and Citizens Mutual Telephone Company alleging that such companies tariffed originating and
terminating intrastate switched access rates of each are not just and reasonable and should be lowered by the Iowa Utilities Board to mirror the rates contained in Qwest Corporations Iowa tariff. The complaint appears to be similar
to others asserted by these or related entities against the intrastate access charges of mid-sized incumbent local exchange companies in several other states. We filed a motion to dismiss the complaint in light of our legislated price plan, and
believe the substance of the complaint to be without merit given the absence of any rationale for the proposed decrease. The



40



---

##### Table of Contents

Iowa Utilities Board denied our motion to dismiss on November 14, 2008, a decision we could not appeal until the Iowa Utilities Board issued a decision on the merits.



Following the filing of all rounds of testimony but prior to the
hearing, Iowa Telecom and Verizon reached a tentative settlement of Verizons complaint on October 23, 2009 and successfully requested the proceeding to be stayed until a settlement agreement had been executed. Iowa Telecom and Verizon
executed the settlement agreement on December 7, 2009 and jointly filed for approval of the same on December 11, 2009, which the Iowa Utilities Board granted on February 4, 2010. By the terms of the settlement, Iowa Telecom and its
Iowa CLECs agreed to decrease their current intrastate switched access rates for the local switching element to $0.01508, $0.021780, and $0.021780, respectively, in three steps via a single tariff filing to be made by each Iowa Telecom company. As
required by the settlement agreement, these tariff revisions were filed on February 11, 2010 with a requested effective date of March 13, 2010. Approval of such filing is currently pending. The settlement agreement requires Verizon to
request dismissal of its complaint with prejudice no later than five business days after the effective date of the currently-pending tariff filing. Further, Verizon agreed that it would not seek to reduce any element of Iowa Telecoms ILEC or
CLEC intrastate switching rates before January 1, 2012. The settlement also provides for mutual releases of all claims set forth in Verizons Complaint and Iowa Telecoms Answer in this docket. In addition, the settlement provides
that it shall not limit or affect: Verizons right to seek to reduce, eliminate or otherwise challenge the approximately three-cent-per-minute carrier common line charges (CCLCs) of Iowa Telecom in any rulemaking proceedings of
general applicability; Iowa Telecoms right to implement switched access rate increases or decreases ordered or permitted by the Iowa Utilities Board or the FCC in proceedings to reform intercarrier compensation; and Iowa Telecoms right
to seek to maintain the CCLCs of Iowa Telecom in rulemaking proceedings of general applicability.



On September 12, 2008, the Iowa Utilities Board issued an order commencing an inquiry into whether the Iowa Utilities Board should
create an Iowa universal service fund (USF). At this point, the Iowa Utilities Board is seeking comment on preliminary issues, such as how it should determine whether an Iowa USF is needed, and on certain policy and implementation issues
assuming that an Iowa USF will be established. Comments were filed on October 27, 2008. Eventually, the Iowa Utilities Board may issue an order commencing rulemaking. Sprint filed a petition for rulemaking on July 6, 2009 requesting that
the Iowa Utilities Board eliminate the CCLC, which the Iowa Utilities Board denied on September 4, 2009 and again on October 13, 2009 following Sprints request for reconsideration. In so doing, the Iowa Utilities Board stated that
CCLC matters were best considered in the context of universal service issues. We cannot predict whether the Iowa Utilities Board will establish a rulemaking as a result of its pending inquiry or, assuming it does, the result of such rulemaking.



Merger-Related Proceedings



On November 24, 2009, a purported shareholder of Iowa
Telecom filed a petition styled as a class action lawsuit in the Iowa District Court for Jasper County. The case caption is: Stephen Smigel on behalf of himself and all others similarly situated v. Iowa Telecommunications Services, Inc., Alan L.
Wells, Kenneth R. Cole, Norman C. Frost, Brian G. Hart, H. Lynn Horak, Craig A. Lang, Kendrik A. Packer and Windstream Corporation. The petition alleges that Iowa Telecoms board members breached their fiduciary duties in agreeing to the Merger
and that Windstream aided and abetted in the breaches of fiduciary duties. The petition asserts, among other things, that the consideration to be paid to Iowa Telecoms shareholders is insufficient. The lawsuit seeks to enjoin the Merger. On
December 15, 2009, Iowa Telecom moved to dismiss this petition. Windstream moved to dismiss the petition on January 4, 2010. Those motions remain pending. The plaintiff filed a motion for expedited discovery on December 22, 2009. A
hearing was held on the plaintiffs motion for expedited discovery on January 15, 2010. The Court decided that it would defer a decision on the motion for expedited discovery until it decided Iowa Telecoms and Windstreams
motions to dismiss.



On December 4, 2009, a
second purported shareholder of Iowa Telecom filed a petition styled as a class action lawsuit in the Iowa District Court for Jasper County. The case caption is: Francine Gerendasy, individually



41



---

##### Table of Contents

and on behalf of all others similarly situated v. Alan L. Wells, Kenneth R. Cole, Norman C. Frost, Brian G. Hart, H. Lynn Horak, Craig A. Lang, Kendrik E. Packer, Iowa Telecommunications
Services, Inc., Windstream Corporation, and Buffalo Merger Sub, Inc. Two additional substantially similar petitions were filed in the Iowa District Court for Jasper County on December 23 and December 29, 2009, respectively. Each of these
petitions contains substantially similar allegations to the above-described petition.



On December 11, 2009, a purported shareholder filed a complaint in the United States District Court for the Southern District of Iowa. This complaint names Iowa Telecoms individual board
members, Iowa Telecom and Windstream as defendants and asserts that Iowa Telecoms board members breached their fiduciary duties in agreeing to the Merger. It also seeks to enjoin the Merger. On December 17, 2009, the plaintiff in
this action moved for expedited discovery. Windstream and Iowa Telecom both responded in opposition to this motion. A hearing was held on the plaintiffs motion for expedited discovery on January 12, 2010. On January 21, 2010, the
Court granted in part and denied in part the plaintiffs motion for expedited discovery, ordering that Windstreams and Iowa Telecoms motions to dismiss would be heard before any discovery would begin, but that production of
documents would occur on an expedited basis if the Court denies the motions to dismiss.



On December 16, 2009, another complaint was filed in the United States District Court for the Southern District of Iowa by a purported shareholder, seeking to enjoin the Merger. It contains
allegations substantially similar to the petitions filed in the Iowa District Court for Jasper County, alleging that the individual board members of Iowa Telecoms board of directors breached their fiduciary duties in agreeing to the Merger and
that Windstream aided and abetted in the breaches of fiduciary duties.



On January 4, 2010, Iowa Telecom and Windstream moved to dismiss both complaints in the United States District Court. Those motions remain pending. On December 18, 2009, the plaintiffs in the
two United States District Court cases moved to consolidate those two actions and for the appointment of their attorneys as co-lead class counsel. The motion to consolidate the two cases was granted on January 12, 2010.



Iowa Telecom, its directors and Windstream believe each of these
lawsuits is without merit. However, in order to eliminate the uncertainty, distraction, burden and expense of further litigation and to permit the Merger to proceed without possible delays from litigation, Iowa Telecom and Windstream have entered
into a memorandum of understanding with counsel to the various plaintiffs to settle the aforementioned actions in exchange for including additional disclosures set forth in the proxy statement/prospectus relating to the transaction. This memorandum
of understanding is subject to the terms and conditions set forth therein, including satisfactory confirmatory discovery by plaintiffs and approval of the settlement by the Iowa District Court for Jasper County. The settlement would result in all of
the above actions being dismissed with prejudice and would become effective only upon consummation of the Merger.



ITEM 4. Submission of Matters to a Vote of Security Holders



None.



42



---

##### Table of Contents

PART II.



ITEM 5. Market for Registrants Common
Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities



Market for Common Stock



Our Common Stock is listed on the New York Stock Exchange and is traded under the symbol IWA. As of February 18, 2010, we had approximately 127 shareholders of record. Because many of our
shares are held by brokers and other institutions on behalf of stockholders, we are unable to estimate the total number of stockholders represented by these record holders. The high and low reported sales prices per share of our common stock are set
forth in the following table for the periods indicated.



|                   |  |      |       |     |   |      
|------------------ |  | ---- | ----- | --- | - | -----
|Quarter Ended      |  | High |       | Low
|March 31, 2008     |  | $    | 18.92 |     | $ | 14.50
|June 30, 2008      |  |      | 19.92 |     |   | 16.31
|September 30, 2008 |  |      | 20.99 |     |   | 16.55
|December 31, 2008  |  |      | 18.86 |     |   | 11.54
|March 31, 2009     |  |      | 14.95 |     |   | 9.94 
|June 30, 2009      |  |      | 13.55 |     |   | 11.14
|September 30, 2009 |  |      | 13.50 |     |   | 11.02
|December 31, 2009  |  |      | 17.73 |     |   | 11.46



Dividend Policy and Restrictions



Our board of directors has adopted a dividend policy which reflects an intention to distribute, as regular quarterly dividends to our shareholders, a substantial portion of the cash generated by our
business in excess of operating needs, interest and principal payments on our indebtedness and capital expenditures, rather than retaining all of such cash for other purposes.



We believe that our dividend policy may limit, but not preclude, our ability to pursue growth. If we continue
paying dividends at the level currently anticipated under our dividend policy, we expect that we would need additional financing to fund significant acquisitions or to pursue growth opportunities requiring capital expenditures significantly beyond
our current expectations. However, we intend to retain sufficient cash after the distribution of dividends to permit the pursuit of growth opportunities that do not require material capital investment.



The table below reflects the dividends declared or paid by the
Company during 2008 and 2009:



|                   |  |                    |       |             |                    |              |                 
|------------------ |  | ------------------ | ----- | ----------- | ------------------ | ------------ | ----------------
|Date Declared      |  | Dividend Per Share |       | Record Date |                    | Payment Date
|December 14, 2007  |  | $                  | 0.405 |             | December 31, 2007  |              | January 15, 2008
|March 14, 2008     |  | $                  | 0.405 |             | March 31, 2008     |              | April 15, 2008  
|June 12, 2008      |  | $                  | 0.405 |             | June 30, 2008      |              | July 15, 2008   
|September 15, 2008 |  | $                  | 0.405 |             | September 30, 2008 |              | October 15, 2008
|December 15, 2008  |  | $                  | 0.405 |             | December 31, 2008  |              | January 15, 2009
|March 16, 2009     |  | $                  | 0.405 |             | March 31, 2009     |              | April 15, 2009  
|June 15, 2009      |  | $                  | 0.405 |             | June 30, 2009      |              | July 15, 2009   
|September 15, 2009 |  | $                  | 0.405 |             | September 30, 2009 |              | October 15, 2009
|December 15, 2009  |  | $                  | 0.405 |             | December 31, 2009  |              | January 15, 2010



Dividends on our common stock are not cumulative.



43



---

##### Table of Contents

Despite our dividend policy, our shareholders may not receive dividends in the future for
reasons that may include any of the following factors:



| |  |  | we may not have enough cash to pay dividends due to changes in our operating earnings, working capital requirements and anticipated cash needs;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | while the dividend policy adopted by our board of directors contemplates the distribution of a substantial portion of our cash available to pay
dividends, our board could modify or revoke this policy at any time;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | even if our dividend policy is not modified or revoked, the actual amount of dividends distributed under the policy and the decision to make any
distribution will remain at all times entirely at the discretion of our board of directors;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the amount of dividends that we may distribute is limited by restricted payment and leverage covenants in our credit facilities and, potentially, the
terms of any future indebtedness that we may incur;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the amount of dividends that we may distribute is subject to restrictions under Iowa law;
| | - |  | -----------------------------------------------------------------------------------------



| |  |  | our shareholders have no contractual or other legal right to dividends; and
| | - |  | ---------------------------------------------------------------------------



| |  |  | restrictions included in the Merger Agreement.
| | - |  | ----------------------------------------------



In addition, see Long-Term Debt and Revolving Credit Facilities in Item 7 of this report for a
discussion of the material restrictions on paying dividends contained in our credit facilities.



Equity Compensation Plan Information



The following table sets forth information, as of December 31, 2009, concerning compensation plans previously approved by security holders and not previously approved by security holders.



|                                                           |  |                                                                                                     |  |                                                                                  |      |                                                                                                                                                |        
|---------------------------------------------------------- |  | --------------------------------------------------------------------------------------------------- |  | -------------------------------------------------------------------------------- | ---- | ---------------------------------------------------------------------------------------------------------------------------------------------- | -------
|Plan Category                                              |  | Number of Securities tobe Issued upon Exerciseof Outstanding Options,Warrants and
RightsColumn A(1) |  | Weighted-AverageExercise Price ofOutstanding Options,Warrants and RightsColumn B |      | Number of SecuritiesRemaining Availablefor Future IssuanceUnder EquityCompensation
Plans(Excluding SecuritiesReflected in Column A)Column C(2)
|Equity compensation plans approved by security holders     |  | 38,141                                                                                              |  | $                                                                                | 0.24 |                                                                                                                                                | 554,916
|Equity compensation plans not approved by security holders |  |                                                                                                    |  |                                                                                  |     |                                                                                                                                                |       
|                                                           |  |                                                                                                     |  |                                                                                  |      |                                                                                                                                                |        
|Total                                                      |  | 38,141                                                                                              |  | $                                                                                | 0.24 |                                                                                                                                                | 554,916
|                                                           |  |                                                                                                     |  |                                                                                  |      |                                                                                                                                                |        



|(1) | Excludes 747,075 shares of common stock that have been issued as restricted stock, subject to certain vesting. requirements.
|--- | ----------------------------------------------------------------------------------------------------------------------------

|(2) | The number of securities noted represents the remaining shares available for future issuance under the Companys 2005 Stock Incentive Plan. Although the 2002 Stock
Incentive Plan (the 2002 Plan) permits the issuance of options to purchase 32,354 additional shares, the board of directors has determined that no further options will be granted under the 2002 Plan.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



44



---

##### Table of Contents

2009 Performance Graph



LOGO



|                                           |  |        |  |        |  |        |  |        |  |        |  |       
|------------------------------------------ |  | ------ |  | ------ |  | ------ |  | ------ |  | ------ |  | ------
|                                           |  | 12/04  |  | 12/05  |  | 12/06  |  | 12/07  |  | 12/08  |  | 12/09 
|Iowa Telecommunications Services, Inc.     |  | 100.00 |  | 78.60  |  | 108.72 |  | 97.37  |  | 94.06  |  | 124.52
|S&P 500                                    |  | 100.00 |  | 104.91 |  | 121.48 |  | 128.16 |  | 80.74  |  | 102.11
|Dow Jones US Fixed-Line Telecommunications |  | 100.00 |  | 94.11  |  | 140.50 |  | 163.32 |  | 118.58 |  | 128.83



Recent Sales of Unregistered Securities



None.



45



---

##### Table of Contents

Repurchase of Equity Securities by the Issuer and Affiliated Purchasers



During the quarter ended December 31, 2009, the Company
reacquired the following number of shares of its common stock from recipients of stock option awards under the Companys 2002 Stock Incentive Plan in order to satisfy tax withholding obligations due upon option exercise (see also Note 14 to
Consolidated Financial Statements):



ISSUER
PURCHASES OF EQUITY SECURITIES



|                                |  |                                              |  |                                          |       |                                                                                             |   |                                                                                                                         |  
|------------------------------- |  | -------------------------------------------- |  | ---------------------------------------- | ----- | ------------------------------------------------------------------------------------------- | - | ----------------------------------------------------------------------------------------------------------------------- | -
|                               
|Periods                         |  | (a) TotalNumber ofShares (or Units)Purchased |  | (b) AveragePrice Paid perShare (or Unit) |       | (c) Total Number ofShares (or Units)Purchased as Part ofPublicly
AnnouncedPlans or Programs |   | (d)
Maximum Number (orApproximate Dollar Value) ofShares (or Units) that May YetBe Purchased Under the Plansor Programs
|October 1 to October 31, 2009   |  |                                             |  | $                                        |      |                                                                                             |  |                                                                                                                         | 
|November 1 to November 31, 2009 |  |                                             |  | $                                        |      |                                                                                             |  |                                                                                                                         | 
|December 1 to December 31, 2009 |  | 26,946                                       |  | $                                        | 16.02 |                                                                                             |  |                                                                                                                         | 
|                                |  |                                              |  |                                          |       |                                                                                             |   |                                                                                                                         |  
|Total                           |  | 26,946                                       |  | $                                        | 16.02 |                                                                                             |  |                                                                                                                         | 
|                                |  |                                              |  |                                          |       |                                                                                             |   |                                                                                                                         |  



46



---

##### Table of Contents

ITEM 6. Selected Financial Data



The following selected financial data for the years ended
December 31, 2005 through 2009 has been derived from our consolidated financial statements. The following data should be read in conjunction with Managements Discussion and Analysis of Financial Condition and Results of
Operations under Item 7 and our consolidated financial statements for 2007, 2008 and 2009 and the related notes thereto contained under Item 8. The figures in the table below reflect rounding adjustments.



|                                                                          |  |                                                                               |         |   |         |   |         |         |  |   |         |   |  |         |         |   |  |   |         |  
|------------------------------------------------------------------------- |  | ----------------------------------------------------------------------------- | ------- | - | ------- | - | ------- | ------- |  | - | ------- | - |  | ------- | ------- | - |  | - | ------- | -
|                                                                          |  | Iowa Telecommunications Services, Inc.and SubsidiariesYear Ended December 31, |        
|                                                                          |  | 2005                                                                          |         |   | 2006(a) |   |         | 2007(b) |  |   | 2008(c) |   |  | 2009(d) |        
|                                                                          |  | (in thousands, except per share data)                                         |        
|Statement of Operations Data:                                             |  |                                                                               |         |   |         |   |         |         |  |   |         |   |  |         |         |   |  |   |         |  
|Revenues & sales                                                          |  | $                                                                             | 231,640 |   |         | $ | 234,085 |         |  | $ | 251,401 |   |  | $       | 246,965 |   |  | $ | 254,142 |  
|Operating costs & expenses:                                               |  |                                                                               |         |   |         |   |         |         |  |   |         |   |  |         |         |   |  |   |         |  
|Cost of services and sales & selling, general and administrative expenses |  |                                                                               | 105,826 |   |         |   | 108,670 |         |  |   | 120,473 |   |  |         | 122,805 |   |  |   | 140,041 |  
|Depreciation & amortization                                               |  |                                                                               | 48,600  |   |         |   | 47,736  |         |  |   | 48,992  |   |  |         | 53,694  |   |  |   | 61,092  |  
|                                                                          |  |                                                                               |         |   |         |   |         |         |  |   |         |   |  |         |         |   |  |   |         |  
|Total operating costs & expenses                                          |  |                                                                               | 154,426 |   |         |   | 156,406 |         |  |   | 169,465 |   |  |         | 176,499 |   |  |   | 201,133 |  
|                                                                          |  |                                                                               |         |   |         |   |         |         |  |   |         |   |  |         |         |   |  |   |         |  
|Operating income                                                          |  |                                                                               | 77,214  |   |         |   | 77,679  |         |  |   | 81,936  |   |  |         | 70,466  |   |  |   | 53,009  |  
|Other income (expense):                                                   |  |                                                                               |         |   |         |   |         |         |  |   |         |   |  |         |         |   |  |   |         |  
|Interest and dividend income                                              |  |                                                                               | 1,078   |   |         |   | 953     |         |  |   | 928     |   |  |         | 938     |   |  |   | 1,880   |  
|Interest expense                                                          |  |                                                                               | (31,089 | ) |         |   | (31,708 | )       |  |   | (31,885 | ) |  |         | (31,444 | ) |  |   | (31,813 | )
|Other, net                                                                |  |                                                                               | (813    | ) |         |   | (572    | )       |  |   | (719    | ) |  |         | 429     |   |  |   | 378     |  
|                                                                          |  |                                                                               |         |   |         |   |         |         |  |   |         |   |  |         |         |   |  |   |         |  
|Total other expense, net                                                  |  |                                                                               | (30,824 | ) |         |   | (31,327 | )       |  |   | (31,676 | ) |  |         | (30,077 | ) |  |   | (29,555 | )
|                                                                          |  |                                                                               |         |   |         |   |         |         |  |   |         |   |  |         |         |   |  |   |         |  
|Earnings before income taxes                                              |  |                                                                               | 46,390  |   |         |   | 46,352  |         |  |   | 50,260  |   |  |         | 40,389  |   |  |   | 23,454  |  
|Income tax expense                                                        |  |                                                                               |        |   |         |   | 12,309  |         |  |   | 20,945  |   |  |         | 17,345  |   |  |   | 13,117  |  
|                                                                          |  |                                                                               |         |   |         |   |         |         |  |   |         |   |  |         |         |   |  |   |         |  
|Net income                                                                |  |                                                                               | 46,390  |   |         |   | 34,043  |         |  |   | 29,315  |   |  |         | 23,044  |   |  |   | 10,337  |  
|Net loss attributable to noncontrolling interest                          |  |                                                                               |        |   |         |   |        |         |  |   |        |   |  |         | 105     |   |  |   | 195     |  
|                                                                          |  |                                                                               |         |   |         |   |         |         |  |   |         |   |  |         |         |   |  |   |         |  
|Net Income attributable to Iowa Telecommunications Services, Inc.         |  | $                                                                             | 46,390  |   |         | $ | 34,043  |         |  | $ | 29,315  |   |  | $       | 23,149  |   |  | $ | 10,532  |  
|                                                                          |  |                                                                               |         |   |         |   |         |         |  |   |         |   |  |         |         |   |  |   |         |  
|Per Share Data:(e)                                                        |  |                                                                               |         |   |         |   |         |         |  |   |         |   |  |         |         |   |  |   |         |  
|Earnings per share:                                                       |  |                                                                               |         |   |         |   |         |         |  |   |         |   |  |         |         |   |  |   |         |  
|Basic                                                                     |  | $                                                                             | 1.49    |   |         | $ | 1.07    |         |  | $ | 0.91    |   |  | $       | 0.71    |   |  | $ | 0.29    |  
|Diluted                                                                   |  | $                                                                             | 1.46    |   |         | $ | 1.05    |         |  | $ | 0.90    |   |  | $       | 0.70    |   |  | $ | 0.29    |  
|Cash dividends declared                                                   |  | $                                                                             | 1.62    |   |         | $ | 1.62    |         |  | $ | 1.62    |   |  | $       | 1.62    |   |  | $ | 1.62    |  



47



---

##### Table of Contents

|                                                    |  |                                                                               |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |          |  
|--------------------------------------------------- |  | ----------------------------------------------------------------------------- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | - |  | ---- | ------- | - |  | - | -------- | -
|                                                    |  | Iowa Telecommunications Services, Inc.and SubsidiariesYear Ended December 31, |        
|                                                    |  | 2005                                                                          |         |   | 2006 |   |         | 2007 |  |   | 2008    |   |  | 2009 |        
|                                                    |  | (in thousands)                                                                |        
|Balance Sheet Data (at end of period):              |  |                                                                               |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |          |  
|Cash & cash equivalents                             |  | $                                                                             | 26,782  |   |      | $ | 13,613  |      |  | $ | 21,919  |   |  | $    | 11,605  |   |  | $ | 12,259   |  
|Property, plant and equipment, net                  |  |                                                                               | 315,499 |   |      |   | 298,975 |      |  |   | 278,665 |   |  |      | 290,846 |   |  |   | 306,639  |  
|Total assets                                        |  |                                                                               | 864,522 |   |      |   | 859,529 |      |  |   | 831,559 |   |  |      | 859,928 |   |  |   | 915,827  |  
|Long-term debt                                      |  |                                                                               | 477,778 |   |      |   | 477,778 |      |  |   | 477,778 |   |  |      | 489,003 |   |  |   | 565,214  |  
|Stockholders equity(f)                             |  |                                                                               | 280,531 |   |      |   | 267,699 |      |  |   | 242,967 |   |  |      | 202,744 |   |  |   | 167,567  |  
|Cash Flow Data:                                     |  |                                                                               |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |          |  
|Net cash provided by operating activities           |  | $                                                                             | 97,321  |   |      | $ | 89,493  |      |  | $ | 100,201 |   |  | $    | 88,556  |   |  | $ | 91,178   |  
|Net cash used in investing activities               |  |                                                                               | (30,235 | ) |      |   | (44,423 | )    |  |   | (26,903 | ) |  |      | (67,204 | ) |  |   | (105,486 | )
|Net cash provided by (used in) financing activities |  |                                                                               | (43,178 | ) |      |   | (58,239 | )    |  |   | (64,992 | ) |  |      | (31,666 | ) |  |   | 14,962   |  
|Other Financial Data:                               |  |                                                                               |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |          |  
|Adjusted EBITDA(g)                                  |  | $                                                                             | 127,864 |   |      | $ | 124,317 |      |  | $ | 134,263 |   |  | $    | 128,311 |   |  | $ | 124,172  |  
|Interest expense                                    |  |                                                                               | 31,089  |   |      |   | 31,708  |      |  |   | 31,885  |   |  |      | 31,444  |   |  |   | 31,813   |  
|Capital expenditures                                |  |                                                                               | 30,141  |   |      |   | 28,122  |      |  |   | 26,903  |   |  |      | 28,166  |   |  |   | 24,307   |  



|(a) | Includes a pension settlement charge of $3.0 million.
|--- | -----------------------------------------------------

|(b) | Includes $5.8 million of revenue from a non-recurring network access billing matter with connecting carriers.
|--- | -------------------------------------------------------------------------------------------------------------

|(c) | Includes a $2.5 million curtailment gain resulting from changes to our postretirement welfare plan obligations.
|--- | ---------------------------------------------------------------------------------------------------------------

|(d) | Includes $3.1 million of expense resulting from items related to the Merger Agreement, $3.2 million of expense related to other acquisitions and a $1.8 million charge
related to a network access matter.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(e) | Basic and diluted earnings per share amounts have been retrospectively adjusted to conform with new authoritative guidance for determining whether instruments granted
in share-based payment transactions are participating securities, which was adopted by Iowa Telecom effective January 1, 2009. For further information on this authoritative guidance and its impact, see Notes to Consolidated Financial
Statements. The effect of adopting this guidance was immaterial to all periods presented.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(f) | The Stockholders equity has been retrospectively adjusted to conform with new authoritative guidance which established new accounting and reporting standards for
noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary, which was adopted by Iowa Telecom effective January 1, 2009. For further information on this authoritative guidance and its impact, see Notes to Consolidated
Financial Statements. The effect of adopting this guidance was immaterial to all periods presented.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(g) | We present Adjusted EBITDA because we believe it is a useful indicator of our historical debt capacity and our ability to service debt and pay dividends. We also
present Adjusted EBITDA because covenants in our credit facilities contain ratios based on Adjusted EBITDA.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Adjusted EBITDA is defined in our credit facilities as: (1) consolidated net income, as defined therein; plus (2) the following
items, to the extent deducted from consolidated net income: (a) interest expense; (b) provision for income taxes; (c) depreciation and amortization; (d) transaction expenses related to our initial public offering and the related
debt refinancing and other limited expenses related to permitted securities offerings, investments and acquisitions incurred after the closing date of the our initial public offering, to the extent not exceeding $5.0 million; (e) unrealized
losses on financial derivatives; (f) non-cash stock-based compensation expense; (g) extraordinary or unusual losses (including extraordinary or unusual losses on permitted sales of assets and casualty events); (h) losses on sales of
assets other than in the ordinary course of business; and (i) all other non-cash charges that represent an accrual for which no cash is expected to be paid in the next twelve months; minus (3) the following items, to the extent any of them
increases consolidated net income: (w) extraordinary or unusual gains (including extraordinary or unusual gains on permitted sales of assets and casualty events); (x) gains on asset disposals not in the ordinary course of business;
(y) unrealized gains on financial derivatives; and (z) all other non-cash income



48



---

##### Table of Contents

(including the non-cash portion of any RTFC patronage capital allocation). If our Adjusted EBITDA were to decline below certain levels, covenants in our credit facilities that are based on
Adjusted EBITDA, including our fixed charge coverage and total leverage ratio covenants, may be violated and could cause, among other things, a default or mandatory prepayment under our credit facilities, or result in our inability to pay dividends.
We believe that net income is the most directly comparable financial measure to Adjusted EBITDA under generally accepted accounting principles. Adjusted EBITDA should not be considered in isolation or as a substitute for consolidated statement of
operations and cash flows data prepared in accordance with GAAP. Adjusted EBITDA is not a complete measure of an entitys profitability because it does not include costs and expenses identified above; nor is Adjusted EBITDA a complete net cash
flow measure because it does not include reductions for cash payments for an entitys obligation to service its debt, fund its working capital, make capital expenditures and make acquisitions or pay its income taxes and dividends.



