10-K

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, 2008

¨ 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 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.  x

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of Exchange Act.

Large accelerated filer  x                    Accelerated filer  ¨                    Non-accelerated filer  ¨

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, 2008, was approximately $552,684,232 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 31,977,837 shares of Common Stock, $0.01 par value, outstanding as of February 17, 2009.

DOCUMENTS INCORPORATED BY REFERENCE

The definitive proxy statement relating to the Registrant’s 2009 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

		PAGE
PART I.		3
ITEM 1.	Business	3
ITEM 1A.	Risk Factors	24
ITEM 1B.	Unresolved Staff Comments	35
ITEM 2.	Properties	35
ITEM 3.	Legal Proceedings	35
ITEM 4.	Submission of Matters to a Vote of Security Holders	35
PART II.		36
ITEM 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	36
ITEM 6.	Selected Financial Data	39
ITEM 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	41
ITEM 7A.	Quantitative and Qualitative Disclosures About Market Risk	62
ITEM 8.	Financial Statements and Supplementary Data	64
ITEM 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	98
ITEM 9A.	Controls and Procedures	98
ITEM 9B.	Other Information	100
PART III.		101
ITEM 10.	Directors, Executive Officers of the Registrant and Corporate Governance	101
ITEM 11.	Executive Compensation	101
ITEM 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	101
ITEM 13.	Certain Relationships and Related Transactions and Director Independence	101
ITEM 14.	Principal Accountant Fees and Services	101
PART IV.		102
ITEM 15.	Exhibits and Financial Statement Schedules	102
SIGNATURES		103
INDEX TO EXHIBITS		105

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.

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.

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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 2008. 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 2008 annual meeting of shareholders.

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PART I.

ITEM 1. Business

Company Overview

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 294 telephone exchanges serving 423 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 242,100 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 65% of our total revenues for the year ended December 31, 2008, 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. 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.”

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.”

On July 18, 2008, we acquired Bishop Communications Corporation (“Bishop Communications”). 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, to 4,600 access lines as a competitive local exchange carrier, to 9,700 long distance subscribers, and provides Internet access service to more than 6,600 subscribers in Minnesota.

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 20,000 square miles in size, and each of our switching centers is within 30 miles of another of our switching centers.

On November 21, 2008, the Company announced a definitive agreement to acquire, subject to regulatory approvals, substantially all of the assets of Sherburne Tele Systems, Inc. (“Sherburne”) for a total purchase price of $80.6 million, subject to certain adjustments. Sherburne is a closely held telecommunications company headquartered in Big Lake, Minnesota, less than 30 miles from the headquarters of Bishop Communications, which we acquired on July 18, 2008. As of December 31, 2008, Sherburne served 15,500 access lines as the incumbent local exchange carrier, and 10,200 access lines as a competitive local exchange carrier, and provides service to 13,900 DSL high-speed Internet customers and 3,700 video customers, primarily in communities and rural areas near the Minnesota/St. Paul Metropolitan Area. Sherburne’s operations include its incumbent local exchange carrier services, marketed as Connections, Etc., and competitive local exchange carrier services provided through its wholly-owned subsidiary, Northstar Access.

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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. To achieve this goal, we intend to pursue the following strategies:

• 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 created 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 competitive local exchange carrier subsidiaries, ITC, IT Communications, Lakedale Link, Inc. and EN-TEL. 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 intend to continue pursuing a disciplined process of evaluating select acquisitions of access lines from Regional Bell Operating Companies and other rural local exchange carriers, as well as evaluating acquisitions of providers of businesses complementary to ours. Over the past several years, Regional Bell Operating Companies have divested a significant number of access lines nationwide and are expected to continue these divestitures in order to focus on larger markets. 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 rural local exchange carriers serving a fragmented market representing approximately 580,000 access lines. One of our key acquisition criteria will be the potential of any proposed transaction to increase our free cash flow per share.

Products, Services and Revenue Sources

We provide wireline local exchange telecommunications services as the incumbent local exchange carrier to residential and business customers in 423 communities in Iowa, Minnesota and Missouri. Our wholly owned CLEC’s, ITC, IT Communications and Lakedale Link, Inc. are certified to provide service in all areas served by Qwest in Iowa and Minnesota and certain Embarq and Frontier exchanges in Minnesota. EN-TEL, our majority owned CLEC subsidiary, is a certified reseller in Qwest, Embarq and Frontier exchanges and a certified facility-based provider in certain Qwest exchanges in Minnesota. Approximately 70% of our access lines serve residential customers and 30% 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;

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• 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, 2006, 2007 and 2008, by category of service:

	Year Ended December 31,
	2006				2007				2008
	Amount		Percent		Amount		Percent		Amount		Percent
Local services	$	76,428	33	%	$	73,918	29	%	$	71,131	29	%
Network access services		96,217	41	%		100,636	40	%		89,420	36	%
Toll services		21,804	9	%		21,213	9	%		23,010	9	%
Data and Internet services		25,016	11	%		29,512	12	%		35,163	14	%
Other services and sales		14,620	6	%		26,122	10	%		28,241	12	%
Total revenues and sales	$	234,085	100	%	$	251,401	100	%	$	246,965	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.

The rates for our network access revenues are determined under two jurisdictions. 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

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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 (“SLC’s”) 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,
	2006		2007		2008
Subscribers	146,600		143,600		146,400
Penetration rate(1)	58	%	60	%	60	%

(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.

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 294 incumbent exchanges. We estimate that we are capable of providing DSL Internet access service to over 80% of our access lines. Approximately 38% 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	2006		2007		2008
Dial-up Internet	31,500		22,500		16,700
DSL Internet	50,000		62,800		75,700
Total	81,500		85,300		92,400
Penetration rate(1)	32	%	35	%	38	%

(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.

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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	2006		2007		2008
Video	4,500		9,000		20,300
Penetration rate(1)	2	%	5	%	12	%

(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 and Lakedale Link, Inc 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. Our interest in EN-TEL was acquired as a part of the acquisition of Bishop Communications and is primarily a facilities-based provider. Our CLEC currently offers a broad range of traditional and enhanced wireline communications services to business and residential customers. Between ITC, IT Communications and Lakedale Link, Inc., our wholly owned CLEC subsidiaries are certified in all markets served by Qwest in Iowa and Minnesota and certain Embarq and Frontier markets in Minnesota. Our majority owned CLEC subsidiary, EN-TEL, is a certified reseller in Embarq, Frontier and Qwest exchanges and is a certified facility-based provider in certain Qwest exchanges in Minnesota. As of December 31, 2008, our CLEC Operations served approximately 17,000 business and 15,400 residential access lines and accounted for 13% 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.

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 2009, range from $12.55 to $29.34 per line for residential customers and $15.91 to $38.04 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 and we believe such investment can be cost effective. The cost to expand our competitive local exchange carrier 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. In 2009, we plan to maintain this limited investment approach as we continue to grow our competitive local exchange carrier business, focusing primarily on business customers.

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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 21 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 21 customer offices and three 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 created 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 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 138 of the 423 communities our incumbent local exchange carriers serve. Of these 138 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 second quarter of 2007. Additionally, we believe that in approximately 40 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.

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. We appealed this decision to the U.S. Court of Appeals for the Eighth Circuit on May 14, 2008, and oral argument was held on December 12, 2008. We cannot predict how or when this litigation will be resolved.

Notwithstanding the period in which our complaint was under consideration, we have negotiated, mediated and litigated with Sprint and, at times, with MCC to resolve issues relating to interpretation and implementation of the interconnection agreement. On January 22, 2007, we filed a second complaint against the Iowa Utilities Board and Sprint in U.S. District Court asking the court to rule that the Iowa Utilities Board acted unlawfully

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when it interpreted the interconnection agreement to require Iowa Telecom to provide certain services to Sprint, particularly in the manner requested by Sprint. Briefing on this complaint concluded on August 11, 2008. We cannot predict how or when this litigation will be resolved.

In addition to the disputes pending in federal district court and before the Iowa Utilities Board, we are also defending a complaint filed by MCC on July 31, 2006, in the Iowa District Court for Polk County alleging that our refusal to accede to Sprint’s negotiation demands improperly interfered with MCC’s contracts and prospective customer relationships. The state court complaint seeks unspecified damages and costs and additional relief as warranted. This state court proceeding had been stayed pending the result of our first federal complaint. On September 9, 2008, the state court refused to lift the stay due to the pending appeal of the federal district court’s decision on the first complaint to the Eighth Circuit. This stay will remain effective until the Eighth Circuit rules, subject to reconsideration by the state court if the Eighth Circuit has not ruled by March 9, 2009. We cannot predict how long this stay will last nor how this state court litigation will be resolved.

Wireless and Emerging Technology Competition. We estimate that wireless service providers served approximately 5.9 million subscribers in Iowa and Minnesota, as of June 2007, 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, the United States Post Office 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 four competitive local exchange carrier subsidiaries—ITC, IT Communications, Lakedale Link, Inc. and EN-TEL. Our wholly owned CLEC subsidiaries, ITC, ITC Communications and Lakedale Link, Inc., are authorized to provide services in all of Qwest’s Iowa and Minnesota exchanges as well as certain Embarq and Frontier exchanges in Minnesota, and generally offer the same local exchange services as those offered by the local incumbent provider. Our wholly owned CLEC subsidiaries also provide DSL Internet access service in all exchanges in which they operate, using either Qwest’s, Embarq’s or Frontier’s wholesale service or owned facilities. Our majority owned CLEC subsidiary, EN-TEL, is an authorized reseller in Embarq, 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 and Verizon Business currently are the other major long distance providers in our service territory. 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 60% of our local access lines also subscribe to one of our long distance services.

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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, small proprietors with service in only a few communities or, in some circumstances, near larger Midwest communities, national providers such as America Online and the Microsoft Network. 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 collocated 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 294 local telephone exchanges in 423 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 service area includes four communities with a population over 9,000; ten communities with a population between 5,001 and 9,000; 27 communities with a population between 2,000 and 5,000; and 382 communities with a population under 2,000. The largest five communities in our 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 11% 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 2006 to 2008.

As a competitive local exchange carrier, we are authorized to provide services in all Iowa and Minnesota local telephone exchanges served by Qwest, and to certain Embarq and Frontier telephone exchanges in Minnesota. Our majority owned CLEC subsidiary, EN-TEL, is an authorized reseller in Embarq, Frontier and Qwest Minnesota exchanges and is an authorized facility based provider in certain Qwest exchanges. Approximately 52% of the access lines in our competitive local exchange carrier markets serve business customers and approximately 48% serve residential customers.

Network access charges historically have been one of our largest sources of revenues. During 2006, the Company had one carrier customer that represented approximately 11% of total revenue and sales. During 2007 and 2008, the Company did not have an access carrier customer that represented more than 10% of total revenue and sales.

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 3,700 miles of fiber 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.

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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. Over 80% of our access lines are now 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 in to service in the second quarter of 2008.

• 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.

Employees

We employ approximately 720 full-time employees, of which 629 are based in Iowa. We have a collective bargaining agreement with the Communications Workers of America, or CWA, which covers 176 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 2009. There have been no work stoppages or strikes by our IBEW or CWA employees in the past 8 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 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

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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 by requiring 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 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. and subsidiaries 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.

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

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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 2008 filing became effective on June 30, 2008, 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). Lakedale Link, Inc., through its use of total service resale, does not assess access charges.

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).

Intercarrier compensation reform, and, to a lesser degree, universal service reform, were intensely debated at the FCC during the third and fourth quarters of 2008. Most proposals entailed 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 high-cost funding. We cannot predict when the FCC will take global action to reform intercarrier compensation and universal service 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

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“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.

• 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 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

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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, 2008, our incumbent local exchange carrier and our independent incumbent local exchange carriers had interconnection agreements with 42 of the competitive local exchange carriers authorized to offer local service in our service area, and 17 active interconnection agreements in force with wireless carriers. We are currently negotiating one additional interconnection agreement with a wireless carrier. We are currently negotiating one additional interconnection agreement with a CLEC. Thirty-nine CLEC agreements and ten 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 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 UNEs 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

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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.

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 2008, our incumbent local exchange carrier received approximately $5.2 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. 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. nor EN-TEL operate as eligible telecommunications carriers.

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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 first quarter of 2009, decreased to below 10% of interstate and international revenues for the first time in two years. In 2008, our incumbent local exchange carrier and competitive local exchange carriers collected and contributed to the universal service fund approximately $2.4 million and $231,000, 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), 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 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, 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.

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In February 2004, the FCC determined that a particular type of entirely Internet-based voice over Internet protocol service also is 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. 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 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 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, the FCC on October 4, 2007, released an order amending some of these new requirements to

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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 2009 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 (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 concerning wireless carriers. Lakedale Telephone provides service through a resale agreement. Montezuma, through a management agreement with Iowa Wireless Services, LLC (“Iowa Wireless”), provides mobile wireless service in its incumbent local exchange carrier service territory. Lakedale Telephone (either directly 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 CLEC 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.

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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 our 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 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 Board is currently considering such a challenge based on a February 20, 2008, MCImetro Transmission Access Transmission Services LLC, d/b/a Verizon Access Transmission Services and MCI Communications Services, Inc. d/b/a Verizon Business Services complaint filed with the Iowa Utilities Board against our local incumbent exchange carrier, our Iowa competitive local exchange carriers, Frontier

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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 Iowa Utilities Board denied our motion to dismiss on November 14, 2008, a decision we cannot appeal until the Board issues a decision on the merits. The final round of testimony will be filed by Verizon on April 2, 2009, with a hearing to be held starting during the first week of May 2009. We cannot predict when this proceeding will conclude and what the outcome may be.

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.

On September 12, 2008, the Iowa Utilities Board issued an order commencing an inquiry into whether the Board should create an Iowa universal service fund (“USF”). At this point, the Board is seeking comment on preliminary issues, such as how it should determine whether an Iowa USF is needed, and on certain policy and implementation issues assuming that an Iowa USF will be established. Comments were filed on October 27, 2008. Eventually the Board may issue an order commencing rulemaking. We cannot predict whether the Board will establish a rulemaking as a result of its pending inquiry or, assuming it does, the result of such rulemaking.

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. See 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.

Minnesota Competitive Local Exchange Carriers. We have two Minnesota competitive local exchange carrier subsidiaries: Lakedale Link, Inc., which is engaged in total service resale of Qwest, Frontier, and Embarq products in certain of their respective 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

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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 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.

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 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 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 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 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 cannot predict the result of either the rehearing on the ITA tariff or of any proceeding regarding ITA’s CCL rate. Montezuma and perhaps our Iowa CLECs could also be affected by any Iowa universal service fund program.

Neither Lakedale Telephone’s or 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 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.

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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.

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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 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 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.

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. 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;

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• 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. Any additional debt incurred by us could increase the risks associated with our substantial leverage.

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.

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Due to the severe contraction in the global financial markets, 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 along with a commitment from them to fund a $75 million incremental term loan. 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.

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 hold fully vested options to purchase a total of 677,579 shares of our common stock as of December 31, 2008, all of which have been registered under the Securities Act of 1933 and may be exercised and sold at any time.

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We may issue shares of our common stock, or other securities, from time to time as consideration for future acquisitions and investments. 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.

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.

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 $41 million from taxable income associated with the amortization of intangibles through June 2015. In addition, as of December 31, 2008, we have net operating losses to offset taxable income of $149.0 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 42 of the competitive local exchange carriers authorized to offer local service in our service area.

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Six of the 42 competitive local exchange carriers are municipal telephone utilities, and other communities we serve may in the future evaluate the establishment of 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 Court for the Southern District of Iowa asking the court to rule that the Iowa Utilities Board acted unlawfully when it required us to enter into an interconnection agreement with Sprint and asking the court to invalidate the agreement. On April 15, 2008, the court issued a ruling holding against us, therefore maintaining the status quo in which we are obligated to enter into an interconnection agreement with Sprint. We appealed this decision to the U.S. Court of Appeals for the Eighth Circuit on May 14, 2008 and oral argument was held on December 12, 2008. We cannot predict how and when this litigation will be resolved.

Notwithstanding the period in which our complaint was under consideration, we have negotiated, mediated and litigated with Sprint and, at times, with MCC to resolve issues relating to interpretation and implementation of the interconnection agreement. On January 22, 2007, we filed a second complaint against the Iowa Utilities Board and Sprint in U.S. District Court asking the court to rule that the Iowa Utilities Board acted unlawfully when it interpreted the interconnection agreement to require Iowa Telecom to provide certain services to Sprint, particularly in the manner requested by Sprint. Briefing on this complaint concluded on August 11, 2008. We cannot predict how and when this litigation will be resolved.

In addition to the disputes pending in federal district court and before the Iowa Utilities Board, we are also defending a complaint filed by MCC on July 31, 2006, in the Iowa District Court for Polk County alleging that our refusal to accede to Sprint’s negotiation demands improperly interfered with MCC’s contracts and prospective customer relationships. The state court complaint seeks unspecified damages and costs and additional relief as warranted. This state court proceeding had been stayed pending the result of our first federal complaint. On September 9, 2008, the state court refused to lift the stay due to the pending appeal of federal district court’s decision on the first complaint to the Eighth Circuit. This stay will remain effective until the Eighth Circuit rules, subject to reconsideration by the state court if the Eighth Circuit has not ruled by March 9, 2009. We cannot predict how long this stay will last nor how this state court litigation will be resolved.

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 decreased by 4.5% during 2007 and increased 0.6% during 2008. Access lines decreased 6.1% for 2007, and 7.5% for 2008, if we exclude lines served by our competitive local exchange carrier and access lines acquired during 2008. 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.

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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 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 Post Office, 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 or 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.

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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;

• 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, 2008, we had approximately 32,400 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, Embarq 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 recently enacted statutory provisions 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.

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We face risks associated with the planned acquisition of Sherburne Tele Systems, Inc. and 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;

• 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.

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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.

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 176 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 2009. 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

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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.

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.

As the incumbent local exchange carrier in our service areas, we are subject to regulation that is not applicable to our competitors.

Federal and state rules impose obligations and limitations on us, as an 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

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transit services and transport and termination services billed to wireless and landline carriers (governed by interconnection agreements) accounted for approximately 36% of our revenues in 2008.

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 also 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.

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• 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 518,300 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 and a 41,000 square foot combined office and warehouse in Annandale, 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.

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 Board is currently considering such a challenge based on a February 20, 2008, MCImetro Transmission Access Transmission Services LLC, d/b/a Verizon Access Transmission Services and MCI Communications Services, Inc. d/b/a Verizon Business Services complaint filed with the 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 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 Iowa Utilities Board denied our motion to dismiss on November 14, 2008, a decision we cannot appeal until the Board issues a decision on the merits. The final round of testimony will be filed by Verizon on April 2, 2009, with a hearing to be held starting during the first week of May 2009. We cannot predict when this proceeding will conclude and what the outcome may be.

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

None.

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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 17, 2009, we had approximately 147 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, 2007	$	20.74	$	18.75
June 30, 2007		23.84		19.70
September 30, 2007		23.13		16.55
December 31, 2007		20.99		15.00
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

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 2007 and 2008:

Date Declared	Dividend Per Share	Record Date	Payment Date
December 15, 2006	$0.405	December 29, 2006	January 16, 2007
March 15, 2007	$0.405	March 30, 2007	April 16, 2007
June 15, 2007	$0.405	June 29, 2007	July 16, 2007
September 14, 2007	$0.405	September 28, 2007	October 15, 2007
December 14, 2007	$0.405	December 31, 2007	January 15, 2008
March 14, 2008	$0.405	March 31, 2008	April 15, 2008
June 12, 2008	$0.405	June 30, 2008	July 15, 2008
September 15, 2008	$0.405	September 30, 2008	October 15, 2008
December 15, 2008	$0.405	December 31, 2008	January 15, 2009

Dividends on our common stock are not cumulative.

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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; and

• our shareholders have no contractual or other legal right to dividends.

Equity Compensation Plan Information

The following table sets forth information, as of December 31, 2008, concerning compensation plans previously approved by security holders and not previously approved by security holders.

Plan Category	Number of Securities to be Issued upon Exercise of Outstanding Options, Warrants and Rights Column A(1)	Weighted-Average Exercise Price of Outstanding Options, Warrants and Rights Column B		Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans (Excluding Securities Reflected in Column A) Column C(2)
Equity compensation plans approved by security holders	677,579	$	1.48	910,698
Equity compensation plans not approved by security holders	—		—	—
Total	677,579	$	1.48	910,698

(1) Excludes 471,150 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 permits the issuance of options to purchase 32,354 additional shares, the board has determined that no further options will be granted under the 2002 Plan.

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2008 Performance Graph

	11/04	12/04	12/05	12/06	12/07	12/08
Iowa Telecommunications Services, Inc.	100.00	104.54	82.16	113.65	101.79	98.33
S&P 500	100.00	107.59	112.87	130.70	137.88	86.87
Dow Jones US Fixed-Line Telecommunications	100.00	105.94	99.70	148.84	173.03	125.62

Recent Sales of Unregistered Securities

None.

Repurchase of Equity Securities by the Issuer and Affiliated Purchasers

None.

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ITEM 6. Selected Financial Data

The following selected financial data for the years ended December 31, 2004 through 2008 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 2006, 2007 and 2008 and the related notes thereto contained under Item 8. The figures in the table below reflect rounding adjustments.

	Iowa Telecommunications Services, Inc. and Subsidiaries Year Ended December 31,
	2004(a)			2005			2006(b)			2007(c)			2008(d)
	(in thousands, except per share data)
Statement of Operations Data:
Revenues & sales	$	228,119		$	231,640		$	234,085		$	251,401		$	246,965
Operating costs & expenses:
Cost of services & selling general and administrative expenses		93,184			105,826			108,670			120,473			122,805
Depreciation & amortization		47,941			48,600			47,736			48,992			53,694
Total operating costs & expenses		141,125			154,426			156,406			169,465			176,499
Operating income		86,994			77,214			77,679			81,936			70,466
Other income (expense):
Interest and dividend income		4,057			1,078			953			928			938
Interest expense		(55,654	)		(31,089	)		(31,708	)		(31,885	)		(31,444	)
Other, net		(21,193	)		(813	)		(572	)		(719	)		429
Total other expense, net		(72,790	)		(30,824	)		(31,327	)		(31,676	)		(30,077	)
Earnings before income taxes		14,204			46,390			46,352			50,260			40,389
Income tax expense		—			—			12,309			20,945			17,345
Net income before minority interest		14,204			46,390			34,043			29,315			23,044
Minority interest		—			—			—			—			105
Gain on redemption of redeemable convertible preferred stock		57,681			—			—			—			—
Preferred dividend		(2,056	)		—			—			—			—
Income available for common stockholders	$	69,829		$	46,390		$	34,043		$	29,315		$	23,149
Per Share Data:
Net income per share:
Basic	$	2.97		$	1.50		$	1.09		$	0.93		$	0.74
Diluted	$	2.64		$	1.46		$	1.06		$	0.91		$	0.72
Cash dividends declared	$	0.175		$	1.62		$	1.62		$	1.62		$	1.62

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	Iowa Telecommunications Services, Inc. and Subsidiaries Year Ended December 31,
	2004			2005			2006			2007			2008
	(in thousands)
Balance Sheet Data (at end of period):
Cash & cash equivalents	$	2,874		$	26,782		$	13,613		$	21,919		$	11,605
Property, plant and equipment, net		331,736			315,499			298,975			278,665			290,846
Total assets		852,784			864,522			859,529			831,559			859,928
Long-term debt		477,778			477,778			477,778			477,778			489,003
Stockholders’ equity		275,962			280,531			267,699			242,967			202,457
Cash Flow Data:
Net cash provided by operating activities	$	76,635		$	97,321		$	89,493		$	100,201		$	88,556
Net cash provided by (used in) investing activities		5,722			(30,235	)		(44,423	)		(26,903	)		(67,204	)
Net cash used in financing activities		(116,332	)		(43,178	)		(58,239	)		(64,992	)		(31,666	)
Other Financial Data:
Adjusted EBITDA(e)	$	137,935		$	127,864		$	124,317		$	134,263		$	128,311
Interest expense		55,654			31,089			31,708			31,885			31,444
Capital expenditures		34,803			30,141			28,122			26,903			28,166

(a) Includes the recognition, as a result of our rate settlement agreement with the Iowa Utilities Board in April 2004, of $7.1 million of revenues that we had collected in prior periods subject to refund pending such agreement. In addition, Other, net includes $22.4 million of costs associated with our initial public offering and related debt refinancing.

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

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

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

(e) 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 recognized in accordance with SFAS No. 133; (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 recognized in accordance with SFAS No. 133; and (z) all other non-cash income (including the non-cash portion of any RTFC patronage capital allocation). If our Adjusted EBITDA were to decline below certain levels, covenants in our new 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

40

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 Subsidiaries Year Ended December 31,
	2004			2005			2006			2007			2008
	(in thousands, except per share data)
Net Income	$	14,204		$	46,390		$	34,043		$	29,315		$	23,149
Income tax expense		—			—			12,309			20,945			17,345
Interest expense		55,654			31,089			31,708			31,885			31,444
Depreciation and amortization		47,941			48,600			47,736			48,992			53,694
Unrealized (gains) losses on financial derivatives		(1,452	)		234			572			719			(314	)
Non-cash stock-based compensation expense		141			1,828			2,354			2,687			3,553
Extraordinary or unusual (gains) losses		—			—			—			—			—
Non-cash portion of RTFC Capital Allocation		(1,142	)		(277	)		(211	)		(280	)		(560	)
Other non-cash losses (gains)		—			—			—			—			—
Loss (gain) on disposal of assets not in ordinary course		—			—			(4,194	)		—			—
Transaction costs		22,589			—			—			—			—
Adjusted EBITDA	$	137,935		$	127,864		$	124,317		$	134,263		$	128,311

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 294 telephone exchanges serving 423 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 242,100 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 65% of our total revenues for the year ended December 31, 2008, 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. 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.”

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Factors Affecting Our Operating Performance

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

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

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

• our ability to control our variable operating expenses, such as sales and marketing expense;

• the development of our competitive local exchange carrier strategy; and

• our success in integrating acquired operations.

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 and for the Year Ended December 31,
	2006	2007	2008(3)
Incumbent local exchange access lines(1)	228,200	214,300	209,700
Competitive local exchange carrier access lines(2)	23,800	26,400	32,400
Total access lines	252,000	240,700	242,100
Long distance subscribers	146,600	143,600	146,400
Dial-up Internet subscribers	31,500	22,500	16,700
DSL subscribers	50,000	62,800	75,700
Video subscribers(4)	4,500	9,000	20,300

(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

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competitive local exchange carrier pays us a monthly fee equal to what we would charge our customers for local service less an agreed discount; and shared lines, for which a competitive local exchange carrier pays us a monthly fee to provide DSL service to its customers. We had 2,300 wholesale lines subscribed at December 31, 2008; 2,900 at December 31, 2007; and 3,100 at December 31, 2006.

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

(3) Includes units acquired from Bishop Communications.

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

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 138 of the 423 incumbent local exchange communities our incumbent local exchange carrier serves. Of these 138 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 40 of these communities, independent local exchange carriers operating in mostly adjacent exchanges and municipal utilities have constructed networks to provide competitive local exchange carrier services to customers in our exchanges.

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

The jurisdiction of the Iowa Utilities Board 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. We appealed this decision to the U.S. Court of Appeals for the Eighth Circuit on May 14, 2008 and oral argument was held on December 12, 2008. We cannot predict how or when this litigation will be resolved.

Notwithstanding the period in which our complaint was under consideration, we have negotiated, mediated and litigated with Sprint and, at times, with MCC to resolve issues relating to interpretation and implementation of the interconnection agreement. On January 22, 2007, we filed a second complaint against the Iowa Utilities Board and Sprint in U.S. District Court asking the court to rule that the Iowa Utilities Board acted unlawfully when it interpreted the interconnection agreement to require Iowa Telecom to provide certain services to Sprint, particularly in the manner requested by Sprint. Briefing on this complaint concluded on August 11, 2008. We cannot predict how or when this litigation will be resolved.