The following table sets forth a reconciliation of Net Income
to Adjusted EBITDA:



|                                                         |  |                                                                               |         |   |      |   |         |         |  |   |         |   |  |      |         |   |  |   |         |  
|-------------------------------------------------------- |  | ----------------------------------------------------------------------------- | ------- | - | ---- | - | ------- | ------- |  | - | ------- | - |  | ---- | ------- | - |  | - | ------- | -
|                                                         |  | Iowa Telecommunications Services, Inc.and SubsidiariesYear Ended December 31, |        
|                                                         |  | 2005                                                                          |         |   | 2006 |   |         | 2007(a) |  |   | 2008(a) |   |  | 2009 |        
|                                                         |  | (in thousands, except per share data)                                         |        
|Net income                                               |  | $                                                                             | 46,390  |   |      | $ | 34,043  |         |  | $ | 29,315  |   |  | $    | 23,149  |   |  | $ | 10,337  |  
|Income tax expense                                       |  |                                                                               |        |   |      |   | 12,309  |         |  |   | 20,945  |   |  |      | 17,345  |   |  |   | 13,117  |  
|Interest expense                                         |  |                                                                               | 31,089  |   |      |   | 31,708  |         |  |   | 31,885  |   |  |      | 31,444  |   |  |   | 31,813  |  
|Depreciation and amortization                            |  |                                                                               | 48,600  |   |      |   | 47,736  |         |  |   | 48,992  |   |  |      | 53,694  |   |  |   | 61,092  |  
|Unrealized losses (gains) on financial derivatives       |  |                                                                               | 234     |   |      |   | 572     |         |  |   | 719     |   |  |      | (314    | ) |  |   | 729     |  
|Non-cash stock-based compensation expense                |  |                                                                               | 1,828   |   |      |   | 2,354   |         |  |   | 2,687   |   |  |      | 3,553   |   |  |   | 3,771   |  
|Extraordinary or unusual (gains) losses                  |  |                                                                               |        |   |      |   |        |         |  |   |        |   |  |      |        |   |  |   |        |  
|Non-cash portion of RTFC Capital Allocation              |  |                                                                               | (277    | ) |      |   | (211    | )       |  |   | (280    | ) |  |      | (560    | ) |  |   | (651    | )
|Other non-cash losses (gains)                            |  |                                                                               |        |   |      |   |        |         |  |   |        |   |  |      |        |   |  |   | (1,036  | )
|Loss (gain) on disposal of assets not in ordinary course |  |                                                                               |        |   |      |   | (4,194  | )       |  |   |        |   |  |      |        |   |  |   |        |  
|Transaction costs                                        |  |                                                                               |        |   |      |   |        |         |  |   |        |   |  |      |        |   |  |   | 5,000   |  
|                                                         |  |                                                                               |         |   |      |   |         |         |  |   |         |   |  |      |         |   |  |   |         |  
|Adjusted EBITDA                                          |  | $                                                                             | 127,864 |   |      | $ | 124,317 |         |  | $ | 134,263 |   |  | $    | 128,311 |   |  | $ | 124,172 |  
|                                                         |  |                                                                               |         |   |      |   |         |         |  |   |         |   |  |      |         |   |  |   |         |  



|(a) | The FASB issued amended guidance regarding Noncontrolling Interest in Consolidated Financial Statements. The amended guidance was adopted by Iowa Telecom
effective January 1, 2009 and the Statement of Operations has been retrospectively adjusted to conform to new authoritative guidance. The Adjusted EBITDA calculation as presented for 2007 and 2008 is calculated in accordance with the definition
of Adjusted EBITDA, as defined in our credit agreement, and financial statements prepared in accordance with the authoritative guidance in effect at that time.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



ITEM 7. Managements Discussion and Analysis of Financial Condition and Results of
Operations



The following discussion and
analysis should be read in combination with the selected financial data and the consolidated financial statements and notes thereto included in Items 6 and 8 herein.



Overview



General



Iowa Telecommunications Services, Inc. (Iowa Telecom) and its subsidiaries provide wireline local exchange telecommunications
services to residential and business customers in rural Iowa, Minnesota and Missouri. We currently operate 298 telephone exchanges serving 428 communities as the incumbent or



49



---

##### Table of Contents

historical local exchange carrier and are the sole telecommunications company providing wireline services in approximately 67% of these communities. In addition, we provide service to
residential and business customers throughout Iowa and Minnesota as a competitive local exchange carrier. In total, we provide services to approximately 253,000 access lines.



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 64% of our total revenues for the year ended December 31, 2009, we provide long distance service, dial-up and DSL Internet access,
and other communications services. We provide services as the incumbent local exchange carrier through Iowa Telecom and its wholly-owned subsidiaries, Lakedale Telephone Company and Montezuma Mutual Telephone Company. As part of our strategy of
pursuing growth beyond our current service area, we compete for customers in Iowa in mostly adjacent markets through our competitive local exchange carrier subsidiaries, Iowa Telecom Communications, Inc. (ITC) and IT Communications, LLC
(IT Communications). Additionally, Lakedale Link, Inc., Lakedale Link, LLC and EN-TEL Communications LLC (EN-TEL) are competitive local exchange carriers that provide local and long distance service in Minnesota. Together,
ITC, IT Communications, Lakedale Link, Inc. and EN-TEL are referred to as the CLEC or our CLEC Operations.



Windstream Merger Agreement



On November 23, 2009, we entered into a definitive Agreement and Plan of Merger (the Merger Agreement) with Windstream
Corporation, a Delaware corporation (Windstream), and Buffalo Merger Sub, Inc., a Delaware corporation and a wholly-owned subsidiary of Windstream (Newco). The Merger Agreement provides that, upon the terms and subject to the
conditions set forth in the Merger Agreement, we will merge with and into Newco, with Newco continuing as the surviving corporation (the Merger).



Pursuant to the Merger Agreement, at the effective time and as a result of the Merger, each share of Iowa Telecom common stock outstanding
immediately prior to the effective time of the Merger will be converted into and become exchangeable for (i) shares of common stock of Windstream at a fixed exchange ratio of 0.804 and (ii) $7.90 in cash. In connection with the Merger,
each outstanding stock option under our 2002 Stock Incentive Plan will be converted into the right to receive the merger consideration, less the exercise price of the stock option. Each share of restricted stock awarded under our 2005 Stock
Incentive Plan will be treated the same as any other outstanding share of Company common stock, but the forfeiture provisions and other terms and conditions of the restricted stock will continue to apply to the merger consideration received for the
restricted stock and the cash portion of the consideration will be retained by Windstream until the restrictions have lapsed.



The transaction is expected to close mid - 2010. Completion of the Merger with Windstream is conditioned upon the receipt of certain
governmental consents and approvals, and our shareholders approval. The special meeting of the Companys shareholders to vote on the Merger has been scheduled for March 25, 2010, and the proxy statement/prospectus for the
special meeting was mailed to shareholders on or about February 22, 2010. No assurance can be given that the required conditions to closing will be satisfied or that the Merger will be completed.



Factors outside of managements control could delay or
prevent completion of the Merger. In the event of a termination of the Merger Agreement, we may be required to pay Windstream a termination fee of $25.0 million in certain circumstances.



Iowa Telecom has agreed that until the effective time of the Merger, unless Windstream otherwise consents in
writing, it will, and will cause each of its subsidiaries to, conduct their respective businesses in the ordinary course of business and seek to preserve intact their current business organizations, and keep available the services of their officers
and employees and preserve their relationships with customers, suppliers and other persons with whom they have business relations.



50



---

##### Table of Contents

In addition, Iowa Telecom has agreed that until the Merger is completed, Iowa Telecom and
its subsidiaries will not take the following actions (each as more fully described, and subject to the exceptions set forth in, the Merger Agreement), without Windstreams prior written consent:



| |  |  | issue, deliver, sell, dispose of, pledge or otherwise encumber its capital stock, or any securities or rights convertible into or exchangeable for any
such shares or ownership interests or permit or authorize any of the above;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | redeem, purchase or otherwise acquire, or propose to redeem, purchase or otherwise acquire, its capital stock;
| | - |  | --------------------------------------------------------------------------------------------------------------



| |  |  | split, combine, subdivide or reclassify any of its capital stock;
| | - |  | -----------------------------------------------------------------



| |  |  | except for regular quarterly cash dividends of $0.405 per share of its common stock and except for a pro-rated portion of such quarterly dividend with
respect to the quarter in which the Merger is completed, declare, set aside for payment or pay any dividend, or make any other actual, constructive or deemed distribution in respect of its capital stock, or otherwise make any payments to its
shareholders in such capacity;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | adopt a plan of complete or partial liquidation, dissolution, merger, consolidation, restructuring, recapitalization or other reorganization of it or
any of its subsidiaries or alter through merger, liquidation, reorganization or restructuring the corporate structure of any of its subsidiaries;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | amend its articles of incorporation or bylaws;
| | - |  | ----------------------------------------------



| |  |  | grant to any current or former director or officer any increase in compensation, bonus or fringe or other benefits or grant any type of compensation or
benefit to any such person not previously receiving or entitled to receive such compensation;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | grant to any current or former employee (other than directors or officers) any increase in compensation, bonus or fringe or other benefits or grant any
type of compensation or benefit to any such person not previously receiving or entitled to receive such compensation, except to employees in the ordinary course of business, or to the extent expressly required under any benefit plan as in effect on
November 23, 2009;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | grant to any person any severance, retention, change in control or termination compensation or benefits or any increase therein, except with respect to
new hires, in the ordinary course of business, or to the extent expressly required under any benefit plan as in effect on November 23, 2009;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | enter into or adopt any benefit plan or amend in any respect any benefit plan;
| | - |  | ------------------------------------------------------------------------------



| |  |  | amend, change or modify the terms of any existing equity grants;
| | - |  | ----------------------------------------------------------------



| |  |  | enter into or make any loans to any of its officers, directors, employees, affiliates, agents or consultants;
| | - |  | -------------------------------------------------------------------------------------------------------------



| |  |  | make any material change in financial accounting methods, principles or practices, except insofar as may have been required by a change in GAAP after
November 23, 2009;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | directly or indirectly acquire or agree to acquire in any transaction any equity interest in or business of any entity if the aggregate amount of the
consideration paid would exceed $500,000;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | (A) acquire any tangible properties or assets if the aggregate amount of the consideration paid would exceed $500,000, or (B) sell, lease (as
lessor), license, mortgage, sell and leaseback or otherwise dispose of, tangible properties or assets or any interests therein, if the aggregate amount of the consideration paid would exceed $500,000;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | encumber any tangible properties or assets or any interests therein;
| | - |  | --------------------------------------------------------------------



| |  |  | make or change any material tax election or settle or compromise any material tax liability, or change its fiscal year;
| | - |  | -----------------------------------------------------------------------------------------------------------------------



| |  |  | grant or acquire, or dispose of or permit to lapse, any rights to any material intellectual property;
| | - |  | -----------------------------------------------------------------------------------------------------



51



---

##### Table of Contents

| |  |  | incur any indebtedness, except for indebtedness incurred in the ordinary course of business under the revolving credit agreements to which Iowa Telecom
was a party on November 23, 2009, guarantees by Iowa Telecom of indebtedness of any of its subsidiaries, or indebtedness of Iowa Telecom to any of its subsidiaries;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | make, or agree or commit to make, any capital expenditure except in accordance with the capital plans for 2009 and 2010 disclosed to Windstream plus a
15% variance on an aggregate and cumulative basis;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | enter into or amend any contract or take any other action if such contract, amendment or action would reasonably be expected to prevent or materially
impede, interfere with, hinder or delay the consummation of the Merger or any of the other transactions contemplated by the Merger Agreement;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | enter into any material contract not in the ordinary course of business or enter into or amend any material contract to the extent consummation of the
Merger or compliance by Iowa Telecom or its subsidiaries with the provisions of the Merger Agreement would reasonably be expected to conflict with such contract;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | enter into, modify, amend or terminate any collective bargaining agreement;
| | - |  | ---------------------------------------------------------------------------



| |  |  | voluntarily contribute or commit cash or funds to any of Iowa Telecoms pension plans or any administrator thereof for purposes of funding
shortfalls in any of Iowa Telecoms pension plans;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | enter into a new line of business or engage in the conduct of any business in any new state which would require the receipt or transfer of governmental
approval;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | file for any permit or approval outside of the ordinary course of business, or the receipt of which would reasonably be likely to prevent or materially
impair or delay the consummation of the Merger;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | settle, compromise, dismiss, discharge or otherwise dispose of litigation or proceedings;
| | - |  | -----------------------------------------------------------------------------------------



| |  |  | take any action that would reasonably be expected to materially restrict or impede the consummation of the Merger or cause any of the conditions to the
closing of the Merger as set forth in the Merger Agreement to fail to be satisfied as of the closing date;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | approve or authorize any action to be submitted to the shareholders of Iowa Telecom for approval that is intended, or would reasonably be expected, to
prevent, impede, interfere with, delay, postpone or adversely affect the transactions contemplated by the Merger Agreement;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | make any change in its dividend policies other than as permitted by the Merger Agreement; or
| | - |  | --------------------------------------------------------------------------------------------



| |  |  | authorize any of, or commit, resolve or agree to take any of the foregoing actions.
| | - |  | -----------------------------------------------------------------------------------



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 DSL Internet access and long distance service and to cross-sell these services to our subscriber base;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



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



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



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



52



---

##### Table of Contents

Access Line Trends



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



|                                                   |  |                    |  |         |  |        
|-------------------------------------------------- |  | ------------------ |  | ------- |  | -------
|                                                   |  | As of December 31,
|                                                   |  | 2007               |  | 2008(4) |  | 2009(5)
|Incumbent local exchange access lines(1)           |  | 214,300            |  | 209,700 |  | 210,300
|Competitive local exchange carrier access lines(2) |  | 26,400             |  | 32,400  |  | 42,700 
|                                                   |  |                    |  |         |  |        
|Total access lines                                 |  | 240,700            |  | 242,100 |  | 253,000
|                                                   |  |                    |  |         |  |        
|Long distance subscribers                          |  | 143,600            |  | 146,400 |  | 158,500
|Dial-up Internet subscribers                       |  | 22,500             |  | 16,700  |  | 10,200 
|DSL subscribers                                    |  | 62,800             |  | 75,700  |  | 95,200 
|Video subscribers(3)                               |  | 9,000              |  | 20,300  |  | 27,100 



|(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 1,800 wholesale lines subscribed at December 31, 2009; 2,300 at December 31, 2008; and
2,900 at December 31, 2007.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

|(4) | Includes units acquired from Bishop Communications.
|--- | ---------------------------------------------------

|(5) | Includes units acquired from Sherburne Tele Systems, Inc. and WH Comm.
|--- | ----------------------------------------------------------------------



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



Competition. We currently face competition from other
providers of local services in approximately 141 of the 428 communities our incumbent local exchange carrier serves. Of these 141 communities, we believe 109 communities have some voice service offered by Mediacoms telephony affiliates, MCC
Telephony of Iowa, Inc. and MCC Telephony of Minnesota, LCC (MCC), which initiated service in most of these markets during the second quarter of 2007. Additionally, we believe that in approximately 42 of these communities, independent
local exchange carriers operating in mostly adjacent exchanges and municipal utilities have constructed networks to provide competitive local exchange carrier services to customers in our exchanges.



53



---

##### Table of Contents

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



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



MCC is offering voice
services through a business arrangement with Sprint Communications L.P. (Sprint). On June 23, 2006, we filed a complaint against the Iowa Utilities Board and Sprint in the U.S. District Court for the Southern District of Iowa
asking the court to rule that the Iowa Utilities Board acted unlawfully when it required us to enter into an interconnection agreement with Sprint and asking the court to invalidate the agreement. On April 15, 2008, the court issued a ruling in
favor of the Iowa Utilities Board and Sprint, therefore maintaining the status quo in which we are obligated to enter into an interconnection agreement with Sprint. On April 28, 2009, the U.S. Court of Appeals for the Eighth Circuit affirmed the
lower courts decision (and, ultimately, the Iowa Utilities Boards decision).



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 in the manner requested by Sprint. On June 12, 2009, the District Court held that the Iowa Utilities Board acted improperly by requiring us
to serve as a traffic-switching intermediary between Sprint and third-party long distance carriers.



On July 31, 2006, MCC filed a complaint 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 proceeding was stayed while our first federal complaint was pending but the stay was lifted after issuance of the Eighth Circuits
April 28, 2009 decision. On January 20, 2010, we executed an interconnection agreement with MCC that envisions MCC connecting directly to us rather than through Sprint and on February 5, 2010, MCC dismissed its Iowa District Court
complaint.



Business Acquisitions. We
completed the purchase of Bishop Communications on July 18, 2008. As of September 30, 2008, Bishop Communications and its consolidated subsidiaries provided telecommunications services to 11,600 access lines as the incumbent local exchange
carrier, 4,600 access lines as a competitive local exchange carrier, served 9,700 long distance subscribers, and provided Internet access service to more than 6,600 subscribers.



On July 1, 2009, we acquired substantially all of the assets of Sherburne Tele Systems, Inc. (the
Sherburne Assets). As of September 30, 2009, the Sherburne Assets served approximately 14,300 incumbent local exchange carrier access lines, 9,600 competitive local exchange carrier lines, 14,600 DSL high-speed Internet customers
and 3,600 video customers, primarily in communities and rural areas adjacent to the Minneapolis/St. Paul Metropolitan Area. The acquired operations include its incumbent local exchange carrier services, marketed as Connections. Etc., and competitive
local exchange carrier services marketed as North Star Access.



54



---

##### Table of Contents

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



On November 1, 2009, the Company completed
the acquisition of substantially all the assets of WH Comm for $1.1 million (the WH Comm Assets). WH Comm was a division of Wright-Hennepin Cooperative Electric Association based in Rockford, Minnesota. WH Comm, a competitive local
exchange carrier, provides telephone and high speed DSL Internet in several communities near the western suburbs of Minneapolis, Minnesota. As of December 31, 2009, the WH Comm Assets served approximately 1,800 access lines and 700 DSL
subscribers.



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



Our Retail Local Rate and
Pricing Structure



As described under
OverviewCompetition above, effective July 1, 2005, the rates for all of our Iowa retail local exchange service except for single line flat-rated business and residential service and extended area service were deregulated. The
remaining retail local exchange service rate regulation in our then-rate-regulated exchanges, with the arguable exception of extended area service, expired effective July 1, 2008. The Iowa Utilities Board had an opportunity to extend such
remaining rate regulation until July 1, 2010, but, in a June 27, 2008 order, found that an extension of rate regulation was not in the public interest.



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



As of
December 31, 2009, our CLEC Operations served 42,700 access lines. Our CLEC Operations accounted for 16.9% of Iowa Telecoms total access lines as of December 31, 2009. Throughout 2010, we plan to maintain a limited investment
approach as we continue to grow our competitive local exchange carrier business.



55



---

##### Table of Contents

Revenues



We derive our revenues from five sources:



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



Network Access Services. We receive revenues from charges established to compensate us for the origination, transport and termination of calls generated by the customers of long distance carriers and for calls transported and
terminated for the customers of wireless carriers. These include subscriber line charges imposed on end users, and switched and special access charges paid by carriers and others. We receive federally administered universal service support,
representing approximately 3% of our total revenue in 2009, as a result of the interstate switched access support provisions of the FCCs CALLS Order to which the Company became subject in 2000. In addition, Montezuma Telephone and Lakedale
Telephone Company (through the Sherburne County Rural Telephone study area) received high cost loop universal service support amounting to less than 1% of our revenue. Our incumbent local exchange carrier (Iowa Telecommunications, Inc.) and our
independent incumbent local exchange carriers (Lakedale Telephone Company and Montezuma Telephone) switched access charges are based on rates approved by applicable state regulatory agencies. Our incumbent local exchange carrier and our independent
incumbent local exchange carriers switched and special access charges for interstate and international services are based on rates approved by the FCC. The transport and termination charges paid by wireless carriers to our incumbent local exchange
carriers are specified in interconnection agreements negotiated with each individual wireless carrier.



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



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



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



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



|                           |                        |                                              |         |                                                          |      |         |      |   |         |      |     |   |      |     |   |  |     |  
|-------------------------- | ---------------------- | -------------------------------------------- | ------- | -------------------------------------------------------- | ---- | ------- | ---- | - | ------- | ---- | --- | - | ---- | --- | - |  | --- | -
|                           |                        | Revenue and Sales forYear Ended December 31, |         | % of Total Revenues and Salesfor Year Ended December 31, |     
|                           | 2007                   |                                              | 2008    |                                                          | 2009 |         | 2007 |   |         | 2008 |     |   | 2009 |    
|                           | (dollars in thousands) |                                              |         |                                                          |      |         |      |   |         |     
|Local services             |                        | $                                            | 73,918  |                                                          | $    | 71,131  |      | $ | 74,859  |      | 29  | % |      | 29  | % |  | 29  | %
|Network access services    |                        |                                              | 100,636 |                                                          |      | 89,420  |      |   | 87,690  |      | 40  | % |      | 36  | % |  | 35  | %
|Toll services              |                        |                                              | 21,213  |                                                          |      | 23,010  |      |   | 22,234  |      | 9   | % |      | 9   | % |  | 9   | %
|Data and internet services |                        |                                              | 29,512  |                                                          |      | 35,163  |      |   | 43,040  |      | 12  | % |      | 14  | % |  | 17  | %
|Other services and sales   |                        |                                              | 26,122  |                                                          |      | 28,241  |      |   | 26,319  |      | 10  | % |      | 12  | % |  | 10  | %
|                           |                        |                                              |         |                                                          |      |         |      |   |         |      |     |   |      |     |   |  |     |  
|Total                      |                        | $                                            | 251,401 |                                                          | $    | 246,965 |      | $ | 254,142 |      | 100 | % |      | 100 | % |  | 100 | %
|                           |                        |                                              |         |                                                          |      |         |      |   |         |      |     |   |      |     |   |  |     |  



56



---

##### Table of Contents

Operating Expenses



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



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



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



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



Results of Operations



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



|                                                                        |  |                         |   |  |      |   |  |      |  
|----------------------------------------------------------------------- |  | ----------------------- | - |  | ---- | - |  | ---- | -
|                                                                        |  | Year Ended December 31, |  
|                                                                        |  | 2007                    |   |  | 2008 |   |  | 2009 |  
|Total revenue and sales                                                 |  | 100                     | % |  | 100  | % |  | 100  | %
|Cost of services and sales (excluding expenses listed separately below) |  | 31                      |   |  | 32   |   |  | 33   |  
|Selling, general and administrative                                     |  | 17                      |   |  | 18   |   |  | 22   |  
|Depreciation and amortization                                           |  | 19                      |   |  | 22   |   |  | 24   |  
|                                                                        |  |                         |   |  |      |   |  |      |  
|Operating income                                                        |  | 33                      |   |  | 28   |   |  | 21   |  
|Total other expenses, net                                               |  | 13                      |   |  | 12   |   |  | 12   |  
|Income tax expense                                                      |  | 8                       |   |  | 7    |   |  | 5    |  
|                                                                        |  |                         |   |  |      |   |  |      |  
|Net income                                                              |  | 12                      | % |  | 9    | % |  | 4    | %
|                                                                        |  |                         |   |  |      |   |  |      |  



Year ended December 31, 2009 compared to
year ended December 31, 2008



Revenues and Sales



The table below sets forth the components of our
revenues and sales for 2009 as compared to 2008:



|                           |                        |                                |         |        |        |         |  |         |        |   |  |      |  
|-------------------------- | ---------------------- | ------------------------------ | ------- | ------ | ------ | ------- |  | ------- | ------ | - |  | ---- | -
|                           |                        | For the year endedDecember 31, |         | Change |       
|                           | 2008                   |                                | 2009    |        | Amount |         |  | Percent |       
|                           | (dollars in thousands) |                               
|Revenue and Sales          |                        |                                |         |        |        |         |  |         |        |   |  |      |  
|Local services             |                        | $                              | 71,131  |        | $      | 74,859  |  | $       | 3,728  |   |  | 5.2  | %
|Network access services    |                        |                                | 89,420  |        |        | 87,690  |  |         | (1,730 | ) |  | -1.9 | %
|Toll services              |                        |                                | 23,010  |        |        | 22,234  |  |         | (776   | ) |  | -3.4 | %
|Data and internet services |                        |                                | 35,163  |        |        | 43,040  |  |         | 7,877  |   |  | 22.4 | %
|Other services and sales   |                        |                                | 28,241  |        |        | 26,319  |  |         | (1,922 | ) |  | -6.8 | %
|                           |                        |                                |         |        |        |         |  |         |        |   |  |      |  
|Total revenues and sales   |                        | $                              | 246,965 |        | $      | 254,142 |  | $       | 7,177  |   |  | 2.9  | %
|                           |                        |                                |         |        |        |         |  |         |        |   |  |      |  



57



---

##### Table of Contents

Local Services. Local services revenues increased $3.7 million, or 5.2%, for 2009 as
compared to 2008. The increase was primarily due to a full year of revenue from Bishop Communications in 2009 compared to the partial year from mid-July through December in 2008 and higher access lines resulting from the acquisition of the Sherburne
Assets and the WH Comm Assets. During 2009, excluding lines acquired from the acquisition of the Sherburne Assets and the WH Comm Assets total access lines decreased by 13,800, including the loss of 13,300 incumbent local exchange carrier lines and
500 competitive local exchange carrier lines. Inclusive of the lines acquired in the acquisition of the Sherburne Assets and the WH Comm Assets, total access lines increased by 10,900, comprised of an increase in incumbent local exchange carrier
lines of 600 and an increase in competitive local exchange carrier lines of 10,300.



Network Access Services. Our network access services revenues decreased $1.7 million, or 1.9%, for 2009 as compared to 2008. The decrease was primarily due to lower minutes of use per access line,
a decrease in the switched access rates for the CLEC Operations in Iowa and at Montezuma Telephone, partially offset by the acquisition of the Sherburne Assets and the WH Comm Assets and a full year of revenue from Bishop Communications in 2009
compared to the partial year from mid-July through December in 2008.



Toll Services. Our toll services revenues decreased by $776,000, or 3.4%, for 2009 as compared to 2008. The decrease in revenue was due to a decrease in minutes of use partially offset by the
acquisition of the Sherburne Assets, the WH Comm Assets, and a full year of revenue from Bishop Communications in 2009 compared to the partial year from mid-July through December in 2008.



Data and Internet Services. Data and Internet services revenues increased by $7.9 million, or 22.4%, for
2009 as compared to 2008. The increase was primarily a result of growth in our existing DSL Internet access service revenue of $2.5 million, $4.4 million from the acquisition of the Sherburne Assets and the WH Comm Assets and a full year of revenue
from Bishop Communications compared to the partial year from mid-July through December in 2008, and growth in our data solutions products revenue of $1.9 million. This increase was partially offset by a decrease in dial-up Internet revenue of $1.1
million.



Other Services and Sales. Other
services and sales revenues decreased by $1.9 million, or 6.8%, for 2009 as compared to 2008. The revenue decrease was primarily due to a $5.3 million decline in our existing CPE business, a $600,000 decrease in rental income, partially offset by
$3.8 million from the acquisition of the Sherburne Assets, and a full year of revenue from Bishop Communications compared to the partial year from mid-July through December in 2008.



Operating Costs and Expenses



The table below sets forth the components of our operating costs and expenses for 2009 as compared to 2008:



|                                                                       |                        |                                |         |        |        |         |         |   |        |  |      |  
|---------------------------------------------------------------------- | ---------------------- | ------------------------------ | ------- | ------ | ------ | ------- | ------- | - | ------ |  | ---- | -
|                                                                       |                        | For the year endedDecember 31, |         | Change |       
|                                                                       | 2008                   |                                | 2009    |        | Amount |         | Percent |  
|                                                                       | (dollars in thousands) |                               
|Operating Costs and Expenses:                                          |                        |                                |         |        |        |         |         |   |        |  |      |  
|Cost of services and sales (exclusive of items shown separately below) |                        | $                              | 78,091  |        | $      | 83,640  |         | $ | 5,549  |  | 7.1  | %
|Selling, general and administrative                                    |                        |                                | 44,714  |        |        | 56,401  |         |   | 11,687 |  | 26.1 | %
|Depreciation and amortization                                          |                        |                                | 53,694  |        |        | 61,092  |         |   | 7,398  |  | 13.8 | %
|                                                                       |                        |                                |         |        |        |         |         |   |        |  |      |  
|Total operating costs and expenses                                     |                        | $                              | 176,499 |        | $      | 201,133 |         | $ | 24,634 |  | 14.0 | %
|                                                                       |                        |                                |         |        |        |         |         |   |        |  |      |  



Cost of Services and
Sales. Cost of services and sales increased $5.5 million, or 7.1%, for 2009 as compared to 2008. The increase was principally due to the operating costs of the Sherburne Assets and the Joint Ventures,



58



---

##### Table of Contents

which became consolidated subsidiaries as a result of the acquisition of the additional ownership interest as a part of the acquisition of the Sherburne Assets on July 1, 2009, and a full
year of expense from Bishop Communications compared to the partial year from mid-July through December in 2008. This was partially offset by lower access expense and CPE material expense of $3.9 million due to lower revenue.



Selling, General and Administrative. Selling, general and
administrative expenses increased $11.7 million for 2009 as compared to 2008. The increase in expenses was primarily due to $5.4 million of additional operating costs from the acquisition of the Sherburne Assets, $3.2 million of acquisition
related costs that are now charged to expense in accordance with FASB ASC 805, Business Combinations, $3.1 million of costs related to the Merger Agreement and a $1.8 million one-time charge related to a network access matter.



Depreciation and Amortization. Depreciation and
amortization increased $7.4 million, or 13.8%, for 2009 as compared to 2008. The increase was primarily due to depreciation and amortization expense of $2.9 million related to the Sherburne Assets (including the effects of consolidating the Joint
Ventures), and a full year of depreciation and amortization expense from Bishop Communications compared to the partial year from mid-July through December in 2008 and higher plant balances for the Iowa properties.



Other Income (Expense)



The table below sets forth other income (expense) for 2009 as
compared to 2008:



|                             |  |                                |         |   |        |   |         |        |  |   |         |   |  |       |  
|---------------------------- |  | ------------------------------ | ------- | - | ------ | - | ------- | ------ |  | - | ------- | - |  | ----- | -
|                             |  | For the year endedDecember 31, |         |   | Change |  
|                             |  | 2008                           |         |   | 2009   |   |         | Amount |  |   | Percent |  
|                             |  | (dollars in thousands)         |        
|Other Income (Expense)       |  |                                |         |   |        |   |         |        |  |   |         |   |  |       |  
|Interest and dividend income |  | $                              | 938     |   |        | $ | 1,880   |        |  | $ | 942     |   |  | 100.4 | %
|Interest expense             |  |                                | (31,444 | ) |        |   | (31,813 | )      |  |   | (369    | ) |  | 1.2   | %
|Other, net                   |  |                                | 429     |   |        |   | 378     |        |  |   | (51     | ) |  | -11.9 | %
|                             |  |                                |         |   |        |   |         |        |  |   |         |   |  |       |  
|Total Other Income (Expense) |  | $                              | (30,077 | ) |        | $ | (29,555 | )      |  | $ | 522     |   |  | -1.7  | %
|                             |  |                                |         |   |        |   |         |        |  |   |         |   |  |       |  



Interest and Dividend
Income. Interest and dividend income increased $942,000, or 100.4%, for 2009 as compared to 2008, primarily due to higher patronage income in 2009.



Interest Expense. Interest expense increased $369,000, or 1.2%, for 2009 as compared to 2008. Interest expense remained steady year
over year as lower interest rates offset a higher average balance on the revolving line of credit, the debt of SHAL, LLC due to the effects of consolidating the Joint Ventures, and the additional $75.0 million of Term Loan B debt that was issued to
acquire the Sherburne Assets.



Other, Net.
Other, net was income of $378,000 for 2009, compared to income of $429,000 in 2008. The 2009 period included a gain of $1.0 million on the previously owned one-third interest in the Joint Ventures. The gain was recorded as part of the acquisition of
the Sherburne Assets and was partially offset by the ineffective portion of an interest rate swap agreement. The $429,000 of income in 2008 resulted from the ineffectiveness and subsequent termination of an interest rate swap agreement.



Income Tax Expense



Income tax expense decreased $4.2 million to $13.1 million for
2009 as compared to 2008 due to lower income before taxes partially offset by a higher combined effective tax rate and a significant increase in non-deductible expense related to the Merger Agreement with Windstream.



59



---

##### Table of Contents

At December 31, 2009, we had unused tax net operating loss carryforwards of
approximately $154 million which expire in 2021 to 2024. Furthermore, we expect that we will continue to be able to take deductions related to the amortization of intangibles in excess of the amount recorded for book purposes in the amount of
approximately $44 million annually through June 2015. We determined that, based upon the evidence available as of December 31, 2009, 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, we determined that no valuation allowance was required for our deferred tax assets. During the years ended December 31, 2008 and
2009, cash income taxes paid were $399,000, and $62,000, respectively, and primarily relate to payments of alternative minimum tax (AMT).



Year ended December 31, 2008 compared to year ended December 31, 2007



Revenues and Sales



The table below sets forth the components of our revenues and sales for 2008 as compared to 2007:



|                           |  |                                |         |        |   |         |  |   |         |   |  |       |  
|-------------------------- |  | ------------------------------ | ------- | ------ | - | ------- |  | - | ------- | - |  | ----- | -
|                           |  | For the year endedDecember 31, |         | Change |  
|                           |  | 2007                           |         | 2008   |   | Amount  |  |   | Percent |  
|                           |  | (dollars in thousands)         |        
|Revenue and Sales:         |  |                                |         |        |   |         |  |   |         |   |  |       |  
|Local services             |  | $                              | 73,918  |        | $ | 71,131  |  | $ | (2,787  | ) |  | -3.8  | %
|Network access services    |  |                                | 100,636 |        |   | 89,420  |  |   | (11,216 | ) |  | -11.1 | %
|Toll services              |  |                                | 21,213  |        |   | 23,010  |  |   | 1,797   |   |  | 8.5   | %
|Data and internet services |  |                                | 29,512  |        |   | 35,163  |  |   | 5,651   |   |  | 19.1  | %
|Other services and sales   |  |                                | 26,122  |        |   | 28,241  |  |   | 2,119   |   |  | 8.1   | %
|                           |  |                                |         |        |   |         |  |   |         |   |  |       |  
|Total revenues and sales   |  | $                              | 251,401 |        | $ | 246,965 |  | $ | (4,436  | ) |  | -1.8  | %
|                           |  |                                |         |        |   |         |  |   |         |   |  |       |  



Local Services. Local
services revenues decreased $2.8 million, or 3.8%, for 2008 as compared to 2007. The decrease was primarily due to a decline in average access lines. From December 31, 2007 to December 31, 2008, total access lines, excluding lines acquired
in the Bishop Communications transaction, decreased by 14,500, including the loss of 16,000 incumbent local exchange carrier lines partially offset by an increase in lines served by our competitive local exchange carriers of 1,500. Inclusive of the
lines acquired in the Bishop Communication transaction, total access lines decreased by 1,400, comprised of a decrease in incumbent local exchange carrier lines of 4,600 and an increase in competitive local exchange carrier lines of 6,000. The
decrease in revenue resulting from the access line loss 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 $11.2 million, or 11.1%, for 2008 as compared to 2007. The decrease was primarily due to $5.8 million of revenue from certain non-recurring network access billing matters with connecting carriers recorded in 2007, while 2008
included a $1.5 million unfavorable impact due to similar items. Also contributing to the decrease was the decline in access lines, lower minutes of use per line and slightly lower revenue per minute.



Toll Services. Our toll services revenues increased by
$1.8 million, or 8.5%, for 2008 as compared to 2007. The increase in revenue was due to higher customer connection charges and the acquisition of Bishop Communications.



Data and Internet Services. Data and Internet services revenues increased by $5.7 million, or 19.1%, for 2008 as
compared to 2007. The increase was primarily a result of growth in our DSL Internet access service revenue of $4.8 million excluding Bishop Communications, growth in our enhanced data services products revenue of $1.2 million and revenue from Bishop
Communications. This increase was partially offset by a



60



---

##### Table of Contents

decrease in dial-up Internet revenue of $1.7 million. We believe the decline in dial-up Internet access service customers primarily was the result of customer migration to broadband products such
as our DSL Internet service.



Other Services
and Sales. Other services and sales revenues increased by $2.1 million, or 8.1%, for 2008 as compared to 2007. The revenue increase was primarily due to a $2.9 million growth in our CPE business and the acquisition of Bishop Communications,
partially offset by a $1.9 million decrease in rental income.



Operating Costs and Expenses



The
table below sets forth the components of our operating costs and expenses for 2008 as compared to 2007:



|                                                                       |  |                                |         |        |   |         |  |   |         |   |  |      |  
|---------------------------------------------------------------------- |  | ------------------------------ | ------- | ------ | - | ------- |  | - | ------- | - |  | ---- | -
|                                                                       |  | For the year endedDecember 31, |         | Change |  
|                                                                       |  | 2007                           |         | 2008   |   | Amount  |  |   | Percent |  
|                                                                       |  | (dollars in thousands)         |        
|Operating Costs and Expenses:                                          |  |                                |         |        |   |         |  |   |         |   |  |      |  
|Cost of services and sales (exclusive of items shown separately below) |  | $                              | 78,246  |        | $ | 78,091  |  | $ | (155    | ) |  | -0.2 | %
|Selling, general and administrative                                    |  |                                | 42,227  |        |   | 44,714  |  |   | 2,487   |   |  | 5.9  | %
|Depreciation and amortization                                          |  |                                | 48,992  |        |   | 53,694  |  |   | 4,702   |   |  | 9.6  | %
|                                                                       |  |                                |         |        |   |         |  |   |         |   |  |      |  
|Total operating costs and expenses                                     |  | $                              | 169,465 |        | $ | 176,499 |  | $ | 7,034   |   |  | 4.2  | %
|                                                                       |  |                                |         |        |   |         |  |   |         |   |  |      |  



Cost of Services and
Sales. Cost of services and sales decreased $155,000, or 0.2%, for 2008 as compared to 2007. During the fourth quarter of 2008, the Companys obligation for postretirement benefits was modified. This resulted in a one-time curtailment gain
of $2.5 million which reduced expenses. Exclusive of the benefit plan obligation changes, costs of services and sales increased by $2.4 million. The increase was principally due to growth of our CPE and data business and costs attributable to the
acquisition of Bishop Communications.



Selling,
General and Administrative. Selling, general and administrative expenses increased $2.5 million, or 5.9%, for 2008 as compared to 2007. The increase in expenses was primarily due to increased costs from Bishop Communications partially
offset by lower salary, wages, benefits and insurance costs.



Depreciation and Amortization. Depreciation and amortization increased $4.7 million, or 9.6%, for 2008 as compared to 2007. The increase was primarily due to higher plant balances for the Iowa
properties and depreciation and amortization expense for Bishop Communications.



Other Income (Expense)



The table below sets forth other income (expense) for 2008 as compared to 2007:



|                             |  |                                |         |   |        |   |         |        |  |         |       |  |       |  
|---------------------------- |  | ------------------------------ | ------- | - | ------ | - | ------- | ------ |  | ------- | ----- |  | ----- | -
|                             |  | For the year endedDecember 31, |         |   | Change |  
|                             |  | 2007                           |         |   | 2008   |   |         | Amount |  | Percent |      
|                             |  | (dollars in thousands)         |        
|Other Income (Expense):      |  |                                |         |   |        |   |         |        |  |         |       |  |       |  
|Interest and dividend income |  | $                              | 928     |   |        | $ | 938     |        |  | $       | 10    |  | 1.1   | %
|Interest expense             |  |                                | (31,885 | ) |        |   | (31,444 | )      |  |         | 441   |  | -1.4  | %
|Other, net                   |  |                                | (719    | ) |        |   | 429     |        |  |         | 1,148 |  | 159.7 | %
|                             |  |                                |         |   |        |   |         |        |  |         |       |  |       |  
|Total Other Income (Expense) |  | $                              | (31,676 | ) |        | $ | (30,077 | )      |  | $       | 1,599 |  | -5.0  | %
|                             |  |                                |         |   |        |   |         |        |  |         |       |  |       |  



61



---

##### Table of Contents

Interest and Dividend Income. Interest and dividend income increased $10,000, or
1.1%, for 2008 as compared to 2007, primarily due to higher patronage dividend income.



Interest Expense. Interest expense decreased $441,000, or 1.4%, for 2008 as compared to 2007, principally as a result of lower interest rates on our variable rate debt.



Other, Net. Other, net was income of $429,000 for 2008,
compared to expense of $719,000 in 2007, primarily due to lower earnings before income tax. This was principally from the ineffectiveness and subsequent termination of an interest rate swap agreement during 2008. The $719,000 of expense in 2007
resulted from the ineffective portion of our interest rate swap agreements.



Income Tax Expense



Income tax expense decreased $3.6 million to $17.3 million for 2008 as compared to 2007.



Liquidity and Capital Resources



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



We are subject to various covenants contained in the Merger
Agreement that restrict our ability to operate our business outside the ordinary course of business. As such, our ability to address the short-term and long-term liquidity requirements may be impacted by these restrictions.



The table below reflects the dividends declared or paid by the
Company during 2009:



|                   |  |                    |       |             |                    |              |                 
|------------------ |  | ------------------ | ----- | ----------- | ------------------ | ------------ | ----------------
|Date Declared      |  | Dividend Per Share |       | Record Date |                    | Payment Date
|December 15, 2008  |  | $                  | 0.405 |             | December 31, 2008  |              | January 15, 2009
|March 16, 2009     |  | $                  | 0.405 |             | March 31, 2009     |              | April 15, 2009  
|June 15, 2009      |  | $                  | 0.405 |             | June 30, 2009      |              | July 15, 2009   
|September 15, 2009 |  | $                  | 0.405 |             | September 30, 2009 |              | October 15, 2009
|December 15, 2009  |  | $                  | 0.405 |             | December 31, 2009  |              | January 15, 2010



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



We intend to fund our operations, interest expense, capital expenditures, working capital requirements and dividend payments on our common
stock with cash from operations. For 2009 and 2008, cash provided by operating activities was $91.2 million and $88.6 million, respectively.



The purchase price of any significant future acquisitions may be paid in the form of equity securities, including common stock, and/or cash.
To the extent cash is used, we intend to use borrowings under our revolving credit facility or, subject to the restrictions in our credit facilities, to arrange additional funding through the sale of public or private debt and/or equity securities,
including common stock, or to obtain additional senior bank debt.



On July 1, 2009, Iowa Telecom completed its acquisition of substantially all of the assets of Sherburne Tele Systems, Inc. for a purchase price of approximately $79.7 million in cash (net of cash
acquired), subject to certain tax adjustments. Approximately $10.9 million of the purchase price was deposited into escrow accounts to satisfy, among other things, potential balance sheet purchase price adjustments, tax adjustments and potential



62



---

##### Table of Contents

indemnification claims by Iowa Telecom, if any. The purchase price was funded by an incremental term loan of $75.0 million under Iowa Telecoms credit facilities, with the balance from
borrowings under Iowa Telecoms revolving credit facility.



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



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



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



On November 2,
2009, the Company completed the acquisition of substantially all the assets of WH Comm for $1.1 million. WH Comm was a division of Wright-Hennepin Cooperative Electric Association based in Rockford, Minnesota. WH Comm, a competitive local exchange
carrier, provides voice and high speed DSL Internet in several communities near the western suburbs of Minneapolis, Minnesota. As of December 31, 2009, WH Comm had approximately 1,800 access lines and 700 DSL subscribers.



Our ability to service our indebtedness will depend on our
ability to generate cash in the future. We are not required to make any scheduled principal payments on Term Loans B, C and D, which will mature in November 2011. However, we may be required to make annual mandatory prepayments under these credit
facilities with a portion of our available cash. Accordingly, a mandatory prepayment of $1.3 million is required prior to April 30, 2010. We will need to refinance all or a portion of our indebtedness on or before maturity in 2011. Debt issued
by EN-TEL, of approximately $11.2 million, will have principal payments of $1.3 million in 2010, $1.4 million in 2011, $1.5 million in 2012, $1.6 million in 2013, $1.8 million in 2014 and $3.6 million thereafter. Debt issued by SHAL, LLC of
approximately $4.5 million will have scheduled principal payments of $772,000 in 2010, $830,000 in 2011, $892,000 in 2012, $960,000 in 2013 and $1.0 million in 2014.



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



63



---

##### 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 and Adjusted EBITDA, as defined in our Credit Agreement, as of December 31, 2008 and 2009:



|                                          |  |                    |         |   |      |   |         |  
|----------------------------------------- |  | ------------------ | ------- | - | ---- | - | ------- | -
|                                          |  | As of December 31, |        
|                                          |  | 2008               |         |   | 2009 |  
|                                          |  | (in thousands)     |        
|Short-Term Liquidity:                     |  |                    |         |   |      |   |         |  
|Current assets                            |  | $                  | 42,020  |   |      | $ | 47,853  |  
|Current liabilities                       |  |                    | (92,280 | ) |      |   | (96,349 | )
|                                          |  |                    |         |   |      |   |         |  
|Net working capital deficit               |  | $                  | (50,260 | ) |      | $ | (48,496 | )
|                                          |  |                    |         |   |      |   |         |  
|Cash and cash equivalents                 |  | $                  | 11,605  |   |      | $ | 12,259  |  
|Availability on revolving credit facility |  | $                  | 61,000  |   |      | $ | 63,000  |  
|                                          |  |                   
|Adjusted Total Debt:                      |  |                    |         |   |      |   |         |  
|Long-term debt                            |  | $                  | 489,003 |   |      | $ | 565,214 |  
|Current maturities of long-term debt      |  |                    | 1,219   |   |      |   | 3,276   |  
|Revolving credit facility                 |  |                    | 39,000  |   |      |   | 37,000  |  
|                                          |  |                    |         |   |      |   |         |  
|Total debt                                |  | $                  | 529,222 |   |      | $ | 605,490 |  
|Minus:                                    |  |                    |         |   |      |   |         |  
|RTFC Capital Certificates                 |  | $                  | (7,778  | ) |      | $ | (7,778  | )
|Cash and cash equivalents                 |  |                    | (11,605 | ) |      |   | (12,259 | )
|                                          |  |                    |         |   |      |   |         |  
|Adjusted Total Debt                       |  | $                  | 509,839 |   |      | $ | 585,453 |  
|                                          |  |                    |         |   |      |   |         |  



|                                                         |  |                         |         |   |         |   |         |      |  |   |         |  
|-------------------------------------------------------- |  | ----------------------- | ------- | - | ------- | - | ------- | ---- |  | - | ------- | -
|                                                         |  | Year Ended December 31, |        
|                                                         |  | 2007(a)                 |         |   | 2008(a) |   |         | 2009 | 
|                                                         |  | (in thousands)          |        
|Adjusted EBITDA:                                         |  |                         |         |   |         |   |         |      |  |   |         |  
|Net income                                               |  | $                       | 29,315  |   |         | $ | 23,149  |      |  | $ | 10,337  |  
|Income tax expense                                       |  |                         | 20,945  |   |         |   | 17,345  |      |  |   | 13,117  |  
|Interest expense                                         |  |                         | 31,885  |   |         |   | 31,444  |      |  |   | 31,813  |  
|Depreciation and amortization                            |  |                         | 48,992  |   |         |   | 53,694  |      |  |   | 61,092  |  
|Unrealized losses (gains) on financial derivatives       |  |                         | 719     |   |         |   | (314    | )    |  |   | 729     |  
|Non-cash stock-based compensation expense                |  |                         | 2,687   |   |         |   | 3,553   |      |  |   | 3,771   |  
|Extraordinary or unusual (gains) losses                  |  |                         |        |   |         |   |        |      |  |   |        |  
|Non-cash portion of RTFC Capital Allocation              |  |                         | (280    | ) |         |   | (560    | )    |  |   | (651    | )
|Other non-cash losses (gains)                            |  |                         |        |   |         |   |        |      |  |   | (1,036  | )
|Loss (gain) on disposal of assets not in ordinary course |  |                         |        |   |         |   |        |      |  |   |        |  
|Transaction costs                                        |  |                         |        |   |         |   |        |      |  |   | 5,000   |  
|                                                         |  |                         |         |   |         |   |         |      |  |   |         |  
|Adjusted EBITDA                                          |  | $                       | 134,263 |   |         | $ | 128,311 |      |  | $ | 124,172 |  
|                                                         |  |                         |         |   |         |   |         |      |  |   |         |  



|(a) | The FASB issued amended guidance regarding Noncontrolling Interest in Consolidated Financial Statements. The amended guidance was adopted by Iowa Telecom
effective January 1, 2009 and the Statement of Operations has been retrospectively adjusted to conform to new authoritative guidance. The Adjusted EBITDA calculation as presented for 2007 and 2008 is calculated in accordance with the definition
of Adjusted EBITDA, as defined in our credit agreement, and financial statements prepared in accordance with the authoritative guidance in effect at that time.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



64



---

##### Table of Contents

The following table summarizes our sources and uses of cash for the years ended
December 31, 2007, 2008 and 2009:



|                               |  |                                 |         |   |      |   |         |      |  |   |          |  
|------------------------------ |  | ------------------------------- | ------- | - | ---- | - | ------- | ---- |  | - | -------- | -
|                               |  | For the year ended December 31, |        
|Description                    |  | 2007                            |         |   | 2008 |   |         | 2009 | 
|                               |  | (in thousands)                  |        
|Net Cash Provided by (Used in) |  |                                 |         |   |      |   |         |      |  |   |          |  
|Operating activities           |  | $                               | 100,201 |   |      | $ | 88,556  |      |  | $ | 91,178   |  
|Investing activities           |  |                                 | (26,903 | ) |      |   | (67,204 | )    |  |   | (105,486 | )
|Financing activities           |  |                                 | (64,992 | ) |      |   | (31,666 | )    |  |   | 14,962   |  



Cash Provided by Operating Activities



For the years ended December 31, 2007, 2008, and 2009, cash provided by operating activities was $100.2 million, $88.6 million, and $91.2 million, respectively. The decrease of $11.6 million for 2008
as compared to 2007 was primarily attributable to funds received related to the resolution of certain network access disputes in 2007.



Cash Used in Investing Activities



The table below sets forth the components of cash used in investing activities for the years ended December 31, 2007, 2008, and 2009:



|                                            |  |                    |        |      |   |        |  |   |        
|------------------------------------------- |  | ------------------ | ------ | ---- | - | ------ |  | - | -------
|                                            |  | As of December 31,
|                                            |  | 2007               |        | 2008 |   | 2009  
|                                            |  | (in thousands)    
|Network and support assets                  |  | $                  | 21,078 |      | $ | 22,960 |  | $ | 18,745 
|Other                                       |  |                    | 5,825  |      |   | 5,206  |  |   | 5,562  
|                                            |  |                    |        |      |   |        |  |   |        
|Total capital expenditures                  |  |                    | 26,903 |      |   | 28,166 |  |   | 24,307 
|Business acquisitions, net of cash acquired |  |                    |       |      |   | 33,100 |  |   | 81,179 
|Purchase of wireless licenses               |  |                    |       |      |   | 5,938  |  |   |       
|                                            |  |                    |        |      |   |        |  |   |        
|Total                                       |  | $                  | 26,903 |      | $ | 67,204 |  | $ | 105,486
|                                            |  |                    |        |      |   |        |  |   |        



We expect that total capital expenditures will be between approximately $26 million to $28 million in fiscal 2010. We expect to fund all of these capital expenditures through cash generated by our
operations. Our capital expenditures can fluctuate from quarter to quarter, and are impacted to some extent by factors beyond our control, such as customer demand, the level of construction activity in our region, and weather.



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



65



---

##### Table of Contents

On July 18, 2008, we completed the purchase of Bishop Communications for a total
purchase price of $33.1 million net of cash acquired and assumed debt of $13.0 million.



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



Cash Provided by (Used in) Financing Activities



For the year ended December 31, 2009, net cash provided by
financing activities was $15.0 million and included the net proceeds from the incremental Term Loan B utilized in the acquisition of the Sherburne Assets of $73.4 million and dividends on common stock of $52.7 million. For the year ended
December 31, 2008, net cash used in financing activities was $31.7 million, consisting primarily of dividends on common stock of $51.7 million offset by an increase in the balance outstanding on the revolving credit facility of $21.0 million
primarily for the acquisition of Bishop Communications. For the year ended December 31, 2007, net cash used in financing activities was $65.0 million, consisting primarily of dividends on common stock of $51.5 million and a reduction in
the balance outstanding on the revolving credit facility of $13.0 million.



Long-Term Debt and Revolving Credit Facilities



|                                           |  |                       |        
|------------------------------------------ |  | --------------------- | -------
|                                           |  | As ofDecember 31,2009
|                                           |  | (in thousands)       
|Total Long-Term Debt:                      |  |                       |        
|Iowa Telecom senior secured term loans     |  | $                     | 552,778
|EN-TEL Communications, LLC notes payable   |  |                       | 11,225 
|SHAL, LLC notes payable                    |  |                       | 4,487  
|                                           |  |                       |        
|Total Debt                                 |  |                       | 568,490
|LESS: Current Maturities of long-term debt |  |                       | 3,276  
|                                           |  |                       |        
|LongTerm Debt                             |  | $                     | 565,214
|                                           |  |                       |        



Iowa Telecom Credit Facilities



As of December 31, 2009, we had outstanding $552.8 million of senior debt under the term facilities, and had $37.0 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 December 31, 2009, $37.0 million was outstanding on the
revolving credit facility and $63.0 million was available. Borrowings under the revolving credit facility bear interest per annum at either (a) the London inter-bank offered rate, or LIBOR, plus 2.0% or (b) a base rate plus 1.0%. As of
December 31, 2009, we had $37.0 million outstanding under LIBOR elections at an average all-in rate of 2.2%.



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 December 31, 2009, $350.0 million was outstanding under Term Loan B based upon a LIBOR
election effective through March 30, 2010, at an all-in rate of 2.01%. 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 December 31, 2009, the interest
rate on the remaining $50.0 million was based upon a LIBOR election effective through January 21, 2010 at an all-in rate of 1.99%.



66



---

##### Table of Contents

On July 1, 2009, Iowa Telecom entered into an Incremental Loan Amendment (the
Incremental Amendment) to the Amended and Restated Credit Agreement dated as of November 23, 2004 (as amended from time to time, the Credit Agreement), among Iowa Telecom, the lenders party thereto and Rural Telephone
Finance Cooperative, as administrative agent. Pursuant to the Incremental Amendment, Iowa Telecom borrowed $75.0 million in incremental loans under the incremental loan facility provided under the Credit Agreement. The incremental loans bear
interest at either a base rate plus 1.00% (in case of base rate loans) or LIBOR plus 2.00% (in the case of Eurodollar loans), at the election of Iowa Telecom. The incremental loans are subject to the terms and conditions of the Credit Agreement and
are entitled to the benefits of the collateral security provided to the other loans made pursuant to the Credit Agreement. The maturity date of the incremental loans is November 23, 2011. As of December 31, 2009, the interest rate on the
$75.0 million was based upon a LIBOR election effective through January 5, 2010 at an all-in-rate of 2.29%.



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



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



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



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



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



The Iowa Telecom credit facilities require us, subject to certain exceptions, to prepay outstanding loans under the credit facilities to the
extent of net cash proceeds received from the following: issuance of certain indebtedness; proceeds of certain asset sales; and casualty insurance proceeds. The credit facilities further require us, subject to certain exceptions, to make prepayments
under the credit facilities equal to 50% of any net increase in the following: distributable cash during a dividend suspension period, as defined; and cumulative distributable cash, as defined, during the fiscal year less the cumulative reductions
of revolving loans (adjusted to exclude the



67



---

##### Table of Contents

effects of borrowings to fund permitted acquisitions) through such period, with reductions to the percentage to be determined based on improvements in certain credit ratios. A mandatory
prepayment of $1.3 million is due prior to April 30, 2010 under these provisions.



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



In addition, the financial covenants under the Iowa Telecom
credit facilities specify, among other things, certain fixed charge coverage ratios and a maximum total leverage ratio, as defined, all of which we were in compliance with as of December 31, 2009.



EN-TEL Debt



On July 18, 2008, the Company acquired Bishop
Communications. As part of the acquisition, the Company assumed debt issued by EN-TEL, a majority owned subsidiary of Bishop Communications, of $13.0 million. The EN-TEL debt consists of promissory notes payable to the Rural Telephone Finance
Cooperative which have quarterly installments of principal and interest. The notes currently bear interest at an average all-in fixed rate of 7.04%. The notes have a fixed interest rate for specific periods of time ranging from January 2010 through
December 2013 and will thereafter be either at a variable interest rate or renegotiated at a fixed rate at the end of the specified period. The notes total $11.2 million as of December 31, 2009 and mature in 2015 and 2018. Principal payments of
$1.2 million were made in 2009. The remaining scheduled payments are $1.3 million in 2010, $1.4 million in 2011, $1.5 million in 2012 $1.6 million in 2013, $1.8 million in 2014 and $3.5 million thereafter.



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



SHAL, LLC Notes Payable



On July 1, 2009, the Company acquired the Sherburne Assets. As part of the acquisition, the Company became the majority owner of SHAL, LLC. As a result, the Company began reflecting the results of
operations, cash flows and financial position of SHAL, LLC on a consolidated basis. At the time of the acquisition of the Sherburne Assets, SHAL, LLC had debt outstanding of $4.9 million. The debt is represented by promissory notes payable to the
Rural Telephone Finance Cooperative which have quarterly installments of principal and interest. The notes currently bear interest at an average all-in fixed rate of 7.25%. The notes have a fixed interest rate for specific periods of time ranging
from January 2010 through January 2012 and will thereafter be either at a variable interest rate or renegotiated at a fixed rate at the end of the specified period. The promissory notes total $4.5 million at December 31, 2009 and mature in
January 2015. Principal payments of $718,000 were made in 2009. This includes $365,000 since SHAL, LLC became a consolidated subsidiary on July 1, 2009. The remaining scheduled payments are $772,000 in 2010, $830,000 in 2011, $892,000 in 2012,
$960,000 in 2013, and $1.0 million in 2014.



The
notes are secured by the assets of SHAL, LLC and SHAL Networks, Inc. The debt agreements restrict dividends paid by SHAL, LLC and no amounts are currently available for dividends.



Interest Rate Swaps



On August 26, 2005, the Company amended a swap arrangement that was originally entered into on November 4, 2004. The amended swap
arrangement resulted in two identical swap agreements which each fixed the interest rate on $175.0 million of indebtedness under Term Loan B, for a total swap notional value of $350.0 million. Effective September 26, 2008, we terminated one of
our swap agreements which we had designated as a hedge against the variability in future interest payments due on $175.0 million of Term Loan B. We entered into



68



---

##### Table of Contents

a new swap agreement effective September 30, 2008 to replace the terminated swap agreement. The amended terms of the new swap agreement and the remaining swap agreement effective
August 31, 2005, effectively convert the variable rate interest payments due on $350.0 million of Term Loan B to a fixed rate of 5.87% through maturity of November 23, 2011.



Other Items



On November 23, 2009 we entered into the Merger Agreement with Windstream. Completion of the Merger with Windstream is conditioned upon
the receipt of approvals of the Federal Communications Commission (the FCC), the Iowa Utilities Board, the Minnesota Public Utilities Commission (the MPUC) and the Missouri Public Service Commission (the MPSC).
Pursuant to the Merger Agreement, Windstream and Iowa Telecom filed the applications required for the transfer of control of the relevant franchises, licenses and similar instruments issued under the rules and regulations of the FCC on
December 21, 2009, the Iowa Utilities Board on December 21, 2009, the MPUC on December 18, 2009, and the MPSC on December 18, 2009. There is no timeline for the final approvals necessary from the FCC, although the deadlines for
filing initial comments and reply comments passed on February 4 and February 11, 2010, respectively, without any party filing comments. The IUBs right to prohibit the transaction expires on June 19, 2010. A hearing regarding our
application to the Iowa Utilities Board is currently scheduled for May 4, 2010. There are currently three intervenors in this proceeding, as well as the Consumer Advocate. The MPUC is under no deadline for acting on our application, although
the deadline for filing initial comments passed on February 18, 2010 with the Minnesota Department of Commerce recommending approval and no other comments being filed. Reply comments are due March 1, 2010. The MPSC issued the final order
necessary for its consent to the transaction on February 1, 2010. We cannot predict whether the FCC, Iowa Utilities Board or MPUC will approve the transaction. We also cannot predict when the FCC or MPUC will act or how soon before
June 19, 2010, if at all, the Iowa Utilities Board may act.



In addition, as a condition to the Merger, the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the HSR Act) requires Iowa Telecom and Windstream to observe the HSR Acts
notification and waiting period. The HSR Act provides for an initial 30-calendar-day waiting period following the necessary filings by the parties to the Merger which were completed on December 30, 2009 by the filing of notification and report
forms with the U.S. Department of Justice (DOJ) and the Federal trade Commission (FTC). On January 8, 2010, the DOJ and FTC granted early termination of the waiting period under the HSR Act.



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.



The Iowa Utilities Board took the position in the fourth quarter of 2008 that our incumbent local exchange carriers intrastate access
rates have ceased to be subject to the intrastate switched access rate freeze since July 1, 2005, and are subject to challenge. The Iowa Utilities Board recently considered such a challenge based on a February 20, 2008, MCImetro
Transmission Access Transmission Services LLC (d/b/a Verizon Access Transmission Services) and MCI Communications Services, Inc. (d/b/a Verizon Business Services) complaint filed with the Iowa Utilities Board against our local incumbent exchange
carrier, our Iowa competitive local exchange carriers, Frontier Communication of Iowa, Inc., and Citizens Mutual Telephone Company alleging that such companies tariffed originating and terminating intrastate switched access rates are not just
and reasonable and should be lowered by the Iowa Utilities Board to mirror the rates contained in Qwest Corporations Iowa tariff. The complaint appears to be similar to others asserted by these or related entities against the
intrastate



69



---

##### Table of Contents

access charges of mid-sized incumbent local exchange companies in several other states. We filed a motion to dismiss the complaint in light of our legislated price plan, and believe the substance
of the complaint to be without merit given the absence of any rationale for the proposed decrease. The Iowa Utilities Board denied our motion to dismiss on November 14, 2008, a decision we could not appeal until the Iowa Utilities Board issued
a decision on the merits.