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In addition to the disputes pending in federal district court and before the Iowa Utilities Board, we are also defending a complaint filed by MCC on July 31, 2006, in the Iowa District Court for Polk County alleging that our refusal to accede to Sprint’s negotiation demands improperly interfered with MCC’s contracts and prospective customer relationships. The state court complaint seeks unspecified damages and costs and additional relief as warranted. This state court proceeding had been stayed pending the result of our first federal complaint. On September 9, 2008, the state court refused to lift the stay due to the pending appeal of the federal district court’s decision on the first complaint to the Eighth Circuit. This stay will remain effective until the Eighth Circuit rules, subject to reconsideration by the state court if the Eighth Circuit has not ruled by March 9, 2009. We cannot predict how long this stay will last nor how or when this state court litigation will be resolved.

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.

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

Our Retail Local Rate and Pricing Structure

As described under “Overview—Competition” above, effective July 1, 2005, the rates for all of our Iowa retail local exchange service except for single line flat-rated business and residential service and EAS were deregulated. Beginning July 1, 2005, monthly rates for single line services remaining under price regulation could be adjusted annually by one dollar for residential lines and two dollars for business lines, plus an inflation increment, up to a monthly rate cap of $19.00 for residential lines and $38.00 for business lines. These rate caps did not, however, include charges for EAS. The remaining retail local exchange service rate regulation in our then-rate-regulated exchanges, with the arguable exception of EAS, expired effective July 1, 2008. The 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, 2008, our CLEC Operations served 32,400 access lines. Our CLEC Operations accounted for 13.4% of Iowa Telecom’s total access lines as of December 31, 2008. Throughout 2009, we plan to maintain a limited investment approach as we continue to grow our competitive local exchange carrier business.

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Revenues

We derive our revenues from five sources:

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

Network Access Services. We receive revenues from charges established to compensate us for the origination, transport and termination of calls generated by the customers of long distance carriers and for calls transported and terminated for the customers of wireless carriers. These include subscriber line charges imposed on end users, and switched and special access charges paid by carriers and others. We receive federally administered universal service support, representing approximately 2% of our total revenue in 2008, as a result of the interstate switched access support provisions of the FCC’s CALLS Order to which the Company became subject in 2000. In addition, Montezuma Telephone received high cost loop universal service support amounting to less than 1% of our revenue. Our incumbent local exchange carrier and our independent incumbent local exchange carriers 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 for Year Ended December 31,						% of Total Revenues and Sales for Year Ended December 31,
	2006		2007		2008		2006		2007		2008
	(dollars in thousands)
Local services	$	76,428	$	73,918	$	71,131	33	%	29	%	29	%
Network access services		96,217		100,636		89,420	41	%	40	%	36	%
Toll services		21,804		21,213		23,010	9	%	9	%	9	%
Data and internet services		25,016		29,512		35,163	11	%	12	%	14	%
Other services and sales		14,620		26,122		28,241	6	%	10	%	12	%
Total	$	234,085	$	251,401	$	246,965	100	%	100	%	100	%

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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.

Gain on sale of properties. This includes gains recorded when properties are sold.

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,
	2006		2007		2008
Total revenue and sales	100	%	100	%	100	%
Cost of services and sales (excluding expenses listed separately below)	29		31		32
Selling, general and administrative	20		17		18
Gain on sale of exchanges	(2	)	—		—
Depreciation and amortization	20		19		22
Operating income	33		33		28
Total other expenses, net	13		13		12
Income tax expense	5		8		7
Minority interest	—		—		—
Net income	15	%	12	%	9	%

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 ended December 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	%

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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 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 ended December 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 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.

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Selling, General and Administrative. Selling, general and administrative expenses increased $2.5 million 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 ended December 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 expense, net	$	(31,676	)	$	(30,077	)	$	1,599	-5.0	%

Interest and Dividend Income. Interest and dividend income increased $10,000, or 1.1% for 2008 as compared to 2007, primarily due to higher 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 a net income of $429,000 for 2008, compared to a net 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.

At December 31, 2008, we had unused tax net operating loss carryforwards of approximately $149.0 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 $41 million annually through June 2015. We determined that, based upon the evidence available as of December 31, 2008, the combination of the continued generation of taxable income and the taxable income generated from reversing temporary differences will, more likely than not, be sufficient to utilize the entire deferred tax asset. As such, we determined that no valuation allowance was required for our deferred tax assets. During the years ended December 31, 2007 and 2008, cash income taxes paid were $633,000, and $399,000, respectively, and primarily relate to payments of alternative minimum tax (AMT).

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Year ended December 31, 2007 compared to year ended December 31, 2006

Revenues and Sales

The table below sets forth the components of our revenues and sales for 2007 as compared to 2006:

	For the year ended December 31,				Change
	2006		2007		Amount			Percent
	(dollars in thousands)
Revenue and Sales
Local services	$	76,428	$	73,918	$	(2,510	)	-3.3	%
Network access services		96,217		100,636		4,419		4.6	%
Toll services		21,804		21,213		(591	)	-2.7	%
Data and internet services		25,016		29,512		4,496		18.0	%
Other services and sales		14,620		26,122		11,502		78.7	%
Total revenues and sales	$	234,085	$	251,401	$	17,316		7.4	%

Local Services. Local services revenues decreased $2.5 million, or 3.3%, for 2007 as compared to 2006. The decrease was primarily attributable to the loss of access lines. From December 31, 2006 to December 31, 2007, total access lines decreased by 11,300, including the loss of 13,900 incumbent local exchange carrier lines offset by an increase in lines served by our competitive local exchange carriers of 2,600. 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 increased $4.4 million, or 4.6%, for 2007 as compared to 2006. The increase was primarily due to $5.8 million of revenue from certain non-recurring network access billing matters with connecting carriers. This was partially offset by a decrease in minutes of use resulting from the loss of access lines.

Toll Services. Our toll services revenues decreased by $591,000, or 2.7%, for 2007 as compared to 2006. The number of long distance customers decreased by approximately 3,000, or 2.0%. In addition, average minutes of use per access line decreased.

Data and Internet Services. Data and Internet Services revenues increased by $4.5 million, or 18.0%, for 2007 as compared to 2006, primarily as a result of growth in our DSL Internet access service of $5.8 million. This increase was partially offset by decreases in dial-up Internet revenue of $1.9 million. We believe the decline in dial-up Internet access service customers was the result of customer migration to broadband products such as our DSL service.

Other Services and Sales. Other services and sales revenues increased by $11.5 million, or 78.7%, for 2007 as compared to 2006. The revenue increase was in part due to growth of our CPE and data business, primarily as a result of our acquisition of Baker Communications in August 2006. Also contributing to the increase was $3.5 million of revenue from the lease of office space to another entity during 2007.

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Operating Costs and Expenses

The table below sets forth the components of our operating costs and expenses for 2007 as compared to 2006:

	For the year ended December 31,					Change
	2006			2007		Amount			Percent
	(dollars in thousands)
Operating Costs and Expenses:
Cost of services and sales (exclusive of items shown separately below)	$	66,528		$	78,246	$	11,718		17.6	%
Selling, general and administrative		46,336			42,227		(4,109	)	-8.9	%
Gain on sale of properties		(4,194	)		—		4,194		NA	%
Depreciation and amortization		47,736			48,992		1,256		2.6	%
Total operating costs and expenses	$	156,406		$	169,465	$	13,059		8.3	%

Cost of Services and Sales. Cost of services and sales increased $11.7 million, or 17.6%, for 2007 as compared to 2006. The increase was principally due to growth of our CPE and data business, primarily as a result of our acquisition of Baker Communications in August 2006. Additionally, the operating costs for the newly acquired corporate headquarters facilities contributed to the increase in cost of services and sales.

Selling, General and Administrative. Selling, general and administrative expenses decreased $4.1 million, or 8.9%, for 2007 as compared to 2006. The 2006 period included a pension settlement charge of approximately $3.0 million. During the second quarter of 2007, the Company amended its postretirement welfare plan. The amendment reduced expense $1.1 million compared to 2006.

Gain on sale of Properties. The 2006 period included a $4.2 million gain on the sale of exchanges.

Depreciation and Amortization. Depreciation and amortization increased $1.3 million, or 2.6%, for 2007 as compared to 2006. The increase was primarily due to depreciation and amortization related to Montezuma Mutual Telephone Company and Baker Communications, which were acquired in July 2006 and August 2006, respectively.

Other Income (Expense)

The table below sets forth other income (expense) for 2007 as compared to 2006:

	For the year ended December 31,						Change
	2006			2007			Amount			Percent
	(dollars in thousands)
Other Income (Expense)
Interest and dividend income	$	953		$	928		$	(25	)	-2.6	%
Interest expense		(31,708	)		(31,885	)		(177	)	0.6	%
Other, net		(572	)		(719	)		(147	)	25.7	%
Total other expense, net	$	(31,327	)	$	(31,676	)	$	(349	)	1.1	%

Interest and Dividend Income. Interest and dividend income decreased $25,000, or 2.6% for 2007 as compared to 2006, primarily due to lower dividend income.

Interest Expense. Interest expense increased $177,000, or 0.6%, for 2007 as compared to 2006 principally as a result of higher interest rates on our variable rate debt.

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Other, Net. Other, net was a net expense of $719,000 for 2007, compared to $572,000 in 2006.

Income Tax Expense

Income tax expense increased $8.6 million to $20.9 million for 2007 as compared to 2006.

A valuation allowance had been recorded at December 31, 2005 for our deferred tax assets that expire over time to the extent that they exceeded the net deferred tax assets and liabilities resulting from reversing temporary differences. We determined that no valuation allowance was required for our deferred tax assets as of December 31, 2006 and thereafter. We determined that, based upon the evidence available as of December 31, 2007, 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. During the years ended December 31, 2006 and 2007, cash income taxes paid were $964,000, and $633,000, respectively, and relate to payments of alternative minimum tax (AMT).

At December 31, 2007, we had unused tax net operating loss carryforwards of approximately $159.8 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 $41 million annually through June 2015.

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.

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

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

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 2008 and 2007, cash provided by operating activities was $88.6 million and $100.2 million, respectively.

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

On November 21, 2008, the Company announced a definitive agreement to acquire substantially all of the assets of Sherburne Tele Systems, Inc. (“Sherburne”) for a total purchase price of $80.6 million, subject to certain adjustments and regulatory approvals. Sherburne is a closely held telecommunications company headquartered in Big Lake, Minnesota, less than 30 miles from the headquarters of Bishop Communications, which we acquired on July 18, 2008. The Company intends to fund the acquisition of Sherburne with the

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proceeds of $75.0 million of new term debt issued under our existing credit facilities, borrowings on our revolving credit facility and cash on hand. The new term debt is expected to bear interest per annum at a LIBOR rate plus 2.0% and will mature in November 2011.

Our ability to service our indebtedness will depend on our ability to generate cash in the future. We are not required to make any scheduled principal payments on Term Loans B, C and D, which will mature in 2011. However, we may be required to make annual mandatory prepayments under our credit facilities with a portion of our available cash. We will need to refinance all or a portion of our indebtedness on or before maturity in 2011. Debt issued by EN-TEL, of approximately $13.0 million, required principal payments of $599,000 in 2008, and will have principal payments of $1.2 million in 2009, $1.3 million in 2010, $1.4 million in 2011, $1.5 million in 2012, $1.6 million in 2013 and $5.3 million thereafter.

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

We have historically funded our operations and capital expenditure requirements primarily with cash from operations and our revolving line of credit. The following table summarizes our short-term liquidity and Adjusted Total Debt and Adjusted EBITDA, as defined in our credit agreement, as of December 31, 2007 and 2008:

	As of December 31,
	2007			2008
	(in thousands)
Short-Term Liquidity:
Current assets	$	47,454		$	42,020
Current liabilities		(68,531	)		(92,280	)
Net working capital deficit	$	(21,077	)	$	(50,260	)
Cash and cash equivalents	$	21,919		$	11,605
Availablity on revolving credit facility	$	82,000		$	61,000
Adjusted Total Debt:
Long-term debt	$	477,778		$	489,003
Current maturities of long-term debt		—			1,219
Revolving credit facility		18,000			39,000
Total debt		495,778			529,222
Minus:
RTFC Capital Certificates	$	(7,778	)	$	(7,778	)
Cash and cash equivalents		(21,919	)		(11,605	)
Adjusted Total Debt	$	466,081		$	509,839

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	Year Ended December 31,
	2006			2007			2008
	(in thousands)
Adjusted EBITDA:
Net income	$	34,043		$	29,315		$	23,149
Income tax expense		12,309			20,945			17,345
Interest expense		31,708			31,885			31,444
Depreciation and amortization		47,736			48,992			53,694
Unrealized losses (gains) on financial derivatives		572			719			(314	)
Non-cash stock-based compensation expense		2,354			2,687			3,553
Extraordinary or unusual (gains) losses		—			—			—
Non-cash portion of RTFC Capital Allocation		(211	)		(280	)		(560	)
Other non-cash losses (gains)		—			—			—
Loss (gain) on disposal of assets not in ordinary course		(4,194	)		—			—
Transaction costs		—			—			—
Adjusted EBITDA	$	124,317		$	134,263		$	128,311

The reductions in current assets and increase in current liabilities from December 31, 2007 to December 31, 2008 were primarily due to the use of cash and cash equivalents and borrowings on the revolving credit facility to acquire Bishop Communications, and to acquire our wireless licenses.

The following table summarizes our sources and uses of cash for the years ended December 31, 2006, 2007 and 2008:

	For the year ended December 31,
Description	2006			2007			2008
	(in thousands)
Net Cash Provided by (Used in)
Operating activities	$	89,493		$	100,201		$	88,556
Investing activities		(44,423	)		(26,903	)		(67,204	)
Financing activities		(58,239	)		(64,992	)		(31,666	)

Cash Provided by Operating Activities

For the years ended December 31, 2006, 2007, and 2008, cash provided by operating activities was $89.5 million, $100.2 million, and $88.6 million, respectively. The increase of $10.7 million for 2007 as compared to 2006 was primarily attributable to the funds received related to the resolution of certain network access disputes in 2007 and a pension contribution in 2006. 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.

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Cash Used in Investing Activities

The table below sets forth the components of cash used in investing activities for the years ended December 31, 2006, 2007, and 2008:

	As of December 31,
	2006			2007		2008
	(in thousands)
Network and support assets	$	24,120		$	21,078	$	22,960
Other		4,002			5,825		5,206
Total capital expenditures		28,122			26,903		28,166
Business acquisitions, net of cash acquired		18,115			—		33,100
Purchase of wireless licenses		11,473			—		5,938
Proceeds from sale of properties		(13,287	)		—		—
Total	$	44,423		$	26,903	$	67,204

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

We expect that total capital expenditures, excluding those associated with the Sherburne acquisition, will be between approximately $25.0 million to $27.0 million in fiscal 2009. We expect to fund all of these capital expenditures through cash generated by our operations. Our capital expenditures can fluctuate from quarter to quarter, and are impacted to some extent by factors beyond our control, such as customer demand, the level of construction activity in our region, and weather.

On July 18, 2008, we completed the purchase of Bishop Communications for a total purchase price of $33.1 million net of cash received and assumed debt of $13.0 million, subject to potential working capital adjustments.

During the first quarter of 2008, we participated in the FCC’s auction of 700 MHz Band licenses (Auction No. 73) after depositing $1.9 million with the FCC. We were the high bidder on three Cellular Market Area licenses in the 704-710 MHz, and 734-740 MHz bands. We submitted the balance of our $5.9 million total winning bids on April 17, 2008. The FCC issued the licenses during the second quarter of 2008.

We currently hold 15 FCC Advanced Wireless Service licenses and hold three 700 MHz licenses in Iowa. Our ownership of these licenses subjects us to FCC regulation of the wireless services we may choose to provide and the technical operating characteristics of the network equipment we may utilize. In addition, our right to renew these licenses depends on our compliance with build-out requirements promulgated by the FCC. For the 700 MHz licenses, which were acquired in 2008, 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, which were acquired in 2006, 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 of 700 MHz licenses, the network we may build or the services we may provide over the period of time we may hold the licenses.

Cash Used in Financing Activities

For the year ended December 31, 2008, net cash used in financing 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. For the year ended December 31, 2007, net cash used in financing was $65.0 million, consisting primarily of dividends on common stock of $51.5 million and a reduction in the balance

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outstanding on the revolving credit facility of $13.0 million. For the year ended December 31, 2006, net cash used in financing was $58.2 million, consisting primarily of dividends on common stock of $51.0 million and a reduction in the balance outstanding on the revolving credit facility of $9.0 million.

Long-Term Debt and Revolving Credit Facilities

	As of December 31, 2008
	(in thousands)
Total Long-Term Debt:
Iowa Telecom senior secured term loans	$	477,778
EN-TEL Communications, LLC notes payable		12,444
Total Debt		490,222
Current Maturities of long-term debt		(1,219	)
Long –Term Debt	$	489,003

Iowa Telecom Credit Facilities

As of December 31, 2008, we had outstanding $477.8 million of senior debt under the term facilities, and had $39.0 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, 2008, $39.0 million was outstanding on the revolving credit facility and $61.0 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, 2008, we had $39.0 million outstanding under LIBOR elections at an average 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, 2008, $350.0 million was outstanding under Term Loan B based upon a LIBOR election effective through March 30, 2009, at an all-in rate of 3.22%. 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, 2008, the interest rate on the remaining $50.0 million was based upon a LIBOR election effective through January 12, 2009 at an all-in rate of 3.19%.

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%.

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

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

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

The Iowa Telecom credit facilities require us, subject to certain exceptions, to prepay outstanding loans under the credit facilities to the extent of net cash proceeds received from the following: issuance of certain indebtedness; proceeds of certain asset sales; and casualty insurance proceeds. The credit facilities further require us, subject to certain exceptions, to make prepayments under the credit facilities equal to 50% of any net increase in the following: distributable cash during a dividend suspension period, as defined; and cumulative distributable cash, as defined, during the fiscal year less the cumulative reductions of revolving loans (adjusted to exclude the effects of borrowings to fund permitted acquisitions) through such period, with reductions to the percentage to be determined based on improvements in certain credit ratios. As of December 31, 2008, no prepayment amounts were due under these provisions.

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

In addition, the financial covenants under the Iowa Telecom credit facilities specify, among other things, certain fixed charge coverage ratios and a maximum total leverage ratio, as defined, all of which we were in compliance with as of December 31, 2008.

EN-TEL Debt

On July 18, 2008, the Company acquired Bishop Communications Corporation (“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 7.19%. The notes have a fixed interest rate for specific periods of time ranging from December 2008 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 mature in 2015 and 2018. Principal payments of $599,000 were made in 2008. The remaining scheduled payments are $1.2 million in 2009, $1.3 million in 2010, $1.4 million in 2011, $1.5 million in 2012, $1.6 million in 2013 and $5.3 million thereafter.

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

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Interest Rate Swaps

On August 26, 2005, the Company amended the 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 that we 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, 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 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 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.

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 Board is currently considering such a challenge based on a February 20, 2008, MCImetro Transmission Access Transmission Services LLC, d/b/a Verizon Access Transmission Services and MCI Communications Services, Inc. d/b/a Verizon Business Services complaint filed with the 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 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 Iowa Utilities Board denied our motion to

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dismiss on November 14, 2008, a decision we cannot appeal until the Board issues a decision on the merits. The final round of testimony will be filed by Verizon on April 2, 2009, with a hearing to be held starting during the first week of May 2009. We cannot predict when this proceeding will conclude and what the outcome may be.

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

In June 2008, record flooding damaged a few of the 423 ILEC communities served by Iowa Telecom. Through December 31, 2008, we believe that we have lost approximately 250 access lines that can be directly attributed to the flooding. Additionally, we believe that our operating results for the twelve months ended December 31, 2008 were negatively impacted by approximately $400,000, which is comprised of lost revenues, increased labor costs from overtime and a shift of capital efforts into repair efforts, along with other repair and prevention costs. We estimate that we have also incurred approximately $1.0 million of capital expenditures related to the flooding through December 31, 2008. However, we expect that amount may increase over time as the infrastructure is rebuilt in the impacted communities. We believe that we will recover a portion of the costs and expenditures described from our insurance carrier, but have not finalized an insurance claim. No insurance recovery has been recorded in the financial statements.

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

During the fourth quarter of 2008, the Company modified the agreement with the Communications Workers of America. The modification resulted in 26 employees opting out of the retiree medical plan effective November 30, 2008. This in turn triggered a plan curtailment under FAS 106 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. This resulted in a curtailment service ratio of 66.2% and a curtailment gain of $2.5 million in the fourth quarter of 2008.

Obligations and Commitments

Our ongoing capital commitments include capital expenditures and debt service requirements. For 2008, our capital expenditures were $28.2 million; see “—Liquidity and Capital Resources—Cash Used in Investing Activities.”

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The following table sets forth our contractual obligations as of December 31, 2008, together with cash payments due in each period indicated:

	Payments Due by Period
Obligation	Total		2009		2010-2011		2012-2013		2014 and after
	(dollars in thousands)
Current Debt:
Revolving credit facility(1)	$	39,000	$	—	$	39,000	$	—	$	—
Current maturities of long-term debt		1,219		1,219		—		—		—
Long-Term Debt:
Senior debt payments		477,778		—		477,778		—		—
Interest Payments(2)		73,026		25,961		47,065		—		—
EN-TEL debt payments		11,225		—		2,731		3,175		5,319
Operating Lease Payments		812		243		239		173		157
Total Contractual Obligations(3)	$	603,060	$	27,423	$	566,813	$	3,348	$	5,476

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

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

(3) Excludes commitments for Sherburne of $80.6 million, subject to certain future adjustments and regulatory approvals.

As of December 31, 2008, no letters of credit were outstanding.

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

Critical Accounting Policies

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

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

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We performed an annual impairment review of goodwill and indefinite-lived intangible assets as required by Statement of Financial Accounting Standards (“SFAS”) No. 142, Goodwill and Other Intangible Assets, as of August 31, 2008, primarily using discounted cash flow and market value of debt methodologies. No impairment of goodwill or other long-lived assets resulted from the annual valuation.

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

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

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

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

The swap agreements are accounted for in accordance with Statement of Financial Accounting Standard SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, and qualify for cash flow hedge accounting of a variable-rate debt. In accordance with this standard, all changes in fair market value of the swap instruments attributable to hedge ineffectiveness are reported currently in earnings and are recorded in the Other Income (Expense) section of the Company’s Consolidated Statements of Income. Changes in fair market value of the swap instruments attributable to hedge effectiveness are recorded, net of income tax effects, in the Accumulated Other Comprehensive Income section of the Company’s Consolidated Statements of Stockholders’ Equity and Comprehensive Income.

In the event that the swap agreements no longer qualify for cash flow hedge accounting treatment, all changes in fair market value would be reported currently in earnings and would be recorded in the Other Income (Expense) section of the Company’s Consolidated Statements of Income. Additionally, the net gain or loss remaining in accumulated other comprehensive income would be reclassified into earnings over the remainder of the term of the swap agreements. For the period ended December 31, 2008, the Company would have recognized in earnings a loss of $18.1 million, had the interest rate swaps ceased to qualify for hedge accounting.

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. The discount rate was derived from a yield curve created by a nationally recognized financial institution. The fair value of the interest rate swap is recorded in the Other Long-Term Liabilities section of the Company’s Consolidated Balance Sheets.

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Off-Balance Sheet Risk and Concentration of Credit Risk

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

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

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

New Accounting Pronouncements

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

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (“SFAS 157”). SFAS 157 defines fair value, establishes a framework for measuring fair value and expands disclosure of fair value measurements. SFAS 157 applies under other accounting pronouncements that require or permit fair value measurements and accordingly, does not require any new fair value measurements. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007. Adoption of SFAS 157 on January 1, 2008, did not have a material impact on the Company’s financial position, results of operations or cash flows.

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (“SFAS 159”). SFAS 159 permits entities to choose, at specified election dates, to measure eligible items at fair value and to report in earnings unrealized gains and losses on those items for which the fair value option has been elected. SFAS 159 also requires entities to display the fair value of those assets and liabilities on the face of the balance sheet. SFAS 159 establishes presentation and disclosure requirements designed to facilitate comparisons between entities that choose different measurement attributes for similar types of assets and liabilities. SFAS 159 is effective as of the beginning of an entity’s first fiscal year beginning after November 15, 2007. Early adoption is permitted as of the beginning of the previous fiscal year provided that the entity makes that choice in the first 120 days of that fiscal year and also elects to apply the provisions of SFAS 157. The Company evaluated the provisions of this statement and did not elect to adopt the fair value option on any financial instruments or other items held by the Company on January 1, 2008.

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

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In June 2007, the Emerging Issues Task Force (“EITF”) reached consensus on Issue No. 06-11, Accounting for Income Tax Benefits of Dividends on Share-Based Payment Awards. EITF Issue No. 06-11 requires that the tax benefit related to dividend equivalents paid on restricted stock units that are expected to vest be recorded as an increase to additional paid-in capital. The Company currently accounts for this tax benefit as a reduction to its income tax provision. EITF Issue No. 06-11 is to be applied prospectively for tax benefits on dividends declared in fiscal years beginning after December 15, 2007. Adoption of EITF Issue No. 06-11 on January 1, 2008, did not have a material impact on the Company’s financial position, results of operations or cash flows.

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

In December 2007, the FASB issued SFAS No. 141(R), Business Combinations (“SFAS 141(R)”). SFAS 141(R) requires an acquiring entity to recognize all the assets acquired and liabilities assumed in a transaction at the acquisition-date fair value, with limited exceptions, and also includes a substantial number of new disclosure requirements. SFAS 141(R) applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. Early adoption is prohibited. SFAS 141(R) requires acquisition related costs to be expensed as incurred. Acquisition related costs of $868,000 deferred pursuant to Statement of Financial Accounting Standard No. 141 (“SFAS 141”) on acquisitions that will not close until after SFAS 141(R) is adopted will be expensed upon adoption of SFAS 141(R) during the first quarter of 2009. Other than expensing acquisition costs deferred pursuant to SFAS 141 as discussed above, the Company does not expect the adoption of this pronouncement to have a material impact on its financial position, results of operations and cash flows.

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

ITEM 7A. Quantitative And Qualitative Disclosures About Market Risk

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

Under the terms of our credit facilities, as amended, our long-term secured debt facilities will mature 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 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

62

agreements and entered in to 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.

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

We are exposed to interest rate risk, resulting primarily from fluctuations in LIBOR, with respect to $50.0 million of borrowings under Term Loan B through November 2011. Similarly, changes in LIBOR will be the primary source of interest rate risk we face with respect to the $39.0 million of borrowings drawn under the revolving credit facility at December 31, 2008. 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.

With respect to our $12.4 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. The interest rate risk from the dates of the current interest rate locks, which have expiration dates from 2009 through 2013, until the notes mature in 2018.

A one percent change in the underlying interest rates for the variable rate debt that was outstanding on December 31, 2008 would have an impact of approximately $890,000 per year on our interest expense while our fixed rates and swaps are in place.

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of

Iowa Telecommunications Services, Inc. and subsidiaries

Newton, Iowa

We have audited the accompanying consolidated balance sheets of Iowa Telecommunications Services, Inc. and subsidiaries (the “Company”) as of December 31, 2008 and 2007, and the related consolidated statements of income, stockholders’ equity and comprehensive income, and of cash flows for each of the three years in the period ended December 31, 2008. 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 Telecommunications Services, Inc. and subsidiaries as of December 31, 2008 and 2007, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2008, in conformity with accounting principles generally accepted in the United States of America.