Following the filing of
all rounds of testimony but prior to the hearing, Iowa Telecom and Verizon reached a tentative settlement of Verizons complaint on October 23, 2009 and successfully requested the proceeding to be stayed until a settlement agreement had
been executed. Iowa Telecom and Verizon executed the settlement agreement on December 7, 2009 and jointly filed for approval of the same on December 11, 2009, which the Iowa Utilities Board granted on February 4, 2010. By the terms of
the confidential settlement, Iowa Telecom and its Iowa CLECs agreed to decrease their current intrastate switched access rates for the local switching element to $0.01508, $0.021780, and $0.021780, respectively, in three steps via a single tariff
filing to be made by each Iowa Telecom company. As required by the settlement agreement, the first of such tariff revisions was filed by February 11, 2010 with a requested effective date of March 13, 2010. Approval of such filing is
currently pending. The second tariff filing is to be made so as to be effective January 1, 2011, and the final of such filings is to be made so as to be effective January 1, 2012. In return, Verizon agreed that it would not seek to reduce
any element of Iowa Telecoms ILEC or CLEC intrastate switching rates before January 1, 2012. The settlement agreement requires Verizon to request dismissal of its complaint with prejudice no later than five business days after the
effective date of the currently- pending tariff filing. The settlement also provides for mutual releases of all claims set forth in Verizons Complaint and Iowa Telecoms Answer in this docket. In addition, the settlement provides that it
shall not limit or affect: Verizons right to seek to reduce, eliminate or otherwise challenge the approximately three-cent-per-minute carrier common line charges (CCLCs) of Iowa Telecom in any rulemaking proceedings of general
applicability; Iowa Telecoms right to implement switched access rate increases or decreases ordered or permitted by the Iowa Utilities Board or the FCC in proceedings to reform intercarrier compensation; and Iowa Telecoms right to seek
to maintain the CCLCs of Iowa Telecom in rulemaking proceedings of general applicability.



On September 12, 2008, the Iowa Utilities Board issued an order commencing an inquiry into whether the Iowa Utilities Board should create an Iowa Universal Service Fund (USF). At this
point, the Iowa Utilities Board is seeking comment on preliminary issues, such as how it should determine whether an Iowa USF is needed, and on certain policy and implementation issues assuming that an Iowa USF will be established. Comments were
filed on October 27, 2008. Eventually, the Iowa Utilities Board may issue an order commencing rulemaking. Sprint filed a petition for rulemaking on July 6, 2009 requesting that the Iowa Utilities Board eliminate the CCLC, which the Iowa
Utilities Board denied on September 4, 2009 and again on October 13, 2009 following Sprints request for reconsideration. In so doing, the Iowa Utilities Board stated that CCLC matters were best considered in the context of universal
service issues. We cannot predict whether the Iowa Utilities Board will establish a rulemaking as a result of its pending inquiry or, assuming it does, the result of such rulemaking.



On August 18, 2009, Iowa Telecom filed eleven applications with the National Telecommunications and
Information Administration (NTIA) and the U.S. Department of Agricultures Rural Utilities Service (RUS) seeking Broadband Infrastructure grants to fund 80% of $8.6 million of broadband projects in and between 46
communities or localities that are within Iowa Telecoms Iowa service territory. Iowa Telecom has been notified that each of the eleven applications were rejected because none scored high enough on NTIAs ranking system to merit
further consideration and each requested a larger portion of grant funding than RUS offered. On January 15, 2010, NTIA and RUS separately released notices of funds availability soliciting a second, and final, round of applications for Broadband
Infrastructure grants. Each agency made significant changes in the application requirements. Iowa Telecom is reviewing the new requirements and will likely file new applications in the second round. The filing deadline is March 15, 2010. If we
file second round applications, we cannot predict when we will learn whether such applications will be granted.



70



---

##### Table of Contents

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



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



Obligations and Commitments



Our
ongoing capital commitments include capital expenditures and debt service requirements. For 2009, our capital expenditures were $24.3 million; see Liquidity and Capital ResourcesCash Used in Investing Activities.



The following table sets forth our contractual obligations as
of December 31, 2009, together with cash payments due in each period indicated:



|                                     |  |                           |         |      |   |           |  |           |         |               |   |       |  |   |      
|------------------------------------ |  | ------------------------- | ------- | ---- | - | --------- |  | --------- | ------- | ------------- | - | ----- |  | - | -----
|                                     |  | Payments Due by Period(3)
|Obligation                           |  | Total                     |         | 2010 |   | 2011-2012 |  | 2013-2014 |         | 2015and after
|                                     |  | (dollars in thousands)   
|Current Debt:                        |  |                           |         |      |   |           |  |           |         |               |   |       |  |   |      
|Revolving credit facility(1)         |  | $                         | 37,000  |      | $ |          |  | $         | 37,000  |               | $ |      |  | $ |     
|Current maturities of long-term debt |  |                           | 3,276   |      |   | 3,276     |  |           |        |               |   |      |  |   |     
|Long-Term Debt:                      |  |                           |         |      |   |           |  |           |         |               |   |       |  |   |      
|Senior debt payments                 |  |                           | 551,558 |      |   |          |  |           | 551,558 |               |   |      |  |   |     
|Interest payments(2)                 |  |                           | 47,045  |      |   | 25,950    |  |           | 21,095  |               |   |      |  |   |     
|EN-TEL debt payments                 |  |                           | 9,911   |      |   |          |  |           | 2,945   |               |   | 3,424 |  |   | 3,542
|SHAL, LLC debt payments              |  |                           | 3,715   |      |   |          |  |           | 1,722   |               |   | 1,993 |  |   |     
|Operating Lease Payments             |  |                           | 8,066   |      |   | 1,510     |  |           | 2,519   |               |   | 2,130 |  |   | 1,907
|                                     |  |                           |         |      |   |           |  |           |         |               |   |       |  |   |      
|Total Contractual Obligations        |  | $                         | 660,571 |      | $ | 30,736    |  | $         | 616,839 |               | $ | 7,547 |  | $ | 5,449
|                                     |  |                           |         |      |   |           |  |           |         |               |   |       |  |   |      



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

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

|(3) | Excludes postretirement benefit obligation payments estimated in accordance with Financial Accounting Standards Board Accounting Standards Codification 715,
Compensation-Retirement Benefits, as disclosed in Note 13 to the Consolidated Financial Statements.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



As of December 31, 2009, 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, and the level of construction activity in our region and the impact of weather.



71



---

##### Table of Contents

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. The Company assesses the recoverability of long-lived assets, including property, plant and equipment and definite-lived intangible assets, whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. In such cases, if the sum of the expected cash flows (undiscounted and without interest) resulting from the use of the asset are less than the carrying amount, an impairment loss
is recognized based on the difference between the carrying amount and the fair value of the assets.



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



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



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



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



As of December 31, 2009, our unused tax net operating loss carry forwards were $154 million, and will expire between 2021 and 2024. Additionally, the Company expects to be able to continue taking deductions related to the amortization
of intangibles in excess of the amount recorded for book purposes in the amount of approximately $44 million per year through June 2015. Based upon the evidence available as of December 31, 2009, the combination of the continued generation of
taxable income from operations and reversing temporary differences will, more likely than not, be sufficient to utilize the entire deferred tax asset. As such, we have determined that no valuation allowance was required for our deferred tax assets.



Interest Rate Swap Agreements. The Company
has entered into interest rate swap agreements which the Company designated as a hedge against the variability in future interest payments due on $350.0 million of Term Loan B. The purpose of the swap agreements is to adjust the interest rate
profile of the Companys debt obligations and to achieve a targeted mix of floating and fixed rate debt.



72



---

##### Table of Contents

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



In the event that the swap agreements no longer qualify for cash flow hedge accounting treatment, all changes in fair market value would be
reported currently in earnings and would be recorded in the Other Income (Expense) section of the Companys Consolidated Statements of Income. Additionally, the net gain or loss remaining in accumulated other comprehensive income would be
reclassified into earnings over the remainder of the term of the swap agreements.



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



Off-Balance Sheet Risk and Concentration of Credit Risk



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



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



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



New Accounting Pronouncements



In June 2007, the Emerging Issues Task Force (EITF)
reached consensus on guidance regarding Accounting for Income Tax Benefits of Dividends on Share-Based Payment Awards. The guidance 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 previously accounted for this tax benefit as a reduction to its income tax provision. The guidance is to be applied prospectively for tax benefits
on dividends declared in fiscal years beginning after December 15, 2007. Adoption of the guidance on January 1, 2008, did not have a material impact on the Companys Consolidated Balance Sheets, Statements of Income or Statements of
Cash Flows.



In December 2007, the FASB issued
amended guidance regarding Noncontrolling Interests in Consolidated Financial Statements, which establishes new accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a
subsidiary. The amended guidance clarifies that changes in a parents ownership interest in a subsidiary that do not result in deconsolidation are equity transactions if the parent retains its controlling financial interest. In addition, this
amended guidance requires that a parent recognize a gain or loss in net income when a subsidiary is deconsolidated. Such gain or



73



---

##### Table of Contents

loss will be measured using the fair value of the noncontrolling equity investment on the deconsolidation date. The amended guidance also includes expanded disclosure requirements regarding the
interest of the parent and its noncontrolling interest. The amended guidance is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. Adoption of the amended guidance did not have a
material impact on the Companys Consolidated Balance Sheets, Statements of Income or Statements of Cash Flows.



In December 2007, the FASB issued revised guidance regarding Business Combinations. The revised guidance requires an
acquiring entity to recognize all the assets acquired and liabilities assumed in a transaction at the acquisition-date fair value, with limited exceptions, and also includes a substantial number of new disclosure requirements. The revised guidance
applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. The revised guidance requires acquisition related costs to
be expensed as incurred. During the first quarter of 2009, the Company expensed acquisition related costs of $868,000 that had been deferred pursuant to the prior guidance applicable to acquisitions that did not close prior to the adoption date of
January 1, 2009. In addition, as a result of adoption the Company expensed $2.3 million of acquisition-related costs in 2009. Other than expensing acquisition costs deferred pursuant to prior guidance as discussed above, the adoption of the
revised guidance did not have a material impact on the Companys Consolidated Balance Sheets, Statements of Income or Statements of Cash Flows.



In March 2008, the FASB issued amended guidance regarding Disclosures about Derivative Instruments and Hedging Activities.
The amended guidance is intended to improve financial reporting about derivative instruments and hedging activities by requiring enhanced disclosures to enable investors to better understand their effects on an entitys financial condition,
financial performance and cash flows. The amended guidance is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. Adoption of the amended guidance impacted disclosures only and did
not have an impact on the Companys Consolidated Balance Sheets, Statements of Income or Statements of Cash Flows.



In December 2008, the FASB amended its prior guidance regarding Employers Disclosures about Postretirement Benefit Plan
Assets. The amended guidance is effective for fiscal years ending after December 15, 2009. The amended guidance will impact disclosures only and will not have an impact on the Companys Consolidated Balance Sheets, Statements of
Income or Statements of Cash Flows.



Effective
January 1, 2009, the Company adopted amended guidance related to Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities. Under the amended guidance, unvested share-based
payment awards that contain non-forfeitable rights to dividends or dividend equivalents are participating securities and, therefore, are included in computing earnings per share (EPS) pursuant to the two-class method. The two-class
method determines earnings per share for each class of common stock and participating securities according to dividends or dividend equivalents and their respective participation rights in undistributed earnings. Shares of restricted stock granted
to employees under the Companys 2005 Stock Incentive Plan are considered participating securities as they receive non-forfeitable dividend equivalents at the same rate as common stock. The amended guidance was adopted via retroactive
application for the years ended December 31, 2007 and 2008, resulting in a $0.02 and $0.03 decrease to basic EPS and a $0.01 and $0.02 decrease in diluted EPS for the years then ended, respectively.



In April 2009, the FASB issued amended guidance regarding
Interim Disclosures about Fair Value of Financial Instruments, which requires disclosures about fair value of financial instruments in interim financial information. The amended guidance also requires those disclosures in
summarized financial information at interim reporting periods. Under the amended guidance, publicly traded companies must include disclosures about the fair value of their financial instruments whenever summarized financial information for interim
reporting periods is issued. In addition, companies must disclose in the body or in the accompanying notes of their summarized financial information for interim reporting periods and in their financial statements for annual reporting periods the
fair value of all financial instruments for which it is practicable to estimate that value,



74



---

##### Table of Contents

whether recognized or not recognized at fair value in the Companys balance sheet. The amended guidance is effective for interim periods ending after June 15, 2009. Adoption of the
amended guidance impacted disclosures only and did not have an impact on the Companys Consolidated Balance Sheets, Statements of Income or Statements of Cash Flows.



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



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



In January 2010, the FASB issued FASB ASU 2010-06, Fair Value
Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements. FASB ASU 2010-06 requires new disclosures and clarifies existing disclosure requirements about fair value measurements as set forth in the FASB
Codification Subtopic 820-10. FASB ASU 2010-06 is effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances, and settlements in the roll forward of
activity in Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years beginning after December 15, 2010. Early adoption is
permitted. Adoption of FASB ASU 2010-06 impacts disclosures only and will not have an impact on the Companys Consolidated Balance Sheets, Statements of Income or Statements of Cash Flows.



ITEM 7A. Quantitative And Qualitative
Disclosures About Market Risk



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



Under the terms of our credit facilities, as amended, our
long-term secured debt facilities will mature November 2011. Our $400.0 million of indebtedness under Term Loan B, maturing in 2011, bears interest per year at either (a) LIBOR plus 1.75% or (b) a base rate plus 0.75%. On August 26,
2005, we entered into two



75



---

##### Table of Contents

identical interest rate swap agreements with nationally recognized counterparties for the purpose of fixing the interest on a portion of these borrowings. On September 26, 2008, we
terminated one of our swap agreements and entered into a new replacement swap agreement effective September 30, 2008. Pursuant to the current swap agreements, we will pay a fixed rate of interest of 5.87% on a $350.0 million notional amount of
Term Loan B from September 30, 2008 through November 23, 2011. The Term B incremental loans bear interest at either a base rate plus 1.00% (in the case of base rate loans) or LIBOR plus 2.00% (in the case of Eurodollar loans), at the
election of Iowa Telecom.



We are exposed to
interest rate risk, resulting primarily from fluctuations in LIBOR, with respect to $125.0 million of borrowings under Term Loan B through November 2011. Similarly, changes in LIBOR will be the primary source of interest rate risk we face with
respect to the $37.0 million of borrowings drawn under the revolving credit facility at December 31, 2009. 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.



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.



With respect to our $11.2 million of borrowings at our EN-TEL subsidiary, we are exposed to interest rate risk, resulting primarily from
fluctuations in the Rural Telephone Finance Cooperation variable rate, from the dates of the current interest rate locks, which have expiration dates from 2010 through 2013, until the notes mature in 2018.



With respect to the $4.5 million of borrowings SHAL, LLC we are
exposed to interest rate risk, resulting primarily from fluctuations in the Rural Telephone Finance Cooperation variable rate, from the dates on which the current fixed interest rates expire (January 2010 through January 2012) until the notes mature
in January 2015.



A one percent change in the
underlying interest rates for the variable rate debt that was outstanding on December 31, 2009 would have an impact of approximately $1,620,000 per year on our interest expense while our fixed rates and swaps are in place.



76



---

##### Table of Contents

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM



To the Board of Directors and Stockholders of

Iowa Telecommunications Services, Inc.

Newton,
Iowa



We have audited the accompanying
consolidated balance sheets of Iowa Telecommunication Services, Inc. and subsidiaries (the Company) as of December 31, 2009 and 2008, and the related consolidated statements of income, stockholders equity and other
comprehensive income, and of cash flows for each of the three years in the period ended December 31, 2009. These financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on the
financial statements based on our audits.



We
conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.



In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Iowa
Telecommunication Services, Inc. and subsidiaries as of December 31, 2009 and 2008, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2009, in conformity with accounting
principles generally accepted in the United States of America.



We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Companys internal control over financial reporting as of
December 31, 2009, based on the criteria established in Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 26, 2010 expressed an
unqualified opinion on the Companys internal control over financial reporting.



/s/ DELOITTE & TOUCHE LLP



Des Moines, IA

February 26, 2010



77



---

##### Table of Contents

IOWA TELECOMMUNICATIONS SERVICES, INC. AND SUBSIDIARIES



CONSOLIDATED BALANCE SHEETS

AS OF DECEMBER 31, 2008 AND 2009

(Dollars in Thousands, Except Per Share Amounts)



|                                                                                                                                                             |  |      |          |   |      |   |          |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ---- | -------- | - | ---- | - | -------- | -
|                                                                                                                                                             |  | 2008 |          |   | 2009 |  
|ASSETS                                                                                                                                                       |  |      |          |   |      |   |          |  
|                                                                                                                                                             |  |     
|CURRENT ASSETS:                                                                                                                                              |  |      |          |   |      |   |          |  
|Cash and cash equivalents                                                                                                                                    |  | $    | 11,605   |   |      | $ | 12,259   |  
|Accounts receivable, net                                                                                                                                     |  |      | 23,320   |   |      |   | 22,632   |  
|Inventories                                                                                                                                                  |  |      | 3,946    |   |      |   | 5,105    |  
|Prepayments and other current assets                                                                                                                         |  |      | 3,149    |   |      |   | 7,857    |  
|                                                                                                                                                             |  |      |          |   |      |   |          |  
|Total Current Assets                                                                                                                                         |  |      | 42,020   |   |      |   | 47,853   |  
|                                                                                                                                                             |  |      |          |   |      |   |          |  
|PROPERTY, PLANT AND EQUIPMENT:                                                                                                                               |  |      |          |   |      |   |          |  
|Property, plant and equipment                                                                                                                                |  |      | 601,782  |   |      |   | 672,270  |  
|Accumulated depreciation                                                                                                                                     |  |      | (310,936 | ) |      |   | (365,631 | )
|                                                                                                                                                             |  |      |          |   |      |   |          |  
|Property, Plant and Equipment, net                                                                                                                           |  |      | 290,846  |   |      |   | 306,639  |  
|                                                                                                                                                             |  |      |          |   |      |   |          |  
|GOODWILL                                                                                                                                                     |  |      | 473,984  |   |      |   | 492,956  |  
|INTANGIBLE ASSETS AND OTHER, NET                                                                                                                             |  |      | 36,904   |   |      |   | 51,238   |  
|INVESTMENT IN AND RECEIVABLE FROM THE RURAL TELEPHONE FINANCE COOPERATIVE                                                                                    |  |      | 16,174   |   |      |   | 17,141   |  
|                                                                                                                                                             |  |      |          |   |      |   |          |  
|Total Assets                                                                                                                                                 |  | $    | 859,928  |   |      | $ | 915,827  |  
|                                                                                                                                                             |  |      |          |   |      |   |          |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                         |  |      |          |   |      |   |          |  
|                                                                                                                                                             |  |     
|CURRENT LIABILITIES:                                                                                                                                         |  |      |          |   |      |   |          |  
|Revolving credit facility                                                                                                                                    |  | $    | 39,000   |   |      | $ | 37,000   |  
|Accounts payable                                                                                                                                             |  |      | 11,017   |   |      |   | 12,408   |  
|Advanced billings and customer deposits                                                                                                                      |  |      | 8,615    |   |      |   | 10,470   |  
|Accrued and other current liabilities                                                                                                                        |  |      | 32,429   |   |      |   | 33,195   |  
|Current maturities of long-term debt                                                                                                                         |  |      | 1,219    |   |      |   | 3,276    |  
|                                                                                                                                                             |  |      |          |   |      |   |          |  
|Total Current Liabilities                                                                                                                                    |  |      | 92,280   |   |      |   | 96,349   |  
|                                                                                                                                                             |  |      |          |   |      |   |          |  
|LONG-TERM DEBT                                                                                                                                               |  |      | 489,003  |   |      |   | 565,214  |  
|DEFERRED TAX LIABILITIES                                                                                                                                     |  |      | 47,575   |   |      |   | 60,783   |  
|OTHER LONG-TERM LIABILITIES                                                                                                                                  |  |      | 28,326   |   |      |   | 25,914   |  
|                                                                                                                                                             |  |      |          |   |      |   |          |  
|Total Liabilities                                                                                                                                            |  |      | 657,184  |   |      |   | 748,260  |  
|                                                                                                                                                             |  |      |          |   |      |   |          |  
|COMMITMENTS AND CONTINGENCIES (Note 16)                                                                                                                      |  |      |          |   |      |   |          |  
|STOCKHOLDERS EQUITY:                                                                                                                                        |  |      |          |   |      |   |          |  
|Iowa Telecommunications Services, Inc. stockholders equity Preferred stock, $0.01 par value, 50,000,000 shares authorized,
no shares issued and outstanding |  |      |         |   |      |   |         |  
|Common stock, $0.01 par value, 100,000,000 shares authorized, 31,500,687 and 32,193,036 issued and outstanding,
respectively                                 |  |      | 315      |   |      |   | 322      |  
|Additional paid-in capital                                                                                                                                   |  |      | 327,264  |   |      |   | 332,722  |  
|Accumulated deficit                                                                                                                                          |  |      | (110,814 | ) |      |   | (153,383 | )
|Accumulated other comprehensive loss                                                                                                                         |  |      | (14,308  | ) |      |   | (12,094  | )
|                                                                                                                                                             |  |      |          |   |      |   |          |  
|Total Iowa Telecommunications Services, Inc. Stockholders Equity                                                                                            |  |      | 202,457  |   |      |   | 167,567  |  
|Noncontrolling Interest                                                                                                                                      |  |      | 287      |   |      |   |         |  
|                                                                                                                                                             |  |      |          |   |      |   |          |  
|Total Stockholders Equity                                                                                                                                   |  |      | 202,744  |   |      |   | 167,567  |  
|                                                                                                                                                             |  |      |          |   |      |   |          |  
|Total Liabilities and Stockholders Equity                                                                                                                   |  | $    | 859,928  |   |      | $ | 915,827  |  
|                                                                                                                                                             |  |      |          |   |      |   |          |  



See notes to consolidated
financial statements.



78



---

##### Table of Contents

IOWA TELECOMMUNICATIONS SERVICES, INC. AND SUBSIDIARIES



CONSOLIDATED STATEMENTS OF INCOME

FOR THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009

(Dollars in Thousands, Except Per Share Amounts)



|                                                                       |  |      |         |   |      |   |         |      |  |   |         |  
|---------------------------------------------------------------------- |  | ---- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|                                                                       |  | 2007 |         |   | 2008 |   |         | 2009 | 
|REVENUE AND SALES                                                      |  | $    | 251,401 |   |      | $ | 246,965 |      |  | $ | 254,142 |  
|OPERATING COSTS AND EXPENSES:                                          |  |      |         |   |      |   |         |      |  |   |         |  
|Cost of services and sales (exclusive of items shown separately below) |  |      | 78,246  |   |      |   | 78,091  |      |  |   | 83,640  |  
|Selling, general and administrative                                    |  |      | 42,227  |   |      |   | 44,714  |      |  |   | 56,401  |  
|Depreciation and amortization                                          |  |      | 48,992  |   |      |   | 53,694  |      |  |   | 61,092  |  
|                                                                       |  |      |         |   |      |   |         |      |  |   |         |  
|Total Operating Costs and Expenses                                     |  |      | 169,465 |   |      |   | 176,499 |      |  |   | 201,133 |  
|                                                                       |  |      |         |   |      |   |         |      |  |   |         |  
|OPERATING INCOME                                                       |  |      | 81,936  |   |      |   | 70,466  |      |  |   | 53,009  |  
|                                                                       |  |      |         |   |      |   |         |      |  |   |         |  
|OTHER INCOME (EXPENSE):                                                |  |      |         |   |      |   |         |      |  |   |         |  
|Interest and dividend income                                           |  |      | 928     |   |      |   | 938     |      |  |   | 1,880   |  
|Interest expense                                                       |  |      | (31,885 | ) |      |   | (31,444 | )    |  |   | (31,813 | )
|Other, net                                                             |  |      | (719    | ) |      |   | 429     |      |  |   | 378     |  
|                                                                       |  |      |         |   |      |   |         |      |  |   |         |  
|Total Other Expense, net                                               |  |      | (31,676 | ) |      |   | (30,077 | )    |  |   | (29,555 | )
|                                                                       |  |      |         |   |      |   |         |      |  |   |         |  
|EARNINGS BEFORE INCOME TAXES                                           |  |      | 50,260  |   |      |   | 40,389  |      |  |   | 23,454  |  
|INCOME TAX EXPENSE                                                     |  |      | 20,945  |   |      |   | 17,345  |      |  |   | 13,117  |  
|                                                                       |  |      |         |   |      |   |         |      |  |   |         |  
|NET INCOME                                                             |  |      | 29,315  |   |      |   | 23,044  |      |  |   | 10,337  |  
|Net loss attributable to noncontrolling interest                       |  |      |        |   |      |   | 105     |      |  |   | 195     |  
|                                                                       |  |      |         |   |      |   |         |      |  |   |         |  
|NET INCOME ATTRIBUTABLE TO IOWA TELECOMMUNICATIONS SERVICES, INC.      |  | $    | 29,315  |   |      | $ | 23,149  |      |  | $ | 10,532  |  
|                                                                       |  |      |         |   |      |   |         |      |  |   |         |  
|                                                                       |  |      |        
|EARNINGS PER SHARE:                                                    |  |      |         |   |      |   |         |      |  |   |         |  
|Basic                                                                  |  | $    | 0.91    |   |      | $ | 0.71    |      |  | $ | 0.29    |  
|                                                                       |  |      |         |   |      |   |         |      |  |   |         |  
|Diluted                                                                |  | $    | 0.90    |   |      | $ | 0.70    |      |  | $ | 0.29    |  
|                                                                       |  |      |         |   |      |   |         |      |  |   |         |  
|Dividends Declared Per Share                                           |  | $    | 1.62    |   |      | $ | 1.62    |      |  | $ | 1.62    |  
|                                                                       |  |      |         |   |      |   |         |      |  |   |         |  



See notes to consolidated
financial statements.



79



---

##### Table of Contents

IOWA TELECOMMUNICATIONS SERVICES, INC. AND SUBSIDIARIES



CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY AND

COMPREHENSIVE INCOME

FOR THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009

(Dollars in
Thousands, Except Per Share Amounts)



|                                                           |  |              |   |  |             |     |                          |   |         |                    |  |   |                                            |   |  |                        |         |   |       |   |        |   |  |   |         |  
|---------------------------------------------------------- |  | ------------ | - |  | ----------- | --- | ------------------------ | - | ------- | ------------------ |  | - | ------------------------------------------ | - |  | ---------------------- | ------- | - | ----- | - | ------ | - |  | - | ------- | -
|                                                           |  | CommonShares |   |  | CommonStock |     | AdditionalPaid-InCapital |   |         | AccumulatedDeficit |  |   | AccumulatedOtherComprehensiveIncome (Loss) |   |  | NoncontrollingInterest |         |   | Total |  
|Balance, December 31, 2006                                 |  | 31,379,670   |   |  | $           | 314 |                          | $ | 322,016 |                    |  | $ | (59,976                                    | ) |  | $                      | 5,345   |   |       | $ |       |   |  | $ | 267,699 |  
|Net income                                                 |  |             |   |  |             |    |                          |   |        |                    |  |   | 29,315                                     |   |  |                        |        |   |       |   |       |   |  |   | 29,315  |  
|Unrealized loss on derivatives, net of tax effect          |  |             |   |  |             |    |                          |   |        |                    |  |   |                                           |   |  |                        | (8,629  | ) |       |   |       |   |  |   | (8,629  | )
|Post retirement benefit plan adjustment, net of tax effect |  |             |   |  |             |    |                          |   |        |                    |  |   |                                           |   |  |                        | 3,921   |   |       |   |       |   |  |   | 3,921   |  
|                                                           |  |              |   |  |             |     |                          |   |         |                    |  |   |                                            |   |  |                        |         |   |       |   |        |   |  |   |         |  
|Total comprehensive income (loss)                          |  |             |   |  |             |    |                          |   |        |                    |  |   | 29,315                                     |   |  |                        | (4,708  | ) |       |   |       |   |  |   | 24,607  |  
|Compensation from compensatory stock plans                 |  | 82,447       |   |  |             |    |                          |   | 2,687   |                    |  |   |                                           |   |  |                        |        |   |       |   |       |   |  |   | 2,687   |  
|Shares reacquired                                          |  | (26,902      | ) |  |             |    |                          |   | (561    | )                  |  |   |                                           |   |  |                        |        |   |       |   |       |   |  |   | (561    | )
|Exercise of employee stock options                         |  | 5,000        |   |  |             |    |                          |   | 21      |                    |  |   |                                           |   |  |                        |        |   |       |   |       |   |  |   | 21      |  
|Income tax benefit related to stock compensation           |  |             |   |  |             |    |                          |   | 7       |                    |  |   |                                           |   |  |                        |        |   |       |   |       |   |  |   | 7       |  
|Dividends declared ($1.62 per share)                       |  |             |   |  |             |    |                          |   |        |                    |  |   | (51,493                                    | ) |  |                        |        |   |       |   |       |   |  |   | (51,493 | )
|                                                           |  |              |   |  |             |     |                          |   |         |                    |  |   |                                            |   |  |                        |         |   |       |   |        |   |  |   |         |  
|Balance, December 31, 2007                                 |  | 31,440,215   |   |  |             | 314 |                          |   | 324,170 |                    |  |   | (82,154                                    | ) |  |                        | 637     |   |       |   |       |   |  |   | 242,967 |  
|Net income (loss)                                          |  |             |   |  |             |    |                          |   |        |                    |  |   | 23,149                                     |   |  |                        |        |   |       |   | (105   | ) |  |   | 23,044  |  
|Unrealized loss on derivatives, net of tax effect          |  |             |   |  |             |    |                          |   |        |                    |  |   |                                           |   |  |                        | (11,935 | ) |       |   |       |   |  |   | (11,935 | )
|Post retirement benefit plan adjustment, net of tax effect |  |             |   |  |             |    |                          |   |        |                    |  |   |                                           |   |  |                        | (3,010  | ) |       |   |       |   |  |   | (3,010  | )
|                                                           |  |              |   |  |             |     |                          |   |         |                    |  |   |                                            |   |  |                        |         |   |       |   |        |   |  |   |         |  
|Total comprehensive income (loss)                          |  |             |   |  |             |    |                          |   |        |                    |  |   | 23,149                                     |   |  |                        | (14,945 | ) |       |   | (105   | ) |  |   | 8,099   |  
|Compensation from compensatory stock plans                 |  | 87,825       |   |  |             | 1   |                          |   | 3,552   |                    |  |   |                                           |   |  |                        |        |   |       |   |       |   |  |   | 3,553   |  
|Shares reacquired                                          |  | (27,353      | ) |  |             |    |                          |   | (488    | )                  |  |   |                                           |   |  |                        |        |   |       |   |       |   |  |   | (488    | )
|Capital contributions from noncontrolling interest         |  |             |   |  |             |    |                          |   |        |                    |  |   |                                           |   |  |                        |        |   |       |   | 392    |   |  |   | 392     |  
|Income tax benefit related to stock compensation           |  |             |   |  |             |    |                          |   | 30      |                    |  |   |                                           |   |  |                        |        |   |       |   |       |   |  |   | 30      |  
|Dividends declared ($1.62 per share)                       |  |             |   |  |             |    |                          |   |        |                    |  |   | (51,809                                    | ) |  |                        |        |   |       |   |       |   |  |   | (51,809 | )
|                                                           |  |              |   |  |             |     |                          |   |         |                    |  |   |                                            |   |  |                        |         |   |       |   |        |   |  |   |         |  
|Balance, December 31, 2008                                 |  | 31,500,687   |   |  |             | 315 |                          |   | 327,264 |                    |  |   | (110,814                                   | ) |  |                        | (14,308 | ) |       |   | 287    |   |  |   | 202,744 |  
|Net income (loss)                                          |  |             |   |  |             |    |                          |   |        |                    |  |   | 10,532                                     |   |  |                        |        |   |       |   | (195   | ) |  |   | 10,337  |  
|Unrealized gain on derivatives, net of tax effect          |  |             |   |  |             |    |                          |   |        |                    |  |   |                                           |   |  |                        | 2,652   |   |       |   |       |   |  |   | 2,652   |  
|Post retirement benefit plan adjustment, net of tax effect |  |             |   |  |             |    |                          |   |        |                    |  |   |                                           |   |  |                        | (438    | ) |       |   |       |   |  |   | (438    | )
|                                                           |  |              |   |  |             |     |                          |   |         |                    |  |   |                                            |   |  |                        |         |   |       |   |        |   |  |   |         |  
|Total comprehensive income (loss)                          |  |             |   |  |             |    |                          |   |        |                    |  |   | 10,532                                     |   |  |                        | 2,214   |   |       |   | (195   | ) |  |   | 12,551  |  
|Compensation from compensatory stock plans                 |  | 121,075      |   |  |             |    |                          |   | 3,771   |                    |  |   |                                           |   |  |                        |        |   |       |   |       |   |  |   | 3,771   |  
|Shares reacquired                                          |  | (68,164      | ) |  |             |    |                          |   | (925    | )                  |  |   |                                           |   |  |                        |        |   |       |   |       |   |  |   | (925    | )
|Exercise of employee stock options                         |  | 639,438      |   |  |             | 7   |                          |   | 696     |                    |  |   |                                           |   |  |                        |        |   |       |   |       |   |  |   | 703     |  
|Capital contributions from noncontrolling interest         |  |             |   |  |             |    |                          |   | 32      |                    |  |   |                                           |   |  |                        |        |   |       |   | 358    |   |  |   | 390     |  
|Noncontrolling interest in acquired entities               |  |             |   |  |             |    |                          |   |        |                    |  |   |                                           |   |  |                        |        |   |       |   | 3,319  |   |  |   | 3,319   |  
|Acquisition of noncontrolling interest                     |  |             |   |  |             |    |                          |   | 1,879   |                    |  |   |                                           |   |  |                        |        |   |       |   | (3,769 | ) |  |   | (1,890  | )
|Income tax benefit related to stock compensation           |  |             |   |  |             |    |                          |   | 5       |                    |  |   |                                           |   |  |                        |        |   |       |   |       |   |  |   | 5       |  
|Dividends declared ($1.62 per share)                       |  |             |   |  |             |    |                          |   |        |                    |  |   | (53,101                                    | ) |  |                        |        |   |       |   |       |   |  |   | (53,101 | )
|                                                           |  |              |   |  |             |     |                          |   |         |                    |  |   |                                            |   |  |                        |         |   |       |   |        |   |  |   |         |  
|Balance, December 31, 2009                                 |  | 32,193,036   |   |  | $           | 322 |                          | $ | 332,722 |                    |  | $ | (153,383                                   | ) |  | $                      | (12,094 | ) |       | $ |       |   |  | $ | 167,567 |  
|                                                           |  |              |   |  |             |     |                          |   |         |                    |  |   |                                            |   |  |                        |         |   |       |   |        |   |  |   |         |  



See notes to consolidated
financial statements.



80



---

##### Table of Contents

IOWA TELECOMMUNICATIONS SERVICES, INC. AND SUBSIDIARIES



CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009

(Dollars in Thousands)



|                                                                                      |  |      |         |   |      |   |         |      |  |   |          |  
|------------------------------------------------------------------------------------- |  | ---- | ------- | - | ---- | - | ------- | ---- |  | - | -------- | -
|                                                                                      |  | 2007 |         |   | 2008 |   |         | 2009 | 
|CASH FLOWS FROM OPERATING ACTIVITIES:                                                 |  |      |         |   |      |   |         |      |  |   |          |  
|Net income                                                                            |  | $    | 29,315  |   |      | $ | 23,044  |      |  | $ | 10,337   |  
|Adjustments to reconcile net income to cash provided by operating activities:         |  |      |         |   |      |   |         |      |  |   |          |  
|Depreciation                                                                          |  |      | 47,243  |   |      |   | 51,747  |      |  |   | 58,403   |  
|Amortization of intangible assets                                                     |  |      | 1,749   |   |      |   | 1,947   |      |  |   | 2,689    |  
|Amortization of debt issuance costs                                                   |  |      | 591     |   |      |   | 640     |      |  |   | 1,113    |  
|Deferred income taxes                                                                 |  |      | 19,973  |   |      |   | 17,286  |      |  |   | 12,843   |  
|Non-cash stock based compensation expense                                             |  |      | 2,687   |   |      |   | 3,553   |      |  |   | 3,771    |  
|Changes in operating assets and liabilities, net of effects of business acquisitions: |  |      |         |   |      |   |         |      |  |   |          |  
|Receivables                                                                           |  |      | 576     |   |      |   | (1,754  | )    |  |   | 3,164    |  
|Inventories                                                                           |  |      | 129     |   |      |   | (15     | )    |  |   | 326      |  
|Accounts payable                                                                      |  |      | (503    | ) |      |   | 1,267   |      |  |   | (48      | )
|Pension and postretirement benefit plan obligations                                   |  |      | (2,655  | ) |      |   | (4,147  | )    |  |   | (687     | )
|Other assets and liabilities                                                          |  |      | 1,096   |   |      |   | (5,012  | )    |  |   | (733     | )
|                                                                                      |  |      |         |   |      |   |         |      |  |   |          |  
|Net Cash Provided by Operating Activities                                             |  |      | 100,201 |   |      |   | 88,556  |      |  |   | 91,178   |  
|                                                                                      |  |      |         |   |      |   |         |      |  |   |          |  
|CASH FLOWS FROM INVESTING ACTIVITIES:                                                 |  |      |         |   |      |   |         |      |  |   |          |  
|Capital expenditures                                                                  |  |      | (26,903 | ) |      |   | (28,166 | )    |  |   | (24,307  | )
|Business acquisitions (net of cash acquired)                                          |  |      |        |   |      |   | (33,100 | )    |  |   | (81,179  | )
|Purchase of wireless licenses                                                         |  |      |        |   |      |   | (5,938  | )    |  |   |         |  
|                                                                                      |  |      |         |   |      |   |         |      |  |   |          |  
|Net Cash Used in Investing Activities                                                 |  |      | (26,903 | ) |      |   | (67,204 | )    |  |   | (105,486 | )
|                                                                                      |  |      |         |   |      |   |         |      |  |   |          |  
|CASH FLOWS FROM FINANCING ACTIVITIES:                                                 |  |      |         |   |      |   |         |      |  |   |          |  
|Net change in revolving credit facility                                               |  |      | (13,000 | ) |      |   | 21,000  |      |  |   | (2,000   | )
|Proceeds from exercise of stock options                                               |  |      | 21      |   |      |   |        |      |  |   | 703      |  
|Issuance of long-term debt                                                            |  |      |        |   |      |   |        |      |  |   | 75,000   |  
|Acquisition of noncontrolling interest                                                |  |      |        |   |      |   |        |      |  |   | (1,890   | )
|Capital contributions from noncontrolling interest                                    |  |      |        |   |      |   | 520     |      |  |   | 390      |  
|Shares reacquired                                                                     |  |      | (561    | ) |      |   | (488    | )    |  |   | (925     | )
|Payment of long-term debt                                                             |  |      |        |   |      |   | (599    | )    |  |   | (1,585   | )
|Payment of debt issuance costs                                                        |  |      |        |   |      |   | (351    | )    |  |   | (2,009   | )
|Dividends paid                                                                        |  |      | (51,452 | ) |      |   | (51,748 | )    |  |   | (52,722  | )
|                                                                                      |  |      |         |   |      |   |         |      |  |   |          |  
|Net Cash Provided by (Used in) Financing Activities                                   |  |      | (64,992 | ) |      |   | (31,666 | )    |  |   | 14,962   |  
|                                                                                      |  |      |         |   |      |   |         |      |  |   |          |  
|NET CHANGE IN CASH AND CASH EQUIVALENTS                                               |  |      | 8,306   |   |      |   | (10,314 | )    |  |   | 654      |  
|CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD                                      |  |      | 13,613  |   |      |   | 21,919  |      |  |   | 11,605   |  
|                                                                                      |  |      |         |   |      |   |         |      |  |   |          |  
|CASH AND CASH EQUIVALENTS AT END OF PERIOD                                            |  | $    | 21,919  |   |      | $ | 11,605  |      |  | $ | 12,259   |  
|                                                                                      |  |      |         |   |      |   |         |      |  |   |          |  
|SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:                                     |  |      |         |   |      |   |         |      |  |   |          |  
|Cash paid for interest                                                                |  | $    | 31,269  |   |      | $ | 31,609  |      |  | $ | 30,314   |  
|                                                                                      |  |      |         |   |      |   |         |      |  |   |          |  
|Cash paid for income taxes                                                            |  | $    | 633     |   |      | $ | 399     |      |  | $ | 62       |  
|                                                                                      |  |      |         |   |      |   |         |      |  |   |          |  



SUPPLEMENTAL NONCASH INVESTING
AND FINANCING ACTIVITIES:



| |  |  | Dividends on common stock of $12,887 were declared on December 14, 2007 for shareholders of record as of December 31, 2007 and paid on
January 15, 2008.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Dividends on common stock of $12,949 were declared on December 15, 2008 for shareholders of record as of December 31, 2008 and paid on
January 15, 2009.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Dividends on common stock of $13,341 were declared on December 15, 2009 for shareholders of record as of December 31, 2009 and paid on
January 15, 2010.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | In the year ended December 31, 2008, the Company completed the purchase of Bishop Communications Corporation (Bishop Communications)
for approximately $33.1 million net of cash received. See Note 20 for further information on the Companys acquisition of Bishop Communications.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | In the year ended December 31, 2009, the Company completed the purchase of (a) substantially all of the assets of Sherburne Tele Systems,
Inc. (the Sherburne Assets) for approximately $79.7 million in cash (net of cash acquired), subject to certain tax adjustments, (b) New Ulm Telecom Inc.s ownership interests in EN-TEL Communications, LLC, SHAL, LLC and SHAL
Networks, Inc. for $1.9 million, and (c) substantially all of the assets of WH Comm (the WH Comm Assets) for $1.1 million. See Note 20 for further information on the Companys acquisitions.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



See notes to consolidated financial statements.



81



---

##### Table of Contents

IOWA TELECOMMUNICATIONS SERVICES, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009



1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES



Business DescriptionIowa Telecommunications Services, Inc. and subsidiaries (Iowa
Telecom or the Company) is an integrated telecommunications network serving approximately 253,000 total access lines in Iowa, Minnesota and Missouri. Iowa Telecom provides local, long distance and Internet access and communications
equipment primarily to rural residential and business customers, and provides access services to interexchange carriers (IXCs) and other communications companies. The companys retail rates are primarily deregulated on a federal and
state level. The vast majority of the Companys interstate wholesale revenue is derived from access services provided to IXCs that are regulated on a price cap basis at the federal level. At the state level, the vast majority of similar revenue
is regulated on a basis currently under determination by the Iowa Utilities Board although we believe it to be a price cap basis and retain the right to litigate this matter. The Company manages its business as one operating segment.



Windstream Merger Agreement On
November 23, 2009, the Company entered into a definitive Agreement and Plan of Merger (the Merger Agreement) with Windstream Corporation, a Delaware corporation (Windstream), and Buffalo Merger Sub, Inc., a Delaware
corporation and a wholly-owned subsidiary of Windstream (Newco). The Merger Agreement provides that, upon the terms and subject to the conditions set forth in the Merger Agreement, the Company will merge with and into Newco, with Newco
continuing as the surviving corporation (the Merger). Pursuant to the Merger Agreement, at the effective time and as a result of the Merger, each share of Iowa Telecom common stock, par value $0.01 per share, issued and outstanding
immediately prior to the effective time of the Merger will be converted into and become exchangeable for (i) shares of common stock of Windstream at a fixed exchange ratio of 0.804 and (ii) $7.90 in cash. In connection with the Merger,
each outstanding stock option under our 2002 Stock Incentive Plan will be converted into the right to receive the merger consideration, less the exercise price of the stock option. Each share of restricted stock awarded under our 2005 Stock
Incentive Plan will be treated the same as any other outstanding share of Company common stock, but the forfeiture provisions and other terms and conditions of the restricted stock will continue to apply to the merger consideration received for the
restricted stock and the cash portion of the consideration will be retained by Windstream until the restrictions have lapsed.



The transaction is expected to close mid - 2010. Completion of the Merger with Windstream is conditioned upon the receipt of certain
governmental consents and approvals, and Iowa Telecom shareholders approval. The special meeting of the Companys shareholders to vote on the Merger has been scheduled for March 25, 2010, and the proxy statement/prospectus for
the special meeting was mailed to shareholders on or about February 22, 2010. No assurance can be given that the required conditions to closing will be satisfied or that the Merger will be completed.



Factors outside of managements control could delay or
prevent completion of the proposed Merger. In the event of a termination of the Merger Agreement, we may be required to pay Windstream a termination fee of $25.0 million in certain circumstances. Pending completion of the Merger, Iowa Telecom is
subject various covenants contained in the Merger Agreement that restrict Iowa Telecoms ability to operate its business outside the ordinary course of business.



Basis of ConsolidationThe consolidated financial statements include the accounts of the
Company and its majority owned subsidiaries. Intercompany balances and transactions have been eliminated in consolidation.



Revenue RecognitionRevenue is recognized when evidence of an arrangement exists, the earning process is complete and
collectability is reasonably assured. The prices for regulated services are filed in tariffs with the appropriate regulatory bodies that exercise jurisdiction over the various services. All revenues are recorded net of applicable taxes assessed by
governmental authorities.



82



---

##### Table of Contents

Local ServicesMonthly recurring local line charges are billed to end users in
advance. Revenue is recognized during the period these services are rendered. Billed but unearned revenue is deferred and recorded as a current liability included in advanced billings and customer deposits.



Network Access ServicesNetwork access revenue
primarily consists of switched access revenue billed to other carriers. Switched access revenue is billed in arrears based on originating and terminating minutes of use. Earned but unbilled switched access revenue is included in receivables. Network
access revenue also contains special access revenue. Special access revenue is billed in advance based on recurring fees. Network access revenue and special access revenue is recognized in the month services are provided.



Toll ServicesToll services are typically billed to
end users in arrears based on actual usage. Earned but unbilled toll services are included in receivables. Toll service revenue is recognized in the month services are provided.



Data and Internet SalesMonthly recurring charges for dial-up and DSL Internet access services are
billed to end users in advance. Revenue is recognized during the period these services are provided. Billed but unearned revenue is included in advanced billings and customer deposits.



Other Services and SalesOther services and sales consist primarily of revenues from the sale,
installation and maintenance of customer premise voice and data equipment (CPE), directory publishing, inside line care, providing satellite and cable video services, and the lease of office space. The Company recognizes directory
services revenue on a straight-line basis over the twelve month period in which the corresponding directory is distributed. The monthly recurring charges for inside line care are billed to end users in advance. Revenue is recognized during the
period these services are provided. Billed but unearned revenue is included in advanced billings and customer deposits. The Company recognizes the revenue from the sale and maintenance of CPE in the period the sale or service is rendered. Rent is
recognized on a straight-line basis over the term of the lease agreement.



Cash and Cash EquivalentsCash and cash equivalents include cash and temporary investments with maturities of three months or less from the acquisition date of the instrument.



Allowance for Doubtful
AccountsThe Company must make estimates of the uncollectability of its accounts receivables. The Company specifically analyzes accounts receivables and historic bad debts, customer concentrations, customer creditworthiness, current
economic trends and changes in its customer payment terms when evaluating the adequacy of the allowance for doubtful accounts.



InventoriesInventories, which consist mainly of cable, supplies and replacement parts, are stated at the lower of cost,
determined principally by the average cost method, or net realizable value.



Property and DepreciationProperty, plant and equipment are carried at cost. Depreciation has been calculated primarily using the composite remaining life methodology and straight-line
depreciation rates. This method depreciates the remaining net investment in telephone plant, less anticipated net salvage value, over remaining economic asset lives by asset category. This method requires the periodic review and revision of
depreciation rates. When depreciable telephone plant is retired in the normal course of business, the amount of such plant is deducted from the respective plant and accumulated depreciation accounts with no gain or loss recognized.



The Company completed its most recent review of the depreciation
rates during 2006. The composite depreciation rate is 9.6%.



Goodwill and Other Intangible AssetsGoodwill and indefinite-lived intangible assets are not amortized but are reviewed annually (or more frequently under various conditions) for
impairment in accordance with



83



---

##### Table of Contents

Financial Accounting Standards Board Accounting Standards Codification (FASB ASC) 350, Intangibles  Goodwill and Other. Impairment occurs when the fair value of the asset
is less than its carrying value. The Company performs its annual goodwill and other indefinite-lived intangible asset impairment test during the third quarter, primarily using discounted cash flow and market value of equity methodologies. Intangible
assets with definite lives include the value assigned to customer relationships, tradenames and easements at the date of acquisition, which are being amortized using a straight-line method over 4 to 20 years.



While our wireless licenses are issued for only a fixed time,
such licenses are subject to renewal by the FCC. Renewals of licenses occur routinely, subject to meeting certain build out requirements, and at nominal cost. Moreover, we have determined that there are currently no legal, regulatory, contractual,
competitive, economic or other factors that limit the useful life of our wireless licenses. As a result, we treat the wireless licenses as an indefinite-lived intangible asset under the provisions of FASB ASC 350 and test for impairment using the
Greenfield approach.



Impairment
of Long-Lived AssetsThe Company assesses the recoverability of long-lived assets, including property, plant and equipment and definite-lived intangible assets, whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. In such cases, if the sum of the expected cash flows (undiscounted and without interest) resulting from the use of the asset are less than the carrying amount, an impairment loss is recognized
based on the difference between the carrying amount and the fair value of the assets. No impairment loss has been recognized to date.



Debt Issuance CostsDeferred financing costs are amortized on a straight line basis over the term of the related debt
issuance.



Income
TaxesDeferred tax assets and liabilities are determined based on the differences between the financial reporting and tax bases of assets and liabilities at each balance sheet date using enacted tax rates expected to be in effect in the
year the differences are expected to reverse. Deferred tax assets are reduced by a valuation allowance to the extent that it is unlikely they will be realized. See Note 10, Income Taxes, for further discussion.



Stock-Based CompensationThe Company applies
FASB ASC 718, Compensation  Stock Compensation, to stock based compensation. This statement requires companies to apply a fair value-based measurement method in accounting for share-based payment transactions with employees and to
record compensation cost for all stock awards granted after the required effective date and for awards modified, repurchased or cancelled after that date.



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.



Fair Value of Financial
InstrumentsThe estimated fair value of accounts receivable, accounts payable and revolving credit facility approximate their carrying values unless otherwise indicated. The carrying value of receivables, accounts payable and revolving
credit facility approximate fair value based on their short-term nature.



Interest Rate Swap AgreementsThe Company has entered into interest rate swap agreements which the Company designated as hedges against the variability in future interest payments due
on $350.0 million of Term Loan B. The purpose of the swap agreements is to adjust the interest rate profile of the Companys debt obligations, and to achieve a targeted mix of floating and fixed rate debt.



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



84



---

##### Table of Contents

Changes in fair market value of the swap instruments attributable to hedge effectiveness are recorded, net of income tax effects, in the Accumulated Other Comprehensive Loss section of the
Companys Consolidated Statements of Stockholders Equity and Comprehensive Income. Accordingly, in the event that the swap agreements no longer qualify for cash flow hedge accounting treatment, all changes in fair market value would be
reported currently in earnings and recorded in the Other Income (Expense) section of the Companys Consolidated Statements of Income.



The fair value of the Companys interest rate swaps were determined based on the present value of the expected future cash flows using
discount rates appropriate with consideration given to the Companys and counterparties non-performance risk. The fair value of the interest rate swaps is recorded in the Other Long-Term Liabilities section of the Companys
Consolidated Balance Sheets.



Use of
EstimatesThe preparation of the financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.



Recently Issued Accounting Pronouncements In
June 2007, the Emerging Issues Task Force (EITF) reached consensus on guidance regarding Accounting for Income Tax Benefits of Dividends on Share-Based Payment Awards. The guidance 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 previously accounted for this tax benefit as a reduction to its income tax provision. The
guidance is to be applied prospectively for tax benefits on dividends declared in fiscal years beginning after December 15, 2007. Adoption of the guidance on January 1, 2008, did not have a material impact on the Companys
Consolidated Balance Sheets, Statements of Income or Statements of Cash Flows.



In December 2007, the FASB issued amended guidance regarding Noncontrolling Interests in Consolidated Financial Statements, which establishes new accounting and reporting standards for
the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. The amended guidance clarifies that changes in a parents ownership interest in a subsidiary that do not result in deconsolidation are equity transactions
if the parent retains its controlling financial interest. In addition, this amended guidance requires that a parent recognize a gain or loss in net income when a subsidiary is deconsolidated. Such gain or loss will be measured using the fair value
of the noncontrolling equity investment on the deconsolidation date. The amended guidance also includes expanded disclosure requirements regarding the interest of the parent and its noncontrolling interest. The amended guidance is effective for
fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. Adoption of the amended guidance did not have a material impact on the Companys Consolidated Balance Sheets, Statements of Income or
Statements of Cash Flows.



In December 2007, the
FASB issued revised guidance regarding Business Combinations. The revised guidance requires an acquiring entity to recognize all the assets acquired and liabilities assumed in a transaction at the acquisition-date fair value, with
limited exceptions, and also includes a substantial number of new disclosure requirements. The revised guidance applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting
period beginning on or after December 15, 2008. The revised guidance requires acquisition related costs to be expensed as incurred. During the first quarter of 2009, the Company expensed acquisition related costs of $868,000 that had been
deferred pursuant to the prior guidance applicable to acquisitions that did not close before to the adoption date of January 1, 2009. In addition, as a result of adoption the Company expensed $2.3 million of acquisition-related costs in 2009.
Other than expensing acquisition costs deferred pursuant to prior guidance as discussed above, the adoption of the revised guidance did not have a material impact on the Companys Consolidated Balance Sheets, Statements of Income or Statements
of Cash Flows.



85



---

##### Table of Contents

In March 2008, the FASB issued amended guidance regarding Disclosures about
Derivative Instruments and Hedging Activities. The amended guidance is intended to improve financial reporting about derivative instruments and hedging activities by requiring enhanced disclosures to enable investors to better understand
their effects on an entitys financial condition, financial performance and cash flows. The amended guidance is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. Adoption of
the amended guidance impacted disclosures only and did not have an impact on the Companys Consolidated Balance Sheets, Statements of Income or Statements of Cash Flows.



In December 2008, the FASB amended its prior guidance regarding Employers Disclosures about
Postretirement Benefit Plan Assets. The amended guidance is effective for fiscal years ending after December 15, 2009. The amended guidance will impact disclosures only and will not have an impact on the Companys Consolidated
Balance Sheets, Statements of Income or Statements of Cash Flows.



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



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



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



86



---

##### Table of Contents

In January 2010, the FASB issued FASB ASU 2010-06, Fair Value Measurements and
Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements. FASB ASU 2010-06 requires new disclosures and clarifies existing disclosure requirements about fair value measurements as set forth in the FASB Codification Subtopic
820-10. FASB ASU 2010-06 is effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair
value measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years beginning after December 15, 2010. Early adoption is permitted. Adoption of FASB ASU
2010-06 impacts disclosures only and will not have an impact on the Companys Consolidated Balance Sheets, Statements of Income or Statements of Cash Flows.



2. EARNINGS PER SHARE



Effective January 1, 2009, the Company adopted amended guidance related to Determining Whether Instruments Granted in
Share-Based Payment Transactions Are Participating Securities. Under the amended guidance, unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents are participating securities and,
therefore, are included in computing earnings per share (EPS) pursuant to the two-class method. The two-class method determines earnings per share for each class of common stock and participating securities according to dividends or
dividend equivalents and their respective participation rights in undistributed earnings. Shares of restricted stock granted to employees under the Companys 2005 Stock Incentive Plan are considered participating securities as they receive
non-forfeitable dividend equivalents at the same rate as common stock. The amended guidance was adopted via retroactive application for the years ended December 31, 2007 and 2008, resulting in a $0.02 and $0.03 decrease to basic EPS and a $0.01
and $0.02 decrease in diluted EPS for the years then ended, respectively.



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



|                                                                                       |  |                                          |        |   |      |   |        |      |  |   |        |  
|-------------------------------------------------------------------------------------- |  | ---------------------------------------- | ------ | - | ---- | - | ------ | ---- |  | - | ------ | -
|                                                                                       |  | For the Year Ended December 31,          |       
|                                                                                       |  | 2007                                     |        |   | 2008 |   |        | 2009 | 
|                                                                                       |  | (in thousands, except per share amounts) |       
|Net income attributable to Iowa Telecommunications Services, Inc.                      |  | $                                        | 29,315 |   |      | $ | 23,149 |      |  | $ | 10,532 |  
|Net income allocated to unvested compensatory stock                                    |  |                                          | (593   | ) |      |   | (811   | )    |  |   | (1,187 | )
|                                                                                       |  |                                          |        |   |      |   |        |      |  |   |        |  
|Net income attributable to Iowa Telecommunications Services, Inc. common shares        |  | $                                        | 28,722 |   |      | $ | 22,338 |      |  | $ | 9,345  |  
|                                                                                       |  |                                          |        |   |      |   |        |      |  |   |        |  
|Basic shares outstanding:                                                              |  |                                          |        |   |      |   |        |      |  |   |        |  
|Weighted average basic shares outstanding                                              |  |                                          | 31,786 |   |      |   | 31,952 |      |  |   | 32,612 |  
|Less unvested compensatory stock included in weighted average basic shares outstanding |  |                                          | (371   | ) |      |   | (475   | )    |  |   | (678   | )
|                                                                                       |  |                                          |        |   |      |   |        |      |  |   |        |  
|Weighted average shares outstanding for basic earnings per common share                |  |                                          | 31,415 |   |      |   | 31,477 |      |  |   | 31,934 |  
|                                                                                       |  |                                          |        |   |      |   |        |      |  |   |        |  
|Diluted shares outstanding:                                                            |  |                                          |        |   |      |   |        |      |  |   |        |  
|Weighted average shares outstanding for basic earnings per common share                |  |                                          | 31,415 |   |      |   | 31,477 |      |  |   | 31,934 |  
|Add shares issuable upon exercise of stock options                                     |  |                                          | 540    |   |      |   | 579    |      |  |   | 269    |  
|                                                                                       |  |                                          |        |   |      |   |        |      |  |   |        |  
|Weighted average number of shares outstandingdiluted                                  |  |                                          | 31,955 |   |      |   | 32,056 |      |  |   | 32,203 |  
|                                                                                       |  |                                          |        |   |      |   |        |      |  |   |        |  
|Earnings Per Share:                                                                    |  |                                          |        |   |      |   |        |      |  |   |        |  
|Basic                                                                                  |  | $                                        | 0.91   |   |      | $ | 0.71   |      |  | $ | 0.29   |  
|Diluted                                                                                |  | $                                        | 0.90   |   |      | $ | 0.70   |      |  | $ | 0.29   |  



87



---

##### Table of Contents

As of December 31, 2007, 2008 and 2009, total options outstanding were 677,579, 677,579
and 38,141, respectively.