As discussed in Note 1 to the financial statements, the Company adopted Statement of Financial Accounting Standards No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, as of December 31, 2006.

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, 2008, 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 27, 2009 expressed an unqualified opinion on the Company’s internal control over financial reporting.

/s/ DELOITTE & TOUCHE LLP

Des Moines, Iowa

February 27, 2009

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IOWA TELECOMMUNICATIONS SERVICES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

AS OF DECEMBER 31, 2007 AND 2008

(Dollars in Thousands, Except Per Share Amounts)

	2007			2008
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	21,919		$	11,605
Accounts receivable, net		20,252			23,320
Inventories		2,995			3,946
Prepayments and other current assets		2,288			3,149
Total Current Assets		47,454			42,020
PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment		542,949			601,782
Accumulated depreciation		(264,284	)		(310,936	)
Property, Plant and Equipment, net		278,665			290,846
GOODWILL		466,554			473,984
INTANGIBLE ASSETS AND OTHER, NET		24,888			36,904
INVESTMENT IN AND RECEIVABLE FROM THE RURAL TELEPHONE FINANCE COOPERATIVE		13,998			16,174
Total Assets	$	831,559		$	859,928
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Revolving credit facility	$	18,000		$	39,000
Accounts payable		9,062			11,017
Advanced billings and customer deposits		9,365			8,615
Accrued and other current liabilities		32,104			32,429
Current maturities of long-term debt		—			1,219
Total Current Liabilities		68,531			92,280
LONG-TERM DEBT		477,778			489,003
DEFERRED TAX LIABILITIES		35,255			47,575
OTHER LONG-TERM LIABILITIES		7,028			28,326
Total Liabilities		588,592			657,184
MINORITY INTEREST IN CONSOLIDATED SUBSIDIARY		—			287
COMMITMENTS AND CONTINGENCIES (Note 16)
STOCKHOLDERS’ EQUITY:
Preferred stock, $0.01 par value, 50,000,000 shares authorized, no shares issued and outstanding		—			—
Common stock, $0.01 par value, 100,000,000 shares authorized, 31,440,215 and 31,500,687 issued and outstanding, respectively		314			315
Additional paid-in capital		324,170			327,264
Retained deficit		(82,154	)		(110,814	)
Accumulated other comprehensive income (loss)		637			(14,308	)
Total Stockholders’ Equity		242,967			202,457
Total Liabilities and Stockholders’ Equity	$	831,559		$	859,928

See notes to consolidated financial statements.

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IOWA TELECOMMUNICATIONS SERVICES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

FOR THE YEARS ENDED DECEMBER 31, 2006, 2007 AND 2008

(Dollars in Thousands, Except Per Share Amounts)

	2006			2007			2008
REVENUE AND SALES	$	234,085		$	251,401		$	246,965
OPERATING COSTS AND EXPENSES:
Cost of services and sales (exclusive of items shown separately below)		66,528			78,246			78,091
Selling, general and administrative		46,336			42,227			44,714
Gain on sale of properties		(4,194	)		—			—
Depreciation and amortization		47,736			48,992			53,694
Total Operating Costs and Expenses		156,406			169,465			176,499
OPERATING INCOME		77,679			81,936			70,466
OTHER INCOME (EXPENSE):
Interest and dividend income		953			928			938
Interest expense		(31,708	)		(31,885	)		(31,444	)
Other, net		(572	)		(719	)		429
Total Other Expense, net		(31,327	)		(31,676	)		(30,077	)
EARNINGS BEFORE INCOME TAXES		46,352			50,260			40,389
INCOME TAX EXPENSE		12,309			20,945			17,345
NET INCOME BEFORE MINORITY INTEREST		34,043			29,315			23,044
MINORITY INTEREST		—			—			105
NET INCOME	$	34,043		$	29,315		$	23,149
EARNINGS PER SHARE:
Basic	$	1.09		$	0.93		$	0.74
Diluted	$	1.06		$	0.91		$	0.72
Dividends Declared Per Share	$	1.62		$	1.62		$	1.62

See notes to consolidated financial statements.

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IOWA TELECOMMUNICATIONS SERVICES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND

COMPREHENSIVE INCOME

FOR THE YEARS ENDED DECEMBER 31, 2006, 2007 AND 2008

(Dollars in Thousands, Except Per Share Amounts)

	Common Shares		Common Stock		Additional Paid-In Capital			Retained Deficit			Accumulated Other Comprehensive Income (Loss)			Total
BALANCE, December 31, 2005	31,065,963		$	311	$	317,877		$	(42,874	)	$	5,217		$	280,531
Net Income	—			—		—			34,043			—			34,043
Unrealized loss on derivatives, net of taxes	—			—		—			—			(3,388	)		(3,388	)
Minimum pension liability adjustment, net of taxes	—			—		—			—			5,192			5,192
Total comprehensive income	—			—		—			34,043			1,804			35,847
Compensation from compensatory stock plans	779			—		2,354			—			—			2,354
Exercise of employee stock options	312,928			3		1,737			—			—			1,740
Income tax benefit related to stock compensation	—			—		48			—			—			48
Dividends declared ($1.62 per share)	—			—		—			(51,145	)		—			(51,145	)
Initial impact upon adoption of SFAS No. 158
Pension, net of taxes	—			—		—			—			(1,071	)		(1,071	)
Other postretirement obligations, net of taxes	—			—		—			—			(605	)		(605	)
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 taxes	—			—		—			—			(8,629	)		(8,629	)
Post retirement benefit plan adjustment, net of taxes	—			—		—			—			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	—			—		—			23,149			—			23,149
Unrealized loss on derivatives, net of taxes	—			—		—			—			(11,935	)		(11,935	)
Post retirement benefit plan adjustment, net of taxes	—			—		—			—			(3,010	)		(3,010	)
Total comprehensive income (loss)	—			—		—			23,149			(14,945	)		8,204
Compensation from compensatory stock plans	87,825			1		3,552			—			—			3,553
Shares reacquired	(27,353	)		—		(488	)		—			—			(488	)
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	)	$	202,457

See notes to consolidated financial statements.

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IOWA TELECOMMUNICATIONS SERVICES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31, 2006, 2007 AND 2008

(Dollars in Thousands)

	2006			2007			2008
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	34,043		$	29,315		$	23,149
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation		45,627			47,243			51,747
Amortization of intangible assets		2,109			1,749			1,947
Amortization of debt issuance costs		591			591			640
Gain on sale of properties		(4,194	)		—			—
Deferred income taxes		11,680			19,973			17,286
Non-cash stock based compensation expense		2,354			2,687			3,553
Net loss allocated to minority interests		—			—			(105	)
Changes in operating assets and liabilities, net of effects of business acquisitions:
Receivables		(199	)		576			(1,754	)
Inventories		(214	)		129			(15	)
Accounts payable		(1,742	)		(503	)		1,267
Pension and postretirement benefit plan obligations		(3,250	)		(2,655	)		(4,147	)
Other assets and liabilities		2,688			1,096			(5,012	)
Net Cash Provided by Operating Activities		89,493			100,201			88,556
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures		(28,122	)		(26,903	)		(28,166	)
Business acquisitions (net of cash acquired)		(18,115	)		—			(33,100	)
Purchase of wireless licenses		(11,473	)		—			(5,938	)
Proceeds from sale of properties		13,287			—			—
Net Cash Used in Investing Activities		(44,423	)		(26,903	)		(67,204	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in revolving credit facility		(9,000	)		(13,000	)		21,000
Proceeds from exercise of stock options		1,740			21			—
Capital contributions from investees		—			—			520
Shares reacquired		—			(561	)		(488	)
Payment of long-term debt		—			—			(599	)
Payment of debt issuance costs		—			—			(351	)
Dividends paid		(50,979	)		(51,452	)		(51,748	)
Net Cash Used in Financing Activities		(58,239	)		(64,992	)		(31,666	)
NET CHANGE IN CASH AND CASH EQUIVALENTS		(13,169	)		8,306			(10,314	)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD		26,782			13,613			21,919
CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	13,613		$	21,919		$	11,605
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest	$	31,024		$	31,269		$	31,609
Cash paid for income taxes	$	964		$	633		$	399

SUPPLEMENTAL NONCASH INVESTING AND FINANCING ACTIVITIES:

• Dividends on common stock of $12,846 were declared on December 15, 2006 for shareholders of record as of December 29, 2006 and paid on January 16, 2007.

• 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.

• Includes the assumption of EN-TEL debt of $13,021 in consideration with the acquisition of Bishop Communications.

See notes to consolidated financial statements.

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IOWA TELECOMMUNICATIONS SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2006, 2007 AND 2008

1. ORGANIZATION

Business Description—Iowa Telecommunications Services, Inc. and subsidiaries (“Iowa Telecom” or the “Company”) is an integrated telecommunications network serving approximately 242,100 total access lines in the 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.

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

Iowa Telecommunications Services, Inc., the parent company, is an operating company. For 2008, the parent company represents approximately 80% of total revenues, approximately 94% of net income and approximately 90% of total assets of the consolidated company. The subsidiaries, individually and in the aggregate represent less than 20% of consolidated revenue, earnings and total assets.

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.

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 and recognized in revenue during the period services are provided. 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

69

IOWA TELECOMMUNICATIONS SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

FOR THE YEARS ENDED DECEMBER 31, 2006, 2007 AND 2008

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.

Estimating Valuation Allowances—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. The economic asset lives used are as follows: buildings—35 years; cable and wire—18-25 years; conduit systems—40 years; switching and circuit equipment—12-13 years; and other property—5-15 years. 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 Statement of Financial Accounting Standard (“SFAS”) No. 142, Goodwill and Other Intangible Assets. 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 and debt methodologies. Intangible assets with definite lives include the value assigned to customer base and easements at the date of acquisition, which are being amortized using a straight-line method over 6 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 SFAS No. 142 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

70

IOWA TELECOMMUNICATIONS SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

FOR THE YEARS ENDED DECEMBER 31, 2006, 2007 AND 2008

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 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 footnote 10, Income Taxes, for further discussion.

Stock-Based Compensation—The Company applies SFAS No. 123 (Revised), Share-Based Payment (“SFAS 123(R)”) 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 short-term notes payable approximate their carrying values unless otherwise indicated. The carrying value of receivables and accounts payable 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 SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, 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. Changes in fair market value of the swap instruments attributable to hedge effectiveness are recorded, net of income tax effects, in the Accumulated Other Comprehensive Income section of the Company’s Consolidated Statements of Stockholders’ Equity and Comprehensive Income. 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 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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

FOR THE YEARS ENDED DECEMBER 31, 2006, 2007 AND 2008

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 September 2006, the Financial Accounting Standards Board (“FASB”) released SFAS No.158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements 87, 88, 106, and 132 (“SFAS 158”). SFAS 158 requires that the Company recognize the over-funded or under-funded status of its defined benefit and retiree medical plans as an asset or liability in its 2006 year-end balance sheet, with changes in the funded status recognized through comprehensive income in the year in which they occur. The Company has adopted the recognition and disclosure provisions of SFAS 158 as of December 31, 2006. See footnote 13, Employee Benefit Plans, for further discussion.

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

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (“SFAS 157”). SFAS 157 defines fair value, establishes a framework for measuring fair value and expands disclosure of fair value measurements. SFAS 157 applies under other accounting pronouncements that require or permit fair value measurements and accordingly, does not require any new fair value measurements. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007. Adoption of SFAS 157 on January 1, 2008, did not have a material impact on the Company’s financial position, results of operations or cash flows.

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (“SFAS 159”). SFAS 159 permits entities to choose, at specified election dates, to measure eligible items at fair value and to report in earnings unrealized gains and losses on those items for which the fair value option has been elected. SFAS 159 also requires entities to display the fair value of those assets and liabilities on the face of the balance sheet. SFAS 159 establishes presentation and disclosure requirements designed to facilitate comparisons between entities that choose different measurement attributes for similar types of assets and liabilities. SFAS 159 is effective as of the beginning of an entity’s first fiscal year beginning after November 15, 2007. Early adoption is permitted as of the beginning of the previous fiscal year provided that the entity makes that choice in the first 120 days of that fiscal year and also elects to apply the provisions of SFAS 157. The Company evaluated the provisions of this statement and did not elect to adopt the fair value option on any financial instruments or other items held by the Company on January 1, 2008.

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

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IOWA TELECOMMUNICATIONS SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

FOR THE YEARS ENDED DECEMBER 31, 2006, 2007 AND 2008

In June 2007, the EITF reached consensus on Issue No. 06-11, Accounting for Income Tax Benefits of Dividends on Share-Based Payment Awards. EITF Issue No. 06-11 requires that the tax benefit related to dividend equivalents paid on restricted stock units that are expected to vest be recorded as an increase to additional paid-in capital. The Company currently accounts for this tax benefit as a reduction to its income tax provision. EITF Issue No. 06-11 is to be applied prospectively for tax benefits on dividends declared in fiscal years beginning after December 15, 2007. Adoption of EITF Issue No. 06-11 on January 1, 2008, did not have a material impact on the Company’s financial position, results of operations or cash flows.

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

In December 2007, the FASB issued SFAS No. 141(R), Business Combinations (“SFAS 141(R)”). SFAS 141(R) requires an acquiring entity to recognize all the assets acquired and liabilities assumed in a transaction at the acquisition-date fair value, with limited exceptions and also includes a substantial number of new disclosure requirements. SFAS 141(R) applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. Early adoption is prohibited. SFAS 141(R) requires acquisition related costs to be expensed as incurred. The Company anticipates that acquisition related costs deferred pursuant to Statement of Financial Accounting Standard No. 141 (“SFAS 141”) on acquisitions that will not close until after SFAS 141(R) is adopted of $868,000 will be expensed upon adoption of SFAS 141(R) during the first quarter of 2009. Other than expensing acquisition costs deferred pursuant to SFAS 141 as discussed above, the Company does not expect the adoption of this pronouncement to have a material impact on its financial position, results of operations and cash flows.

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

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IOWA TELECOMMUNICATIONS SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

FOR THE YEARS ENDED DECEMBER 31, 2006, 2007 AND 2008

2. EARNINGS PER SHARE

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

	For the Years Ended December 31,
	2006		2007		2008
	(in thousands except per share amounts)
Net Income	$	34,043	$	29,315	$	23,149
Weighted average shares outstanding—basic		31,221		31,415		31,477
Diluted shares outstanding:
Weighted average shares outstanding		31,221		31,415		31,477
Add shares issuable upon exercise of stock options, net		580		540		579
Add unvested compensatory stock shares		303		90		66
Weighted average shares outstanding—diluted		32,104		32,045		32,122
Earnings Per Share:
Basic	$	1.09	$	0.93	$	0.74
Diluted	$	1.06	$	0.91	$	0.72

As of December 31, 2006, 2007 and 2008, total options outstanding were 682,579, 677,579 and 677,579, respectively.

3. REVENUES

The table below sets forth the components of our revenues and sales for the years ended December 31, 2006, 2007 and 2008:

	Year Ended December 31,
	2006		2007		2008
	(in thousands)
Local services	$	76,428	$	73,918	$	71,131
Network access services		96,217		100,636		89,420
Toll services		21,804		21,213		23,010
Data and internet services		25,016		29,512		35,163
Other services and sales		14,620		26,122		28,241
Total revenues and sales	$	234,085	$	251,401	$	246,965

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IOWA TELECOMMUNICATIONS SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

FOR THE YEARS ENDED DECEMBER 31, 2006, 2007 AND 2008

4. ACCOUNTS RECEIVABLE

Accounts receivable consisted of the following at December 31:

	2007			2008
	(in thousands)
Customers	$	15,132		$	15,674
Connecting companies		5,125			7,324
Other		600			1,576
Allowance for doubtful accounts		(605	)		(1,254	)
Total	$	20,252		$	23,320

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

	Beginning Balance		Additional Charges to Income		Deduction From Reserve			Other(1)		Ending Balance
	(in thousands)
Year ended December 31, 2006	$	1,084	$	1,224	$	(1,145	)	$	—	$	1,163
Year ended December 31, 2007		1,163		53		(611	)		—		605
Year ended December 31, 2008		605		430		(518	)		737		1,254

(1) Includes an addition to the reserve of $737,000 due to the acquisition of Bishop on July 18, 2008.

The Company grants credit to its customers in the normal course of business. At December 31, 2007 and 2008, the Company had outstanding trade receivables from telecommunications companies which totaled $5.1 million and $7.3 million, respectively. During 2006, the Company had one customer that represented approximately 11% of total revenue and sales. During 2007 and 2008, the Company did not have any customers that represented more than 10% of total revenue and sales.

5. PROPERTY, PLANT AND EQUIPMENT

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

	Estimated Useful Lives	2007			2008
		(in thousands)
Land	—	$	3,796		$	4,788
Buildings	35 years		26,418			31,504
Plant and equipment	12-40 years		489,514			540,432
Furniture, vehicles and other	5-15 years		13,348			15,209
Construction in progress	18-25 years		9,873			9,849
Total property, plant and equipment			542,949			601,782
Less accumulated depreciation			(264,284	)		(310,936	)
Total property, plant and equipment, net		$	278,665		$	290,846

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IOWA TELECOMMUNICATIONS SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

FOR THE YEARS ENDED DECEMBER 31, 2006, 2007 AND 2008

6. GOODWILL, INTANGIBLE ASSETS AND OTHER

The Company performed its annual impairment review of goodwill and indefinite-lived intangible assets as required by SFAS No. 142, Goodwill and Other Intangible Assets, as of August 31, 2007 and 2008.

Total goodwill at December 31, 2006 and 2007 was $466.6 million. During 2008, the purchase of Bishop Communications Corporation increased goodwill by $7.4 million and intangibles and other assets by $7.7 million on the acquisition date, which resulted in a goodwill balance of $474.0 million at December 31, 2008. The allocation of the purchase price for Bishop Communications is preliminary as of December 31, 2008.

Intangible assets and other consisted of the following at December 31:

	Life	2008
		Cost		Accumulated Amortization			Net Book Value
		(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

	Life	2007
		Cost		Accumulated Amortization			Net Book Value
		(in thousands)
Definite-lived intangible assets	6-20 years	$	14,755	$	(4,966	)	$	9,789
Debt issuance costs	7 years		4,138		(1,836	)		2,302
Wireless licenses	—		11,753		—			11,753
Other assets	NA		1,044		—			1,044
Total		$	31,690	$	(6,802	)	$	24,888

Amortization expense for definite-lived intangible assets was $2.1 million, $1.7 million and $1.9 million for the years ended December 31, 2006, 2007 and 2008, respectively. Amortization expense is calculated on the straight-line method unless there is a method that more accurately reflects the consumption of the benefit provided by the intangible asset. Estimated annual amortization expense for definite-lived-intangible assets for each of the next five years and cumulative thereafter is as follows (in thousands):

2009		$ 1,525
2010		1,233
2011		1,136
2012		987
2013		876
Thereafter		4,861
Total	$	10,618

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IOWA TELECOMMUNICATIONS SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

FOR THE YEARS ENDED DECEMBER 31, 2006, 2007 AND 2008

7. ACCRUED AND OTHER CURRENT LIABILITIES

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

	2007		2008
	(in thousands)
Property tax payable	$	8,414	$	8,312
Dividends payable		12,887		12,949
Accrued compensation		7,564		6,777
Other		3,239		4,391
Total	$	32,104	$	32,429

8. LONG-TERM DEBT

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

	2007		2008
	(in thousands)
Credit Facility Term Loan B	$	400,000	$	400,000
Credit Facility Term Loan C		70,000		70,000
Credit Facility Term Loan D		7,778		7,778
EN-TEL debt		—		12,444
		477,778		490,222
Less current portion		—		1,219
Long-term debt obligations, net of current portion	$	477,778	$	489,003

The aggregate maturities of long-term obligations for each of the next five years and thereafter subsequent to December 31, 2008 are as follows:

Year Ended December 31,	Term Loan B		Term Loan C		Term Loan D		EN-TEL Debt		Total
	(in thousands)
2009	$	—	$	—	$	—	$	1,219	$	1,219
2010		—		—		—		1,314		1,314
2011		400,000		70,000		7,778		1,417		479,195
2012		—		—		—		1,528		1,528
2013		—		—		—		1,647		1,647
Thereafter		—		—		—		5,319		5,319
Total	$	400,000	$	70,000	$	7,778	$	12,444	$	490,222

Iowa Telecom Long-Term Debt and Revolving Credit Facilities

As of December 31, 2008, the Company had outstanding $477.8 million of senior debt under the term facilities, and had $39.0 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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

FOR THE YEARS ENDED DECEMBER 31, 2006, 2007 AND 2008

$25 million). As of December 31, 2008, $39.0 million was outstanding on the revolving credit facility and $61.0 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, 2008, the Company had $39.0 million outstanding under LIBOR elections at an all-in rate of 2.6%. As of December 31, 2007, the Company had $18.0 million outstanding under a base rate election at an all-in rate of 8.25%.

Term Loan B is a $400.0 million senior secured term facility maturing in November 2011, bearing interest per annum at either (a) a LIBOR rate plus an applicable rate adder of 1.75% per annum or (b) a base rate election plus an applicable rate adder of 0.75% per annum. As of December 31, 2008, $350.0 million was outstanding under Term Loan B based upon a LIBOR election effective through March 30, 2009, at an all-in rate of 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, 2008, the interest rate on the remaining $50.0 million was based upon a LIBOR election effective through January 12, 2009, at an all-in rate of 3.19%.

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

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

As a condition of borrowing under Term Loans C and D, the Company is required to invest $7.8 million, representing 10% of the total amounts of Term Loans C and D, in Subordinated Capital Certificates (“SCCs”) of the Rural Telephone Finance Cooperative. 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 holds $5.5 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 $740,000, $543,000 and $501,000 for the years ended December 31, 2006, 2007 and 2008, 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.

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IOWA TELECOMMUNICATIONS SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

FOR THE YEARS ENDED DECEMBER 31, 2006, 2007 AND 2008

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. As of December 31, 2008, no prepayment amounts were due under these provisions.

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

In addition, the financial covenants under the 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, 2008.

EN-TEL Communications LLC (“EN-TEL”) Debt

On July 18, 2008, the Company acquired Bishop Communications Corporation (“Bishop Communications”). As part of the acquisition, the Company assumed debt of $13.0 million 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 currently bear interest at an average all-in fixed rate of 7.19%. The notes have a fixed interest rate for specific periods of time ranging from December 2008 through December 2013 and will thereafter be either at a variable interest rate or renegotiated at a fixed rate at the end of the specified period. The promissory notes mature in 2015 and 2018. Principal payments of $599,000 were made in 2008.

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.

Interest Rate Swap

On August 26, 2005, the Company amended the interest rate swap agreement that was originally entered into on November 4, 2004. The amended swap agreement resulted in two identical swap agreements which each fixed the interest rate the Company will pay on $175.0 million of indebtedness under Term Loan B, for a total swap notional value of $350.0 million. Effective September 26, 2008, the Company terminated one of its 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 of 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, the Company had 31,500,687 shares of common stock issued and outstanding.

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IOWA TELECOMMUNICATIONS SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

FOR THE YEARS ENDED DECEMBER 31, 2006, 2007 AND 2008

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 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.

10. INCOME TAXES

The Company’s provision for income taxes for the years ended December 31, 2006, 2007 and 2008 differed from the amounts determined by applying the statutory federal income tax rate of approximately 35% to income before taxes for the following reasons:

	2006			2007		2008
	(in thousands)
Expense at Federal Rate	$	16,223		$	17,591	$	14,135
Increase (Decrease) resulting from:
State income tax		1,864			3,190		2,607
Valuation allowance		(5,903	)		—		—
Other, net		125			164		603
Total income tax expense	$	12,309		$	20,945	$	17,345

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

	2006		2007		2008
	(in thousands)
Current Tax Expense (Benefit):
Federal	$	467	$	712	$	(90	)
State		162		260		149
Deferred Income Tax Expense:
Federal		9,942		17,032		13,424
State		1,738		2,941		3,862
Total income tax expense	$	12,309	$	20,945	$	17,345

Current income tax expense (benefit) for 2006, 2007 and 2008 was primarily due pursuant to alternative minimum tax requirements.

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IOWA TELECOMMUNICATIONS SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

FOR THE YEARS ENDED DECEMBER 31, 2006, 2007 AND 2008

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

	2007			2008
	(in thousands)
Deferred Tax Assets:
Net operating loss carryforward	$	65,984		$	58,998
Allowance for doubtful accounts		140			266
Alternative minimum tax credit carryforward		1,793			1,513
Stock-based compensation		1,932			2,776
Loss on interest rate swap		691			9,298
Other		639			1,554
Total	$	71,179		$	74,405
Deferred Tax Liabilities:
Depreciation and amortization	$	(101,711	)	$	(120,650	)
Other		(4,983	)		(1,486	)
Total	$	(106,694	)	$	(122,136	)
Net deferred tax liability	$	(35,515	)	$	(47,731	)
Current portion of deferred tax liability	$	(260	)	$	(156	)
Long-term deferred tax liability		(35,255	)		(47,575	)
Total deferred tax liability	$	(35,515	)	$	(47,731	)

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 audited. The periods to be audited are prior to Iowa Telecom’s ownership and the Company is fully indemnified for any tax obligations resulting from such matters. The Company is not currently under income tax examination in any other jurisdiction. For federal and state tax purposes, the Company’s 2001 through 2008 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 at the time of adoption of FIN 48 on January 1, 2007, or as of December 31, 2007 and 2008.

The following is a summary of activity for the valuation allowance of deferred tax assets for the years ended December 31, 2006, 2007 and 2008:

Year Ended December 31,	Beginning Balance		Additional Charges to Income		Deduction from Reserve			Ending Balance
2006	$	5,555	$	—	$	(5,555	)	$	—
2007		—		—		—			—
2008		—		—		—			—

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IOWA TELECOMMUNICATIONS SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

FOR THE YEARS ENDED DECEMBER 31, 2006, 2007 AND 2008

A valuation allowance had been provided at December 31, 2005, for the deferred tax assets that expire over time to the extent that they exceeded the net deferred tax assets and liabilities resulting from reversing temporary differences. The Company determined that, based upon the evidence available as of June 30, 2006, and as of the end of each period thereafter, the combination of the continued generation of taxable income and the taxable income generated from reversing temporary differences will 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 and reversed the remaining valuation allowance during 2006.

At December 31, 2008, the Company had unused tax net operating loss carryforwards of approximately $149.0 million which expire in 2021 to 2024.

11. OTHER COMPREHENSIVE INCOME (LOSS)

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

	2007			2008
	(in thousands)
Cumulative unrealized loss on derivative, net of taxes	$	(982	)	$	(12,917	)
Minimum pension liability adjustment, net of taxes		(792	)		(2,374	)
Minimum other postretirement benefit obligation, net of taxes		2,411			983
	$	637		$	(14,308	)

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

	Other Comprehensive Income
	2006			2007			2008
	(in thousands)
Unrealized earnings (loss) on derivatives	$	1,992		$	(14,700	)	$	(20,528	)
Income tax (expense) benefit including reversal of valuation allowance		(5,380	)		6,071			8,593
Minimum pension liability adjustment		4,751			6,680			(5,177	)
Income tax benefit (expense) including reversal of valuation allowance		441			(2,759	)		2,167
Total other comprehensive income (loss)		1,804			(4,708	)		(14,945	)
Initial impact upon adoption of SFAS No. 158:
Pension		(1,825	)		—			—
Income tax benefit		754			—			—
Other postretirement obligations		(1,031	)		—			—
Income tax benefit		426			—			—
Total	$	128		$	(4,708	)	$	(14,945	)

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IOWA TELECOMMUNICATIONS SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

FOR THE YEARS ENDED DECEMBER 31, 2006, 2007 AND 2008

12. LEASES

The Company leases property in various locations throughout its service area. Future minimum rental payments required under operating leases that have initial or remaining lease terms in excess of one year are as follows as of December 31, 2008:

	(in thousands)
2009	$	243
2010		146
2011		93
2012		92
2013		81
Thereafter		157
Total	$	812

Rental expense for the years ended December 31, 2006, 2007 and 2008 was $403,000, $415,000, and $402,000, respectively.