3. REVENUES



The table below sets forth the components of our revenues and
sales for the years ended December 31, 2007, 2008 and 2009:



|                           |  |                         |         |      |   |         |  |   |        
|-------------------------- |  | ----------------------- | ------- | ---- | - | ------- |  | - | -------
|                           |  | Year Ended December 31,
|                           |  | 2007                    |         | 2008 |   | 2009   
|                           |  | (in thousands)         
|Local services             |  | $                       | 73,918  |      | $ | 71,131  |  | $ | 74,859 
|Network access services    |  |                         | 100,636 |      |   | 89,420  |  |   | 87,690 
|Toll services              |  |                         | 21,213  |      |   | 23,010  |  |   | 22,234 
|Data and internet services |  |                         | 29,512  |      |   | 35,163  |  |   | 43,040 
|Other services and sales   |  |                         | 26,122  |      |   | 28,241  |  |   | 26,319 
|                           |  |                         |         |      |   |         |  |   |        
|Total revenues and sales   |  | $                       | 251,401 |      | $ | 246,965 |  | $ | 254,142
|                           |  |                         |         |      |   |         |  |   |        



4. ACCOUNTS RECEIVABLE



Accounts
receivable consisted of the following at December 31:



|                                |  |                |        |   |      |   |        |  
|------------------------------- |  | -------------- | ------ | - | ---- | - | ------ | -
|                                |  | 2008           |        |   | 2009 |  
|                                |  | (in thousands) |       
|Customers                       |  | $              | 15,674 |   |      | $ | 15,727 |  
|Connecting companies            |  |                | 7,324  |   |      |   | 6,220  |  
|Other                           |  |                | 1,576  |   |      |   | 1,884  |  
|Allowance for doubtful accounts |  |                | (1,254 | ) |      |   | (1,199 | )
|                                |  |                |        |   |      |   |        |  
|Total                           |  | $              | 23,320 |   |      | $ | 22,632 |  
|                                |  |                |        |   |      |   |        |  



The following is a summary of
activity for the allowance for doubtful accounts during each of the three years ended December 31:



|                             |  |                  |       |                            |   |                      |  |   |       |   |               |   |     |  |   |      
|---------------------------- |  | ---------------- | ----- | -------------------------- | - | -------------------- |  | - | ----- | - | ------------- | - | --- |  | - | -----
|                             |  | BeginningBalance |       | AdditionalChargesto Income |   | DeductionFromReserve |  |   | Other |   | EndingBalance
|                             |  | (in thousands)  
|Year ended December 31, 2007 |  | $                | 1,163 |                            | $ | 53                   |  | $ | (611  | ) |               | $ |    |  | $ | 605  
|Year ended December 31, 2008 |  |                  | 605   |                            |   | 430                  |  |   | (518  | ) |               |   | 737 |  |   | 1,254
|Year ended December 31, 2009 |  |                  | 1,254 |                            |   | 402                  |  |   | (457  | ) |               |   |    |  |   | 1,199



The Company grants credit to its customers in the normal course of business. At December 31, 2008 and 2009 the Company had outstanding
trade receivables from telecommunications companies which totaled $7.3 million and $6.2 million, respectively. During 2007, 2008 and 2009, the Company did not have any customers that represented more than 10% of total revenue and sales.



88



---

##### Table of Contents

5. PROPERTY, PLANT AND EQUIPMENT



Property, plant and equipment consisted of the following at December 31:



|                                         |  |                       |  |                |          |   |      |   |          |  
|---------------------------------------- |  | --------------------- |  | -------------- | -------- | - | ---- | - | -------- | -
|                                         |  | EstimatedUseful Lives |  | 2008           |          |   | 2009 |  
|                                         |  |                       |  | (in thousands) |         
|Land                                     |  |                      |  | $              | 4,788    |   |      | $ | 5,891    |  
|Buildings                                |  | 35 years              |  |                | 31,504   |   |      |   | 38,451   |  
|Plant and equipment                      |  | 12-40 years           |  |                | 540,432  |   |      |   | 601,221  |  
|Furniture, vehicles and other            |  | 5-15 years            |  |                | 15,209   |   |      |   | 16,922   |  
|Construction in progress                 |  | NA                    |  |                | 9,849    |   |      |   | 9,785    |  
|                                         |  |                       |  |                |          |   |      |   |          |  
|Total property, plant and equipment      |  |                       |  |                | 601,782  |   |      |   | 672,270  |  
|Less accumulated depreciation            |  |                       |  |                | (310,936 | ) |      |   | (365,631 | )
|                                         |  |                       |  |                |          |   |      |   |          |  
|Total property, plant and equipment, net |  |                       |  | $              | 290,846  |   |      | $ | 306,639  |  
|                                         |  |                       |  |                |          |   |      |   |          |  



6. GOODWILL, INTANGIBLE ASSETS AND OTHER



The Company performed its annual impairment
review of goodwill and indefinite-lived intangible assets as required by FASB ASC 350,IntangiblesGoodwill and Other, as of August 31, 2008 and 2009. No impairment of goodwill or other long-lived intangible assets resulted from the
annual valuation.



|         |  |                  |         |     |                  |   |       |                  |  |   |                  |     |  |                  |        |     |  |   |         |    
|-------- |  | ---------------- | ------- | --- | ---------------- | - | ----- | ---------------- |  | - | ---------------- | --- |  | ---------------- | ------ | --- |  | - | ------- | ---
|         |  | December 31,2007 |         |     | 2008Acquisitions |   |       | December 31,2008 |  |   | 2009Acquisitions |     |  | December 31,2009 |       
|         |  | (in thousands)   |        
|Goodwill |  | $                | 466,554 | (1) |                  | $ | 7,430 | (2)              |  | $ | 473,984          | (1) |  | $                | 18,972 | (3) |  | $ | 492,956 | (1)



|(1) | Goodwill for the years ended December 31, 2007, 2008 and 2009 include accumulated impairment losses of $98.4 million.
|--- | ---------------------------------------------------------------------------------------------------------------------

|(2) | The purchase of Bishop Communications increased goodwill by $7.4 million in 2008 on the acquisition date.
|--- | ---------------------------------------------------------------------------------------------------------

|(3) | The purchase of Sherburne Assets, the WH Comm Assets and a controlling interest in SHAL, LLC and SHAL Networks, Inc. increased goodwill by $19.6 million on the
acquisition date. This increase in goodwill was offset by a $584,000 adjustment related to finalization of Bishop Communications purchase accounting.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



During 2008, the purchase of Bishop Communications increased indefinite-lived intangibles and other assets by
$7.7 million on the acquisition date. During 2009, the Company acquired the Sherburne Assets, the WH Comm Assets and a controlling interest in SHAL, LLC and SHAL Networks, Inc. which increased definite-lived intangibles by $15.6 million and wireless
licenses by $1.3 million on the acquisition date. Intangible assets and other consisted of the following at December 31:



|                                 |  |            |  |                         |        |  |               |         |   |  |   |       
|-------------------------------- |  | ---------- |  | ----------------------- | ------ |  | ------------- | ------- | - |  | - | ------
|                                 |  | Life       |  | 2009                   
|                                 |  | Cost       |  | AccumulatedAmortization |        |  | Net BookValue
|                                 |  |            |  | (in thousands)         
|Definite-lived intangible assets |  | 4-20 years |  | $                       | 31,792 |  | $             | (8,288  | ) |  | $ | 23,504
|Debt issuance costs              |  | 7 years    |  |                         | 6,498  |  |               | (3,589  | ) |  |   | 2,909 
|Wireless licenses                |  |           |  |                         | 18,987 |  |               |        |   |  |   | 18,987
|Other assets                     |  | NA         |  |                         | 5,838  |  |               |        |   |  |   | 5,838 
|                                 |  |            |  |                         |        |  |               |         |   |  |   |       
|Total                            |  |            |  | $                       | 63,115 |  | $             | (11,877 | ) |  | $ | 51,238
|                                 |  |            |  |                         |        |  |               |         |   |  |   |       



89



---

##### Table of Contents

|                                 |  |            |  |                         |        |  |               |        |   |  |   |       
|-------------------------------- |  | ---------- |  | ----------------------- | ------ |  | ------------- | ------ | - |  | - | ------
|                                 |  | Life       |  | 2008                   
|                                 |  | Cost       |  | AccumulatedAmortization |        |  | Net BookValue
|                                 |  |            |  | (in thousands)         
|Definite-lived intangible assets |  | 6-20 years |  | $                       | 16,996 |  | $             | (6,378 | ) |  | $ | 10,618
|Debt issuance costs              |  | 7 years    |  |                         | 4,489  |  |               | (2,476 | ) |  |   | 2,013 
|Wireless licenses                |  |           |  |                         | 17,691 |  |               |       |   |  |   | 17,691
|Other assets                     |  | NA         |  |                         | 6,582  |  |               |       |   |  |   | 6,582 
|                                 |  |            |  |                         |        |  |               |        |   |  |   |       
|Total                            |  |            |  | $                       | 45,758 |  | $             | (8,854 | ) |  | $ | 36,904
|                                 |  |            |  |                         |        |  |               |        |   |  |   |       



Amortization expense for definite-lived intangible assets was $1.7 million, $1.9 million and $2.7 million for the years ended December 31, 2007, 2008 and 2009, respectively. Amortization expense is
calculated on the straight-line method unless there is a method that more accurately reflects the consumption of the benefit provided by the intangible asset. Estimated annual amortization expense for definite-lived intangible assets for each of the
next five years and cumulative thereafter is as follows (in thousands):



|           |  |   |       
|---------- |  | - | ------
|2010       |  | $ | 3,295 
|2011       |  |   | 2,935 
|2012       |  |   | 2,553 
|2013       |  |   | 2,247 
|2014       |  |   | 2,159 
|Thereafter |  |   | 10,315
|           |  |   |       
|Total      |  | $ | 23,504
|           |  |   |       



7. ACCRUED AND OTHER CURRENT LIABILITIES



Accrued and other current liabilities consisted of the following at December 31:



|                     |  |                |        |      |   |       
|-------------------- |  | -------------- | ------ | ---- | - | ------
|                     |  | 2008           |        | 2009
|                     |  | (in thousands)
|Property tax payable |  | $              | 8,312  |      | $ | 8,456 
|Dividends payable    |  |                | 12,949 |      |   | 13,341
|Accrued compensation |  |                | 6,777  |      |   | 6,690 
|Other                |  |                | 4,391  |      |   | 4,708 
|                     |  |                |        |      |   |       
|Total                |  | $              | 32,429 |      | $ | 33,195
|                     |  |                |        |      |   |       



8. LONG-TERM DEBT



Long-term debt
obligations consisted of the following at December 31:



|                                                              |  |                |         |      |   |        
|------------------------------------------------------------- |  | -------------- | ------- | ---- | - | -------
|                                                              |  | 2008           |         | 2009
|                                                              |  | (in thousands)
|Iowa Telecom Senior Secured Credit Facility:                  |  |                |         |      |   |        
|Credit Facility Term Loan B (including Incremental Term Loan) |  | $              | 400,000 |      | $ | 475,000
|Credit Facility Term Loan C                                   |  |                | 70,000  |      |   | 70,000 
|Credit Facility Term Loan D                                   |  |                | 7,778   |      |   | 7,778  
|EN-TEL debt                                                   |  |                | 12,444  |      |   | 11,225 
|SHAL, LLC debt                                                |  |                |        |      |   | 4,487  
|                                                              |  |                |         |      |   |        
|                                                              |  |                | 490,222 |      |   | 568,490
|Less current portion                                          |  |                | 1,219   |      |   | 3,276  
|                                                              |  |                |         |      |   |        
|Long-term debt obligations, net of current portion            |  | $              | 489,003 |      | $ | 565,214
|                                                              |  |                |         |      |   |        



90



---

##### Table of Contents

The aggregate maturities of long-term debt obligations for each of the next five years and
thereafter subsequent to December 31, 2009 are as follows (excluding mandatory prepayment of Term Loans B, C and D):



|                        |  |                |         |             |   |             |  |             |       |           |   |        |  |   |       |  |   |        
|----------------------- |  | -------------- | ------- | ----------- | - | ----------- |  | ----------- | ----- | --------- | - | ------ |  | - | ----- |  | - | -------
|Year Ended December 31, |  | Term Loan B    |         | Term Loan C |   | Term Loan D |  | EN-TEL Debt |       | SHAL, LLC |   | Total 
|                        |  | (in thousands)
|2010                    |  | $              |        |             | $ |            |  | $           |      |           | $ | 1,314  |  | $ | 772   |  | $ | 2,086  
|2011                    |  |                | 475,000 |             |   | 70,000      |  |             | 7,778 |           |   | 1,417  |  |   | 830   |  |   | 555,025
|2012                    |  |                |        |             |   |            |  |             |      |           |   | 1,528  |  |   | 892   |  |   | 2,420  
|2013                    |  |                |        |             |   |            |  |             |      |           |   | 1,647  |  |   | 960   |  |   | 2,607  
|2014                    |  |                |        |             |   |            |  |             |      |           |   | 1,777  |  |   | 1,033 |  |   | 2,810  
|Thereafter              |  |                |        |             |   |            |  |             |      |           |   | 3,542  |  |   |      |  |   | 3,542  
|                        |  |                |         |             |   |             |  |             |       |           |   |        |  |   |       |  |   |        
|Total                   |  | $              | 475,000 |             | $ | 70,000      |  | $           | 7,778 |           | $ | 11,225 |  | $ | 4,487 |  | $ | 568,490
|                        |  |                |         |             |   |             |  |             |       |           |   |        |  |   |       |  |   |        



Iowa Telecom Long-Term Debt and Revolving Credit Facilities



As of December 31, 2009, the Company had outstanding $552.8 million of senior debt under the term facilities, and had $37.0 million drawn under the $100 million revolving credit facility. The details
of the credit facilities are as follows:



The
revolving credit facility will expire in November 2011 and permits borrowings up to the aggregate principal amount of $100 million (less amounts reserved for letters of credit up to a maximum amount of $25 million). As of December 31,
2009, $37.0 million was outstanding on the revolving credit facility and $63.0 million was available. Borrowings under the revolving credit facility bear interest per annum at either (a) the London inter-bank offered rate, or LIBOR, plus 2.0%
or (b) a base rate plus 1.0%. As of December 31, 2009, the Company had $37.0 million outstanding under LIBOR elections at an all-in rate of 2.2%. As of December 31, 2008, the Company had $39.0 million outstanding under a base rate
election at an all-in rate of 2.6%.



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 December 31, 2009, $350.0 million was outstanding under Term Loan B based upon a LIBOR election effective through March 30, 2010, at an all-in rate of 2.01%. The all-in rate as of December 31, 2008 was
3.22%. The Company 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 December 31, 2009, the interest rate on the remaining $50.0 million was based upon a LIBOR
election effective through January 21, 2010, at an all-in rate of 1.99%. The all-in rate as of December 31, 2008 was 3.19%.



On July 1, 2009, Iowa Telecom entered into an Incremental Loan Amendment (the Incremental Amendment) to the Amended and
Restated Credit Agreement dated as a November 23, 2004 (as amended from time to time, the Credit Agreement), among Iowa Telecom, the lenders party thereto and the Rural Telephone Finance Cooperative, as administrative agent.
Pursuant to the Incremental Amendment, Iowa Telecom borrowed $75.0 million in incremental loans under the incremental loan facility provided under the Credit Agreement. The incremental loans bear interest at either a base rate plus 1.00% (in the
case of base rate loans) or LIBOR plus 2.00% (in the case of Eurodollar loans), at the election of Iowa Telecom. The incremental loans are subject to the terms and conditions of the Credit Agreement and are entitled to the benefits of the collateral
security provided to the other loans made pursuant to the Credit Agreement. The maturity date of the incremental loans is November 23, 2011. As of December 31, 2009, the interest rate on the $75.0 million was based upon a LIBOR election
effective through January 5, 2010 at an all-in-rate of 2.29%.



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



91



---

##### Table of Contents

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. The Rural Telephone Finance Cooperative will redeem the SCCs in proportion to principal repayments on Term Loans C and D. 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 Company has received and holds $5.9 million in Patronage Capital Certificates from the Rural Telephone Finance Cooperative. The
Companys share of Rural Telephone Finance Cooperative net earnings, included in interest and dividend income was $543,000, $501,000, and $504,000 for the years ended December 31, 2007, 2008 and 2009, respectively.



The Iowa Telecom 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 the Companys wholly-owned subsidiaries.



The Iowa Telecom credit facilities permit the Company to pay dividends to holders of its common stock; however,
they contain significant restrictions on the ability to do so. The credit facilities contain certain negative covenants that, among other things, limit or restrict the Companys ability (as well as those of its 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 its fiscal year; and engage in mergers and consolidations.



The Iowa Telecom credit facilities require the Company, 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 the Company, subject to
certain exceptions, to make prepayments under the credit facilities for equal to 50% of any net increase in the following: distributable cash during a dividend suspension period, as defined; and cumulative distributable cash, as defined, during the
fiscal year less the cumulative reductions of revolving loans (adjusted to exclude the effects of borrowings to fund permitted acquisitions) through such period, with reductions to the percentage to be determined based on improvements in certain
credit ratios. A mandatory prepayment of $1.3 million is due prior to April 30, 2010 under these provisions.



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



In
addition, the financial covenants under the credit facilities specify, among other things, certain fixed charge coverage ratios and a maximum total leverage ratio, as defined, all of which the Company was in compliance with as of December 31,
2009.



92



---

##### Table of Contents

EN-TEL Communications LLC (EN-TEL) Debt



On July 18, 2008, the Company acquired Bishop
Communications. As part of the acquisition, the Company assumed debt of $13.0 million issued by EN-TEL, a majority-owned subsidiary of Bishop Communications. The EN-TEL debt consists of promissory notes payable to the Rural Telephone Finance
Cooperative which have quarterly installments of principal and interest. The notes bear interest at an average all-in fixed rate of 7.04%. As of December 31, 2008, the all-in rate was 7.19%. The notes have a fixed interest rate for specific
periods of time ranging from January 2010 through December 2013 and will thereafter be either at a variable interest rate or renegotiated at a fixed rate at the end of the specified period. The promissory notes total $11.2 million as of
December 31, 2009 and mature in 2015 and 2018. Principal payments of $599,000 and $1.2 million were made in 2008 and 2009, respectively.



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



As a condition of borrowing from
the RTFC the Company is required to invest $1.2 million in SCCs.



SHAL, LLC Notes Payable



On July 1, 2009, the Company acquired the Sherburne Assets. As part of the acquisition, the Company became the majority owner of SHAL, LLC. As a result, the Company began reflecting the results of operations, cash flows and financial
position of SHAL, LLC on a consolidated basis. At the time of the acquisition of the Sherburne Assets, SHAL, LLC had debt outstanding of $4.9 million. The debt is represented by promissory notes payable to the Rural Telephone Finance Cooperative
which have quarterly installments of principal and interest. The notes currently bear interest at an average all-in fixed rate of 7.25%. The notes have a fixed interest rate for specific periods of time ranging from January 2010 through January 2012
and will thereafter be either at a variable interest rate or renegotiated at a fixed rate at the end of the specified period. The promissory notes total $4.5 million as of December 31, 2009 and mature in January 2015. Principal payments of
$718,000 were made in 2009. This includes $365,000 since SHAL, LLC became a consolidated subsidiary on July 1, 2009.



The notes are secured by the assets of SHAL, LLC and SHAL Networks, Inc. The debt agreements restrict dividends paid by SHAL, LLC and no
amounts are currently available for dividends.



As
a condition of borrowing from the RTFC the Company is required to invest $260,000 in SCCs.



Interest Rate Swap



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



9. COMMON AND PREFERRED
STOCK



Common StockThe Company
is authorized to issue 100,000,000 shares of common stock, $0.01 par value. Holders of common stock have one vote per share. As of December 31, 2008 and 2009, respectively, the Company had 31,500,687 and 32,193,036 shares of common stock issued
and outstanding.



Preferred StockThe
Companys Board of Directors is authorized to issue up to 50,000,000 shares of preferred stock, $0.01 par value, in one or more series, from time to time, with such designations, preferences



93



---

##### Table of Contents

and relative, participating, optional or other special rights and qualifications, limitations or restrictions thereof as may be provided in a resolution or resolutions adopted by the Board of
Directors. The authority of the Board of Directors includes, but is not limited to, the determination of the following with respect to any such series: (i) the number of shares; (ii) the dividend rate and time of payment, if any, whether
such dividends are cumulative, and if so, from which date; (iii) whether shares are to be redeemable and, if so, the terms and amount of any sinking fund providing for the purchase or redemption of such shares; (iv) whether shares shall be
convertible and, if so, the terms and provisions thereof; (v) the rights of the shares in the event of voluntary or involuntary liquidation, dissolution or winding up affairs of the Company; (vi) whether the shares will have priority over
or be on a parity with or be junior to any other class or series in any respect; and (vii) whether the shares will have voting rights. As of December 31, 2008 and 2009, there were no shares of preferred stock issued and outstanding.



10. INCOME TAXES



The Companys provision for income taxes for the years
ended December 31, 2007, 2008 and 2009 differed from the amounts determined by applying the statutory federal income tax rate of approximately 35% to income before taxes for the following reasons:



|                         |  |                |        |      |   |        |  |   |       
|------------------------ |  | -------------- | ------ | ---- | - | ------ |  | - | ------
|                         |  | 2007           |        | 2008 |   | 2009  
|                         |  | (in thousands)
|Expense at Federal Rate  |  | $              | 17,591 |      | $ | 14,135 |  | $ | 8,277 
|Increase resulting from: |  |                |        |      |   |        |  |   |       
|State income tax         |  |                | 3,190  |      |   | 2,607  |  |   | 3,181 
|Transaction costs        |  |                |       |      |   |       |  |   | 1,002 
|Other, net               |  |                | 164    |      |   | 603    |  |   | 657   
|                         |  |                |        |      |   |        |  |   |       
|Total income tax expense |  | $              | 20,945 |      | $ | 17,345 |  | $ | 13,117
|                         |  |                |        |      |   |        |  |   |       



Income tax expense consisted of the following for the years ended December 31:



|                               |  |                |        |      |   |        |      |  |   |       
|------------------------------ |  | -------------- | ------ | ---- | - | ------ | ---- |  | - | ------
|                               |  | 2007           |        | 2008 |   |        | 2009
|                               |  | (in thousands)
|Current Tax Expense (Benefit): |  |                |        |      |   |        |      |  |   |       
|Federal                        |  | $              | 712    |      | $ | (90    | )    |  | $ | 90    
|State                          |  |                | 260    |      |   | 149    |      |  |   | 184   
|Deferred Income Tax Expense:   |  |                |        |      |   |        |      |  |   |       
|Federal                        |  |                | 17,032 |      |   | 13,424 |      |  |   | 8,133 
|State                          |  |                | 2,941  |      |   | 3,862  |      |  |   | 4,710 
|                               |  |                |        |      |   |        |      |  |   |       
|Total income tax expense       |  | $              | 20,945 |      | $ | 17,345 |      |  | $ | 13,117
|                               |  |                |        |      |   |        |      |  |   |       



Current income tax expense for 2007, 2008 and 2009 was primarily due pursuant to alternative minimum tax requirements.



94



---

##### Table of Contents

The Companys deferred income tax asset (liability) consisted of the following
temporary differences at December 31:



|                                            |  |                |          |   |      |   |          |  
|------------------------------------------- |  | -------------- | -------- | - | ---- | - | -------- | -
|                                            |  | 2008           |          |   | 2009 |  
|                                            |  | (in thousands) |         
|Deferred Tax Assets:                        |  |                |          |   |      |   |          |  
|Net operating loss carryforward             |  | $              | 58,998   |   |      | $ | 60,795   |  
|Allowance for doubtful accounts             |  |                | 266      |   |      |   | 259      |  
|Alternative minimum tax credit carryforward |  |                | 1,513    |   |      |   | 1,656    |  
|Stock-based compensation                    |  |                | 2,776    |   |      |   | 1,722    |  
|Loss on interest rate swap                  |  |                | 9,298    |   |      |   | 7,447    |  
|Other                                       |  |                | 1,554    |   |      |   | 2,231    |  
|                                            |  |                |          |   |      |   |          |  
|Total                                       |  | $              | 74,405   |   |      | $ | 74,110   |  
|                                            |  |                |          |   |      |   |          |  
|Deferred Tax Liabilities:                   |  |                |          |   |      |   |          |  
|Depreciation and amortization               |  | $              | (120,650 | ) |      | $ | (132,303 | )
|Other                                       |  |                | (1,486   | ) |      |   | (4,063   | )
|                                            |  |                |          |   |      |   |          |  
|Total                                       |  | $              | (122,136 | ) |      | $ | (136,366 | )
|                                            |  |                |          |   |      |   |          |  
|Net deferred tax liability                  |  | $              | (47,731  | ) |      | $ | (62,256  | )
|                                            |  |                |          |   |      |   |          |  
|Current deferred tax liability              |  | $              | (156     | ) |      | $ | (1,473   | )
|Long-term deferred tax liability            |  |                | (47,575  | ) |      |   | (60,783  | )
|                                            |  |                |          |   |      |   |          |  
|Total deferred tax liability                |  | $              | (47,731  | ) |      | $ | (62,256  | )
|                                            |  |                |          |   |      |   |          |  



The Company files income tax
returns in the U.S. federal jurisdiction and five state jurisdictions. The Company has been notified by the Minnesota Department of Revenue that an acquired subsidiary will be reviewed. The review covers both pre and post acquisition periods. The
Company is fully indemnified for any tax obligations related to the pre-acquisition period. At this time, the Company is unable to predict the outcome of the review related to the post-acquisition period. The Company is not currently under income
tax examination in any other jurisdiction. For federal and state tax purposes, the Companys 2001 through 2009 tax years remain open for examination by the tax authorities due to net operating losses remaining to be utilized.



The Company had no unrecognized tax benefits or uncertain tax
positions that are not more likely than not of being sustained on audit based on the technical merits of the position as of December 31, 2008 and 2009.



The Company determined that, based upon the evidence available as of the end of each period, the combination of the continued generation of
taxable income and the taxable income generated from reversing temporary differences will be, more likely than not, sufficient to utilize the entire deferred tax asset. As such, the Company determined that no valuation allowance was required for its
deferred tax assets as of December 31, 2007, 2008 and 2009.



At December 31, 2009, the Company had unused tax net operating loss carryforwards of approximately $154 million which expire in 2021 to 2024.



11. OTHER COMPREHENSIVE INCOME (LOSS)



Accumulated other comprehensive loss was comprised of the
following components as of December 31:



|                                                              |  |                |         |   |      |   |         |  
|------------------------------------------------------------- |  | -------------- | ------- | - | ---- | - | ------- | -
|                                                              |  | 2008           |         |   | 2009 |  
|                                                              |  | (in thousands) |        
|Cumulative unrealized loss on derivative, net of taxes        |  | $              | (12,917 | ) |      | $ | (10,265 | )
|Minimum pension liability adjustment, net of taxes            |  |                | (2,374  | ) |      |   | (1,938  | )
|Minimum other postretirement benefit obligation, net of taxes |  |                | 983     |   |      |   | 109     |  
|                                                              |  |                |         |   |      |   |         |  
|                                                              |  | $              | (14,308 | ) |      | $ | (12,094 | )
|                                                              |  |                |         |   |      |   |         |  



95



---

##### Table of Contents

Components of other comprehensive income (loss) for the twelve months ended December 31
were:



|                                                                                 |  |                            |         |   |      |   |         |      |  |   |        |  
|-------------------------------------------------------------------------------- |  | -------------------------- | ------- | - | ---- | - | ------- | ---- |  | - | ------ | -
|                                                                                 |  | Other Comprehensive Income |        
|                                                                                 |  | 2007                       |         |   | 2008 |   |         | 2009 | 
|                                                                                 |  | (in thousands)             |        
|Unrealized gain (loss) on derivatives                                            |  | $                          | (14,700 | ) |      | $ | (20,528 | )    |  | $ | 4,595  |  
|Income tax benefit (expense)                                                     |  |                            | 6,071   |   |      |   | 8,593   |      |  |   | (1,943 | )
|Minimum pension liability adjustment and other postretirement benefit obligation |  |                            | 6,680   |   |      |   | (5,177  | )    |  |   | (759   | )
|Income tax benefit (expense)                                                     |  |                            | (2,759  | ) |      |   | 2,167   |      |  |   | 321    |  
|                                                                                 |  |                            |         |   |      |   |         |      |  |   |        |  
|Total other comprehensive income (loss)                                          |  | $                          | (4,708  | ) |      | $ | (14,945 | )    |  | $ | 2,214  |  
|                                                                                 |  |                            |         |   |      |   |         |      |  |   |        |  



12. LEASES



The Company leases property in various locations throughout its
service area and also leases fiber optic capacity under lease agreements through SHAL Networks and SHAL, LLC subsidiaries. Future rental payments and lease related commitments required under operating leases that have initial or remaining lease
terms in excess of one year are as follows as of December 31, 2009 (in thousands):



|           |  |   |      
|---------- |  | - | -----
|2010       |  | $ | 1,510
|2011       |  |   | 1,360
|2012       |  |   | 1,159
|2013       |  |   | 1,129
|2014       |  |   | 1,001
|Thereafter |  |   | 1,907
|           |  |   |      
|Total      |  | $ | 8,066
|           |  |   |      



Rental expense for the years ended December 31, 2007, 2008 and 2009 was $415,000, $402,000, and $1.1 million, respectively.



13. 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. The provisions of the Plan were assumed by the Company in connection with the Companys acquisition of the Iowa operations of GTE Midwest Incorporated in 2000 (the GTE Acquisition).
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. Approximately 40 employees accrue
benefits under the Plan.