13. EMPLOYEE BENEFIT PLANS

SFAS 158

In September 2006, the FASB issued SFAS No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans. The Company adopted SFAS 158 prospectively on December 31, 2006. SFAS 158 requires that the Company recognize all obligations related to defined benefit pensions and other postretirement benefits. This statement requires that the Company quantify the plans’ funding status as an asset or a liability on its consolidated balance sheet.

SFAS 158 requires that the Company measure the plans’ assets and obligations that determine its funded status as of the end of the fiscal year. The Company was also required to recognize as a component of other comprehensive income the changes in funded status that occurred during the year that was not recognized as part of net periodic benefit cost as explained in SFAS No. 87, Employers’ Accounting for Pensions, or SFAS No. 106, Employers’ Accounting for Postretirement Benefits Other Than Pensions.

	Incremental Effect of Applying SFAS Statement No. 158 On Individual Line Items in the Balance Sheet December 31, 2006
	Before Application of Statement 158		Adjustment			After Application of Statement 158
	(in thousands)
Liability for pension benefits	$	3,466	$	1,825		$	5,291
Liability for other postretirement pension benefits		8,433		1,031			9,464
Deferred tax liability		19,896		(1,180	)		18,716
Total liabilities		590,154		1,676			591,830
Accumulated other comprehensive income		7,021		(1,676	)		5,345
Total stockholders’ equity		269,375		(1,676	)		267,699

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IOWA TELECOMMUNICATIONS SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

FOR THE YEARS ENDED DECEMBER 31, 2006, 2007 AND 2008

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 GTE Acquisition in 2000. The Plan generally provides for employee retirement at age 65 with benefits based upon length of service and compensation. The Plan provides for early retirement, lump-sum benefits and various annuity options.

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

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

	2006			2007			2008
	(in thousands)
Pension benefit cost:
Service cost	$	234		$	236		$	220
Interest cost		1,256			738			753
Expected return on plan assets		(687	)		(615	)		(700	)
Amortization of unrecognized actuarial loss		473			168			10
Amortization of prior service cost		—			—			27
Net periodic benefit cost		1,276			527			310
Settlement loss		2,985			—			—
Net periodic benefit cost, with adjustments	$	4,261		$	527		$	310
Actuarial assumptions:
Discount rate		5.50	%		5.75	%		6.50	%
Expected return on plan assets		6.26	%		7.00	%		7.00	%
Long-term rate of compensation increase		4.00	%		4.00	%		4.00	%

During 2006, the lump-sum distributions from the Plan exceeded the settlement threshold equal to the sum of the service cost and interest cost components of net periodic pension cost resulting in an additional charge to income of $3.0 million. Lump-sum distributions during 2007 and 2008 did not exceed the settlement threshold and therefore no settlement loss was recorded and income was not impacted by a settlement loss.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

FOR THE YEARS ENDED DECEMBER 31, 2006, 2007 AND 2008

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

	2007			2008
	(dollars in thousands)
Change in projected benefit obligation:
Projected benefit obligation at beginning of year	$	12,646		$	11,450
Service cost		236			220
Interest cost		738			753
Actuarial (gain) loss		(1,716	)		754
Benefits paid		(731	)		(146	)
Amendments		277			—
Projected benefit obligation at end of year	$	11,450		$	13,031
Change in plan assets:
Fair value of plan assets at beginning of year	$	7,355		$	9,576
Actual return on plan assets		549			(1,040	)
Employer contributions		2,403			1,000
Benefits paid		(731	)		(146	)
Fair value of plan assets at end of year	$	9,576		$	9,390
Funded status at end of year:
Benefit obligation in excess of plan assets	$	(1,874	)	$	(3,641	)
Amounts recognized in accumulated other comprehensive income:
Net loss	$	1,073		$	3,557
Prior service cost		277			250
Net amount recognized at year end	$	1,350		$	3,807
Actuarial assumptions:
Discount rate		6.50	%		6.25	%
Lump sum conversion rate-Salaried Employees		6.00	%		5.75	%
Lump sum conversion rate-Hourly Employees		5.50	%		5.25	%
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 income (loss) into the net periodic benefit cost over the next fiscal year are $232,000 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 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 (10.4%) in 2008, and 6.9% in 2007.

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IOWA TELECOMMUNICATIONS SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

FOR THE YEARS ENDED DECEMBER 31, 2006, 2007 AND 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:

	2007		2008
	(in thousands)
Projected benefit obligation	$	11,450	$	13,031
Accumulated benefit obligation		9,735		11,225
Fair value of plan assets		9,576		9,390

Cash Contributions

The following table details the Company’s cash contributions for the years ended December 31, 2007 and 2008, and the expected contributions for 2009 (in thousands):

2007	$2,403
2008	1,000
2009 (expected)	750

The Company’s policy with respect to funding the qualified plans 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 2009 through 2018 (in thousands):

2009	$	627
2010		714
2011		829
2012		865
2013		935
Years 2014 – 2018		7,786

Asset Allocation Strategy

The Company’s pension plan asset allocation at December 31, 2007 and 2008, and target allocation for 2009 were as follows:

	Target Allocation		Percentage of Plan Assets December 31,
Assets Category	2009		2007		2008
Equity securities	35	%	29	%	23	%
Debt securities	65	%	71	%	76	%
Cash equivalents	—	%	—	%	1	%
Total	100	%	100	%	100	%

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IOWA TELECOMMUNICATIONS SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

FOR THE YEARS ENDED DECEMBER 31, 2006, 2007 AND 2008

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 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 two 401(k) savings plans for salaried and hourly employees that allow for voluntary contributions into designated investment funds. The Iowa Telecom Savings Plan covers 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 $1.5 million; $1.9 million and $2.0 million for the years ended December 31, 2006, 2007 and 2008, respectively.

The Company is in the process of merging assets of a third 401(k) plan acquired through the Bishop Communications acquisition in which these assets will be merged into Iowa Telecom salaried Savings Plan by July 1, 2009.

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 one time curtailment gain of $247,000 and 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 CWA. The modification resulted in another 26 employees opting out of the retiree medical plan effective November 30, 2008. This triggered a plan curtailment under FAS 106 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 the 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.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

FOR THE YEARS ENDED DECEMBER 31, 2006, 2007 AND 2008

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

	2006			2007			2008
	(dollars in thousands)
Postretirement benefit cost (income):
Service cost	$	182		$	76		$	13
Interest cost		485			306			190
Amortization of unrecognized prior service cost		(155	)		(757	)		(1,007	)
Amortization of unrecognized net actuarial loss		95			88			13
Net periodic benefit costs (income)		607			(287	)		(791	)
Curtailment gain		—			(247	)		(2,507	)
Total postretirement benefit cost (income), with adjustments	$	607		$	(534	)	$	(3,298	)
Actuarial assumptions:
Discount rate		5.25	%		5.50	%		6.0	%

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

	2007			2008
	(dollars in thousands)
Change in accumulated benefit obligation:
Accumulated benefit obligation at beginning of year	$	9,464		$	3,545
Service cost		76			13
Interest cost		306			190
Actuarial gain		(730	)		(499	)
Benefits paid		(246	)		(159	)
Amendments		(5,325	)		(281	)
Accumulated benefit obligation at end of year	$	3,545		$	2,809
Amounts recognized in the balance sheet:
Current liabilities	$	329		$	285
Non-current liabilities		3,216			2,524
Net amount recognized at year end	$	3,545		$	2,809
Amounts recognized in accumulated other comprehensive income:
Net loss		649		$	137
Prior service cost (credit)		(4,757	)		(1,524	)
Net amount recognized at year end	$	(4,108	)	$	(1,387	)
Actuarial assumptions:
Discount rate		6.00	%		6.25	%

The estimated net loss and prior service cost (credit) that will be amortized from accumulated other comprehensive income into net periodic benefit cost over the next fiscal year are $0 and ($438,000), respectively.

The health care cost trend rate used in determining the accumulated postretirement benefit obligation at December 31, 2007 and 2008 was assumed to be 9.5%, decreasing incrementally until reaching an ultimate rate of 5.0% in 2016 and 2017, respectively.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

FOR THE YEARS ENDED DECEMBER 31, 2006, 2007 AND 2008

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, 2008.

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, 2006, 2007 and 2008, and the expected cash contributions and benefit payments for 2009 through 2018 (in thousands):

2006	$	303
2007		246
2008		159
2009 (expected)		285
2010 (expected)		286
2011 (expected)		296
2012 (expected)		269
2013 (expected)		259
Years 2014 – 2018 (expected)		1,153

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 2009 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, 518,340 have been exercised and 677,579 remained outstanding as of December 31, 2008. 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 $1.1 million, $1.0 million and $1.1 million of stock-based compensation expense during 2006, 2007 and 2008, 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.

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IOWA TELECOMMUNICATIONS SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

FOR THE YEARS ENDED DECEMBER 31, 2006, 2007 AND 2008

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,
	2006		2007		2008
Weighted average expected life	2.84	yr	2.23	yr	1.29	yr
Risk free interest rate	4.87	%	4.14	%	1.38	%
Volatility(1)	22	%(1)	22	%(1)	33.8	%
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, 2007 and 2008, and the changes during the years then ended, is presented below:

	Year Ended December 31, 2007				Year Ended December 31, 2008
Fixed Options	Shares		Weighted Average Exercise Price per Share		Shares	Weighted Average Exercise Price per Share
OUTSTANDING AT BEGINNING OF YEAR	682,579		$	4.72	677,579	$	3.10
Exercised	(5,000	)	$	4.14	—	$	—
OUTSTANDING AT DECEMBER 31,	677,579		$	3.10	677,579	$	1.48
Options exercisable at DECEMBER 31,	677,579		$	3.10	677,579	$	1.48

The following table summarizes information about stock options outstanding at December 31, 2008:

	Options Outstanding		Options Exercisable
Exercise Price per Share Range	Number	Weighted Average Remaining Contractual Life In Years	Number	Weighted Average Exercise Price per Share		Weighted Average Aggregate Intrinsic Value
$1.01 to $1.50	533,005	3.3	533,005	$	1.31	$	6,913,476
$1.51 to $2.00	129,379	3.7	129,379	$	1.86	$	1,607,420
$4.01 to $4.50	15,195	5.1	15,195	$	4.44	$	149,455

The weighted average exercise price of options exercisable at December 31, 2008, reflects the reductions required by the plan as a result of the declaration of cash dividends. Pursuant to the 2002 Incentive Plan, all options became fully vested on November 23, 2004, as a result of the change in share ownership resulting from the Company’s initial public offering of common stock.

The total intrinsic value of options exercised during 2006 and 2007 was $4.0 million and $93,000, respectively. There were no options exercised during 2008. The Company received total cash proceeds of $1.7 million and $21,000, respectively, related to the exercise of options during 2006 and 2007. The income tax benefit realized as a result of options exercised was $48,000 and $7,000 during 2006 and 2007, respectively.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

FOR THE YEARS ENDED DECEMBER 31, 2006, 2007 AND 2008

2005 Stock Incentive Plan

The Iowa Telecommunications Services, Inc. 2005 Stock Incentive Plan (the “2005 Incentive Plan”) allows for the issuance of up to an aggregate of 1.5 million shares of restricted or unrestricted stock, of which 634,800 shares of restricted stock, net of forfeitures and cancellations, have been awarded to various officers and employees of the Company and 8,757 shares of unrestricted stock have been issued to members of the Company’s Board of Directors.

A summary of the status of the restricted shares awarded pursuant to the 2005 Incentive Plan as of December 31, 2007 and 2008, and the changes during the years then ended, is presented below:

	Year Ended December 31, 2007				Year Ended December 31, 2008
	Shares		Weighted Average Grant Date Fair Value		Shares		Weighted Average Grant Date Fair Value
OUTSTANDING AT BEGINNING OF YEAR	339,300		$	18.50	378,475		$	19.64
Granted	133,000	(1)		21.80	174,500	(2)		16.73
Vested	(81,825	)		18.47	(81,825	)		18.47
Cancelled/Forfeited	(12,000	)		19.32	—			—
OUTSTANDING AT END OF YEAR	378,475		$	19.64	471,150		$	18.77

(1) Weighted average vesting period at grant date for shares granted is 59 months.

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

The Company recognizes compensation cost related to awards of restricted stock on a straight-line basis over the requisite service period for the entire award. The Company recorded $1.2 million, $1.7 million and $2.4 million of stock-based compensation expense related to the 2005 Incentive Plan during 2006, 2007 and 2008, respectively. The remaining amount to be charged to expense for unvested awards over the remaining service periods of 4.25 years is $6.2 million. The Company also recorded $13,000, $13,000 and $93,000 respectively, of expense during 2006, 2007 and 2008 related to the unrestricted shares issued to members of its Board of Directors. The total fair value of shares vested during 2007 and 2008 was $1.7 million and $1.5 million, respectively. No shares vested during 2006.

The Company has a policy that permits the repurchase of a portion of vested shares from participants upon their vesting in order to satisfy tax withholding obligations. The aggregate fair market value of such repurchases may not exceed the participant’s minimum statutory tax withholding obligation due upon vesting. During 2007 and 2008, the Company reacquired 26,902 shares and 27,353 shares, respectively, for this purpose. No shares were reacquired by the Company during 2006.

During 2006, the Company recognized $831,000 of income tax benefit related to all stock-based compensation arrangements, excluding the effects related to the reversal of our income tax valuation allowance. During 2007 and 2008, the Company recognized $1.0 million and $1.1 million, respectively, of income tax benefit related to all stock-based compensation arrangements.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

FOR THE YEARS ENDED DECEMBER 31, 2006, 2007 AND 2008

15. RELATED PARTY TRANSACTIONS

During 2006 the Company sold network and special access services to a significant stockholder. The Company also purchased certain services including switch monitoring and telecommunication circuits from the related party and resold certain products obtained from the related party. During 2006, the significant stockholder reduced its holdings of the Company’s common stock, and therefore, as of December 31, 2006, is no longer considered a related party. 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. The following table summarizes the amounts included in the accompanying financial statements related to these services:

	2006		2007		2008
	(in thousands)
Revenues	$	2,317	$	—	$	91
Expenses	$	10,203	$	—	$	30
Accounts receivable	$	—	$	—	$	215

In 2008, the Company was reimbursed $387,000 for labor, management and other services provided to certain entities that are accounted for using the equity method.

16. COMMITMENTS AND CONTINGENCIES

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

On November 21, 2008, the Company announced a definitive agreement to acquire substantially all of the assets of Sherburne Tele Systems, Inc. (“Sherburne”) for a total purchase price of $80.6 million, subject to certain adjustments and regulatory approvals. The Company intends to fund the acquisition of Sherburne with the proceeds of $75.0 million of new term debt issued under existing credit facilities, borrowings on the revolving credit facility and cash on hand.

Sherburne is a closely held telecommunications company headquartered in Big Lake, Minnesota, less than 30 miles from the headquarters of Bishop Communications, which we acquired on July 18, 2008. As of December 31 2008, Sherburne served 15,500 incumbent local exchange carrier access lines, 10,200 competitive local exchange carrier lines, 13,900 DSL high-speed Internet customers and 3,700 video customers, primarily in communities and rural areas adjacent to the Minnesota/St. Paul Metropolitan Area. Sherburne’s operations include its incumbent local exchange carrier services, marketed as Connections, Etc., and competitive local exchange carrier services provided through its wholly-owned subsidiary, Northstar Access.

17. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS

Fair Value of Derivative Financial Instruments

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

SFAS 157 establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include: Level 1, defined as observable inputs such as quoted prices in active markets; Level 2,

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

FOR THE YEARS ENDED DECEMBER 31, 2006, 2007 AND 2008

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.

Interest Rate Swaps—These included the Company’s interest rate swap derivative instruments. The fair value of the interest rate swaps were determined based on the present value of expected future cash flows using discount rates appropriate with consideration given to the Company’s non-performance risk utilizing inputs that are readily available in public markets or can be derived from information available in publicly quoted markets. Therefore, the Company has categorized these swap contracts as Level 2. Deducted from the December 31, 2008, interest rate swap fair value calculation was a $2.2 million adjustment in consideration of the Company’s non-performance risk. The Company’s non-performance risk is assessed based on the current trading discount of its Term Loan B debt as the swap agreements are secured by the same collateral. The fair value of the interest rate swaps is recorded in the Other Long-Term Liabilities section of the Company’s Consolidated Balance Sheets.

Cash equivalents consist of funds invested in bank accounts and money market funds that have daily liquidity. Therefore, cash and cash equivalents are categorized as Level 1. The following table presents fair value of the Company’s cash and cash equivalents and interest rate swaps:

	Fair Value Measurements as of December 31, 2008
	Carrying Amount		Total		Level 1		Level 2		Level 3
	(dollars in thousands)
Cash equivalents	$	5,525	$	5,525	$	5,525	$	—	$	—
Interest Rate Swaps		$22,155	$	22,155	$	—	$	22,155	$	—

See footnote 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

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

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

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

Debt—The fair value of the Term Loan C, Term Loan D and EN-TEL 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. For 2007, the Term Loan B debt was considered to be equal to the carrying value because the interest payments are based on LIBOR rates that are

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

FOR THE YEARS ENDED DECEMBER 31, 2006, 2007 AND 2008

reset every three months and the Company did not believe its credit risk had changed materially from the date the applicable LIBOR rate adder of 1.75% per annum was set. See footnote 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, 2007 and 2008, was as follows:

	2007				2008
	Carrying Amount		Fair Value		Carrying Amount		Fair Value
	(in thousands)
Financial Assets:
Cash and cash equivalents	$	21,919	$	21,919	$	11,605	$	11,605
Financial Liabilities:
Fixed Rate long-term debt:
Term Loan C	$	70,000	$	72,533	$	70,000	$	67,356
Term Loan D	$	7,778	$	8,059	$	7,778	$	7,484
EN-TEL debt	$	—	$	—	$	12,444	$	12,260
Floating rate debt:
Term Loan B	$	400,000	$	400,000	$	400,000	$	315,000

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

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

18. DISCLOSURES ABOUT FAIR VALUE OF INTEREST RATE SWAPS

On August 26, 2005, the Company amended the interest rate swap agreement that was originally entered into on November 4, 2004. The amended swap agreement resulted in two identical swap agreements, which each fixed the interest rate the Company will pay on $175.0 million of indebtedness under Term Loan B, for a total swap 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. The termination of the swap resulted in a credit to income of $1.8 million and the change in fair value attributable to hedge ineffectiveness resulted in an expense of $676,000. The net expense reduction of $1.2 million was recorded in the Other Income (Expense) section of the Company’s Consolidated Statements of Income for the year ended December 31, 2008. Other Comprehensive Income of $870,000 related to the terminated hedge recorded in the Company’s Consolidated Statements of Stockholders’ Equity will be amortized as an expense in the Other Income (Expense) section of the Company’s Consolidated Statements of Income throughout the remaining term of the terminated hedge transaction until November 23, 2011. The Company recorded $129,000 of expense related to the amortization of Accumulated Other Comprehensive Income (loss)

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

FOR THE YEARS ENDED DECEMBER 31, 2006, 2007 AND 2008

for the year-ended December 31, 2008 in the Other Income (Expense) section of the Company’s Consolidated Statements of Income.

The Company entered in to 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 new swap agreement, coupled with the remaining August 2005 interest rate swap agreement, effectively converts 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. The purpose of the swap agreements is to adjust the interest rate profile of the Company’s debt obligations and to achieve a target mix of floating and fixed rate debt.

During 2008, the fair market value of the swap instruments decreased by $20.3 million. The portion of the change in fair value attributable to hedge ineffectiveness, which for 2008 was a loss of $1.4 million inclusive of $676,000 of hedge ineffectiveness from the terminated swap discussed above, is recorded in the Other Income (Expenses) section of the Company’s Consolidated Statements of Income. The portion of the change in fair value attributable to hedge effectiveness is recorded, net of income tax effects, in the Accumulated Other Comprehensive Income (loss) section of the Company’s Consolidated Statements of Stockholder’s Equity. In assessing hedge effectiveness, no portion of the gain or loss from the swap is excluded.

During 2007, the fair market value of the swap instruments decreased by $15.4 million. The portion of the change in fair value attributable to hedge ineffectiveness, which for 2007 was a loss of $522,000, is recorded in the Other Income section of the Company’s Consolidated Statements of Income. The portion of the change in fair value attributable to hedge effectiveness is recorded, net of income tax effects, in the Accumulated Other Comprehensive Income (loss) section of the Company’s Consolidated Statements of Stockholders’ Equity. In assessing hedge effectiveness, no portion of the gain or loss from the swap is excluded.

During 2006, the fair market value of the swap instruments increased by $1.4 million. The portion of the change in fair value attributable to hedge ineffectiveness, which for 2006 was a loss of $368,000, is recorded in the Other Income (loss) section of the Company’s Consolidated Statements of Income. The portion of the change in fair value attributable to hedge effectiveness is recorded, net of income tax effects, in the Accumulated Other Comprehensive Income section of the Company’s Consolidated Statements of Stockholders’ Equity. In assessing hedge effectiveness, no portion of the gain or loss from the swap is excluded.

The fair value of the Company’s interest rate swaps 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 non-performance risk. The fair value of the interest rate swaps was in a liability position of $1.9 million and $22.2 million, respectively as of December 31, 2007 and 2008, and was recorded in the Other Long-Term Liabilities section of the Company’s Consolidated Balance Sheets.

19. SALE OF EXCHANGES

The Company closed on the sale of three exchanges representing approximately 600 access lines on April 28, 2006, and received proceeds of approximately $4.8 million. As part of the transaction, the Company retired net plant of $1.5 million and goodwill and other intangible assets of $2.0 million and recorded a gain of approximately $1.3 million, which is included in gain on sale of properties in the Consolidated Statements of Income. On July 1, 2006, the Company completed the sale of four exchanges representing approximately 2,000 access lines and received net proceeds of approximately $8.4 million. As part of the transaction, the Company retired net plant of $1.8 million and goodwill and other intangible assets of $3.7 million, and recorded a gain of approximately $2.9 million, which is included in gain on sale of properties in the Consolidated Statements of Income.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

FOR THE YEARS ENDED DECEMBER 31, 2006, 2007 AND 2008

20. BUSINESS ACQUISITIONS

Montezuma Telephone. On July 1, 2006, the Company acquired Montezuma Mutual Telephone Company, a provider of telecommunications, cable television and Internet services to customers in rural Iowa. The acquisition of Montezuma Telephone expanded the Company’s local exchange service area. The purchase price was $11.9 million and consisted of $11.7 million in cash consideration and $222,000 of direct transaction costs.

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

	Allocation
	(dollars in thousands)
Property, plant & equipment	$	3,625
Current assets	$	1,728
Liabilities	$	(2,624	)
Amortizable intangible assets	$	2,620
Goodwill	$	6,587
Weighted average useful life of amortizable intangibles		9 yr

Baker Communications. On August 1, 2006, the Company acquired Baker Communications, Inc. Baker Communications designs, develops and provides ongoing support of technology solutions for clients. The acquisition of Baker Communications provided growth beyond our local exchange service area. The purchase price was $8.8 million and consisted of $8.6 million in cash consideration and $148,000 of direct transaction costs.

The allocation of the purchase price of Baker Communications was as follows:

	Allocation
	(dollars in thousands)
Property, plant & equipment	$	881
Current assets	$	3,338
Liabilities	$	(4,353	)
Amortizable intangible assets	$	3,450
Goodwill	$	5,441
Weighted average useful life of amortizable intangibles		6 yr

Bishop Communications. On July 18, 2008, the Company acquired 100% of the outstanding stock of Bishop Communications, a provider of telecommunications, cable 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 $33.1 million in cash, net of cash received, and assumed debt of $13.0 million, subject to potential working capital adjustments. The transaction did not result in a tax basis step-up, as such, the goodwill acquired is not deductible for tax purposes.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

FOR THE YEARS ENDED DECEMBER 31, 2006, 2007 AND 2008

The preliminary allocation of the purchase price of Bishop Communications is as follows:

	Allocation
	(dollars in thousands)
Property, plant & equipment	$	35,926
Current assets	$	8,031
Amortizable intangible assets	$	2,770
Goodwill	$	7,430
Other assets	$	4,957
Investment in and receivable from RTFC	$	1,933
Other current liabilities	$	(3,926	)
Debt	$	(13,021	)
Deferred tax liability	$	(6,161	)

The purchase price allocation for this acquisition is 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. The preliminary allocation of the purchase price of Bishop Communications includes amortizable intangible assets consisting primarily of customer relationship intangibles which have a weighted average useful life of 11.6 years.

The results of operations for the acquired company are included in the Consolidated Statements of Income beginning on the acquisition date. The proforma impact of the acquisition was not material to the results of operations.

21. CONSOLIDATED QUARTERLY OPERATING INFORMATION (UNAUDITED)

	2008
	First Quarter		Second Quarter(2)		Third Quarter		Fourth Quarter(3)
	(in thousands except per share amounts)
Operating revenues	$	60,845	$	58,177	$	62,923	$	65,020
Operating income	$	19,512	$	16,618	$	16,798	$	17,538
Net income	$	6,957	$	5,293	$	5,723	$	5,176
Earnings per share—basic	$	0.22	$	0.17	$	0.18	$	0.16
Earnings per share—diluted	$	0.22	$	0.16	$	0.18	$	0.16

	2007
	First Quarter(1)		Second Quarter		Third Quarter		Fourth Quarter
	(in thousands except per share amounts)
Operating revenues	$	66,496	$	62,735	$	60,780	$	61,390
Operating income	$	25,611	$	19,184	$	18,772	$	18,369
Net income	$	10,473	$	6,574	$	6,291	$	5,977
Earnings per share—basic	$	0.33	$	0.21	$	0.20	$	0.19
Earnings per share—diluted	$	0.33	$	0.20	$	0.20	$	0.19

(1) Operating revenues included $4.8 million of revenue from certain non-recurring network access billing matters with connecting carriers.

(2) Operating revenues included a $1.5 million unfavorable impact due to non-recurring network access billing matters.

(3) Operating income included a pension curtailment gain of approximately $2.5 million.

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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, 2008 (the “Evaluation Date”)). Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of the Evaluation Date, our disclosure controls and procedures were effective to 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 significant change in the Company’s internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) during 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, 2008. In making this assessment, management used the framework in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. As allowed by SEC guidance, management excluded from its assessment the 2008 acquisition of Bishop Communications, which accounted for approximately seven percent of consolidated total assets and approximately three percent of consolidated net sales. Based on this assessment, our management concluded that our internal control over financial reporting was effective as of December 31, 2008.

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.

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(b) Attestation Report of the Independent Registered Public Accounting Firm.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of

Iowa Telecommunications Services, Inc. and subsidiaries

Newton, Iowa

We have audited the internal control over financial reporting of Iowa Telecommunications Services, Inc. and subsidiaries (the “Company”) as of December 31, 2008, based on criteria established in Internal Control—Integrated Framework issued 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 Bishop Communications Corporation and subsidiaries, which was acquired on July 18, 2008 and whose financial statements constitute 19.4% and 6.8% of net and total assets, respectively, 3.5% of revenues, and 0.4% of net income of the consolidated financial statement amounts as of and for the year ended December 31, 2008. Accordingly, our audit did not include the internal control over financial reporting at Bishop Communications Corporation and subsidiaries. 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, 2008, based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

99

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, 2008 of the Company and our report dated February 27, 2009 expressed an unqualified opinion on those financial statements and included an explanatory paragraph relating to the Company’s adoption of Statement of Financial Accounting Standards No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, as of December 31, 2008.

/s/ DELOITTE & TOUCHE LLP

Des Moines, Iowa

February 27, 2009

******

ITEM 9B. Other Information

None.

100

PART III.

ITEM 10. Directors, Executive Officers of the Registrant and Corporate Governance

The information required by this item is incorporated by reference to the Company’s Proxy Statement for the 2009 Annual Meeting of Shareholders.

ITEM 11. Executive Compensation

The information required by this item is incorporated by reference to the Company’s Proxy Statement for the 2009 Annual Meeting of Shareholders.

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 2009 Annual Meeting of Shareholders.

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 2009 Annual Meeting of Shareholders.

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 2009 Annual Meeting of Shareholders.

101

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.

102

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 March 2, 2009.

IOWA TELECOMMUNICATIONS SERVICES, INC.

/s/    ALAN L. WELLS        

Alan L. Wells

President, Chief Executive Officer and Director

Principal Executive Officer

103

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 Director Principal Executive Officer	March 2, 2009
/s/    CRAIG A. KNOCK         Craig A. Knock	Vice President, Chief Financial Officer and Treasurer, Principal Accounting Officer	March 2, 2009
/s/    KENNETH R. COLE         Kenneth R. Cole	Director	March 2, 2009
/s/    NORMAN C. FROST         Norman C. Frost	Director	March 2, 2009
/s/    BRIAN G. HART         Brian G. Hart	Director	March 2, 2009
/s/    H. LYNN HORAK         H. Lynn Horak	Director	March 2, 2009
/s/    CRAIG A. LANG         Craig A. Lang	Director	March 2, 2009
/s/    KENDRIK E. PACKER         Kendrik E. Packer	Director	March 2, 2009

104

INDEX TO EXHIBITS

Exhibit Number	Description
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.*
10.1	Settlement Agreement dated as of April 2, 2004, between Iowa Telecommunications Services, Inc., the Iowa Utilities Board, the Office of Consumer Advocate, and Coon Rapids Municipal Utilities, Grundy Center Municipal Communications Utility, Harlan Municipal Utilities, Reinbeck Municipal Telecommunications Utility, Manning Municipal Communication and Television System Utility, and The Community Cable Television Agency of O’Brien County.*
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 August 3, 2005 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 August 2, 2005. #
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.* #
10.11	Non-Competition Agreement, dated as of November 16, 2004, between Iowa Telecommunications Services, Inc. and Iowa Networks Services, Inc.*
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. #

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Exhibit Number	Description
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.
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 August 3, 2005 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 August 2, 2005. #
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. #
21.0	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.

106

EX-10.13

Execution Copy

EXHIBIT 10.13

ASSET PURCHASE AGREEMENT

BY AND AMONG

IOWA TELECOMMUNICATIONS SERVICES, INC.,

SHERBURNE TELE SYSTEMS, INC.,

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.,

AND

THE SHAREHOLDERS SET FORTH

ON THE SIGNATURE PAGE

AND

THE SHAREHOLDERS’ REPRESENTATIVE

NOVEMBER 21, 2008

TABLE OF CONTENTS

ARTICLE I. SALE AND TRANSFER OF ASSETS; CLOSING		6
1.1	Assets to Be Sold	6
1.2	Excluded Assets	6
1.3	Assumed Liabilities; Retained Liabilities	6
1.4	Closing	6
ARTICLE II. INTENTIONALLY DELETED		6
ARTICLE III. PURCHASE PRICE; SHAREHOLDER MEETING; ESCROW; SHAREHOLDERS’ REPRESENTATIVE		6
3.1	Calculation of Amounts; Definitions	6
3.2	Calculation of Estimated Cash Purchase Price	8
3.3	Payment of Estimated Cash Purchase Price	10
3.4	Determination of Cash Purchase Price; Determination of Revised Infrastructure Replacement Costs; Payment of Final Consideration	10
3.5	Escrow	12
3.6	Voting Agreement; Shareholders’ Meeting; ESOP Participant Approval Process	14
3.7	Appointment of Shareholders’ Representative	15
ARTICLE IV. REPRESENTATIONS AND WARRANTIES OF THE SELLING COMPANIES		17
4.1	Corporate Organization and Qualification	17
4.2	Capitalization	18
4.3	Authority Relative to This Agreement	18
4.4	Consents and Approvals; No Violation	18
4.5	Financial Statements; Undisclosed Liabilities	20
4.6	Absence of Certain Changes or Events	21
4.7	Real Property	23
4.8	Litigation	24
4.9	Information Statement	24
4.10	Taxes	25
4.11	Employees	26
4.12	Employee Benefit Plans; ESOP Matters	27
4.13	Affiliate Transactions	29
4.14	Environmental Laws	29
4.15	Intangible Property	32
4.16	Compliance with Laws and Orders	32
4.17	Certain Agreements	33
4.18	Permits	35
4.19	Brokers and Finders	35
4.20	Intentionally Deleted	36

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4.21	Tangible Property Other than Real Property	36
4.22	Intellectual Property Rights	36
4.23	Insurance	37
4.24	Warranties	38
4.25	Other Ventures, Investments	38
4.26	Bank Accounts; Power of Attorneys	38
4.27	Prohibited Payments	38
4.28	Disclosure; Information Supplied	38
4.29	Disclosure Controls and Procedures	39
4.30	NewCore Wireless, LLC	39
ARTICLE V. REPRESENTATIONS AND WARRANTIES OF PARENT		40
5.1	Corporate Organization and Qualification	40
5.2	Authority Relative to this Agreement	40
5.3	Consents and Approvals; No Violation	40
5.4	Information Statement	41
5.5	Brokers and Finders	41
ARTICLE VI. ADDITIONAL COVENANTS AND AGREEMENTS		42
6.1	Conduct of Business of the Selling Companies	42
6.2	No Solicitation of Transactions	44
6.3	Reasonable Efforts	45
6.4	Access to Information	45
6.5	Publicity	46
6.6	Directors and Officers Insurance Reimbursement	46
6.7	Financial Commitment	46
6.8	Investigation and Agreement by the Parties; No Other Representations or Warranties	46
6.9	401(k) Plans	47
6.10	Employee Benefits; ESOP; Phantom Stock Plan	47
6.11	Employees; Employee Benefits	48
6.12	Parent Approvals	50
6.13	Upcoming Financial Statements	50
6.14	Intentionally Deleted	50
6.15	Environmental Review	50
6.16	Excluded Property; Eddy Family Foundation	51
6.17	Estoppel Certificates	52
6.18	CTC Waiver; UNE Replacement	52
6.19	Easements and Rights of Way	54
6.20	Capital Calls	54
6.21	Bonus Payments	54
6.22	Transaction Expenses	55
6.23	Name Changes; Dissolution of the Selling Companies; Noncompetition Agreement	55
6.24	Equity Investment Transfer; ROFR; Admission Consents	56

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6.25	Cable Program Agreements	58
ARTICLE VII. CONDITIONS TO CONSUMMATION OF THE PURCHASE		58
7.1	Conditions to Each Party’s Obligations to Effect the Purchase	58
7.2	Conditions to the Selling Companies’ Obligations to Effect the Purchase	59
7.3	Conditions to the Parent’s and Newco’s Obligations to Effect the Purchase	59
7.4	Closing Deliverables	61
ARTICLE VIII. TERMINATION; AMENDMENT; WAIVER		62
8.1	Termination by Mutual Consent	62
8.2	Termination by Either Parent or the Selling Companies	62
8.3	Termination by Parent	63
8.4	Termination by STS	63
8.5	Effect of Termination	63
8.6	Extension; Waiver	63
ARTICLE IX. INDEMNIFICATION		64
9.1	Indemnification by the Selling Companies and Majority Shareholders	64
9.2	Indemnification by Parent	68
9.3	Third-Party Actions	69
9.4	Escrow	70
9.5	Sole and Exclusive Remedy	70
9.6	Tax Adjustment	70
ARTICLE X. GENERAL PROVISIONS		70
10.1	Binding Arbitration	70
ARTICLE XI. ADDITIONAL AGREEMENTS		71
11.1	Cooperation on Tax Matters	71
11.2	Tax Adjustment	71
11.3	Section 1060 Allocation; Reporting	72
11.4	Calculation and Payment of Tax Adjustment	72
11.5	Tax Adjustment Indemnification	73
11.6	Access to Information	73
ARTICLE XII. MISCELLANEOUS AND GENERAL		74
12.1	Payment of Expenses	74
12.2	Survival of Confidentiality	74
12.3	Modification or Amendment	74
12.4	Waiver of Conditions	74
12.5	Counterparts	74

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12.6	Governing Law	75
12.7	Notices	75
12.8	Entire Agreement; Assignment	76
12.9	Parties in Interest	76
12.10	Certain Definitions	76
12.11	References and Titles	86
12.12	Obligation of Parent	87
12.13	Validity	87
12.14	Captions	87

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ASSET PURCHASE AGREEMENT

ASSET PURCHASE AGREEMENT (this “Agreement”), dated November 21, 2008, by and among Iowa Telecommunications Services, Inc., an Iowa corporation (“Parent”), Sherburne Tele Systems, Inc., a Minnesota corporation (“STS”), Sherburne County Rural Telephone Co., a Minnesota corporation (“SCRTC”), Sherburne Tel-Com, Inc., a Minnesota corporation (“STCI”), Sherburne Cable-Com, Inc., a Minnesota corporation (“SCCI”), Sherburne Long Distance, Inc., a Minnesota corporation (“SLDI”), Northstar Access, LLC, a Minnesota limited liability company (“Northstar”), Northstar Tele-Com, Inc., a Minnesota corporation (“NT”) Sherburne Fiber-Com, Inc. (“SFCI”) (with STS, SCRTC, STCI, SCCI, SLDI, Northstar, NT and SFCI, collectively referred to as the “Selling Companies” or singularly may be referred to as a “Selling Company”) and those shareholders of capital stock of STS set forth on the signature page of the Agreement (the “Majority Shareholders”) and Robert K. Eddy in his capacity as the Shareholders’ Representative as referenced in Section 3.7.

RECITALS

WHEREAS, the Selling Companies operate a telecommunications business headquartered in Big Lake, Minnesota that provides regulated and non-regulated services to residential and business customers (the “Business”);

WHEREAS, the Selling Companies desire to sell and Parent desires to purchase, the Assets (as defined below) of the Selling Companies used in the operation of the Business for the consideration and on the terms set forth in this Agreement (the “Purchase”);

WHEREAS, the board of directors of STS (the “Board of Directors”) and of the Selling Companies have, upon the terms and subject to the conditions of this Agreement, determined that the Purchase is in the best interests of the Selling Companies and have hereby approved this Agreement and the transactions contemplated hereby;

WHEREAS, Parent, the Selling Companies and the Majority Shareholders desire to make certain representations, warranties, covenants and agreements in connection with the acquisition of the Assets; and

WHEREAS, in connection with the transactions contemplated hereunder, prior to Closing Parent may transfer all or a portion of its rights hereunder to one or more newly formed corporations, limited liability companies or other business entities and wholly-owned direct or indirect subsidiaries or Parent or to existing wholly-owned direct or indirect subsidiaries of Parent (a “Newco” or the “Newcos”).

NOW, THEREFORE, in consideration of the foregoing and the mutual representations, warranties, covenants and agreements set forth herein, Parent and the Selling Companies and the Majority Shareholders hereby agree as follows:

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ARTICLE I.

SALE AND TRANSFER OF ASSETS; CLOSING

1.1 Assets to Be Sold. Upon the terms and subject to the conditions set forth in this Agreement, at the Closing, but effective as of the Effective Time, the Selling Companies shall sell, convey, assign, transfer and deliver to Parent and/or Newco and Parent and/or Newco shall purchase, assume and acquire from the Selling Companies, free and clear of any Liens other than Permitted Liens all of the Selling Companies’ right, title and interest in and to all of the Assets, personal or mixed, tangible and intangible, of every kind and description, wherever located, except for the Excluded Assets. In order to effect the transfer of the Assets that are Real Property, each of the applicable Selling Companies and Parent shall execute and perform the obligations set forth in a real property purchase agreement, the form of which is attached hereto as Exhibit A (the “Real Property Purchase Agreement”).

1.2 Excluded Assets. Notwithstanding anything to the contrary contained in Section 1.1 or elsewhere in this Agreement, the Excluded Assets of the Selling Companies shall not be part of the sale and purchase contemplated hereunder and are excluded from the Assets and shall remain the property of the Selling Companies after the Closing.

1.3 Assumed Liabilities; Retained Liabilities. On the Closing Date, but effective as of the Effective Time, Parent and/or Newco shall assume and agree to pay, perform and discharge all of the Assumed Liabilities. The Retained Liabilities will not be assumed by Parent and/or Newco and shall remain the sole responsibility of and shall be retained, paid, performed and discharged solely by the Selling Companies.

1.4 Closing. The closing of the Purchase (the “Closing”) shall take place (a) at the offices of Fredrikson & Byron, P.A. on the last business day of the month following the date on which the last of the conditions set forth in Article VII hereof shall be fulfilled or waived in accordance with this Agreement or (b) at such other place, time and date as Parent and STS may agree; provided however the Closing shall not occur before January 1, 2009. The transactions contemplated hereunder, including Parent’s or Newco’s assumption of the Assumed Liabilities, shall become effective as of 12:01 a.m. on the day following the Closing Date, unless otherwise agreed upon by the parties hereto (the “Effective Time”).

ARTICLE II.

INTENTIONALLY DELETED

ARTICLE III.

PURCHASE PRICE; SHAREHOLDER MEETING;

ESCROW; SHAREHOLDERS’ REPRESENTATIVE

3.1 Calculation of Amounts; Definitions.

(a) “Cash on Hand” means cash or cash equivalents held on hand by the Selling Companies as of the close of business on the Closing Date.

(b) “Cash Purchase Price” shall be equal to Seventy Six Million Four Hundred Thousand Dollars ($76,400,000) (the “Asset Value”) (i) plus or

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minus any UNE Replacement Reimbursement Amount (as determined pursuant to Section 6.18), (ii) minus any Incomplete Infrastructure Replacement Costs (as determined pursuant to Section 6.18), (iii) plus or minus the amount, if any, by which the Closing Date Working Capital exceeds or is less than Target respectively, (iv) plus an amount equal to any EN-TEL Capital Calls, (v) plus or minus any difference between the Estimated Tax Adjustment Amount and the Final Tax Adjustment Amount, (vi) minus any CTC Waiver Deduction, (vi) minus the value of any express guarantees of third party debt by the Selling Companies, which shall, for avoidance of doubt, include without limitation the principal amount guaranteed by the Selling Companies relating to EN-TEL, unless any such guarantee has been released to the satisfaction of the Parent prior to the Closing Date, but shall exclude any guarantee(s) related to SHAL, and (vii) minus any Equity Investment Deduction (as determined pursuant to Section 6.24).

(c) “Closing Date Working Capital” shall mean current assets (including Cash on Hand but excluding any current assets that are Excluded Assets) minus current liabilities (except for current liabilities that are Retained Liabilities) on the Closing Date calculated as shown on the Estimated Closing Date Balance Sheet, which shall not exceed the Target plus $5,000,000 and must include at least $1,000,000 of Cash on Hand.

(d) “EN-TEL Capital Call” means the actual amount paid by a Selling Company to EN-TEL prior to the Closing related to any mandatory capital call with respect to a Selling Company’s ownership interests in EN-TEL as set forth on Schedule 6.1(h).

(e) “Equity Investment Deduction” means an amount that may be deducted from the Estimated Cash Purchase Price and the Cash Purchase Price at Closing pursuant to the terms of Section 6.24 hereof.

(f) “Estimated Cash Purchase Price” means the Asset Value (i) plus or minus any UNE Replacement Reimbursement Amount (as determined pursuant to Section 6.18), (ii) minus any Incomplete Infrastructure Replacement Costs (as determined pursuant to Section 6.18), (iii) plus or minus the amount, if any, by which the Estimated Closing Date Working Capital exceeds or is less than Target respectively, (iv) plus an amount equal to any EN-TEL Capital Calls, plus any Estimated Tax Adjustment Amount, (v) minus any CTC Waiver Deduction, (vi) minus the value of any express guarantees of third party debt by the Selling Companies, which shall, for avoidance of doubt, include without limitation the principal amount guaranteed by the Selling Companies relating to EN-TEL, unless any such guarantee has been released to the satisfaction of the Parent prior to the Closing Date, but shall exclude any guarantee(s) related to SHAL, and (vii) minus any Equity Investment Deduction (as determined pursuant to Section 6.24).

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(g) “Estimated Closing Date Working Capital” means current assets (including Cash on Hand but excluding any current assets that are Excluded Assets) minus current liabilities (except for current liabilities that are Retained Liabilities) estimated as of the close of business on the Closing Date calculated as shown on the Estimated Closing Date Balance Sheet, which shall not exceed the Target plus $5,000,000 and must include at least $1,000,000 of Cash on Hand.

(h) “Purchase Price” means the Cash Purchase Price plus the value of any Assumed Liabilities.

(i) “Target” means an anticipated Closing Date Working Capital as set forth on Exhibit B.

(j) “UNE Replacement Reimbursement Amount” means an amount equal to those capital expenditures to be made by a Selling Company prior to the Closing Date on the 700 MHz infrastructure and physical UNE replacement set forth on Schedule 3.1(j) attached hereto (the “UNE Replacement”), with such amount to be no greater than $383,000 (the “Maximum UNE Replacement Reimbursement Amount”). The Maximum UNE Replacement Reimbursement Amount presumes that the Selling Companies complete replacement of at least 850 local loops in the service territory of Northstar (the “Loops”) and all necessary infrastructure repair or replacement costs set forth on Schedule 3.1(j) (the “Infrastructure Replacement”) are incurred and paid as of the Closing Date, and, accordingly, (i) the UNE Replacement Reimbursement Amount shall be reduced by $75,000 at the time of Closing if the Selling Companies fail to replace at least 850 Loops as of the Closing Date, which $75,000 the parties have agreed to as a liquidated and final amount to compensate the Parent for any lost cost savings as a result of the failure to complete at least 850 Loops as of the Closing Date, and (ii) the UNE Replacement Reimbursement Amount shall be further adjusted to compensate the Selling Companies for the Loops that have been replaced as of the Closing Date, as provided in Section 6.18(b). All actions taken by the Selling Companies prior to the Closing pursuant to and in accordance with this Section 3.1(j) and Section 6.18 hereof shall be deemed approved by Parent for purposes of Section 6.1 of this Agreement.

All accounting terms in this section have the meanings given to them by GAAP, applied on a basis consistent with the preparation of the 2007 Balance Sheet.

3.2 Calculation of Estimated Cash Purchase Price.

(a) At least ten (10) days prior to the Closing Date, STS will deliver to Parent an estimated consolidated balance sheet in substantially the form attached hereto as Exhibit B (the “Estimated Closing Date Balance Sheet”) for the Selling Companies as of the close of business on the Closing Date

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determined on a pro forma basis giving effect to the transactions contemplated by this Agreement and in accordance with GAAP applied on a basis consistent with the preparation of the 2007 Balance Sheet. The Estimated Closing Date Balance Sheet delivered to Parent shall include all of the supporting schedules setting forth in reasonable detail all amounts included in the Estimated Closing Date Balance Sheet. The Estimated Closing Date Balance Sheet will include a determination of the Estimated Closing Date Working Capital.

(b) Parent shall have three (3) days after the receipt of the Estimated Closing Date Balance Sheet (the “Review Period”) to accept or reject the Estimated Closing Date Balance Sheet provided by STS. If Parent accepts the Estimated Closing Date Balance Sheet as provided by STS pursuant to Section 3.2(a) above, the Closing shall occur as set forth in Section 1.4 of this Agreement. If Parent does not accept or agree with the Estimated Closing Date Balance Sheet (an “Estimated Closing Date Balance Sheet Dispute”), the Parent will notify STS in writing regarding the nature of the Estimated Closing Date Balance Sheet Dispute no later than the end of business on the final day of the Review Period. The parties shall, in good faith, attempt to resolve any Estimated Closing Date Balance Sheet Dispute for a period of five (5) days (the “Dispute Period”). If the Parent STS cannot agree upon a resolution to any Estimated Closing Date Balance Sheet Dispute during the Dispute Period, then:

(i) If the aggregate value of the impact of the Estimated Closing Date Balance Sheet Dispute (the “Discrepancy Amount”) does not exceed $1,000,000, the parties shall proceed to Closing pursuant to Section 1.4 of this Agreement and resolve the Estimated Closing Date Balance Sheet Dispute at a later date according to the procedure set forth in Section 3.4 of this Agreement;

(ii) If the Discrepancy Amount exceeds $1,000,000 (with such excess amount referred to as the “Discrepancy Excess”), the amount of money deposited as the True-Up Reserve Amount shall be increased by an amount equal to the Discrepancy Excess and the parties will proceed to Close pursuant to Section 1.4 of this Agreement and resolve the Estimated Closing Date Balance Sheet Dispute at a later date according to the procedure set forth in Section 3.4 of this Agreement; or

(iii) Parent, at its sole discretion, may waive the Estimated Closing Date Balance Sheet Dispute and proceed to Closing pursuant to Section 1.4 of this Agreement.

Any waiver or action of the Parent under this Section 3.2(b) shall not impact Parent’s rights for indemnification pursuant to Article IX of this Agreement.

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3.3 Payment of Estimated Cash Purchase Price. On the Closing Date, Parent shall deliver to STS by wire transfer the Estimated Cash Purchase Price minus the Escrow Amount, which may, subject to Section 3.5(b) below, include the Contract Waiver Escrow. For purposes of receipt of any proceeds, actions or notifications pursuant to the terms of this Agreement, STS agrees to serve as the agent for all of the Selling Companies and to the extent proceeds, notification or actions are taken by or delivered to STS, the parties hereto agree that such amounts, actions or notifications shall be deemed received or taken by the applicable Selling Company if other than STS.

3.4 Determination of Cash Purchase Price; Determination of Revised Infrastructure Replacement Costs; Payment of Final Consideration.

(a) No later than ninety (90) days after the Closing Date, Parent shall prepare and deliver to STS a preliminary final consolidated balance sheet in a form attached hereto as Exhibit B for STS as of the close of business on the Closing Date, determined in accordance with GAAP applied on a basis consistent with the preparation of the 2007 Balance Sheet (the “Closing Date Balance Sheet”) that calculates the Closing Date Working Capital. If there is an Incomplete Infrastructure Replacement Costs Dispute as described in Section 6.18 hereof, the Parent shall also prepare a statement of the actual Infrastructure Replacement Costs incurred as of the date the Closing Date Balance Sheet is delivered hereunder (the “Revised Infrastructure Replacement Costs”) and such Revised Infrastructure Replacement Costs shall be subject to the procedural examination set forth in this Section 3.4 for purposes of calculating any Final Downward Adjustment or Final Upward Adjustment, with such Revised Infrastructure Replacement Costs delivered no later than ninety (90) days after the Closing Date. No later than ninety (90) days after the completion of both the Valuation contemplated pursuant to Section 11.8(a) and the final resolution of the Closing Date Balance Sheet pursuant to the terms of this Section 3.4, Parent shall deliver to STS a written statement setting forth the Final Tax Adjustment Amount.

(b) STS shall be permitted during the ninety (90) day period following delivery of the Closing Date Balance Sheet, the Final Tax Adjustment Amount or the Revised Infrastructure Replacement Costs to examine, and Parent shall make available, the books and records relied upon by Parent in preparing the draft Closing Date Balance Sheet, the Final Tax Adjustment Amount or the Revised Infrastructure Replacement Costs. As promptly as practicable, and in no event later than the last day of applicable ninety (90) day period following the delivery to STS of the Closing Date Balance Sheet, the Revised Infrastructure Replacement Costs and the Final Tax Adjustment Amount, STS shall either inform Parent in writing that the applicable Closing Date Balance Sheet, the Final Tax Adjustment Amount or the Revised Infrastructure Replacement Costs is acceptable or object to the applicable Closing Date Balance Sheet, the Final Tax Adjustment Amount or the Revised Infrastructure Replacement

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Costs by delivering to Parent a written statement setting forth a specific description of STS’ objections to the applicable Closing Date Balance Sheet, the Final Tax Adjustment Amount or the Revised Infrastructure Replacement Costs (each a “Statement of Objections”) and STS’ calculation of any disputed amounts. If Parent shall not have received a Statement of Objections on or before the expiration of the applicable ninety (90) calendar day period, STS will be deemed irrevocably to have accepted the Parent’s Closing Date Balance Sheet, the Final Tax Adjustment Amount or the Revised Infrastructure Replacement Costs. If a Statement of Objections is delivered, Parent and STS shall attempt in good faith to resolve any dispute within thirty (30) days after delivery. If Parent and STS are unable to resolve the dispute within such thirty (30) day period, an accounting firm acceptable to all parties shall resolve any unresolved objections related to accounting matters. If Parent and STS are unable to agree on the choice of an accounting firm, they will select a nationally recognized accounting firm by lot (after excluding the regular outside accounting firms of Parent and STS. The accounting firm will determine, in accordance with the terms of this Agreement, the amount to be included in the applicable Closing Date Balance Sheet and the Closing Date Working Capital or the Final Tax Adjustment Amount, consistent with the amounts included in the Estimated Closing Date Balance Sheet or Tax Adjustment Methodology. The parties will provide the accounting firm, within ten (10) days of its selection, with a definitive statement of the position of each party with respect to each unresolved objection and will advise the accounting firm that the parties accept the accounting firm as the appropriate person to interpret this Agreement for all purposes relevant to the resolution of the unresolved objections. Parent will provide the accounting firm access to the books and records of STS. The accounting firm will have thirty (30) days to carry out a review of the unresolved objections and prepare a written statement of its determination regarding each unresolved objection. The determination of any accounting firm so selected will be set forth in writing and will be conclusive and binding upon the parties. If the Parent and STS submit any unresolved objections to an accounting firm for resolution as provided in this Section 3.4(b), each will bear their respective costs and expenses and each shall bear one-half (1/2) of the costs and expenses of the mutually selected accounting firm. Such firm’s resolution of the accounting matters shall be conclusive, binding upon the parties, nonappealable, and not be subject to further review, and shall be considered a final arbitration award that is enforceable pursuant to the terms of the Federal Arbitration Act.

(c) If the Closing Date Balance Sheet as finally determined, the Final Tax Adjustment Amount or the Revised Infrastructure Replacement Costs result in a Final Downward Adjustment, (i) any Final Downward Adjustment related to either the Closing Date Balance Sheet or the Revised Infrastructure Replacement Costs shall be withdrawn first, from the True-Up Reserve Amount on deposit pursuant to the Escrow

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Agreement, and second, if the True-Up Reserve Amount is not sufficient, the Majority Shareholders shall reimburse to the Parent any such deficiency; or (ii) any Final Downward Adjustment related to the Final Tax Adjustment Amount shall be withdrawn first, from the Tax Adjustment Escrow on deposit pursuant to the Escrow Agreement, and second, if the Tax Adjustment Escrow is not sufficient, the Majority Shareholders shall reimburse to the Parent any such deficiency. The Indemnification Amount may not be used to satisfy any such payment obligations of the Majority Shareholders without the Parent’s consent. Any remaining portion of the True-Up Reserve Amount on deposit pursuant to the Escrow Agreement after the foregoing withdrawal shall be promptly paid to STS by the Escrow Agent, as final payment to the Selling Companies of the Cash Purchase Price, except to the extent any further amounts are released from the Escrow Agreement. Any remaining portion of the Tax Adjustment Escrow on deposit pursuant to the Escrow Agreement after the foregoing withdrawal shall be promptly paid to the Parent.