96



---

##### Table of Contents

Components of pension benefit costs and weighted average actuarial assumptions at
December 31 were:



|                                            |  |                |      |   |      |   |      |      |  |   |      |  
|------------------------------------------- |  | -------------- | ---- | - | ---- | - | ---- | ---- |  | - | ---- | -
|                                            |  | 2007           |      |   | 2008 |   |      | 2009 | 
|                                            |  | (in thousands) |     
|Pension benefit cost:                       |  |                |      |   |      |   |      |      |  |   |      |  
|Service cost                                |  | $              | 236  |   |      | $ | 220  |      |  | $ | 245  |  
|Interest cost                               |  |                | 738  |   |      |   | 753  |      |  |   | 806  |  
|Expected return on plan assets              |  |                | (615 | ) |      |   | (700 | )    |  |   | (673 | )
|Amortization of unrecognized actuarial loss |  |                | 168  |   |      |   | 10   |      |  |   | 227  |  
|Amortization of prior service cost          |  |                |     |   |      |   | 27   |      |  |   | 27   |  
|                                            |  |                |      |   |      |   |      |      |  |   |      |  
|Net periodic benefit cost                   |  | $              | 527  |   |      | $ | 310  |      |  | $ | 632  |  
|                                            |  |                |      |   |      |   |      |      |  |   |      |  
|Actuarial assumptions:                      |  |                |      |   |      |   |      |      |  |   |      |  
|Discount rate                               |  |                | 5.75 | % |      |   | 6.50 | %    |  |   | 6.25 | %
|Expected return on plan assets              |  |                | 7.00 | % |      |   | 7.00 | %    |  |   | 7.00 | %
|Long-term rate of compensation increase     |  |                | 4.00 | % |      |   | 4.00 | %    |  |   | 4.00 | %



The change in projected benefit obligation, change in plan assets, and funded status of the Plan at December 31 were:



|                                                            |  |                        |        |   |      |   |        |  
|----------------------------------------------------------- |  | ---------------------- | ------ | - | ---- | - | ------ | -
|                                                            |  | 2008                   |        |   | 2009 |  
|                                                            |  | (dollars in thousands) |       
|Change in projected benefit obligation:                     |  |                        |        |   |      |   |        |  
|Projected benefit obligation at beginning of year           |  | $                      | 11,450 |   |      | $ | 13,031 |  
|Service cost                                                |  |                        | 220    |   |      |   | 245    |  
|Interest cost                                               |  |                        | 753    |   |      |   | 806    |  
|Actuarial loss                                              |  |                        | 754    |   |      |   | 535    |  
|Benefits paid                                               |  |                        | (146   | ) |      |   | (159   | )
|                                                            |  |                        |        |   |      |   |        |  
|Projected benefit obligation at end of year                 |  | $                      | 13,031 |   |      | $ | 14,458 |  
|                                                            |  |                        |        |   |      |   |        |  
|Change in plan assets:                                      |  |                        |        |   |      |   |        |  
|Fair value of plan assets at beginning of year              |  | $                      | 9,576  |   |      | $ | 9,390  |  
|Actual return on plan assets                                |  |                        | (1,040 | ) |      |   | 1,393  |  
|Employer contributions                                      |  |                        | 1,000  |   |      |   | 750    |  
|Benefits paid                                               |  |                        | (146   | ) |      |   | (159   | )
|                                                            |  |                        |        |   |      |   |        |  
|Fair value of plan assets at end of year                    |  | $                      | 9,390  |   |      | $ | 11,374 |  
|                                                            |  |                        |        |   |      |   |        |  
|Funded status at end of year:                               |  |                        |        |   |      |   |        |  
|Benefit obligation in excess of plan assets                 |  | $                      | (3,641 | ) |      | $ | (3,084 | )
|                                                            |  |                        |        |   |      |   |        |  
|Amounts recognized in accumulated other comprehensive loss: |  |                        |        |   |      |   |        |  
|Net loss                                                    |  | $                      | 3,557  |   |      | $ | 3,145  |  
|Prior service cost                                          |  |                        | 250    |   |      |   | 223    |  
|                                                            |  |                        |        |   |      |   |        |  
|Net amount recognized at year end                           |  | $                      | 3,807  |   |      | $ | 3,368  |  
|                                                            |  |                        |        |   |      |   |        |  
|Actuarial assumptions:                                      |  |                        |        |   |      |   |        |  
|Discount rate                                               |  |                        | 6.25   | % |      |   | 6.00   | %
|Lump sum conversion rate-Salaried Employees                 |  |                        | 5.75   | % |      |   | 5.50   | %
|Lump sum conversion rate-Hourly Employees                   |  |                        | 5.25   | % |      |   | 5.00   | %
|Long-term rate of compensation increase                     |  |                        | 4.00   | % |      |   | 4.00   | %



The estimated net loss and prior service cost that will be amortized from accumulated other comprehensive loss into the net periodic benefit
cost over the next fiscal year are $186,000 and $27,000, respectively.



The discount rate the Company used is based on the yield of a portfolio of high quality, fixed income debt instruments matched against the timing and amounts of projected future benefits. The expected
return on plan



97



---

##### Table of Contents

assets is based on the Companys asset allocation mix and historical returns, taking into account current and expected market conditions. The actual return on pension plan assets, net of
trust paid expenses, was 14.4% in 2009 and (10.4%) in 2008.



The projected benefit obligation, accumulated benefit obligation, and fair value of plan assets for pension plans with accumulated benefit obligations in excess of plan assets at December 31 were:



|                               |  |                |        |      |   |       
|------------------------------ |  | -------------- | ------ | ---- | - | ------
|                               |  | 2008           |        | 2009
|                               |  | (in thousands)
|Projected benefit obligation   |  | $              | 13,031 |      | $ | 14,458
|Accumulated benefit obligation |  |                | 11,225 |      |   | 12,253
|Fair value of plan assets      |  |                | 9,390  |      |   | 11,374



Cash Contributions



The following table details the Companys cash contributions to the Plan for the years ended December 31, 2008 and 2009, and the expected contributions for 2010 (in thousands):



|                |  |   |      
|--------------- |  | - | -----
|2008            |  | $ | 1,000
|2009            |  |   | 750  
|2010 (expected) |  |   | 750  



The Companys policy with respect to funding the qualified plan is to fund at least the minimum required by the Employee Retirement
Income Security Act of 1974, as amended, and not more than the maximum amount deductible for tax purposes.



Benefit Payments



The following table details expected benefit payments for the years 2010 through 2019 (in thousands):



|                  |  |   |      
|----------------- |  | - | -----
|2010              |  | $ | 738  
|2011              |  |   | 788  
|2012              |  |   | 864  
|2013              |  |   | 921  
|2014              |  |   | 1,043
|Years 2015  2019 |  |   | 7,948



Asset Allocation Strategy



The Companys pension plan asset allocation at December 31, 2008 and 2009, and target allocation for 2010 were as follows:



|                  |  |                  |   |  |                                       |   |  |      |  
|----------------- |  | ---------------- | - |  | ------------------------------------- | - |  | ---- | -
|                  |  | TargetAllocation |   |  | Percentage of Plan AssetsDecember 31, |  
|Assets Category   |  | 2010             |   |  | 2008                                  |   |  | 2009 |  
|Equity securities |  | 35               | % |  | 23                                    | % |  | 35   | %
|Debt securities   |  | 65               | % |  | 76                                    | % |  | 65   | %
|Cash equivalents  |  |                 | % |  | 1                                     | % |  |     | %
|                  |  |                  |   |  |                                       |   |  |      |  
|Total             |  | 100              | % |  | 100                                   | % |  | 100  | %
|                  |  |                  |   |  |                                       |   |  |      |  



The investment strategy for
pension plan assets is to maintain a broadly diversified portfolio designed to achieve the Companys target of an average long-term rate of return of 7.0% to 8.0%. While the Company believes achievement of a long-term average rate of return of
7.0% to 8.0% is possible, the Company cannot be



98



---

##### Table of Contents

certain that the portfolio will perform to these expectations. Assets are strategically allocated between equity and debt securities in order to achieve a diversification level that mitigates
wide swings in investment returns. The majority of the plans assets are invested in debt securities because debt portfolios have historically provided less volatility than equity portfolios. Correspondingly, debt portfolios also entail lower
returns than equity portfolios based on historical information. The risk of loss in the plans portfolio is mitigated by investment in a broad range of corporate bonds and equity types.



The investment of pension plan assets in securities of the
Company is specifically prohibited for both the equity and debt portfolios other than through index fund holdings.



Defined Contribution Plan



The Company participates in separate 401(k) savings plans for salaried and hourly employees that allow for voluntary contributions into
designated investment funds. The 401(k) plans cover all full-time salaried and hourly employees, with the Company matching employees contributions at the rate of either 75% or 66% of the first 6% of earnings deferred. The Company makes an
annual non-elective contribution in the amount of 3% of eligible compensation on behalf of eligible employees. Company contributions to the plans were $1.9 million, $2.0 million and $2.5 million for the years ended December 31, 2007, 2008 and
2009, respectively.



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 certain medical and life insurance benefits to select employees who satisfy the requirements for an early or normal pension
under the defined benefit pension plan.



During
the second quarter of 2007, the Company amended its 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 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 the
benefit obligations. The re-measurement resulted in a curtailment gain of $247,000 and a reduction in the liability recorded for prior service costs of $5.6 million, which was to be amortized over 5.31 years as a component of the annual cost.



During the fourth quarter of 2008, the Company
modified the agreement with the Communications Workers of America. The modification resulted in another 26 employees opting out of the retiree medical plan effective November 30, 2008. This triggered a plan curtailment which required the
immediate recognition of a portion of the remaining $3.8 million unrecognized prior service credit that was being amortized over 5.31 years. Although the 26 opt-out employees represented only 29% of the plan participants, they were on average
younger than the other participants. This resulted in a curtailment service ratio of 66.2% and a curtailment gain of $2.5 million in the fourth quarter of 2008, which was recorded in the cost of services and sales section of the Companys
Consolidated Statements of Income.



During the
second quarter of 2009, the Company eliminated a portion of the postretirement welfare benefits. The elimination of life insurance benefits for a significant portion of the total active participants triggered a plan curtailment.The
curtailment required the immediate recognition of an unrecognized prior service credit of $590,000, which was recorded in the cost of services and sales section of the Companys Consolidated Statements of Income.



99



---

##### Table of Contents

Components of postretirement benefit costs and weighted average actuarial assumptions at
December 31, were:



|                                                      |  |                        |      |   |      |   |        |      |  |   |      |  
|----------------------------------------------------- |  | ---------------------- | ---- | - | ---- | - | ------ | ---- |  | - | ---- | -
|                                                      |  | 2007                   |      |   | 2008 |   |        | 2009 | 
|                                                      |  | (dollars in thousands) |     
|Postretirement benefit cost (income):                 |  |                        |      |   |      |   |        |      |  |   |      |  
|Service cost                                          |  | $                      | 76   |   |      | $ | 13     |      |  | $ | 5    |  
|Interest cost                                         |  |                        | 306  |   |      |   | 190    |      |  |   | 165  |  
|Amortization of unrecognized prior service credit     |  |                        | (757 | ) |      |   | (1,007 | )    |  |   | (330 | )
|Amortization of unrecognized net actuarial loss       |  |                        | 88   |   |      |   | 13     |      |  |   |     |  
|                                                      |  |                        |      |   |      |   |        |      |  |   |      |  
|Net periodic benefit income                           |  |                        | (287 | ) |      |   | (791   | )    |  |   | (160 | )
|Curtailment gain                                      |  |                        | (247 | ) |      |   | (2,507 | )    |  |   | (590 | )
|                                                      |  |                        |      |   |      |   |        |      |  |   |      |  
|Total postretirement benefit income, with adjustments |  | $                      | (534 | ) |      | $ | (3,298 | )    |  | $ | (750 | )
|                                                      |  |                        |      |   |      |   |        |      |  |   |      |  
|Actuarial assumptions:                                |  |                        |      |   |      |   |        |      |  |   |      |  
|Discount rate                                         |  |                        | 5.50 | % |      |   | 6.00   | %    |  |   | 6.25 | %



The change in accumulated benefit obligation of the plan at December 31 were:



|                                                              |  |                        |        |   |      |   |       |  
|------------------------------------------------------------- |  | ---------------------- | ------ | - | ---- | - | ----- | -
|                                                              |  | 2008                   |        |   | 2009 |  
|                                                              |  | (dollars in thousands) |       
|Change in accumulated benefit obligation:                     |  |                        |        |   |      |   |       |  
|Accumulated benefit obligation at beginning of year           |  | $                      | 3,545  |   |      | $ | 2,809 |  
|Service cost                                                  |  |                        | 13     |   |      |   | 5     |  
|Interest cost                                                 |  |                        | 190    |   |      |   | 165   |  
|Actuarial gain (loss)                                         |  |                        | (499   | ) |      |   | 293   |  
|Benefits paid                                                 |  |                        | (159   | ) |      |   | (407  | )
|Amendments                                                    |  |                        | (281   | ) |      |   | (16   | )
|                                                              |  |                        |        |   |      |   |       |  
|Accumulated benefit obligation at end of year                 |  | $                      | 2,809  |   |      | $ | 2,849 |  
|                                                              |  |                        |        |   |      |   |       |  
|Amounts recognized in the balance sheet:                      |  |                        |        |   |      |   |       |  
|Current liabilities                                           |  | $                      | 285    |   |      | $ | 282   |  
|Non-current liabilities                                       |  |                        | 2,524  |   |      |   | 2,567 |  
|                                                              |  |                        |        |   |      |   |       |  
|Net amount recognized at year end                             |  | $                      | 2,809  |   |      | $ | 2,849 |  
|                                                              |  |                        |        |   |      |   |       |  
|Amounts recognized in accumulated other comprehensive income: |  |                        |        |   |      |   |       |  
|Net loss                                                      |  | $                      | 137    |   |      | $ | 431   |  
|Prior service credit                                          |  |                        | (1,524 | ) |      |   | (621  | )
|                                                              |  |                        |        |   |      |   |       |  
|Net amount recognized at year end                             |  | $                      | (1,387 | ) |      | $ | (190  | )
|                                                              |  |                        |        |   |      |   |       |  
|Actuarial assumptions:                                        |  |                        |        |   |      |   |       |  
|Discount rate                                                 |  |                        | 6.25   | % |      |   | 5.25  | %



The estimated net loss and prior service credit that will be amortized from accumulated other comprehensive income into net periodic benefit
income over the next fiscal year are $45,000 and ($244,000), respectively.



The health care cost trend rate used in determining the accumulated postretirement benefit obligation at December 31, 2008 and 2009 was assumed to be 9.5%.



100



---

##### Table of Contents

Assumed health care cost trend rates have a minor effect on the amount reported for health
care plans. A one percentage point change in the assumed health care cost trend rates would have no impact on total service, interest cost components or accumulated postretirement benefit obligations for the year ended December 31, 2009.



Cash Contributions and Benefit Payments



The Companys postretirement benefits are unfunded, and
therefore cash contributions for postretirement benefits are equal to the benefit payments.



The following table details the cash contributions and benefit payments for the years ended December 31, 2007, 2008 and 2009, and the expected cash contributions and benefit payments for 2010 through
2019 (in thousands):



|                             |  |   |      
|---------------------------- |  | - | -----
|2007                         |  | $ | 246  
|2008                         |  |   | 159  
|2009                         |  |   | 407  
|2010 (expected)              |  |   | 282  
|2011 (expected)              |  |   | 292  
|2012 (expected)              |  |   | 264  
|2013 (expected)              |  |   | 254  
|2014 (expected)              |  |   | 253  
|Years 2015  2019 (expected) |  |   | 1,054



All benefit payments for other postretirement benefits are voluntary, as the postretirement plans are not funded, and are not subject to any
minimum regulatory funding requirements. Benefit payments for each year represent claims paid for medical and life insurance, and the Company anticipates the 2010 postretirement benefit payments will be made from cash generated from operations.



14. 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, 1,157,778 have been exercised and 38,141 remained outstanding as of December 31, 2009. No new options will be granted under the 2002 Incentive Plan. The term of
each option did not exceed 10 years from the date of grant. Options granted to employees vested over 3 to 5 years from the date of the grant. All unvested options outstanding at the time of the closing of the Companys initial public offering
vested pursuant to the terms of the 2002 Incentive Plan. The exercise price for unexercised options is automatically decreased by the amount of dividends that would have been paid on the shares issuable upon exercise.



The Company recorded $1.0 million, $1.1 million and $293,000 of
stock-based compensation expense during 2007, 2008 and 2009, 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.



101



---

##### Table of Contents

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.



|                               |  |                         |      |  |      |    |  |      |   
|------------------------------ |  | ----------------------- | ---- |  | ---- | -- |  | ---- | --
|                               |  | Year Ended December 31, |     
|                               |  | 2007                    |      |  | 2008 |    |  | 2009 |   
|Weighted average expected life |  | 2.23                    | yr   |  | 1.29 | yr |  | 0.44 | yr
|Risk free interest rate        |  | 4.14                    | %    |  | 1.38 | %  |  | 0.11 | % 
|Volatility                     |  | 22                      | %(1) |  | 33.8 | %  |  | 39.5 | % 
|Dividend yield                 |  | 0                       | %    |  | 0    | %  |  | 0    | % 



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



A summary of the status of options granted under the 2002 Incentive Plan as of December 31, 2008 and 2009, and the changes during the years then ended, is presented below:



|                                   |  |                              |  |                                         |      |        |          |   |                                         |   |     
|---------------------------------- |  | ---------------------------- |  | --------------------------------------- | ---- | ------ | -------- | - | --------------------------------------- | - | ----
|                                   |  | Year Ended December 31, 2008 |  | Year Ended December 31, 2009           
|Fixed Options                      |  | Shares                       |  | Weighted AverageExercise Price perShare |      | Shares |          |   | Weighted AverageExercise Price
perShare
|OUTSTANDING AT BEGINNING OF YEAR   |  | 677,579                      |  | $                                       | 3.10 |        | 677,579  |   |                                         | $ | 1.48
|Exercised                          |  |                             |  | $                                       |     |        | (639,438 | ) |                                         | $ | 1.10
|                                   |  |                              |  |                                         |      |        |          |   |                                         |   |     
|OUTSTANDING AT END OF YEAR         |  | 677,579                      |  | $                                       | 1.48 |        | 38,141   |   |                                         | $ | 0.24
|                                   |  |                              |  |                                         |      |        |          |   |                                         |   |     
|OPTIONS EXERCISABLE AT END OF YEAR |  | 677,579                      |  | $                                       | 1.48 |        | 38,141   |   |                                         | $ | 0.24
|                                   |  |                              |  |                                         |      |        |          |   |                                         |   |     



The following table summarizes information about stock options outstanding at December 31, 2009:



|                               |  |                     |  |                                                  |  |        |  |                                        |      |                                         |   |        
|------------------------------ |  | ------------------- |  | ------------------------------------------------ |  | ------ |  | -------------------------------------- | ---- | --------------------------------------- | - | -------
|                               |  | Options Outstanding |  | Options Exercisable                             
|Exercise Price per Share Range |  | Number              |  | WeightedAverageRemainingContractualLife In Years |  | Number |  | WeightedAverageExercise Priceper Share |      | WeightedAverageAggregateIntrinsic Value
|$0.01 to $0.50                 |  | 38,141              |  | 2.3                                              |  | 38,141 |  | $                                      | 0.24 |                                         | $ | 630,246



The weighted average exercise price of options exercisable at December 31, 2009, reflects the reductions required by the 2002 Incentive
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 2007 was $93,000. There were no options exercised during 2008. The total intrinsic value of options exercised during 2009 was $6.8 million. The Company received total cash proceeds of $21,000 and $703,000 related to
the exercise of options during 2007 and 2009, respectively. The income tax benefit realized as a result of options exercised was $7,000 and $100,000 during 2007 and 2009, respectively.



The Company has a policy that permits the repurchase of a portion of vested shares from participants upon their
option exercise 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 option exercise. No shares were
reacquired for this purpose in 2007 and 2008. During 2009, the Company reacquired 26,946 shares for this purpose.



102



---

##### Table of Contents

2005 Stock Incentive Plan



The Iowa Telecommunications Services, Inc. 2005 Stock Incentive Plan (the 2005 Incentive Plan)
allows for the issuance of up to an aggregate of 1.5 million shares of restricted or unrestricted stock, of which 1,025,800 shares of restricted stock, net of forfeitures and cancellations, have been awarded to various officers and employees of
the Company and 14,757 shares of unrestricted stock have been issued to members of the Companys Board of Directors.



A summary of the status of the restricted shares awarded pursuant to the 2005 Incentive Plan as of December 31, 2008 and 2009, and the
changes during the years then ended, is presented below:



|                                 |        |                             |     |                                     |   |        |  |          |                                     |  |   |      
|-------------------------------- | ------ | --------------------------- | --- | ----------------------------------- | - | ------ |  | -------- | ----------------------------------- |  | - | -----
|                                 |        | Year EndedDecember 31, 2008 |     | Year EndedDecember 31, 2009        
|                                 | Shares |                             |     | WeightedAverageGrant DateFair Value |   | Shares |  |          | WeightedAverageGrant DateFair Value
|OUTSTANDING AT BEGINNING OF YEAR |        | 378,475                     |     |                                     | $ | 19.64  |  | 471,150  |                                     |  | $ | 18.77
|Granted                          |        | 174,500                     | (1) |                                     |   | 16.73  |  | 399,000  | (2)                                 |  |   | 13.63
|Vested                           |        | (81,825                     | )   |                                     |   | 18.47  |  | (115,075 | )                                   |  |   | 19.43
|Cancelled/Forfeited              |        |                            |     |                                     |   |       |  | (8,000   | )                                   |  |   | 14.51
|                                 |        |                             |     |                                     |   |        |  |          |                                     |  |   |      
|OUTSTANDING AT END OF YEAR       |        | 471,150                     |     |                                     | $ | 18.77  |  | 747,075  |                                     |  | $ | 15.97
|                                 |        |                             |     |                                     |   |        |  |          |                                     |  |   |      



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

|(2) | Weighted average vesting period at grant date for shares granted is 46 months.
|--- | ------------------------------------------------------------------------------



The Company recognizes compensation cost related to awards of restricted stock on a straight-line basis over
the requisite service period for the entire award. The Company recorded $1.7 million, $2.4 million and $3.4 million of stock-based compensation expense related to the 2005 Incentive Plan during 2007, 2008 and 2009, respectively. The remaining amount
to be charged to expense for unvested awards over the remaining service periods of 3.25 years is $8.1 million. The Company also recorded $13,000, $93,000 and $77,000 of expense during 2007, 2008 and 2009, respectively, related to the unrestricted
shares issued to members of its Board of Directors. The total fair value of shares vested during 2007, 2008 and 2009 was $1.7 million, $1.5 million and $1.4 million, respectively.



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 2007, 2008 and 2009, the Company
reacquired 26,902 shares, 27,353 shares and 41,218 shares respectively, for this purpose.



During 2007, 2008 and 2009, the Company recognized $1.0 million, $1.1 million and $1.5 million, respectively, of income tax benefit related to this plan.



103



---

##### Table of Contents

15. RELATED PARTY TRANSACTIONS



During 2007, there were no material related party transactions. In 2008, the Company leased fiber both to and
from certain entities that are accounted for using the equity method. In 2009, the Company leased fiber routes and internet connections to and paid access charges to an equity method investee which Iowa Telecom acquired additional ownership
interests in through multiple acquisitions in 2009 resulting in an ownership interest of 31.6% as of December 31, 2009. The following table summarizes the amounts included in the accompanying financial statements related to these services:



|                                     |  |                |     |      |   |    
|------------------------------------ |  | -------------- | --- | ---- | - | ---
|                                     |  | 2008           |     | 2009
|                                     |  | (in thousands)
|Revenues                             |  | $              | 91  |      | $ | 530
|Expenses                             |  | $              | 30  |      | $ | 591
|Accounts receivable                  |  | $              | 215 |      | $ | 16 
|Prepayments and other current assets |  | $              |    |      | $ | 38 
|Other long-term liabilities          |  | $              |    |      | $ | 208



In 2008 and 2009, the Company was reimbursed $387,000 and $209,000, respectively, for labor, management and other services provided to
certain entities that are accounted for using the equity method.



16. COMMITMENTS, CONTINGENCIES AND SUBSEQUENT EVENTS



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



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



On November 23, 2009, the Company entered into a definitive
Agreement and Merger Agreement with Windstream, and Buffalo Merger Sub, Inc., a Delaware corporation and a wholly-owned subsidiary (Newco). The Merger Agreement provides that, upon the terms and subject to the conditions set forth in the
Merger Agreement, we will merge with and into Newco, with Newco continuing as the surviving corporation (the Merger). Pursuant to the Merger Agreement, at the effective time and as a result of the Merger, each share of Iowa Telecom
common stock, par value $0.01 per share, issued and outstanding immediately prior to the effective time of the Merger will be converted into and become exchangeable for (i) shares of common stock of Windstream at a fixed exchange ratio of 0.804
and (ii) $7.90 in cash. In connection with the Merger, each outstanding stock option under our 2002 Stock Incentive Plan will be converted into the right to receive the merger consideration, less the exercise price of the stock option. Each
share of restricted stock awarded under our 2005 Stock Incentive Plan will be treated the same as any other outstanding share of Company common stock, but the forfeiture provisions and other terms and conditions of the restricted stock will continue
to apply to the merger consideration received for the restricted stock and the cash portion of the consideration will be retained by Windstream until the restrictions have lapsed.



The transaction is expected to close mid - 2010. Completion of the Merger with Windstream is conditioned upon
the receipt of certain governmental consents and approvals, and Iowa Telecom shareholders approval. The special meeting of the Companys shareholders to vote on the Merger has been scheduled for March 25, 2010, and the proxy
statement/prospectus for the special meeting was mailed to shareholders on or about February 22, 2010. No assurance can be given that the required conditions to closing will be satisfied or that the Merger will be completed. Pending completion
of the Merger, Iowa Telecom is subject various covenants contained in the Merger Agreement that restrict Iowa Telecoms ability to operate its business outside the ordinary course of business.



104



---

##### Table of Contents

Factors outside of managements control could delay or prevent completion of the
proposed Merger. In the event of a termination of the Merger Agreement, we may be required to pay Windstream a termination fee of $25.0 million in certain circumstances.



In addition, on November 24, 2009, a purported shareholder of Iowa Telecom filed a petition styled as a class action
lawsuit in the Iowa District Court for Jasper County. The case caption is: Stephen Smigel on behalf of himself and all others similarly situated v. Iowa Telecommunications Services, Inc., Alan L. Wells, Kenneth R. Cole, Norman C. Frost, Brian G.
Hart, H. Lynn Horak, Craig A. Lang, Kendrik A. Packer and Windstream Corporation. The petition alleges that Iowa Telecoms board members breached their fiduciary duties in agreeing to the Merger and that Windstream aided and abetted in the
breaches of fiduciary duties. The petition asserts, among other things, that the consideration to be paid to Iowa Telecoms shareholders is insufficient. The lawsuit seeks to enjoin the Merger. On December 15, 2009, Iowa Telecom moved to
dismiss this petition. Windstream moved to dismiss the petition on January 4, 2010. Those motions remain pending. The plaintiff filed a motion for expedited discovery on December 22, 2009. A hearing was held on the plaintiffs motion
for expedited discovery on January 15, 2010. The Court decided that it would defer a decision on the motion for expedited discovery until it decided Iowa Telecoms and Windstreams motions to dismiss.



On December 4, 2009, a second purported shareholder of Iowa
Telecom filed a petition styled as a class action lawsuit in the Iowa District Court for Jasper County. The case caption is: Francine Gerendasy, individually and on behalf of all others similarly situated v. Alan L. Wells, Kenneth R. Cole, Norman C.
Frost, Brian G. Hart, H. Lynn Horak, Craig A. Lang, Kendrik E. Packer, Iowa Telecommunications Services, Inc., Windstream Corporation, and Buffalo Merger Sub, Inc. Two additional substantially similar petitions were filed in the Iowa District Court
for Jasper County on December 23 and December 29, 2009, respectively. Each of these petitions contains substantially similar allegations to the above-described petition.



On December 11, 2009, a purported shareholder filed a complaint in the United States District Court for
the Southern District of Iowa. This complaint names Iowa Telecoms individual board members, Iowa Telecom and Windstream as defendants and asserts that Iowa Telecoms board members breached their fiduciary duties in agreeing to the
Merger. It also seeks to enjoin the Merger. On December 17, 2009, the plaintiff in this action moved for expedited discovery. Windstream and Iowa Telecom both responded in opposition to this motion. A hearing was held on the
plaintiffs motion for expedited discovery on January 12, 2010. On January 21, 2010, the Court granted in part and denied in part the plaintiffs motion for expedited discovery, ordering that Windstreams and Iowa
Telecoms motions to dismiss would be heard before any discovery would begin, but that production of documents would occur on an expedited basis if the Court denies the motions to dismiss.



On December 16, 2009, another complaint was filed in the
United States District Court for the Southern District of Iowa by a purported shareholder, seeking to enjoin the Merger. It contains allegations substantially similar to the petitions filed in the Iowa District Court for Jasper County, alleging that
the individual board members of Iowa Telecoms board of directors breached their fiduciary duties in agreeing to the Merger and that Windstream aided and abetted in the breaches of fiduciary duties.



On January 4, 2010, Iowa Telecom and Windstream moved to
dismiss both complaints in the United States District Court. Those motions remain pending. On December 18, 2009, the plaintiffs in the two United States District Court cases moved to consolidate those two actions and for the appointment of
their attorneys as co-lead class counsel. The motion to consolidate the two cases was granted on January 12, 2010.



Iowa Telecom, its directors and Windstream believe each of these lawsuits is without merit. However, in order to eliminate the uncertainty,
distraction, burden and expense of further litigation and to permit the Merger



105



---

##### Table of Contents

to proceed without possible delays from litigation, Iowa Telecom and Windstream have entered into a memorandum of understanding with counsel to the various plaintiffs to settle the aforementioned
actions in exchange for including additional disclosures set forth in the proxy statement/prospectus relating to the transaction. This memorandum of understanding is subject to the terms and conditions set forth therein, including satisfactory
confirmatory discovery by plaintiffs and approval of the settlement by the Iowa District Court for Jasper County. The settlement would result in all of the above actions being dismissed with prejudice and would become effective only upon
consummation of the Merger.



17. DISCLOSURES ABOUT FAIR VALUE
OF FINANCIAL INSTRUMENTS



Fair Value of Financial
Instruments and Investments Reported at Fair Value



FASB ASC 820, Fair Value Measurements and Disclosures, establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include: Level 1,
defined as observable inputs such as quoted prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs in which
little or no market data exists, therefore requiring an entity to develop its own assumptions.



Cash EquivalentsCash equivalents consist of funds invested in money market funds that have daily liquidity and are recorded at cost which approximates fair value. Therefore, cash and
cash equivalents are categorized as Level 1.



Investments Held in Rabbi TrustInvestments held in a rabbi trust account to meet future obligations under a deferred compensation plan, consist of investments in common equities and mutual funds with quoted market prices
that are actively traded. Therefore, investments held in a rabbi trust account are categorized as Level 1. The fair value of the investments held in a rabbi trust account is recorded in the Intangible Assets and Other section of the
Companys Consolidated Balance Sheets.



Interest Rate SwapsThese included the Companys interest rate swap derivative instruments. The fair value of the interest rate swaps was determined based on the present value of expected future cash flows using
discount rates appropriate with consideration given to the Companys and counterparties non-performance risk utilizing inputs that are readily available in public markets or can be derived from information available in publicly quoted
markets. Therefore, the Company has categorized these swap contracts as Level 2. Deducted from the December 31, 2008, interest rate swap fair value calculation was a $2.2 million adjustment in consideration of the Companys non-performance
risk. Deducted from the December 31, 2009, interest rate swap fair value calculation was a $389,000 adjustment in consideration of the Companys non-performance risk. The Companys non-performance risk is assessed based on the current
trading discount of its Term Loan B debt because the swap agreements are secured by the same collateral. The fair value of the interest rate swaps is recorded in the Other Long-Term Liabilities section of the Companys Consolidated Balance
Sheets.



Pension Plan
InvestmentsPension plan investments consist of funds invested in mutual funds with quoted market prices that are actively traded and collective trust funds which are not traded on an active market but for which observable market inputs
are readily available. Therefore, pension investments held in mutual funds are categorized as Level 1 and pension investments held in collective trust funds are categorized as Level 2.



The following tables present fair value of the Companys
financial instruments and investments reported at fair value:



|                                                   |  |                                                 |         |   |       |   |         |         |  |         |       |  |         |         |   |  |   |  
|-------------------------------------------------- |  | ----------------------------------------------- | ------- | - | ----- | - | ------- | ------- |  | ------- | ----- |  | ------- | ------- | - |  | - | -
|                                                   |  | Fair Value Measurements as of December 31, 2008
|                                                   |  | CarryingAmount                                  |         |   | Total |   |         | Level 1 |  | Level 2 |       |  | Level 3
|                                                   |  | (dollars in thousands)                         
|Cash equivalents invested in money market funds    |  | $                                               | 5,525   |   |       | $ | 5,525   |         |  | $       | 5,525 |  | $       |        |   |  | $ | 
|Interest rate swaps                                |  | $                                               | (22,155 | ) |       | $ | (22,155 | )       |  | $       |      |  | $       | (22,155 | ) |  | $ | 
|Pension investments held in mutual funds           |  | $                                               | 2,302   |   |       | $ | 2,302   |         |  | $       | 2,302 |  | $       |        |   |  | $ | 
|Pension investments held in collective trust funds |  | $                                               | 7,088   |   |       | $ | 7,088   |         |  | $       |      |  | $       | 7,088   |   |  | $ | 



106



---

##### Table of Contents

|                                                   |  |                                                 |         |   |       |   |         |         |  |         |       |  |         |         |   |  |   |  
|-------------------------------------------------- |  | ----------------------------------------------- | ------- | - | ----- | - | ------- | ------- |  | ------- | ----- |  | ------- | ------- | - |  | - | -
|                                                   |  | Fair Value Measurements as of December 31, 2009
|                                                   |  | CarryingAmount                                  |         |   | Total |   |         | Level 1 |  | Level 2 |       |  | Level 3
|                                                   |  | (dollars in thousands)                         
|Cash equivalents invested in money market funds    |  | $                                               | 6,841   |   |       | $ | 6,841   |         |  | $       | 6,841 |  | $       |        |   |  | $ | 
|Investments held in rabbi trust account            |  | $                                               | 938     |   |       | $ | 938     |         |  | $       | 938   |  | $       |        |   |  | $ | 
|Interest rate swaps                                |  | $                                               | (18,289 | ) |       | $ | (18,289 | )       |  | $       |      |  | $       | (18,289 | ) |  | $ | 
|Pension investments held in mutual funds           |  | $                                               | 4,002   |   |       | $ | 4,002   |         |  | $       | 4,002 |  | $       |        |   |  | $ | 
|Pension investments held in collective trust funds |  | $                                               | 7,372   |   |       | $ | 7,372   |         |  | $       |      |  | $       | 7,372   |   |  | $ | 



See Note 18 for additional information regarding the fair value of the Companys interest rate swap agreements.



Carrying Amount and Fair Value of Other Financial Instruments Reported at
Historical Cost



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



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



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



DebtThe fair value of the Term Loan C, Term Loan D, EN-TEL debt and SHAL, LLC debt was estimated using discounted cash flow calculations and current market interest rates. The fair value of the Term Loan B debt was
estimated based upon recent observable transactions for the Term Loan B debt. See Note 8 for additional information regarding the Companys long-term debt.



The estimated fair value of the Companys financial instruments as of December 31, 2008 and 2009, was as follows:



|                                                         |  |                |         |            |   |                |  |            |         |  |   |        
|-------------------------------------------------------- |  | -------------- | ------- | ---------- | - | -------------- |  | ---------- | ------- |  | - | -------
|                                                         |  | 2008           |         | 2009      
|                                                         |  | CarryingAmount |         | Fair Value |   | CarryingAmount |  | Fair Value
|                                                         |  | (in thousands)
|Financial Assets:                                        |  |                |         |            |   |                |  |            |         |  |   |        
|Cash and cash equivalents (excluding money market funds) |  | $              | 6,080   |            | $ | 6,080          |  | $          | 5,418   |  | $ | 5,418  
|Financial Liabilities:                                   |  |                |         |            |   |                |  |            |         |  |   |        
|Fixed rate long-term debt:                               |  |                |         |            |   |                |  |            |         |  |   |        
|Term Loan C                                              |  | $              | 70,000  |            | $ | 67,356         |  | $          | 70,000  |  | $ | 73,726 
|Term Loan D                                              |  | $              | 7,778   |            | $ | 7,484          |  | $          | 7,778   |  | $ | 8,192  
|EN-TEL debt                                              |  | $              | 12,444  |            | $ | 12,260         |  | $          | 11,225  |  | $ | 12,059 
|SHAL, LLC debt                                           |  | $              |        |            | $ |               |  | $          | 4,487   |  | $ | 4,830  
|Floating rate debt:                                      |  |                |         |            |   |                |  |            |         |  |   |        
|Term Loan B                                              |  | $              | 400,000 |            | $ | 315,000        |  | $          | 475,000 |  | $ | 469,775



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



107



---

##### Table of Contents

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



18. DISCLOSURES ABOUT FAIR VALUE OF INTEREST RATE SWAPS



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



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



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



The Company entered into a new interest rate swap agreement effective September 30, 2008, which the Company designated as a hedge against the variability in future interest payments due on $175.0 million of Term Loan B. The terms of
the new swap agreement, coupled with the remaining August 2005 interest rate swap agreement, effectively convert the variable rate interest payments due on $350.0 million of Term Loan B to a fixed rate of 5.87% through maturity on November 23,
2011.



The fair values of the interest rate swaps
have been calculated by discounting the future cash flows of both the fixed rate and variable rate interest payments using discount rates appropriate with consideration given to the Companys and counterparties non-performance risk. The
inputs used in determining the fair value fall within Level 2 of the fair value hierarchy, as defined in FASB ASC 820, Fair Value Measurements and Disclosures. See Note 17 for further information regarding the fair value measurement of the
interest rate swaps.



|                             |  |                             |  |                        |        |                        |   |       
|---------------------------- |  | --------------------------- |  | ---------------------- | ------ | ---------------------- | - | ------
|                             |  |                             |  | Fair Value            
|                             |  | Balance Sheet               |  | As ofDecember 31, 2008 |        | As ofDecember 31, 2009
|                             |  |                             |  | (dollars in thousands)
|Interest rate swap contracts |  | Other long-term liabilities |  | $                      | 22,155 |                        | $ | 18,289



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



108



---

##### Table of Contents

|                                                     |  |                                                                        |         |   |                                                 |                        |                  |  |                  |  |                        |        |   |  |                  |         |      |  |               |      |   |      |      |  |   |      |     
|---------------------------------------------------- |  | ---------------------------------------------------------------------- | ------- | - | ----------------------------------------------- | ---------------------- | ---------------- |  | ---------------- |  | ---------------------- | ------ | - |  | ---------------- | ------- | ---- |  | ------------- | ---- | - | ---- | ---- |  | - | ---- | ----
|Gain or (Loss) Recognized in OCI (effective portion) |  | Loss Reclassified from Accumulated OCI into Income (effective portion) |         |   | Loss Recognized in Income (ineffective portion) |                       
|                                                     |  | Year EndedDecember 31,                                                 |         |   |                                                 | Year EndedDecember 31, |                  |  |                  |  | Year EndedDecember 31, |       
|                                                     |  | 2008                                                                   |         |   | 2009                                            |                        | Income Statement |  | 2008             |  |                        | 2009   |   |  | Income Statement |         | 2008 |  |               | 2009 |  
|                                                     |  | (dollars in thousands)                                                 |         |   |                                                 | (dollars in thousands) |                  |  |                  |  | (dollars in thousands) |       
|Other comprehensive income (loss)                    |  | $                                                                      | (20,657 | ) |                                                 | $                      | 4,399            |  | Interest expense |  | $                      | (2,142 | ) |  | $                | (11,472 | )    |  | Other expense |      | $ | (858 | )(1) |  | $ | (729 | )(2)



|(1) | The amount of loss recognized in income includes $729,000 related to the ineffective portion of the hedging relationship and $129,000 related to the amortization of
Accumulated OCI on the terminated hedge discussed above.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | The amount of loss recognized in income includes $473,000 related to the ineffective portion of the hedging relationship and $256,000 related to the amortization of
Accumulated OCI on the terminated hedge discussed above.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



In addition to the amounts shown above, the Condensed Consolidated Statements of Income for the year ended December 31, 2008 include certain amounts related to the termination of the interest rate
swap agreement as described above. The following impacts are included in the Condensed Consolidated Statements of Income for the year ended December 31, 2008 (in thousands):



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



19. NONCONTROLLING INTEREST



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



|                                                                                                                         |  |                                                                                                     |        |      |   |       
|------------------------------------------------------------------------------------------------------------------------ |  | --------------------------------------------------------------------------------------------------- | ------ | ---- | - | ------
|                                                                                                                         |  | Net Income Attributable toIowa Telecommunicationsand Transfers (to) from theNoncontrolling Interest
|                                                                                                                         |  | Year Ended December 31,                                                                            
|                                                                                                                         |  | 2008                                                                                                |        | 2009
|                                                                                                                         |  | (dollars in thousands)                                                                             
|Net income attributable to Iowa Telecommunications Services, Inc.                                                        |  | $                                                                                                   | 23,149 |      | $ | 10,532
|Increase in Iowa Telecommunications Services, Inc. paid-in capital for issuance of shares                                |  |                                                                                                     |       |      |   | 32    
|Increase in Iowa Telecommunications Services, Inc. paid-in capital due to gain on acquisition of noncontrolling
interest |  |                                                                                                     |       |      |   | 1,879 
|                                                                                                                         |  |                                                                                                     |        |      |   |       
|Change from net income attributable to Iowa Telecommunications Services, Inc. and transfers from noncontrolling
interest |  | $                                                                                                   | 23,149 |      | $ | 12,443
|                                                                                                                         |  |                                                                                                     |        |      |   |       



20. BUSINESS ACQUISITIONS



Bishop Communications. On July 18, 2008, the Company acquired 100% of the outstanding stock of Bishop Communications, a provider of telecommunications, video, and high speed Internet services to customers in portions of
rural Minnesota. The acquisition of Bishop Communications expanded the Companys service area and customer base. The purchase price was approximately $33.1 million in cash, net of cash received, and assumed debt of $13.0 million. The
transaction did not result in a tax basis step-up, as such, the goodwill acquired is not deductible for tax purposes. The allocation of the purchase price of Bishop Communication includes amortizable intangible assets consisting primarily of
customer relationship intangibles which have a weighted average useful life of 11.6 years.



109



---

##### Table of Contents

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



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



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



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



New Ulm Telecom Inc.s Ownership
Interests.On September 24, 2009, the Company acquired New Ulm Telecom Inc.s ownership interests in EN-TEL, SHAL, LLC and SHAL Networks, Inc. for a purchase price of $1.9 million. In addition, the Company assumed New Ulm Telecom
Inc.s debt guarantee obligations on the SHAL, LLC and EN-TEL debt. The outstanding balances due on the SHAL, LLC and EN-TEL debt as of December 31, 2009 are reflected in the consolidated financial statements.



WH Comm Assets.On November 1, 2009, the
Company acquired the WH Comm Assets for a purchase price of $1.1 million. WH Comm is a division of Wright-Hennepin Cooperative Electric Association based in Rockford, MN.



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



21. CONSOLIDATED QUARTERLY OPERATING INFORMATION (UNAUDITED)



|                           |  |                                         |        |                  |   |              |  |                  |        |  |   |        |  
|-------------------------- |  | --------------------------------------- | ------ | ---------------- | - | ------------ |  | ---------------- | ------ |  | - | ------ | -
|                           |  | 2009(5)                                 |       
|                           |  | FirstQuarter                            |        | SecondQuarter(1) |   | ThirdQuarter |  | FourthQuarter(2) |       
|                           |  | (in thousands except per share amounts) |       
|Revenue and sales          |  | $                                       | 61,288 |                  | $ | 58,819       |  | $                | 68,296 |  | $ | 65,739 |  
|Operating income           |  | $                                       | 14,862 |                  | $ | 12,380       |  | $                | 14,922 |  | $ | 10,845 |  
|Net income                 |  | $                                       | 4,509  |                  | $ | 2,921        |  | $                | 4,573  |  | $ | (1,666 | )
|Earnings per sharebasic   |  | $                                       | 0.14   |                  | $ | 0.08         |  | $                | 0.13   |  | $ | (0.06  | )
|Earnings per sharediluted |  | $                                       | 0.14   |                  | $ | 0.08         |  | $                | 0.13   |  | $ | (0.06  | )



110



---

##### Table of Contents

|                           |  |                                         |        |                  |   |              |  |                  |        |  |   |       
|-------------------------- |  | --------------------------------------- | ------ | ---------------- | - | ------------ |  | ---------------- | ------ |  | - | ------
|                           |  | 2008(5)                                
|                           |  | FirstQuarter                            |        | SecondQuarter(3) |   | ThirdQuarter |  | FourthQuarter(4)
|                           |  | (in thousands except per share amounts)
|Revenue and sales          |  | $                                       | 60,845 |                  | $ | 58,177       |  | $                | 62,923 |  | $ | 65,020
|Operating income           |  | $                                       | 19,512 |                  | $ | 16,618       |  | $                | 16,798 |  | $ | 17,538
|Net income(6)              |  | $                                       | 6,957  |                  | $ | 5,293        |  | $                | 5,723  |  | $ | 5,071 
|Earnings per sharebasic   |  | $                                       | 0.22   |                  | $ | 0.16         |  | $                | 0.18   |  | $ | 0.16  
|Earnings per sharediluted |  | $                                       | 0.21   |                  | $ | 0.15         |  | $                | 0.17   |  | $ | 0.16  



|(1) | Operating income included a $1.8 million non-recurring charge related to a network access matter.
|--- | -------------------------------------------------------------------------------------------------

|(2) | Operating income included $739,000 of transactions costs that were charged to expense in accordance with FASB ASC 805, Business Combinations, and $3.1 million of costs
related to the Merger Agreement.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | Operating revenues included a $1.5 million unfavorable impact due to non-recurring network access billing matters.
|--- | ------------------------------------------------------------------------------------------------------------------

|(4) | Operating income included a pension curtailment gain of approximately $2.5 million.
|--- | -----------------------------------------------------------------------------------

|(5) | Basic and diluted earnings per share amounts have been retrospectively adjusted to conform with new authoritative guidance for determining whether instruments granted
in share-based payment transactions are participating securities, which was adopted by Iowa Telecom effective January 1, 2009. For further information on this authoritative guidance and its impact, see Notes to Consolidated Financial
Statements. The effect of adopting this guidance was immaterial to all periods presented.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(6) | Net Income as presented for 2008 was adjusted to conform with amended guidance regarding Noncontroling Interest in Consolidated Financial Statements. The
amended guidance was adopted by Iowa Telecom effective January 1, 2009, and the Statement of Operations has been retrospectively adjusted to conform to the amended authoritative guidance.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



111



---

##### Table of Contents

ITEM 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure



None.



ITEM 9A. 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 Securities Exchange Act of
1934, as amended (the Exchange Act)) as of December 31, 2009 (the Evaluation Date). Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of the Evaluation Date, our
disclosure controls and procedures were effective to provide reasonable assurance to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified by
the Securities and Exchange Commissions rules and forms and that such information is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions
regarding required disclosures.



Changes in Internal Controls



There was no change in the Companys
internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) during the last fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Companys internal control over
financial reporting.



Internal Control over Financial
Reporting.



(a) Managements Report
on Internal Control Over Financial Reporting. Our management is responsible for establishing and maintaining adequate internal control over financial reporting as such term is defined in Exchange Act Rule 13a-15(f). Internal control over
financial reporting is a process designed by, or under the supervision of, our Chief Executive and Chief Financial Officers and effected by our board of directors, management and other personnel to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles, and includes those policies and procedures that:



| |  |  | pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally
accepted accounting principles, and that our receipts and expenditures are being made only in accordance with the authorizations of our management and directors; and
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a
material effect on our financial statements.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Because of inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the
risks that controls may become inadequate because of changes in conditions, or that the degree of compliance with policies or procedures may deteriorate.



Under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, we
assessed the effectiveness of our internal control over financial reporting as of December 31, 2009. In making this assessment, management used the framework inInternal Control-Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission. As allowed by



112



---

##### Table of Contents

SEC guidance, management excluded from its assessment the 2009 acquisition of the Sherburne Assets, which accounted for approximately nine percent of consolidated total assets, approximately
seven percent of consolidated revenues and sales and approximately two percent of operating income. Based on this assessment, our management concluded that our internal control over financial reporting was effective as of December 31, 2009.



Our independent registered public accounting
firm, Deloitte & Touche LLP, independently assessed the effectiveness of our internal control over financial reporting as stated in their report that follows.



113



---

##### Table of Contents

(b) Attestation Report of the Independent Registered Public Accounting Firm.



REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM



To the Board of Directors and Stockholders of

Iowa Telecommunications Services, Inc.

Newton, Iowa



We have audited the
internal control over financial reporting of Iowa Telecommunications Services, Inc. and subsidiaries (the Company) as of December 31, 2009, based on criteria established in Internal ControlIntegrated Frameworkissued by
the Committee of Sponsoring Organizations of the Treadway Commission. As described in Managements Report on Internal Control Over Financial Reporting, management excluded from its assessment the internal control over financial reporting
at Sherburne Tele Systems, Inc. and subsidiaries SHAL, LLC and SHAL Networks Inc., which were acquired on July 1, 2009 and whose financial statements constitute 9% of total assets, 7% of revenues and sales, and 2% of operating income of the
consolidated financial statement amounts as of and for the year ended December 31, 2009. Accordingly, our audit did not include the internal control over financial reporting at Sherburne Tele Systems, Inc. and subsidiaries SHAL, LLC and SHAL
Networks Inc. The Companys management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying
Managements Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Companys internal control over financial reporting based on our audit.



We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the
assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.



A companys internal control over financial reporting is a process designed by, or under the supervision of, the
companys principal executive and principal financial officers, or persons performing similar functions, and effected by the companys board of directors, management, and other personnel to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A companys internal control over financial reporting includes those policies and
procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management
and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the companys assets that could have a material effect on the financial
statements.



Because of the inherent limitations
of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of
any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.



In our
opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2009, based on the criteria established in Internal ControlIntegrated Frameworkissued by the
Committee of Sponsoring Organizations of the Treadway Commission.



114



---

##### Table of Contents

We have also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated financial statements as of and for the year ended December 31, 2009 of the Company and our report dated February 26, 2010 expressed an unqualified opinion on those financial statements.



/s/ DELOITTE & TOUCHE LLP



Des Moines, Iowa

February 26, 2010



******



ITEM 9B. Other
Information



None.



115



---

##### Table of Contents

PART III.



ITEM 10. Directors, Executive Officers and
Corporate Governance



The information
required by this item is incorporated by reference to the Companys Proxy Statement for the 2010 Annual Meeting of Shareholders, or will be filed by amendment to this Form 10-K if such Proxy Statement is not filed within 120 days after the end
of the fiscal year covered by this Form 10-K.



ITEM 11. Executive Compensation



The information required by this item is incorporated by reference to the Companys Proxy Statement for
the 2010 Annual Meeting of Shareholders, or will be filed by amendment to this Form 10-K if such Proxy Statement is not filed within 120 days after the end of the fiscal year covered by this Form 10-K.



ITEM 12. Security Ownership of Certain
Beneficial Owners and Management and Related Stockholder Matters



The information required by this item is incorporated by reference to the Companys Proxy Statement for the 2010 Annual Meeting of Shareholders, or will be filed by amendment to this Form 10-K if
such Proxy Statement is not filed within 120 days after the end of the fiscal year covered by this Form 10-K.



ITEM 13. Certain Relationships and Related Transactions, and Director Independence



The information required by this item is incorporated by reference to the Companys Proxy Statement for
the 2010 Annual Meeting of Shareholders, or will be filed by amendment to this Form 10-K if such Proxy Statement is not filed within 120 days after the end of the fiscal year covered by this Form 10-K.



ITEM 14. Principal Accountant Fees and
Services



The information required by this
item is incorporated by reference to the Companys Proxy Statement for the 2010 Annual Meeting of Shareholders, or will be filed by amendment to this Form 10-K if such Proxy Statement is not filed within 120 days after the end of the fiscal
year covered by this Form 10-K.



116



---

##### Table of Contents

PART IV.



ITEM 15. Exhibits and Financial Statement
Schedules



(a) Index to Financial Statements



1. Financial Statements: The consolidated
financial statements and supplementary data are set forth under Item 8 of this Form 10-K.



2. Financial Statement Schedules: All schedules are inapplicable or the required information is included elsewhere herein.



(b) Exhibits



Reference is made to the Index to Exhibits, immediately preceding the exhibits to this Form 10-K.



117



---

##### Table of Contents

SIGNATURES



Pursuant to the requirements of Section 13 or 15(d) 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 as of February 26, 2010.



IOWA TELECOMMUNICATIONS SERVICES, INC./s/    ALAN L.
WELLSAlan L. Wells President, Chief Executive Officer and Director Principal Executive
Officer




118



---

##### Table of Contents

POWER OF ATTORNEY



Each person whose signature appears below constitutes CRAIG A. KNOCK and DONALD G. HENRY his true and lawful
attorneys-in-fact and agents, each acting alone, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any or all amendments to this Annual Report on Form 10-K and to file
the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, each acting alone, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all said attorneys-in-fact and agents, each acting alone, or
his substitute or substitutes, may lawfully do or cause to be done by virtue thereof.



Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates
indicated.



|                                           |  |                                                                                                 |  |                  
|------------------------------------------ |  | ----------------------------------------------------------------------------------------------- |  | -----------------
|Signature                                  |  | Title                                                                                           |  | Date             
|                                           |  |                                                                                                
|/s/    ALAN L.
WELLS Alan L. Wells         |  | President, Chief Executive Officer and DirectorPrincipal Executive Officer                      |  | February 26, 2010
|                                           |  |                                                                                                
|/s/    CRAIG A.
KNOCK Craig A. Knock       |  | Vice President, Chief Financial Officer and TreasurerPrincipal Financial and Accounting Officer |  | February 26, 2010
|                                           |  |                                                                                                
|/s/    KENNETH R.
COLE Kenneth R. Cole     |  | Director                                                                                        |  | February 26, 2010
|                                           |  |                                                                                                
|/s/    NORMAN C.
FROST Norman C. Frost     |  | Director                                                                                        |  | February 26, 2010
|                                           |  |                                                                                                
|/s/    BRIAN G.
HART Brian G. Hart         |  | Director                                                                                        |  | February 26, 2010
|                                           |  |                                                                                                
|/s/    H. LYNN
HORAK H. Lynn Horak         |  | Director                                                                                        |  | February 26, 2010
|                                           |  |                                                                                                
|/s/    CRAIG A.
LANG Craig A. Lang         |  | Director                                                                                        |  | February 26, 2010
|                                           |  |                                                                                                
|/s/    KENDRIK E.
PACKER Kendrik E. Packer |  | Director                                                                                        |  | February 26, 2010



119



---

##### Table of Contents

INDEX TO EXHIBITS



|               |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|-------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit Number |  | Description                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|2.1            |  | Agreement and Plan of Merger dated November 23, 2009 by and among Iowa Telecommunications Services, Inc., Windstream Corporation and Buffalo Merger Sub., Inc.incorporated
by reference to Exhibit 2.1 to Iowa Telecoms current Report on Form 8-K dated November 23, 2009.                                                                                                                                                                                                                                                   
|               | 
|3.1            |  | Amended and Restated Articles of Incorporation of Iowa Telecommunications Services, Inc.*                                                                                                                                                                                                                                                                                                                                                                                                                                       
|               | 
|3.2            |  | Amended and Restated By-Laws of Iowa Telecommunications Services, Inc.*                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|               | 
|10.2           |  | Amended and Restated Credit Agreement, dated as of November 23, 2004, among Iowa Telecommunications Services, Inc., the several lenders from time to time parties thereto, CIBC
World Markets Corp. and Lehman Brothers Inc., as co-lead arrangers, National Rural Utilities Cooperative Finance Corporation, as co-arranger, CIBC World Markets Corp., as syndication agent, and the Rural Telephone Finance Cooperative, as
administrative agent.*                                                                            
|               | 
|10.3           |  | Amendment No. 1 dated as of August 26, 2005 to the Amended and Restated Credit Agreement dated as of November 23, 2004 between the Company, the several lenders
from time to time party thereto, and Rural Telephone Finance Cooperative, as administrative agentincorporated by reference to Exhibit 10.1 to Iowa Telecoms Current Report on Form 8-K dated August 26, 2005.                                                                                                                                                 
|               | 
|10.4           |  | Amendment No. 2 dated as of July 14, 2008 to the Amended and Restated Credit Agreement dated as of November 23, 2004 between the Company, the several lenders from time to time
party thereto, and Rural Telephone Finance Cooperative, as administrative agentincorporated by reference to Exhibit 10.2 to Iowa Telecoms Current Report on Form 8-K dated July 14, 2008.                                                                                                                                                     
|               | 
|10.5           |  | Form of Mortgage and Security Agreement, dated as of November 23, 2004, by and between Iowa Telecommunications Services, Inc., as mortgagor and Rural Telephone Finance
Cooperative, as mortgage.*                                                                                                                                                                                                                                                                                                                              
|               | 
|10.6           |  | Amended and Restated Pledge and Security Agreement, dated as of November 23, 2004, by and between Iowa Telecommunications Services, Inc., as pledgor and Rural Telephone Finance
Cooperative, as collateral agent.*                                                                                                                                                                                                                                                                                                             
|               | 
|10.7           |  | Amended and Restated Security Agreement, dated as of November 23, 2004, among Iowa Telecommunications Services, Inc., Iowa Telecom Communications, Inc., Iowa Telecom Data
Services, L.C., Iowa Telecom Technologies, LLC, and Rural Telephone Finance Cooperative.*                                                                                                                                                                                                                                                            
|               | 
|10.8           |  | Employment Agreement dated September 24, 2009 between Iowa Telecommunications Services, Inc. and Alan L. Wellsincorporated by reference to Exhibit 10.1 to Iowa
Telecoms Current Report on Form 8-K dated September 21, 2009. #                                                                                                                                                                                                                                                                                               
|               | 
|10.9           |  | Iowa Telecommunications Services, Inc. Stock Incentive Plan, adopted on April 26, 2002.*                                                                                                                                                                                                                                                                                                                                                                                                                                        
|               | 
|10.10          |  | Amendment to Iowa Telecommunications Services, Inc. Stock Incentive Plan, approved as of October 29, 2004.* #                                                                                                                                                                                                                                                                                                                                                                                                                   
|               | 
|10.12          |  | 2005 Stock Incentive Planincorporated by reference to Exhibit A to Iowa Telecoms Definitive Proxy Statement for the 2005 Annual Meeting filed on Schedule 14A on April
29, 2005. #                                                                                                                                                                                                                                                                                                                                            
|               | 
|10.13          |  | Asset Purchase Agreement dated November 21, 2008 by and among Iowa Telecommunications Services, Inc., Sherburne Tele Systems, Inc. (STS), Sherburne County Rural
Telephone Co., Sherburne Tel-Com, Inc., Sherburne Cable-Com, Inc., Sherburne Long Distance, Inc., Northstar Access, LLC, Northstar Tele-Com, Inc., Sherburne fiber-Com, Inc., those shareholders of STS set forth on the signature page of the agreement,
and Robert K. Eddy in his capacity as the Shareholders Representative as defined in the agreement.



120



---

##### Table of Contents

|               |  |                                                                                                                                                                                                                                                                                                                                                         
|-------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit Number |  | Description                                                                                                                                                                                                                                                                                                                                             
|10.14          |  | Stock Purchase Agreement dated as of February 5, 2008 among Iowa Telecommunications Services, Inc., the sellers named in the Agreement, and John M. Bishop as Sellers
Representativeincorporated by reference to Exhibit 10.1 to Iowa Telecoms Quarterly Report on Form 10-Q for the quarter ended March 31, 2008.                                   
|               | 
|10.24          |  | Restricted Stock Agreement dated as of September 24, 2009 between Iowa Telecommunications Services, Inc. and Alan L. Wellsincorporated by reference to Exhibit 10.2 to Iowa
Telecoms Current Report on Form 8-K dated September 21, 2009. #                                                                                                           
|               | 
|10.25          |  | Form of Restricted Stock Agreement used under 2005 Stock Incentive Planincorporated by reference to Exhibit 10.3 to Iowa Telecoms Current Report on Form 8-K dated
August 2, 2005. #                                                                                                                                                                  
|               | 
|10.26          |  | Form of change of control agreement dated September 21, 2009 between Iowa Telecommunications Services, Inc. and each of several of its executivesincorporated by reference
to Exhibit 10.3 to Iowa Telecoms Current Report Form 8-K dated September 21, 2009. #                                                                                       
|               | 
|10.27          |  | Incremental Loan Amendment, dated as of July 1, 2009, to the Amended and Restated Credit Agreement, dated as of November 23, 2004, among Iowa Telecom, the lenders party thereto
and Rural Telephone Finance Cooperative as administrative agentincorporated by reference to Exhibit 99.1 to Iowa Telecoms Current Report Form 8-K dated July 1, 2009.
|               | 
|21             |  | Subsidiaries of Iowa Telecommunications Services, Inc.                                                                                                                                                                                                                                                                                                  
|               | 
|23.1           |  | Consent of Independent Registered Public Accounting Firm.                                                                                                                                                                                                                                                                                               
|               | 
|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.                                                                                                                                                                                                                                                     



|* | Previously filed as exhibits to Iowa Telecoms Registration Statement on Form S-1 (File No. 333-114349) and incorporated herein by reference thereto.
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------

|# | Management agreement or compensatory plan or arrangement.
|- | ---------------------------------------------------------



121