(d) If the Closing Date Balance Sheet as finally determined, the Final Tax Adjustment Amount or the Revised Infrastructure Replacement Costs results in a Final Upward Adjustment, Parent shall (i) with respect to a Final Upward Adjustment related to the Closing Date Balance Sheet or the Revised Infrastructure Replacement Costs, within five (5) Business Days pay the Final Upward Adjustment to STS, or (ii) with respect to a Final Upward Adjustment related to the Final Tax Adjustment Amount, such Final Upward Adjustment shall, within five (5) Business Days, be withdrawn first, from the Tax Adjustment Escrow on deposit pursuant to the Escrow Agreement, and second, if the Tax Adjustment Escrow is not sufficient, the Parent shall pay to STS any such deficiency. In such event, the Escrow Agent shall promptly distribute to STS the True-Up Reserve Amount and/or the Tax Adjustment Escrow (the True-Up Reserve Amount, the Tax Adjustment Escrow together with the Final Upward Adjustment, is referred to as the “Additional Payment”). Any remaining portion of the Tax Adjustment Escrow on deposit pursuant to the Escrow Agreement after the foregoing withdrawal shall be promptly paid to the Parent.

3.5 Escrow.

(a) On the Closing Date, Parent and STS on behalf of all Selling Companies will execute and deliver an Escrow Agreement substantially similar to Exhibit C attached hereto, by and among Parent, STS and the Escrow Agent (the “Escrow Agreement”), and Parent will deliver to the Escrow Agent, as agent, the Escrow Amount which shall be maintained in four (4) separate escrow accounts. The True-Up Reserve Amount shall be used to pay any Final Downward Adjustment related to the Closing Date Balance Sheet or the Revised Infrastructure Replacement Costs, with the balance

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of any amount not so used being paid as set forth in Section 3.4. The Tax Adjustment Escrow shall be used to pay any Final Downward Adjustment or Final Upward Adjustment related to the Final Tax Adjustment Amount. The Indemnification Amount shall be applied to satisfy any indemnity claims of Parent or Indemnified Parties (if any) under Article IX and, at Parent’s discretion pursuant to Section 3.4 hereof, to pay the remaining portion of any Final Downward Adjustment if the True-Up Reserve Amount is not sufficient for such payment. The Contract Waiver Escrow shall be paid to the Parent and/or the Selling Companies as provided in subsection (b) below. The Escrow Amount will be held by the Escrow Agent in available funds in accordance with the terms and conditions of the Escrow Agreement and will be disbursed as provided in the Escrow Agreement. Any funds released from the Indemnification Amount because such amounts are no longer subject to indemnification claims shall be paid to STS.

(b) (i) The Contract Waiver Escrow shall be deposited with the Escrow Agent at Closing unless the Selling Companies deliver to the Parent prior to the Closing written consents in a form satisfactory to Parent to all of the Selling Companies Contracts identified on Schedule 3.5(b) attached hereto (the “Contract Waiver Agreements,” with such written consents referred to as the “Contract Waivers”). If all Contract Waivers are delivered by Closing, the Contract Waiver Escrow shall be reduced to zero. If a specific Contract Waiver is delivered prior to or by Closing, the Contract Waiver Escrow shall be reduced by the specific dollar amount enumerated in Schedule 3.5(b) for that specific Contract Wavier (with such amounts referred to for each Contract Waiver Agreement as the “Contract Wavier Value”).

(ii) In the event the Selling Companies fail to obtain the Contract Waiver for any Contract Waiver Agreement prior to Closing, the Selling Companies shall have 180 days after the Closing Date (the “Contract Waiver Period”) to obtain any remaining Contract Waivers not obtained prior to Closing. Pending the obtaining of such Contract Waiver, the parties shall cooperate with each other in any reasonable and lawful arrangements designed to provide to Parent the benefits of use of the Contract Waiver Agreement for its term (or any right or benefit arising thereunder, including the enforcement for the benefit of Parent of any and all rights of the Selling Companies against a third party thereunder). Parent shall pay or reimburse the Selling Companies for any expenses or costs owed under, and shall be entitled to retain the benefits received under, the Contract Waiver Agreement or such other arrangements during the Contract Waiver Period.

(iii) If during the Contract Waiver Period additional Contract Waivers are delivered to Parent by the Selling Companies, upon delivery of each such Contract Wavier the applicable Contract Waiver Agreement shall be

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included in the Assets and the Assumed Liabilities, and the parties shall promptly cause the Escrow Agent to distribute to STS the applicable Contract Waiver Value for that specific Contract Waiver Agreement.

(iv) For any Contract Waiver Agreement for which a Contract Waiver is not obtained prior to the end of the Contract Waiver Period, Parent shall, upon notice to STS, either (x) reject the assignment of such Contract Waiver Agreement, in which case such Contract Waiver Agreement shall not be an Asset or an Assumed Liability but shall be an Excluded Asset and/or a Retained Liability of the Selling Companies and the parties shall promptly cause the Escrow Agent to distribute to Parent the applicable Contract Waiver Value for that specific Contract Waiver Agreement, or (y) accept the assignment of such Contract Waiver Agreement, in which case such Contract Waiver Agreement shall be included in the Assets and the Assumed Liabilities and the parties shall promptly cause the Escrow Agent to distribute to STS the applicable Contract Waiver Value for that specific Contract Waiver Agreement.

(c) All fees, costs and expenses of the Escrow Agent shall be paid one-half by the Parent and one-half by the Selling Companies.

3.6 Voting Agreement; Shareholders’ Meeting; ESOP Participant Approval Process.

(a) By the execution hereof, the Majority Shareholders hereby agree to vote all Shares held by the Majority Shareholders to approve the execution of this Agreement and the transactions contemplated hereby and, to the extent any such Majority Shareholders are a participant in the ESOP, to vote in favor of the transactions contemplated hereby if the approval of such is passed through to the participants in the ESOP.

(b) STS, acting through the Board of Directors, will, as promptly as reasonably practical, take all actions necessary to approve the transactions contemplated under this Agreement by either:

(i) duly calling, giving notice of, convening and holding (including an option for attendance by remote communications) a special meeting of its shareholders for the purpose of considering and taking action upon this Agreement (the “Shareholders’ Meeting”); or

(ii) written action of the STS Shareholders.

(c) STS shall:

(i) use all reasonable efforts to prepare an information statement or other materials to be provided to the Shareholders and the ESOP Trustee for the purposes of considering and taking action upon this Agreement (the “Information Statement”) and obtain and furnish

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the information required to be included by it in the Information Statement. STS shall allow Parent reasonable opportunity to review and comment on the Information Statement and all amendments and supplements thereto prior to its distribution;

(ii) include in the Information Statement (as defined above) the recommendation of the Board of Directors that Shareholders of STS vote in favor of the approval of this Agreement;

(iii) STS shall use its reasonable efforts to solicit proxies in connection with the Shareholders Meeting;

(d) The parties acknowledge and agree that the transactions contemplated hereby must be voted upon by the participants in the ESOP (the “ESOP Participants”) pursuant to the Internal Revenue Code requirements for employee stock ownership plans. STS has engaged the ESOP Trustee to independently represent the ESOP Participants with respect to the transactions contemplated hereunder. The Majority Shareholders agree that the Majority Shareholders instead of STS shall be responsible for any indemnification obligations related to the ESOP Trustee’s misstatement of or failure or omission to disclose a material fact related to the transactions contemplated under this Agreement to the ESOP Participants.

(e) Notwithstanding the foregoing, neither STS nor any Shareholder shall disclose this Agreement, any Ancillary Document or any schedules attached to any such document, or the contents of any of the foregoing, to any Person (including any ESOP Participant) who is not a party to a confidentiality agreement with STS until such time as the Parent has filed this Agreement in its periodic reports with the Securities and Exchange Commission (the “SEC”).

3.7 Appointment of Shareholders’ Representative.

(a) Each Shareholder who executes this Agreement and each other Shareholder who does not execute this Agreement, by approval of this Agreement, hereby irrevocably constitutes and appoints Robert K. Eddy as the true and lawful agent and attorney-in-fact (the “Shareholders’ Representative”) with the powers set forth herein. If Robert K. Eddy is unwilling or unable to serve as Shareholders’ Representative, a successor Shareholders’ Representative shall be appointed by a plurality of Persons who held Outstanding Shares immediately prior to the Effective Time, with each such Person voting based on the number of Outstanding Shares so held. The absence of a Shareholders’ Representative, due to resignation or any other reason whatsoever, shall not impair or prejudice any right or remedy Parent may have at law or equity or under the terms of this Agreement.

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(b) Parent shall be entitled to rely upon any communication or writings given by or to, or executed by, the Shareholders’ Representative. All notices to be sent to any Shareholder pursuant to this Agreement or any other agreement contemplated hereby or delivered in connection herewith may be addressed to the Shareholders’ Representative and any notice so sent or delivered shall be deemed proper and sufficient notice to each Shareholder hereunder. The Shareholders hereby consent and agree that the Shareholders’ Representative is authorized to accept and deliver notice on behalf of each Shareholder pursuant hereto and pursuant to all other agreements contemplated hereby or delivered in connection herewith and to deliver waivers and consents on behalf of each Shareholder.

(c) The Shareholders’ Representative is hereby appointed and constituted the true and lawful attorney-in-fact of each Shareholder with full power in his, her, or its name and on his, her, or its behalf to act according to the terms of this Agreement and all other agreements contemplated hereby or thereby or delivered in connection herewith or therewith in the absolute discretion of the Shareholders’ Representative, and in general to do all things and to perform all acts, including amending this Agreement (other than to reduce the Cash Purchase Price by more than one percent (1%), and executing and delivering all agreements, certificates, receipts, instructions and other instruments contemplated by or deemed advisable in connection with this Agreement. This power of attorney and all authority hereby conferred is granted subject to the interest of the other Shareholders hereunder and in consideration of the mutual covenants and agreements made herein, and shall be irrevocable and coupled with an interest and shall not be terminated by any act of any Shareholder or by operation of law, whether by death or other event. In addition to the foregoing, the Shareholders’ Representative shall have full power and authority on behalf of the Shareholders to (i) to take any action which the Shareholders’ Representative is required or permitted to take under this Agreement, (ii) to take all actions necessary to wind up the business of STS and its Subsidiaries, and (iii) to negotiate, settle and compromise and otherwise handle all claims of the Parent with respect to Parent Damages.

(d) Nothing in this Agreement is intended, and nothing in this Agreement shall be interpreted as, imposing upon the Shareholders’ Representative, as the agent and attorney-in fact for the Shareholders any personal liability, personal economic obligation, or personal guarantee in favor of any party to this Agreement or any third party. The Shareholders’ Representative and any agent employed by the Shareholders’ Representative shall not have any liability to any Shareholder related to the Shareholders’ Representative’s duties hereunder, except for intentional fraud, willful misconduct or bad faith. The Shareholders agree to indemnify and hold the Shareholders’ Representative harmless against any loss, liability or expense incurred without intentional fraud, willful misconduct or bad faith on the part of the Shareholders’ Representative,

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arising out of or in connection with carrying out its duties hereunder, including the costs and expenses of defending against any claim of liability in connection with the exercise or performance of any of its powers or duties hereunder (including reasonable attorney’s fees and expenses). Notwithstanding the foregoing, the Shareholders’ Representative acknowledges that he is acting as a fiduciary under ERISA with respect to its decisions that may affect the rights of the ESOP under this Agreement and agrees that any such decisions shall be made with reasonable prior notice to the ESOP and in accordance with the fiduciary standards of ERISA.

(e) In furtherance of its role, the Shareholders’ Representative shall be entitled to incur such reasonable costs and expenses as the Shareholders’ Representative may deem appropriate under the circumstances, which expenses may include, but shall not be limited to, hiring attorneys, accountants, appraisers, and other professional advisors. Each Shareholder shall be responsible to reimburse the Shareholders’ Representative for such Shareholder’s pro rata portion of all such costs and expenses incurred by the Shareholders’ Representative within ten (10) days of written notification from the Shareholders’ Representative. After the Closing Date, the Shareholders’ Representative shall receive from STS a fee of Two Thousand Dollars ($2,000) per month for his services.

ARTICLE IV.

REPRESENTATIONS AND WARRANTIES OF THE SELLING COMPANIES

The Selling Companies and the Shareholders hereby make the representations and warranties in the following sections of this Article IV to Parent and Newco, except as qualified or supplemented by schedules in the Selling Companies Disclosure Schedule attached hereto. Each such schedule is numbered by reference to representations and warranties in a specific section of this Article IV. The inclusion of any exception, qualification or supplemental disclosure to such Selling Companies Disclosure Schedule shall not be deemed an admission that such item is a material fact, event or circumstance or that such item has had, or would reasonably be expected to have, individually or in the aggregate, a Company Material Adverse Effect.

4.1 Corporate Organization and Qualification. Schedule 4.1 contains a correct and complete list of all of STS Subsidiaries as of the date hereof and all of these entities are a party to this Agreement as a Selling Company. Each of the Selling Companies is a corporation (or a limited liability company) duly organized, validly existing and in good standing under the laws of its respective jurisdiction of incorporation and is qualified and in good standing as a foreign corporation or limited liability company in the jurisdictions set forth on Schedule 4.1 and each jurisdiction where the properties owned, leased or operated or the business conducted by it require such qualification, except where failure to so qualify or be in good standing would not have a Company Material Adverse Effect. Each of the Selling Companies has all requisite power and authority (corporate or otherwise) to own its properties and to carry on its business as it is now being conducted except where failure to have such power and authority would not have a Company Material Adverse Effect. STS has provided to Parent complete and correct copies of the STS’ Articles of Incorporation, as amended, and By-Laws, as amended, and the governing documents of each of the other Selling Companies.

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4.2 Capitalization. The authorized capital stock of STS consists of 15,000,000 shares of common stock, par value $.01 per share (the “Shares”). As of the date hereof there are 14,436,920 Shares issued and outstanding (“Outstanding Shares”). All of the Outstanding Shares of STS have been duly authorized and validly issued and are fully paid and nonassessable, and are owned beneficially and of record by the persons and in the amounts identified in Schedule 4.2. Except as set forth on Schedule 4.2, all outstanding shares of capital stock of the Selling Companies (except for STS) are owned by STS or a direct or indirect wholly owned subsidiary of STS, free and clear of all Liens, charges, encumbrances, claims and options of any nature. Except as set forth above and on Schedule 4.2, there are not as of the date hereof any outstanding or authorized options, warrants, calls, rights (including preemptive rights), commitments or any other agreements of any character which any Selling Company is a party to, or may be bound by, requiring it to issue, transfer, sell, purchase, redeem or acquire any Shares or any securities or rights convertible into, exchangeable for, or evidencing the right to subscribe for, any Shares or any shares of the capital stock of any of the Selling Companies.

4.3 Authority Relative to This Agreement. Each Selling Company has the requisite corporate power and authority to execute and deliver this Agreement and to consummate the transactions contemplated hereby. This Agreement and the consummation by each Selling Company of the transactions contemplated hereby have been duly and validly authorized by the board of directors of STS and of each of the Selling Companies and the shareholders of each Selling Company other than STS, and no other corporate proceedings on the part of each Selling Company are necessary to authorize this Agreement or to consummate the transactions contemplated hereby, other than, with respect to the Purchase, the approval of the Purchase and this Agreement by holders of Outstanding Shares in accordance with the MBCA. The board of directors of each Selling Company has determined this Agreement and the transactions contemplated hereby are fair to and in the best interest of the shareholders of each Selling Company and have recommended the approval and adoption of this Agreement by the shareholders of each Selling Company. This Agreement has been duly and validly executed and delivered by the Selling Companies and, assuming this Agreement constitutes the valid and binding agreement of Parent and Newco, constitutes the valid and binding agreement of the Selling Companies, enforceable against the Selling Companies in accordance with its terms, except that such enforceability may be limited by (i) bankruptcy, insolvency, reorganization, moratorium or other similar laws now or hereafter in effect relating to creditors’ rights generally and (ii) general principles of equity (regardless of whether enforceability is considered in a proceeding in equity or at law). Neither STS nor any of the other Selling Companies is an “investment company,” as such term is defined in Section 3(a) of the Investment Company Act of 1940.

4.4 Consents and Approvals; No Violation.

(a) Neither the execution and delivery of this Agreement nor the consummation by the Selling Companies of the transactions contemplated hereby will:

(i) conflict with or result in any breach of any provision of the respective articles of incorporation, as amended, or by-laws, as amended, articles of organization, as amended, or member control agreements, as amended, of STS or any of its Subsidiaries;

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(ii) require any consent, approval, authorization or permit of, or filing with or notification to, any governmental or regulatory authority, except (A) in connection with the applicable requirements of the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the “HSR Act”), (B) such filings and consents as may be required by the Federal Communications Commission (the “FCC”), the rules and regulations promulgated by the FCC (the “FCC Rules”), or the rules and regulations promulgated by the Minnesota Public Utilities Commission or the Iowa Utilities Board (collectively the “State Communications Laws and Regulations”) as set forth on Schedule 4.4(a), (C) such filings and consents as may be required under any environmental, health or safety law or regulation pertaining to any notification, disclosure or required approval triggered by the Purchase or the transactions contemplated by this Agreement as set forth on Schedule 4.4(a), (D) where the failure to obtain such consent, approval, authorization or permit, or to make such filing or notification, would not individually or in the aggregate have a Company Material Adverse Effect, or (E) such filings, consents, approvals, orders, registrations and declarations as may be required as a result of the status or identity of Parent and/or Newco;

(iii) except as set forth in Schedule 4.4(a), result in a violation or breach of, or constitute (with or without due notice or lapse of time or both) a default (or give rise to any right of termination, cancellation or acceleration or Lien) under any of the terms, conditions or provisions of any note, license, agreement or other instrument or obligation to which the Selling Companies or any of their assets may be bound, except for such violations, breaches and defaults (or rights of termination, cancellation or acceleration or Lien or other charge or encumbrance) as to which requisite waivers or consents have been obtained or which individually or in the aggregate are not individually or in the aggregate material to the Selling Companies taken as a whole or individually or in the aggregate would adversely affect the consummation of the transactions contemplated hereby; or

(iv) assuming the consents, approvals, authorizations or permits and filings or notifications referred to in this Section 4.4(a) are duly and timely obtained or made and, with respect to the Purchase, the approval of the Purchase and this Agreement by STS’ Shareholders has been obtained, violate any order, writ, injunction,

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decree, statute, rule or regulation applicable to the Selling Companies or to any of their respective assets, except for violations which are not individually or in the aggregate material to the Selling Companies taken as a whole or individually or in the aggregate would adversely affect the consummation of the transactions contemplated hereby.

(b) The affirmative vote of more than 50% of the voting power of the outstanding Shares in favor of the approval of this Agreement (the “Shareholder Approval”) is the only vote of the holders of any class or series of the Selling Companies’ securities necessary to approve this Agreement, the Purchase and the other transactions contemplated hereby that has not already occurred.

4.5 Financial Statements; Undisclosed Liabilities.

(a) The unaudited consolidated balance sheet as of October 31, 2008 of STS and its consolidated Subsidiaries (the “Latest Balance Sheet”) and the unaudited consolidated statements of income, changes in stockholders’ equity and cash flows of STS and its consolidated Subsidiaries for the 10-month period then ended (such statements and the Latest Balance Sheet, the “Latest Financial Statements”) and the audited consolidated balance sheet, as of December 31, 2007 (the “Last Fiscal Year End”) of STS and its consolidated Subsidiaries (the “2007 Balance Sheet”) and the audited consolidated statements of income, changes in stockholders’ equity and cash flows, including the notes, of STS and its consolidated Subsidiaries for each of the three (3) years ended on the Last Fiscal Year End (the “Annual Financial Statements,” and together with the Latest Financial Statements, the “Financial Statements”) are based upon the books and records of STS and its consolidated Subsidiaries, have been prepared in accordance with GAAP consistently applied during the periods indicated and present fairly in all material respects the financial position, results of operations and cash flows of STS and its consolidated Subsidiaries on a consolidated basis at the respective dates and for the respective periods indicated, except that the Latest Financial Statements may not contain all notes and are subject to year-end adjustments; provided however, the Latest Financial Statements were prepared in such a manner that when made such year-end adjustments will not be material and will not differ materially from year-end adjustments made historically. Except as reflected or expressly reserved against in the Latest Balance Sheet, neither of STS nor any Subsidiary has any material liability, contingent or otherwise, except (a) a liability that has arisen after the date of the Latest Balance Sheet in the ordinary course of business consistent with past practice or (b) obligations under any Contract listed on a Schedule to this Agreement or under a Contract not required by this Agreement to be listed on a Schedule.

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4.6 Absence of Certain Changes or Events.

(a) Since December 31, 2007, the Selling Companies have not suffered any Company Material Adverse Effect and there are not any facts, circumstances or events that are reasonably likely to have a Company Material Adverse Effect.

(b) Since December 31, 2007, except as disclosed on Schedule 4.6(b) or as otherwise expressly provided by this Agreement, the Business of the Selling Companies has been conducted in the ordinary course consistent with past practices and there has not been:

(i) any declaration, setting aside or payment of any dividend or other distribution with respect to any equity of STS or any of its Subsidiaries (other than dividends and distributions permitted by Section 6.1), or any repurchase, redemption or other acquisition by STS or any of its Subsidiaries of any outstanding shares of Capital Stock or other securities of, or other ownership interests in, STS or any of its Subsidiaries;

(ii) any split, combination or reclassification of any shares of the Selling Companies or any issuance or the authorization of any issuance of any securities of the Selling Companies;

(iii) any amendment of any material term of any outstanding security of the Selling Companies;

(iv) any incurrence, assumption or guarantee by the Selling Companies of any indebtedness for borrowed money;

(v) any creation or other incurrence by the Selling Companies of any Lien on any Asset;

(vi) except as disclosed on Schedule 4.6(vi) or as otherwise contemplated under Section 6.1(h) and in connection with Equity Investments, any making of any loan, advance or capital contributions to or investment in any Person;

(vii) any damage, destruction or other casualty loss (whether or not covered by insurance) affecting the Business or Assets of the Selling Companies that is material to the Selling Companies, taken as a whole;

(viii) any transaction or commitment made, or any contract or agreement entered into, by any of the Selling Companies relating to its Assets or Business (including the acquisition or disposition of any Assets) or any relinquishment by the Selling Companies of any contract or other right, in either case, material to the Selling Companies, taken

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as a whole, other than transactions and commitments in the ordinary course of business consistent with past practices or as contemplated by this Agreement;

(ix) any change in any method of accounting or accounting principles or practice by STS or any of its Subsidiaries, except for any such change required by reason of a concurrent change in GAAP;

(x) other than as disclosed on Schedule 4.11(b), any (1) grant of any severance or termination pay to (or amendment to any existing arrangement with) any director, officer or employee of STS or any of its Subsidiaries, (2) new or increase in benefits payable under any existing severance or termination pay policies or employment agreements, (3) any employment, deferred compensation or other similar agreement (or any amendment to any such existing agreement) entered into with any director or officer of STS or any of its Subsidiaries, (4) the establishment, adoption or amendment (except as required by applicable law) of any collective bargaining agreement, (5) the payment, establishment, adoption or amendment of any bonus, profit-sharing, thrift, pension, retirement, deferred compensation, compensation, stock option, restricted stock or other benefit plan or arrangement covering any director, officer or employee of STS or any of its Subsidiaries, (4) increase in compensation, bonus or other benefits payable to any director or officer of STS or any Subsidiary of it, or increase in compensation of any employee of STS or any of its Subsidiaries other than Business wide annual adjustments in compensation in the ordinary course of business, consistent with past practice, or (5) loans by STS or its Subsidiaries to any officer, director or any employee, forgiveness of any indebtedness owed by an officer, director or employee to STS or any of its Subsidiaries or guarantees by STS or any of its Subsidiaries of any obligations of any officer, director or employee;

(xi) any hiring or termination of any officer, member of senior management or key employee or consultant and STS or any of its Subsidiaries;

(xii) any labor dispute, other than routine individual grievances, or any activity or proceeding by a labor union or representative thereof to organize any employees of STS or any of its Subsidiaries, which employees were not subject to a collective bargaining agreement at December 31, 2007, or any lockouts, strikes, slowdowns, work stoppages or threats thereof by or with respect to such employees;

(xiii) any tax election made or changed, any annual tax accounting period changed, any method of tax accounting adopted or changed,

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any amended tax returns or claims for Tax refunds filed, any closing agreement entered into, any tax claim, audit or assessment settled, or any right to claim a tax refund, offset or other reduction in tax liability surrendered; or

(xiv) any contract, agreement, arrangement or understanding by STS or any of its Subsidiaries to do any of the things described in the preceding clauses (i) through (xiv).

4.7 Real Property.

(a) The real property owned by the Selling Companies or demised by the leases listed on Schedule 4.7 constitutes all of the real property owned, leased (whether or not occupied and including any leases assigned or leased premises sublet for which any Selling Company remains liable), used or occupied by any Selling Company, other than public rights of way or private easements described in Section 4.7(k). As of the date hereof, the address, square footage and use of each item of Owned Real Property is set forth on Schedule 4.7.

(b) STS or one of its Subsidiaries owns good insurable title to each parcel of real property identified on Schedule 4.7 as being owned by the Sellers (the “Owned Real Property”), free and clear of all Liens, except for Permitted Liens.

(c) The leases of real property listed on Schedule 4.7 as being leased by a Selling Company (the “Leased Real Property”) are in full force and effect, neither tenant, nor, to the Knowledge of the Selling Companies, landlord, are in default, and a Selling Company holds valid and existing leasehold interests under each of such leases. The Leased Real Property and the Owned Real Property are, collectively, the “Real Property.”

(d) The Real Property and improvements thereon are sufficient for the Selling Companies to conduct the Business as presently conducted and currently proposed to be conducted, and such improvements are in working condition ordinary wear and tear excepted.

(e) Except for the Real Property Purchase Agreements, no Selling Company has entered into any contracts for the sale of the Owned Real Property nor are there any rights of first refusal or options to purchase any Owned Real Property.

(f) There is no action, litigation, investigation, condemnation or proceeding of any kind, pending or, to the Knowledge of the Selling Companies, threatened, against all or any portion of any Real Property.

(g) The present use and operation of the Real Property by the Selling Companies is in compliance in all material respects with applicable zoning and land use laws, and other applicable local, state and federal laws and regulations relating to the use and occupation of the Real Property.

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(h) All water, sewer, gas, electric, telephone, and drainage facilities and all other utilities required by law for the use and operation of the Real Property by the Selling Companies in the conduct of the Business have been installed to each Real Property and are in working order.

(i) To the Knowledge of the Selling Companies, there is legal access to the Real Property from public roads sufficient for the use and operation of the Real Property by the Selling Companies in the conduct of their respective businesses, and such roads have been properly dedicated to the applicable governmental body, so that the Selling Companies are not responsible for the maintenance of such roads.

(j) Schedule 4.7(j) identifies those Leased Real Properties upon which STS or any of its Subsidiaries has constructed a building or other permanent fixture.

(k) All communication lines, towers or structures owned by STS or any Subsidiary are either situated on Owned Real Property or Leased Real Property, or within a public right-of-way or on private property pursuant to a valid private easement, which private easements are identified on Schedule 4.7(k), and which public right-of-ways will be shown on a map to be prepared and delivered by STS to Parent as Schedule 6.19 pursuant to Section 6.19 hereof, which Schedule 6.19 shall be deemed part of Schedule 4.7(k).

4.8 Litigation. Except as disclosed on Schedule 4.8, as of the date of this Agreement there are no actions, claims, suits, charges, proceedings and governmental investigations pending or, to the Knowledge of the Selling Companies, threatened, which (i) if determined or resolved adversely in accordance with plaintiff’s demands, individually or in the aggregate are reasonably likely to have a Company Material Adverse Effect, or (ii) seeks to prevent, enjoin, alter or materially delay the Purchase or any of the other transactions contemplated hereby.

4.9 Information Statement. The Information Statement or similar materials distributed to the STS Shareholders in connection with the Purchase, including any amendments or supplements thereto will comply in all material respects with applicable federal securities laws, and the Information Statement will not, at the time that it or any amendment or supplement thereto is mailed to the Shareholders, at the time of the Shareholders’ Meeting or at the Effective Time contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading except that no representation is made by STS with respect to information supplied by Newco or Parent for inclusion in the Information Statement.

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4.10 Taxes.

(a) Tax Returns. For all years for which the applicable statutory period of limitation has not expired, STS and all of its Subsidiaries have timely and properly filed all material federal, state, local and foreign tax returns (including but not limited to income, franchise, sales, payroll, employee withholding and social security and unemployment) which were or (in the case of returns not yet due but due on or before the date of the Closing, taking into account any valid extension of the time for filing) will be required to be filed. STS and each of its Subsidiaries have paid all taxes (including interest and penalties) and withholding amounts owed by it, except where the failure to pay such taxes or withholding amounts is not individually or in the aggregate material to STS and its Subsidiaries taken as a whole. No material, unpaid tax deficiencies have been proposed or assessed in writing against STS or any of its Subsidiaries and no material tax deficiencies, whether paid or unpaid, have been proposed or assessed in writing against STS or any Subsidiary since January 1, 2002. Except as set forth in Schedule 4.10, neither STS nor any Subsidiary is liable for any taxes attributable to any other Person, whether by reason of being a member of another affiliated group, being a party to a tax sharing agreement, as a transferee or successor, or otherwise.

(b) Audits. Except as set forth on Schedule 4.10(b), there is no claim, audit, action, suit, proceeding or investigation now pending or, to the Selling Companies’ Knowledge, threatened against or with respect to STS or any of its Subsidiaries in respect of any tax (including but not limited to income, franchise, sales, payroll, employee withholding and social security and unemployment) or tax return. Except as set forth in Schedule 4.10(b), neither STS nor any of its Subsidiaries have consented to any extension of the statute of limitations with respect to any open federal, state or local tax returns.

(c) Liens. Except as set forth in Schedule 4.10(c), there are no tax liens upon any property or Assets of STS or any of its Subsidiaries except for liens for current taxes not yet due and payable.

(d) Withholding Taxes. STS and its Subsidiaries have properly withheld and timely paid all material withholding and employment taxes which they were required to withhold and pay relating to salaries, compensation and other amounts heretofore paid to its employees or independent contractors. All Forms W-2 and 1099 required to be filed with respect thereto have been timely and properly filed except where the failure to file is not individually or in the aggregate material to STS and its Subsidiaries taken as a whole.

(e) Other Representations. Neither STS nor its Subsidiaries has filed any consent under Section 34l(f) of the Code or agreed to have

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Section 341(f)(2) of the Code apply to any disposition of a subsection (f) asset (as defined in Section 341 (f)(4) of the Code) owned by STS or any of its Subsidiaries. Except as set forth on Schedule 4.10(e), during the five-year period ending on the date hereof, neither STS nor any of its Subsidiaries was a distributing or controlled corporation in a transaction intended to be governed by Section 355 of the Code.

(f) Tax Notices. Neither STS nor any Subsidiary has received a written notice from a Tax authority in a jurisdiction where STS or the Subsidiaries do not file Returns to the effect that STS or the Subsidiaries are subject to taxation by that jurisdiction.

(g) Tax Sharing Agreements. Neither STS nor any Subsidiary is a party to any Tax allocation or sharing agreement that will survive the Closing.

(h) S Corporation Election. STS is a validly electing S corporation, within the meaning of Code Sections 1361 and 1362, and will be an S corporation up to and including the day immediately prior to the Closing Date. STS has also validly elected to be an “S corporation” in all state and local jurisdictions that recognize such status and in which it would, absent such an election, be subject to corporate income Tax, and has maintained its status as an “S corporation” in each such jurisdiction at all times since the date of such election. Schedule 4.10(h) identifies each Subsidiary that is a “qualified subchapter S subsidiary” within the meaning of Section 1361(b)(3)(B) of the Code. Each Subsidiary so identified has been a qualified subchapter S subsidiary at all times since the date shown on such schedule up to an including the day prior to the Closing Date.

(i) Section 280G. There is no contract, agreement, plan or arrangement covering any employee or former employee of either of STS or any Subsidiary that, individually or in the aggregate, could give rise to any amount that would not be deductible pursuant to Section 280G or 162 of the Code, excluding any actions taken by the Parent or Newco from and after the Closing Date.

4.11 Employees.

(a) Schedule 4.11(a) lists each employee or independent contractor of STS or any Subsidiary as of the date of this Agreement, states the total number of employees or independent contractors and shows for each such employee or independent contractor, and in the aggregate, full-time, part-time and temporary status.

(b) Schedule 4.11(b) lists each employee or independent contractor of STS or any Subsidiary as of the date of this Agreement and shows for each such employee annual salary or hourly compensation (with historical annual compensation for the most recently completed fiscal year), accrued and

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unused vacation hours and any other compensation payable (including compensation payable pursuant to bonus, incentive, deferred compensation or commission arrangements), date of employment and position. To the Knowledge of the Selling Companies, no executive employee of STS and no group of employees of STS or any Subsidiary has any plans to terminate his, her or their employment. Neither STS nor any Subsidiary has any labor relations problem pending or, to the Knowledge of the Selling Companies, threatened, and its labor relations are satisfactory.

(c) The employment of any terminated former employee of STS or any Subsidiary has been terminated in accordance with any applicable contract terms and applicable Law, and neither STS nor any Subsidiary has any liability under any contract or applicable Law toward any such terminated employee. The transactions contemplated by this Agreement will not cause STS or any Subsidiary to incur or suffer any liability relating to, or obligation to pay, severance, termination or other payment to any Person.

(d) Neither STS nor any Subsidiary has made any loans (except advances for business travel, lodging or other expenses in the Ordinary Course of Business) to any employee of STS or any Subsidiary.

(e) No employee of STS or any Subsidiary is covered by any collective bargaining agreement, and no collective bargaining agreement is being negotiated.

(f) STS and each of the Subsidiaries has paid in full to all employees all wages, salaries, bonuses and commissions due and payable to such employees and has fully reserved in its books of account all amounts for wages, salaries, bonuses and commissions due but not yet payable to such employees.

(g) There has been no lay-off of employees or work reduction program undertaken by or on behalf of STS or any Subsidiary in the past two years, and no such program has been adopted by STS or any Subsidiary or publicly announced, except for the termination of employment of all employees contemplated by Section 6.11(a) of this Agreement.

4.12 Employee Benefit Plans; ESOP Matters.

(a) Schedule 4.12(a) lists each “Employee Benefit Plan” as defined in Section 3(3) of ERISA that STS or any Subsidiary maintains or sponsor or to which STS or any Subsidiary contribute or are obligated to contribute, or with respect to which STS or any Subsidiary has any current or potential obligation or liability

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(b) Each such Employee Benefit Plan (and each related trust, insurance contract, or fund) complies in form and in operation in all material respects with the applicable requirements of ERISA and the Code.

(c) All material contributions (including all employer contributions and employee salary reduction contributions) which are due have been paid to each such Employee Benefit Plan which is an Employee Pension Benefit Plan within the meaning set forth in ERISA § 3(2).

(d) Each such Employee Benefit Plan which is an Employee Pension Benefit Plan has received a determination letter from the Internal Revenue Service, or is a prototype plan and the prototype sponsor has received a favorable opinion letter from the Internal Revenue Service, to the effect that it meets the requirements of Code §401(a).

(e) STS has delivered or made available to Parent correct and complete copies of the plan documents and summary plan descriptions, the most recent determination letter received from the Internal Revenue Service, the most recent Form 5500 Annual Report, and all related trust agreements, insurance contracts, and other funding agreements which implement each such Employee Benefit Plan.

(f) There are no criminal proceedings against, and no material civil, arbitration, administrative or other proceedings or disputes by or against, the trustees, managers or administrators of the Employee Benefit Plans or STS or any Subsidiary in relation to the Employee Benefit Plans and none is pending or threatened.

(g) Schedule 4.12(g) lists each employee of STS or any Subsidiary who is (i) absent from active employment due to short or long term disability, (ii) absent from active employment on a leave pursuant to the Family and Medical Leave Act or a comparable state Law, (iii) absent from active employment on any other leave or approved absence (together with the reason for each leave or absence) or (iv) absent from active employment due to military service (under conditions that give the employee rights to re-employment).

(h) With respect to continuation rights arising under federal or state Law as applied to Employee Benefit Plans that are group health plans (as defined in Section 601 et seq. of ERISA), Schedule 4.12(h) lists (i) each employee, former employee or qualifying beneficiary who has elected continuation and (ii) each employee, former employee or qualifying beneficiary who has not elected continuation coverage but is still within the period in which such election may be made.

(i) Neither STS nor any Subsidiary has any material unfunded liability under any such Employee Benefit Plan. STS has the right to modify and

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terminate benefits (other than vested pension benefits) with respect to both retired and active employees under such Employee Benefit Plans. The consummation of the transactions contemplated by this Agreement will not cause accelerated vesting, payment or delivery of any payment or benefit under or in connection with any such Employee Benefit Plan or constitute a “deemed severance” or “deemed termination” under any such Employee Benefit Plan otherwise with respect to, any current or former director, officer or employee of STS or any Subsidiary.

(j) Schedule 4.12(j) sets forth the policy of STS or any Subsidiary with respect to accrued vacation, personal and sick time and earned time off applicable to the employees and the total amount of such liabilities with respect to the employees as of the end of the pay period immediately preceding the date hereof.

(k) Each Employee Benefit Plan that is subject to Code Section 409A has been operated and administered in good faith compliance with Code Section 409A, and all regulations, notices and other guidance of general applicability issued thereunder, from the period beginning January 1, 2005, through Closing. Neither STS nor any Subsidiary have any obligation under or with respect to any Employee Benefit Plan that is currently subject to an excise tax under Code Section 409A. There is no stock option or other stock-based right granted under any Employee Benefit Plan that is subject to Code Section 409A.

(l) The ESOP is (i) a qualified plan and tax-exempt trust within the meaning of Sections 401(a) and 501(a) of the Code, (ii) a duly created and validly existing trust under the laws of the State of Minnesota, and applicable legal requirements, including, without limitation, Section 4975(e)(7) of the Code, Section 54.4975-11 of the Treasury Regulations, and Section 407(d)(6) of ERISA; and (iii) has all requisite power and authority to carry out the purposes and conduct the affairs for which it was created and to own its assets.

4.13 Affiliate Transactions. Except as set forth on Schedule 4.13, no Insider has any contract with STS or any Subsidiary (other than employment not represented by a written contract and terminable at will), any loan to or from STS or any interest in any assets (whether real, personal or mixed, tangible or intangible) used in or pertaining to the business of STS or any Subsidiary (other than ownership of capital stock of the Selling Companies). No Insider has any direct or indirect interest in any competitor, supplier or customer of STS or any Subsidiary or in any Person from whom or to whom STS or any Subsidiary leases any property, or in any other Person with whom STS or any Subsidiary otherwise transacts business of any nature.

4.14 Environmental Laws.

(a) As used in this Section 4.14, the following terms have the following meanings:

(i) “Environmental Costs” means any and all costs and expenditures, including any reasonable fees and expenses of attorneys and of environmental consultants or engineers incurred in connection with investigating, defending, remediating or otherwise responding to any Release of Hazardous Materials, any violation or alleged violation of Environmental Law, any fees, fines, penalties or charges associated with any Environmental Permit, or any actions necessary to comply with any Environmental Law.

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(ii) “Environmental Law” means any Law or Order relating to pollution, contamination, Hazardous Materials, protection of human health and the environment, or any Environmental Permit, but not including Laws or Orders relating solely to worker health and safety such as the Federal Occupational Safety and Health Act.

(iii) “Environmental Permit” means any permit, license, variance, exemption, registration, certificate or approval issued by or filed with any Governmental Entity pursuant to Environmental Law.

(iv) “Environmental Reports” means, collectively, the documents identified on Schedule 4.14(h) and the documents prepared as part of Parent’s Environmental Review under Section 6.15 below.

(v) “Hazardous Materials” means any pollutant; contaminant; dangerous, toxic or hazardous chemical or waste; dangerous, toxic or hazardous material; or dangerous, toxic or hazardous substance as defined in or otherwise governed by any Environmental Law, including any chemical waste, material, substance, pollutant or contaminant that might cause any injury to human health or to the environment or might subject the owner or operator of the Real Property to any Environmental Costs or liability under any Environmental Law.

(vi) “Regulatory Action” means any actual or threatened claim, cause of action or legal proceeding with respect to STS or any Subsidiary brought or instigated by any Governmental Entity in connection with any Environmental Costs, Release of Hazardous Materials or any Environmental Law.

(vii) “Release” means the spilling, leaking, disposing, burying, discharging, emitting, depositing, ejecting, leaching, escaping or any other release or threatened release, however defined, whether intentional or unintentional, of any Hazardous Material.

(viii) “Third-Party Environmental Claim” means any actual or threatened claim, cause of action or legal proceeding (other than a Regulatory Action) brought or instigated by any Person based on

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negligence, trespass, strict liability, nuisance, toxic tort or any other cause of action or theory relating to any Environmental Costs, Release of Hazardous Materials or any violation of Environmental Law.

(b) To the Selling Companies’ Knowledge, no Third-Party Environmental Claim or Regulatory Action is pending or threatened, against the Real Property, STS or any of its Subsidiaries.

(c) Except as disclosed in the Environmental Reports, all handling, transfer, transportation, treatment, or disposal of Hazardous Materials by STS or any of its Subsidiaries has been in compliance in all material respects with applicable Environmental Law.

(d) No Real Property has ever been used by STS or the Subsidiaries, nor to the Knowledge of the Selling Companies and except as disclosed in the Environmental Reports, by any other Person, as a landfill, dump or other disposal or treatment area for Hazardous Materials.

(e) Except as disclosed in the Environmental Reports, (i) there has not been any Release of any Hazardous Material by STS or any of its Subsidiaries on, under, about, from or in connection with the Real Property that reasonably could be expected to subject STS or any of its Subsidiaries to any material Environmental Costs or liability under Environmental Law; and (ii) the Real Property has been used and operated by STS and/or any of its Subsidiaries in compliance in all material respects with all applicable Environmental Law.

(f) STS and each of its Subsidiaries has obtained all material Environmental Permits necessary to conduct its business as currently conducted. STS and each of its Subsidiaries has timely filed all material reports and notifications required to be filed under and pursuant to all applicable Environmental Law.

(g) No Hazardous Materials have been generated, treated, contained, handled, located, used, manufactured, processed, buried, incinerated, deposited or stored by STS or any of its Subsidiaries on, under or about any part of the Real Property except in the ordinary course of business and in material compliance with applicable Environmental Law. To the Knowledge of the Selling Companies, except as disclosed in the Environmental Reports, (i) the Real Property contains no asbestos, urea, formaldehyde, radon at levels above natural background, PCBs or pesticides; (ii) no underground storage tanks are located on the Real Property, or have been located on the Real Property and then subsequently been removed or filled; and (iii) there are no wells or septic systems on the Real Property.

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(h) The Environmental Reports include all environmental reports and investigations that STS or any of its Subsidiaries has obtained or ordered with respect to STS, any of its Subsidiaries or the Real Property and copies have been delivered to Parent. Schedule 4.14(h) lists all Environmental Reports except those to be obtained pursuant to Section 6.15 after the execution hereof.

(i) There is currently no unpaid Lien against STS, any of its Subsidiaries or any of the Owned Real Property in favor of any Person relating to or arising from (i) any liability under, or violation of, any applicable Environmental Law, (ii) any Release of Hazardous Materials or (iii) any imposition of Environmental Costs on STS or any of its Subsidiaries. To the Selling Companies’ Knowledge there is currently no unpaid Lien against any of the Leased Real Property in favor of any Person relating to or arising from (i) any liability of STS or any of its Subsidiaries or to the Selling Companies’ Knowledge any other Person, or violation by STS or any of its Subsidiaries or to the Selling Companies’ Knowledge any other Person, of any applicable Environmental Law, (ii) any Release of Hazardous Materials by STS or any of its Subsidiaries or to the Selling Companies’ Knowledge any other Person, or (iii) any imposition of Environmental Cost on STS or any of its Subsidiaries.

The representations and warranties in this Section 4.14 are the sole and exclusive representations and warranties of the Selling Companies and the Shareholders concerning environmental matters.

4.15 Intangible Property. The Selling Companies are the owner of, or a licensee under a valid license for, all items of intangible property that are material to the Business of the Selling Companies as currently conducted, taken as a whole, including, without limitation, trade names, unregistered trademarks and service marks, brand names, patents and copyrights. As of the date of this Agreement, except as disclosed on Schedule 4.15, there are no claims pending or, to the Selling Companies’ Knowledge, threatened, that STS or any Subsidiary is in violation of any such intangible property rights of any third party which is reasonably likely to be material to the Selling Companies taken as a whole.

4.16 Compliance with Laws and Orders. Except with respect to the matters described in Sections 4.10, 4.11, 4.12 and 4.14, the Selling Companies are not in violation of or in default under any law, statute, rule or regulation having the effect of law of the United States or any state, county, city or other political subdivision thereof or of any government or regulatory authority (“Laws”) or writ, judgment, decree, injunction or similar order of any governmental or regulatory authority, in each case, whether preliminary or final, (an “Order”) applicable to the Selling Companies or any of their respective assets and properties which individually or in the aggregate is material to the Selling Companies taken as a whole.

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4.17 Certain Agreements.

(a) Except as set forth in Schedule 4.17(a), neither STS nor any of its Subsidiaries is a party to any oral or written agreement or plan, including any Employee Benefits Plan, any of the benefits of which will be increased, or the vesting of the benefits of which will be accelerated, by the occurrence of any of the transactions contemplated by this Agreement or the value of any of the benefits of which will be calculated on the basis of any of the transactions contemplated by this Agreement. Except as described in Schedule 4.17(a) or except for any such matter that would not individually or in the aggregate be material to STS and its Subsidiaries taken as a whole, the transactions contemplated by this Agreement will not constitute a “change of control” under, require the consent from or the giving of notice to any third party pursuant to, or accelerate the vesting or repurchase rights under, the terms, conditions or provisions of any loan or credit agreement, note, bond, mortgage, indenture, license, lease, contract, Scheduled Agreement (as defined in Section 4.17(b)), agreement or other instrument or obligation to which STS or any of its Subsidiaries is a party or by which any of them or any of their properties or assets may be bound. Except as set forth in Schedule 4.17(a), there are no amounts payable by STS or its Subsidiaries to any officers of STS or its Subsidiaries (in their capacity as officers) as a result of the transactions contemplated by this Agreement and/or any subsequent employment termination.

(b) Except as set forth on Schedule 4.17(b), neither STS nor any of its Subsidiaries is a party to or bound by:

(i) any (x) lease or sublease of real property or (y) other lease or sublease providing for annual rentals of Twenty-Five Thousand Dollars ($25,000) or more;

(ii) any agreement for the sale, purchase or license of materials, supplies, goods, services, equipment or other tangible or intangible assets providing for scheduled annual payments by or to STS or its Subsidiaries of Fifty Thousand Dollars ($50,000) or more;

(iii) any partnership, joint venture, development, alliance, agency, dealer, sales representative, marketing, distribution, or other similar agreement or arrangement;

(iv) any agreement, contract or commitment relating to the acquisition or disposition of any business (whether by merger, sale of stock, sale of assets or otherwise) entered into since January 1, 2002;

(v) any mortgages, indentures, loans or credit agreements, security agreements or other written agreements or instruments relating to the borrowing of money or extension of credit;

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(vi) any material agreement with any Affiliate of STS (or any of its Subsidiaries), with any director or officer of STS or any of its Subsidiaries, or with any “associate” or any member of the “immediate family” (as such terms are respectively defined in Rules 12b-2 and 16a-1 of the 1934 Act) of any such director or officer;

(vii) any agreement containing a non-compete agreement or other covenant that in either case would by its terms limit the freedom of the Parent, Newco or any of its Subsidiaries to compete in any material respect with any third party;

(viii) except for negotiable instruments in the process of collection, any power of attorney outstanding or any contract, commitment or liability (whether absolute, accrued, contingent or otherwise) any agreement whereby STS or any of its Subsidiaries is a guarantor, surety, co-signer, endorser, co-maker, or indemnitor in respect of the contract or commitment of any other Person or entity;

(ix) any leases, subleases, easements, licenses, deeds or contracts for deed or other use agreements by which STS or its Subsidiaries occupy or have the right to use or access land, tower or other structures or spaces including those rights of way and easements set forth on Schedule 4.7(k) (as such Schedule will be amended pursuant to Section 6.19), the termination of which, individually or in the aggregate, would be material to STS and its Subsidiaries taken as a whole;

(x) any licensing or other agreements with respect to patents, trademarks, copyrights, or other intellectual properties (other than commercially available software which has a replacement value of less than Twenty-Five Thousand Dollars ($25,000));

(xi) any investment banking agreement or financial advisory agreement; or

(xii) any other agreement, commitment, arrangement or plan not made in the ordinary course of business that is material to STS and its Subsidiaries, taken as a whole; or

(xiii) any agreement that is not assignable or that requires notice to, or consent of, another party for an assignment to Parent or Newco pursuant to the Agreement.

(c) Each agreement, contract, instrument, plan, lease, arrangement or commitment disclosed or required to be disclosed pursuant to Section 4.17(b) is referred to as a “Scheduled Agreement” and is a valid and binding agreement of STS or its Subsidiaries, as the case may be, and

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is in full force and effect with respect to STS or any of its Subsidiaries, as applicable. To the Knowledge of the Selling Companies, except as set forth on Schedule 4.17(b), each other party to any Scheduled Agreement, and neither STS nor any of its Subsidiaries is in default or breach in any material respect under the terms of any such Scheduled Agreement, which such default or breach would be material to STS and its Subsidiaries taken as a whole.

(d) Except as otherwise disclosed on Schedule 4.17(d), all of the indebtedness referred to in Section 4.17(b)(v) is prepayable without penalty or premium.

4.18 Permits. STS and its Subsidiaries hold all permits, licenses, variances, exemptions, orders, registrations, certificates and approvals of all governmental or regulatory authority that are required from them to own, lease or operate their assets and to carry on their businesses (the “Permits”), except where the failure to have such Permit (other than a Permit required by the FCC Rules or under State Communications Laws and Regulations, as to which this exception shall not apply) would not individually or in the aggregate be material to STS and its Subsidiaries taken as a whole. Except for the Permits with the FCC and under the State Communications Laws and Regulations, and any other Permits that pursuant to the terms of the Permits or applicable law terminate upon change in ownership or control of the permitted facility or the Purchase, in and of itself, would not cause the revocation or cancellation of any Permit. Schedule 4.18 sets forth a true and complete list of all Permits, including but not limited to those obtained from the FCC and under the State Communications Laws and Regulations. There is no outstanding notice of cancellation or termination or, the Knowledge of the Selling Companies, any threatened cancellation or termination of the Permits with the FCC or pursuant to the State Communications Laws and Regulations and STS and its Subsidiaries is in compliance with the terms and conditions of such Permits, except to the extent any non-compliance would not be material to STS and its Subsidiaries taken as a whole. The Permits with the FCC and under the State Communications Laws and Regulations are not subject to any restrictions or conditions that limit the operation of the business, other than customary restrictions or limitations that are generally applicable to permits of that type. There are no applications by STS or its Subsidiaries or complaints by customers before the FCC or state regulatory authorities which administer State Communications Laws and Regulations or investigations, inquiries or proceedings pending or threatened related to the Permits with the FCC or the state regulatory authorities which administer State Communications Laws and Regulations that could reasonably be expected to have a Company Material Adverse Effect.

4.19 Brokers and Finders. Except for the fees and expenses payable to Greene Holcomb & Fisher, LLC, which fees and expenses are reflected in its agreement with STS, a redacted copy of which has been provided to Parent, STS has not employed any investment banker, broker, finder, consultant or intermediary in connection with the transactions contemplated by this Agreement which would be entitled to any investment banking, brokerage, finder’s or similar fee or commission in connection with this Agreement or the transactions contemplated hereby.

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4.20 Intentionally Deleted.

4.21 Tangible Property Other than Real Property.

(a) With respect to Tangible Property other than the Real Property, (i) the Selling Companies have good and marketable title, free and clear of all Liens except for Permitted Liens, to all of the Tangible Property used in the Business including but not limited to the Tangible Property reflected on the Latest Balance Sheet, or with respect to leased properties and assets, valid leasehold interests therein; (ii) the Selling Companies have sufficient personal property and other tangible assets to conduct the Business as presently conducted and currently proposed to be conducted; and (iii) all such Tangible Property is in operating condition, ordinary wear and tear excepted. Schedule 4.21(a) lists all material machinery, equipment and other Tangible Property other than Real Property used in the conduct of the Business as of the date of this Agreement.

(b) No director, officer, employee or Affiliate owns or has an interest in any material asset used in the Business other than the Excluded Property (as defined in Section 6.16).

4.22 Intellectual Property Rights.

(a) Set forth on Schedule 4.22(a) is a list of each patent or trademark registration which has been issued to STS or any of its Subsidiaries, which identifies each pending patent application or application for registration which STS or any of its Subsidiaries has made, and which identifies each material license, agreement, or other permission which STS or any of its Subsidiaries have granted to any third party with respect to each item identified in Schedule 4.22(a). Schedule 4.22(a) also identifies each registered or unregistered trade name and registered or unregistered trademark and domain names used by STS or any of its Subsidiaries in connection with any of the Business. With respect to each item identified in Schedule 4.22(a) (and except as set forth on Schedule 4.22(a):

(i) STS or one of its Subsidiaries possesses all right, title, and interest in and to the item, free and clear of any Lien, license, or other restriction;

(ii) the item is not subject to any outstanding injunction, judgment, order, decree, ruling, or charge; and

(iii) no action, suit, proceeding, hearing, investigation, claim or demand is pending or threatened which challenges the legality, validity, enforceability, use, or ownership of the item.

(b) To the Selling Companies’ Knowledge, neither STS nor any Subsidiary has infringed upon any intellectual property rights of third parties, and neither STS nor any of its Subsidiaries has received any claim or demand, alleging any such infringement. To the Selling Companies’ Knowledge, except as set forth on Schedule 4.22(b), no third party has infringed upon any intellectual property rights of STS or any Subsidiary.

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(c) Schedule 4.22(c) identifies each material item of intellectual property that any third party owns and that STS or any of its Subsidiaries uses pursuant to license, sublicense, agreement, or permission. With respect to each item identified in Schedule 4.22(c):

(i) the license, sublicense, agreement, or permission covering the item is valid, binding, enforceable, and in full force and effect in all material respects; and

(ii) neither STS nor any of its Subsidiaries nor any other party to the license, sublicense, agreement, or permission is in material breach or default.

(d) All software that is used by STS or any of its Subsidiaries or is present at any facility or on any equipment of STS or any of its Subsidiaries is owned by STS or a Subsidiary or is subject to a current license agreement that covers all use of the software in the business of STS or any of its Subsidiaries as currently conducted. Neither STS nor any of its Subsidiaries is in breach of any license to, or license of, any software, except as would not have a Company Material Adverse Effect. Except as set forth on Schedule 4.23(d), STS and its Subsidiaries do not use, rely on or contract with any Person to provide service bureau, outsourcing or other computer processing services, in lieu of or in addition to their respective use of software. Following the Closing, Parent or Newco will have all rights to all software necessary to operate the Business as it is currently conducted.

4.23 Insurance.

(a) Both STS and each Subsidiary has insurance relating to its business and covering property, fire, casualty, liability, workers’ compensation and all other forms of insurance customarily obtained by businesses in the same industry. Such insurance (i) is in full force and effect, (ii) is sufficient for compliance with all requirements of applicable law and of any contract to which STS or any of its Subsidiaries is subject and (iii) is valid and enforceable. Schedule 4.23 lists each policy of insurance in effect.

(b) Schedule 4.23 lists by year for the current policy year and each of the two preceding policy years a summary of the loss experience under each policy involving any claim in excess of $50,000 setting forth (i) the name of the claimant, (ii) a description of the policy by insurer, type of insurance and period of coverage and (iii) the amount and a brief description of the claim. Schedule 4.23 also describes the loss experience for all claims in excess of $50,000 that were self-insured, including the aggregate cost of such claims.

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4.24 Warranties. Schedule 4.24 lists as of the date of this Agreement all claims pending or threatened for product liability or breach of any warranty relating to any products sold or services performed by STS or any of its Subsidiaries. Such claims in the aggregate are not in excess of the reserve for product warranty claims set forth on the face of the Latest Balance Sheets. Schedule 4.24 describes the warranties for products sold or services performed by each of STS and the Subsidiaries. No product or service manufactured, sold, leased or delivered by STS or any of its Subsidiaries is subject to any guaranty, warranty or other indemnity other than such warranties.

4.25 Other Ventures, Investments. Except as described in Schedule 4.25 (each an “Equity Investment”), neither of STS nor any of its Subsidiaries owns of record or beneficially any equity ownership interest in any other Person, nor is it a partner or member of any partnership, limited liability companies or joint venture. Schedule 4.25 sets forth the income and/or losses historically allocated and cash distributed to either one of STS or its Subsidiaries for each such Equity Investment since January 1, 2002.

4.26 Bank Accounts; Power of Attorneys. Schedule 4.26 sets forth all accounts or safe deposit boxes at any bank or other financial institution of STS or its Subsidiaries, and the names of all Persons authorized to draw on or have access to such accounts and safe deposit boxes. Schedule 4.26 sets forth all powers of attorney entered into by STS or its Subsidiaries.

4.27 Prohibited Payments. Neither STS nor any of its Subsidiaries, nor any director, officer, agent or employee of STS or any of its Subsidiaries has, directly or indirectly: (a) made any contribution, gift, bribe, rebate, payoff, influence payment, kick-back, or other payment to any Person, regardless of form, whether in money, property or services in violation of a legal requirement (i) to obtain favorable treatment in securing business, (ii) to pay for favorable treatment for business secured, or (iii) to obtain special concessions or for special concessions already obtained, for or in respect of STS or any of its Subsidiaries, or (b) established or maintained any fund or asset that has not been recorded in the books and records of STS or any of its Subsidiaries.

4.28 Disclosure; Information Supplied. To the Knowledge of the Selling Companies, no representation or warranty contained in this Agreement, and no statement contained in any Ancillary Document to be furnished or to be furnished by or on behalf of the Selling Companies to Parent or any of its representatives, contains or will contain any untrue statement of a material fact, or omits or will omit to state any material fact required to be stated therein or necessary, in light of the circumstances under which it was or will be made, in order to make such statement not misleading, or necessary in order to fully and fairly provide the information required to be provided in any such Ancillary Document. For purposes of this Agreement, “Ancillary Document” shall mean any certificate, instrument, agreement or other document delivered (1) on the date hereof, or (2) on the Closing Date or in connection with the Closing, in each case by or on behalf of STS or any of its Subsidiaries in accordance with the express terms of this Agreement.

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4.29 Disclosure Controls and Procedures. Subject to (a) the qualifications and exceptions set forth in the Independent Auditor’s Report on Internal Control of Olsen Thielen & Co., Ltd., dated April 11, 2008 (the “Auditor’s Report”) and (b) the Knowledge of the Selling Companies, both STS and each of its Subsidiaries have implemented and maintain a system of internal accounting controls sufficient to provide reasonable assurances regarding the reliability of financial reporting and the preparation of financial statements in accordance with GAAP. Subject to (a) the exceptions set forth in the Auditor’s Report, and (b) the Knowledge of the Selling Companies, both STS and each of its Subsidiaries (i) have implemented and maintain disclosure controls and procedures designed to provide that material information relating to STS and each of its Subsidiaries is made known to the chief executive officer and chief financial officer of STS or each of its Subsidiaries by others within those entities, and (ii) have disclosed, based on its most recent evaluation prior to the date hereof, to STS or each of its Subsidiaries’ outside auditors any fraud, whether or not material, that involves management or other employees who have a significant role in STS and each of its Subsidiaries’ internal controls over financial reporting. Notwithstanding anything to the contrary in this Agreement, neither the Selling Companies nor the Shareholders are making any representations or warranties of any kind regarding the rules and regulations adopted pursuant to the Sarbanes-Oxley Act of 2002. For purposes of this Section 4.29, references to the Auditor’s Report are for purposes of cross referencing the qualifications and exceptions thereunder that relate to the representations and warranties set forth in this Section 4.29, and not for purposes of expanding the representations and warranties under this Agreement, or including in this Agreement any representations that were made to Olsen Thielen & Co., Ltd. in connection with the Auditor’s Report.

4.30 NewCore Wireless, LLC. Wireless Communications Venture, LLC, a Minnesota limited liability company (“WCV”), an Equity Investment of STS, is a member of NewCore Wireless, LLC, a Minnesota limited liability company (“NewCore”), with such membership having the rights and obligations set forth in that certain NewCore Member Control Agreement dated August 28, 2008 by and among WCV and Core Wireless Group, LLC (the “NewCore Member Control Agreement”). Except as set forth in the NewCore Member Control Agreement, there are no restrictions on transfer of WCV’s membership interest in NewCore. A true and correct copy of the NewCore Member Control Agreement has been provided to Parent. Pursuant to Section 6.3 of the NewCore Member Control Agreement, WCV is obligated to loan NewCore $4,500,000 on commercially reasonable terms and conditions (the “NewCore Loan”). WCV will borrow $1,500,000 from each of the three members of WCV, including STS, to obtain the $4,500,000 with which to make the NewCore Loan. STS agrees that, if the loan is made before the Closing, it will make the $1,500,000 loan to WCV, and STS and Parent agree that such loan will be an Excluded Asset and will remain the sole property of STS. STS and Parent agree that, if the loan is not made prior to Closing any obligation to make the loan will be a Retained Liability. STS and Parent further agree that, if Parent or Newco becomes the owner of STS’ membership interest in WCV (i.e., there is no Exercised ROFR and the Admission Consent is obtained), STS will make the $1,500,000 loan on behalf of (and instead of) Parent or Newco, and the loan will be the sole property of STS.

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ARTICLE V.

REPRESENTATIONS AND WARRANTIES OF PARENT

Parent represents and warrants to the Selling Companies that:

5.1 Corporate Organization and Qualification. Each of Parent and Newco is or will be a corporation, limited liability company or other entity duly organized, validly existing and in good standing under the laws of its respective jurisdiction of incorporation and is qualified and in good standing as a foreign corporation in each jurisdiction where the properties owned, leased or operated, or the business conducted, by it require such qualification, except where the failure to so qualify or be in such good standing would not have a Parent Material Adverse Effect or adversely affect the consummation of the transactions contemplated hereby. Each of Parent and its Subsidiaries has all requisite power and authority (corporate or otherwise) to own its properties and to carry on its business as it is now being conducted except where failure to have such power and authority would not have a Parent Material Adverse Effect or adversely affect the consummation of the transactions contemplated hereby.

5.2 Authority Relative to this Agreement. Each of Parent and Newco has the requisite corporate power and authority to execute and deliver this Agreement and to consummate the transactions contemplated hereby. This Agreement and the consummation by Parent and Newco of the transactions contemplated hereby have been duly and validly authorized by the respective Boards of Directors of Parent and Newco and by Parent as sole shareholder of Newco, and no other corporate proceedings on the part of Parent and Newco are necessary to authorize this Agreement or to consummate the transactions contemplated hereby. This Agreement has been duly and validly executed and delivered by each of Parent and Newco and, assuming this Agreement constitutes the valid and binding agreement of the Selling Companies, constitutes the valid and binding agreement of each of Parent and Newco, enforceable against each of them in accordance with its terms, except that such enforceability may be limited by (a) bankruptcy, insolvency, reorganization, moratorium or other similar laws now or hereafter in effect relating to creditors’ rights generally and (b) general principles of equity (regardless of whether enforceability is considered in a proceeding at law or in equity).

5.3 Consents and Approvals; No Violation. Neither the execution and delivery of this Agreement by Parent or Newco nor the consummation by Parent and Newco of the transactions contemplated hereby will:

(a) conflict with or result in any breach of any provision of the articles of incorporation, as amended, or the by-laws, respectively, of Parent or Newco;

(b) require any consent, approval, authorization, permit or filing with or notification to, any governmental or regulatory authority, except (i) in connection with the applicable requirements of the HSR Act, (ii) pursuant to the applicable requirements of the Exchange Act, (iii) such filings and consents as may be required by the FCC or the FCC Rules or under the State Communications Laws and Regulations, (iv) as may be required by any applicable state securities or “blue sky” laws or state takeover laws,

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(v) such filings, consents, approvals, orders, registrations, declarations and filings as may be required under the laws of any foreign country in which Parent or any of its Subsidiaries conducts any business or owns any assets, (vi) such filings and consents as may be required under any environmental, health or safety law or regulation pertaining to any notification, disclosure or required approval triggered by the Purchase or the transactions contemplated by this Agreement or (vii) where the failure to obtain such consent, approval, authorization or permit, or to make such filing or notification, would not individually or in the aggregate have a Parent Material Adverse Effect or adversely affect the consummation of the transactions contemplated hereby;

(c) result in a violation or breach of, or constitute (with or without due notice or lapse of time or both) a default (or give rise to any right of termination, cancellation or acceleration or Lien) under any of the terms, conditions or provisions of any note, license, agreement or other instrument or obligation to which Parent or any of its Subsidiaries may be bound, except for such violations, breaches and defaults (or rights of termination, cancellation or acceleration or Lien or other charge or encumbrance) as to which requisite waivers or consents have been obtained or which individually or in the aggregate are not material to Parent and its Subsidiaries taken as a whole or adversely affect the consummation of the transactions contemplated hereby; or

(d) assuming the consents, approvals, authorizations or permits and filings or notifications referred to in this Section 5.3 are duly and timely obtained or made, violate any order, writ, injunction, decree, statute, rule or regulation applicable to Parent or any of its Subsidiaries or to any of their respective assets, except for violations which would not individually or in the aggregate be material to Parent and its Subsidiaries taken as a whole or adversely affect the consummation of the transactions contemplated hereby.

5.4 Information Statement. None of the information supplied by Parent or Newco in writing for inclusion in any Information Statement, if one is provided, will, at the time that it or any amendment or supplement thereto is mailed to the Shareholders, at the time of the Shareholders’ Meeting, contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they are made, not misleading.

5.5 Brokers and Finders. Except as set forth on Schedule 5.5, neither Parent nor Newco has employed any investment banker, broker, finder, consultant or intermediary in connection with the transactions contemplated by this Agreement which would be entitled to any investment banking, brokerage, finder’s or similar fee or commission in connection with this Agreement or the transactions contemplated hereby.

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ARTICLE VI.

ADDITIONAL COVENANTS AND AGREEMENTS

6.1 Conduct of Business of the Selling Companies. During the period from the date of this Agreement to the Effective Time (unless Parent shall otherwise agree in writing and except as otherwise contemplated by this Agreement), the Selling Companies will conduct their operations in accordance with their ordinary and usual course of business consistent with past practice and, to the extent consistent therewith, with no less diligence and effort than would be applied in the absence of this Agreement, preserve intact their current business organizations, keep available the service of their current officers and employees and preserve their relationships with customers, suppliers and others having business dealings with them to the end that their goodwill and ongoing businesses shall not be impaired in any material respect at the Effective Time. Without limiting the generality of the foregoing, and except as otherwise permitted in this Agreement, prior to the Effective Time, the Selling Companies will not, without the prior written consent of Parent:

(a) issue, deliver, sell, dispose of, pledge or otherwise Lien, or authorize or propose the issuance, sale, disposition or pledge or other Lien of (i) any additional shares of capital stock of any class (including the Shares), or any securities or rights convertible into, exchangeable for, or evidencing the right to subscribe for any shares of capital stock, or any rights, warrants, options, calls, commitments or any other agreements of any character to purchase or acquire any shares of capital stock or any securities or rights convertible into, exchangeable for, or evidencing the right to subscribe for, any shares of capital stock, or (ii) any other securities in respect of, in lieu of, or in substitution for, outstanding Shares on the date hereof;

(b) redeem, purchase or otherwise acquire, or propose to redeem, purchase or otherwise acquire, any of its Outstanding Shares;

(c) split, combine, subdivide or reclassify any Shares or declare, set aside for payment or pay any dividend, or make any other actual, constructive or deemed distribution in respect of any outstanding Shares or otherwise make any payments to Shareholders in their capacity as such, provided that “upstream” dividends paid by a Subsidiary to STS may be paid, and dividends and distributions as provided in Section 6.1(o) may be made;

(d) adopt a plan of complete or partial liquidation, dissolution, merger, consolidation, restructuring, recapitalization or other reorganization of any of the Selling Companies (other than the Purchase or as provided in Section 6.23);

(e) adopt any amendments to its articles of incorporation, certificate of formation, by-laws or member control agreements or alter through merger, liquidation, reorganization, restructuring or in any other fashion the corporate structure or ownership of any Subsidiary;

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(f) make any acquisition, by means of merger, consolidation or otherwise, or disposition, of Assets or securities other than in the ordinary course of business consistent with past practice or as required by this Agreement;

(g) intentionally deleted;

(h) incur any indebtedness for borrowed money or guarantee any such indebtedness or make or refinance any loans, advances or capital contributions to, or investments in, any other Person, other than loans, investments and advances between any Selling Companies and in connection with those capital calls required to be made in connection with any Equity Investments as set forth on Schedule 6.1(h) attached hereto;

(i) grant any bonuses or any increases in the compensation of any of its directors, officers or employees or make any changes to wage scales or severance agreements, other than annual raises consistent with past practice;

(j) pay or agree to pay any pension, retirement allowance or other employee benefit not required or contemplated by any of the existing benefit, severance, termination, pension or employment plans, agreements or arrangements as in effect as of December 31, 2007 to any director or officer or employee, whether past or present or enter into any deferred compensation benefits;

(k) enter into any new or materially amend any existing employment or severance or termination agreement with any director, officer or key employee;

(l) except in the ordinary course of business consistent with past practice or as may be required to comply with applicable law, become obligated under any new pension plan, welfare plan, Multiemployer Plan, employee benefit plan, severance plan, benefit arrangement, or similar plan or arrangement, which was not in existence on the date hereof, or amend any such plan or arrangement in existence on the date hereof if such amendment would have the effect of materially enhancing any benefits thereunder;

(m) enter into any collective bargaining agreement;

(n) change any of their methods of accounting in effect on December 31, 2007, other than changes required by GAAP or the FCC;

(o) except as contemplated under this Agreement or as set forth in Schedule 6.1(o), make any distributions of assets to their respective shareholders except as necessary to provide such shareholders cash to pay tax obligations, and to reduce the Closing Date Working Capital to an amount not to exceed the Target plus $5,000,000, which must include at least $1,000,000 of Cash on Hand at Closing;

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(p) will cancel or terminate its current insurance policies or allow any of the coverage thereunder to lapse, unless simultaneously with such termination, cancellation or lapse replacement policies providing coverage equal to or greater than the coverage under the canceled, terminated or lapsed policies for substantially similar premiums are in full force and effect;

(q) the Selling Companies will not (i) dispose of or acquire any Assets except (A) in the Ordinary Course of Business or (ii) otherwise transfer any Asset, including cash, among any Subsidiary or entities in which either of STS or a Subsidiary holds an equity investment, except in connection with the Equity Investments as set forth on Schedule 6.1(q) attached hereto;

(r) the Selling Companies will not make any investments, either in the form of equity or debt, in any proposed new ventures, except in connection with the Equity Investments as set forth on Schedule 6.1(r) attached hereto; or

(s) authorize, recommend, propose or announce an intention to do any of the foregoing, or enter into any contract, agreement, commitment or arrangement to do any of the foregoing.

6.2 No Solicitation of Transactions. The Selling Companies and the Majority Shareholders agree that, as of the date of this Agreement, they have, and have caused each officer, director or employee of, or any investment banker, attorney or other advisor or representative of STS and its Subsidiaries to immediately cease and cause to be terminated any existing activities, discussions or negotiations with any Third Party (as defined below) conducted prior to the date hereof with respect to any Competing Transaction (as defined below). Neither the Majority Shareholders nor STS shall permit STS or any of the Selling Companies to, nor shall it authorize or permit any officer, director or employee of, or any investment banker, attorney or other advisor or representative of, STS or any of the Selling Companies to (i) solicit or initiate, encourage, or facilitate, directly or indirectly, any inquiries relating to, or the submission of, any proposal or offer, whether in writing or otherwise, from any Person other than Parent, Newco or any Affiliates thereof (a “Third Party”) to acquire equity of STS or any of the assets of STS or any of the Selling Companies pursuant to a merger, consolidation or other business combination, sale of shares of stock, sale of assets, tender offer, exchange offer or similar transaction or series of related transactions, (a “Competing Transaction”); (ii) participate in any discussions or negotiations regarding, or furnish to any Person any information or data with respect to or access to the properties of, or take any other action to knowingly facilitate the making of any proposal that constitutes, or may reasonably be expected to lead to, any Competing Transaction; or (iii) enter into any agreement with respect to any Competing Transaction, approve or recommend or resolve to approve or recommend any Competing Transaction or enter into any agreement requiring it to abandon, terminate or fail to consummate the Purchase and the other transactions contemplated by this Agreement. Nothing contained on the Agreement shall prevent the Board of Directors from making any disclosure to STS’ Shareholders as required by applicable law.

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6.3 Reasonable Efforts.

(a) Subject to the terms and conditions herein provided, each of the parties hereto shall use all reasonable efforts to take, or cause to be taken, all actions and to do, or cause to be done, all things necessary, proper or advisable under applicable laws and regulations to consummate and make effective the transactions contemplated by this Agreement, including using its reasonable efforts to obtain all necessary or appropriate waivers, consents and approvals, to effect all necessary registrations, filings and submissions. The Selling Companies will use commercially reasonable efforts to obtain the required consents set forth on Schedule 6.3 attached hereto (“Required Consents”) and Governmental Authorizations necessary for the consummation of the transactions contemplated by this Agreement.

(b) Without limiting the foregoing, promptly after the date of this Agreement, the appropriate Selling Company will make all filings and submissions required by them or it under the HSR Act, the FCC Rules, the MPUC Rules, the IUB Rules and any other law applicable to the Selling Companies, required for the consummation of the transactions contemplated by this Agreement requested to be filed by any of the Selling Companies, with the Selling Companies to be responsible for any filings with the MPUC. The Selling Companies will use commercially reasonable efforts to obtain an early termination of the applicable waiting period under the HSR Act. The Selling Companies will cooperate in all commercially reasonable respects with the Parent with respect to any filings or submissions and will promptly inform Parent of any communication from the Federal Trade Commission, Department of Justice, FCC, MPUC, IUB or any other Governmental Entity. The Selling Companies will promptly comply with any request for additional information made by the relevant Governmental Entities, engage in good faith discussions and negotiations with the relevant Governmental Entities, and use commercially reasonable efforts to respond to any proceedings by the relevant Governmental Entities.

6.4 Access to Information. Upon reasonable notice, the Selling Companies shall afford to officers, employees, counsel, accountants and other authorized representatives of Parent (“Representatives”), in order to evaluate the transactions contemplated by this Agreement and perform reasonable integration planning consistent with law, reasonable access, during normal business hours and upon reasonable notice throughout the period prior to the Effective Time, to their properties, books and records and, during such period, shall furnish or make available reasonably promptly to such Representatives all information concerning their business, properties and personnel as may reasonably be requested. Parent agrees that it will not, and will cause its Representatives not to, use any information obtained pursuant to this Section VI for any purpose unrelated to the consummation of the transactions contemplated by this Agreement. The Confidentiality Agreements between STS and Parent dated January 3, 2008 (the “Confidentiality Agreement”), shall continue to apply with respect to information furnished by the Selling Companies and their officers, employees, counsel, accountants and other authorized representatives hereunder.

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6.5 Publicity. The parties hereto agree that neither this Agreement nor the contents of this Agreement may be disclosed to any party not specifically subject to a confidentiality agreement until such time as the Parent has disclosed such information or filed this Agreement with the SEC. The Parent and Shareholders’ Representative will consult with each other and will mutually agree upon any press releases or public announcements pertaining to the Purchase (including the merger consideration) and shall not issue any such press releases or make any such public announcements prior to such consultation and agreement, except as may be required by applicable law or by obligations pursuant to any agreement with any national securities exchange or automated quotation system, in which case the party proposing to issue such press release or make such public announcement shall use its reasonable efforts to consult in good faith with the other party before issuing any such press releases or making any such public announcements.

6.6 Directors and Officers Insurance Reimbursement. At Closing Parent shall reimburse the Selling Companies up to Sixty Thousand Dollars ($60,000) for the cost of directors’ and officers’ liability insurance and fiduciary insurance policies (or tail coverage) covering the individuals who are presently covered by the Selling Companies’ directors’ and officers’ liability insurance and fiduciary insurance, with respect to claims arising from facts or events which occurred at or before the Effective Time for no more than $2,000,000 of coverage.

6.7 Financial Commitment. Upon execution of this Agreement, Parent delivered to STS a commitment letter for financing related to the transactions contemplated hereunder (the “Commitment Letter”), and assuming the satisfaction of the conditions set forth in the Commitment Letter are met the Parent will have the funds necessary to consummate the Purchase.

6.8 Investigation and Agreement by the Parties; No Other Representations or Warranties.

(a) Each of the Parent Parties, on the one hand, and the Selling Companies, on the other, agrees that, except for the representations and warranties made by the other party that are expressly set forth in Article IV and Article V of this Agreement, as applicable, neither the other parties nor any of their Representatives or Affiliates have made and shall not be deemed to have made to such party or to any of its Representatives or Affiliates any representation or warranty of any kind. Without limiting the generality of the foregoing, each party agrees that except as expressly set forth in this Agreement, neither the other parties nor any of their Affiliates make or have made any representation or warranty to such party or to any of its representatives or Affiliates with respect to:

(i) any projections, forecasts, estimates, plans or budgets of future revenues, expenses or expenditures, future results of operations (or any component thereof), future cash flows (or any component

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thereof), future capital expenditures or future customer retention or churn or future financial condition (or any component thereof) of the other party or any of its Subsidiaries or the future business, operations or affairs of the other party or any of its Subsidiaries heretofore or hereafter delivered to or made available to such party or its counsel, accountants, advisors, lenders, representatives or Affiliates; and

(ii) any other information, statement or documents heretofore or hereafter delivered to or made available to such party or its counsel, accountants, advisors, lenders, representatives or Affiliates with respect to the other party or any of its Subsidiaries or the business, operations or affairs of the other party or any of its Subsidiaries.

(b) Notwithstanding anything to the contrary in this Agreement, each party shall be entitled to rely on the representations and warranties of the other party contained in Article IV or V of this Agreement.

6.9 401(k) Plans. Prior to the Closing Date STS (or any other Selling Company if applicable) will, if so requested by the Parent, terminate any 401(k) Plan and Shareholders will be responsible for the payment prior to Closing of any obligations that have accrued prior to the Closing Date under any such 401(k) Plan. In the event that the Parent requests that the 401(k) Plan be terminated prior to the Closing Date, STS will contribute to the 401(k) Plan any amounts STS has accrued for discretionary matching or discretionary profit sharing contributions pursuant to the terms of the 401(k) Plan. Any obligations of STS under a 401(k) Plan or profit sharing payment accrued as of the Closing Date and not paid at or before Closing shall be the responsibility of the Shareholders and to the extent the terms of any such 401(k) Plan do not allow for termination without liability, the Shareholders shall be responsible for any additional payments due under such 401(k) Plan that accrue after the Closing until such time as Parent can, without liability, terminate any such 401(k) Plan.

6.10 Employee Benefits; ESOP; Phantom Stock Plan.

(a) That certain Sherburne Tele Systems, Inc. Employee Stock Ownership Plan and Trust, as amended dated December 27, 2006 (the “ESOP”) shall be terminated immediately prior to the Closing Date and any expense or liability related to the operations of the ESOP either related to the ESOP prior to the Closing Date or after the Closing Date, the ESOP Trustee’s misstatement or omission of or failure to disclose a material fact related to the transactions contemplated under this Agreement to the ESOP Participants in connection with the solicitation of the approval of the transactions contemplated under this Agreement shall remain the responsibility of the Shareholders.

(i) After Closing, Parent or Newco and STS shall appoint a committee of three or more individuals who (A) are currently employees of

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STS, and (B) will be employed by Parent or Newco following the Closing whose sole responsibility and authority pursuant to such appointment is limited to overseeing the ESOP’s termination process on behalf of the STS Board of Directors.

(ii) As soon as possible following the Closing Date, STS shall submit the ESOP, by the filing of IRS Form 5310, to the IRS for a determination (“Determination Letter”) that the form of the ESOP is qualified under section 401(a) and 501(c) of the Code upon its termination.

(b) That certain Sherburne Tele Systems, Inc. Phantom Stock Plan, as amended dated April 24, 2008 (the “Phantom Stock Plan”) and any other deferred compensation plan or program shall be terminated immediately prior to the Closing Date and any amounts due thereunder shall be paid by STS prior to the Effective Date. For avoidance of doubt, any rights of the participants to the Phantom Stock Plan that would vest as a result of the transactions contemplated under this Agreement shall be deemed vested as if the Phantom Stock Plan was in effect as of the Closing Date and the Shareholders shall be responsible for any payments due under the Phantom Stock Plan for any such vested rights.

(c) After the execution hereof but prior to Closing, Parent or Newco may determine that it desires to assume one or more of the STS’ Employee Benefit Plans (except for the Phantom Stock Plan or the ESOP). If Parent or Newco make such a determination with respect to a particular Employee Benefit Plan, such Employee Benefit Plan shall become an Assumed Liability only for purposes of such transfer subject to the obligations set forth in Section 9.1(c) hereof and STS will transfer such Employee Benefit Plan to Parent or Newco and the parties hereby agree to cooperate to obtain any consent or waiver related to any such transfer. In addition, if so requested by Parent, STS shall terminate those additional Employee Benefit Plans that Parent so requests be terminated.

6.11 Employees; Employee Benefits.

(a) Immediately before the Closing, the Selling Companies shall terminate all of their employees and immediately after the Closing, Parent or Newco shall offer employment to all of such employees, subject to Parent’s standard employment procedures. The Selling Companies shall be responsible for severance payments or unemployment benefits created by or imposed upon the Selling Companies by law, if any, due either as a result of the transactions contemplated under this Agreement or as a result of a particular employee of the Selling Companies not accepting employment with the Parent or Newco. Notwithstanding the foregoing, Parent shall administer and pay for any COBRA obligations related to any employee who does not accept employment with the Parent or Newco after the Closing.

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(b) Following the Closing, Parent or Newco shall provide individuals who accept employment with the Parent or Newco after the Closing Date (the “Affected Employees”), for so long as such Affected Employees remain employed by Parent, Newco or any Subsidiary of Parent or Newco, employee benefits that are comparable to those provided to employees of Parent in positions comparable to positions held by Affected Employees with Parent, Newco or its Subsidiaries from time to time after the Closing Date. For purposes of eligibility to participate and vesting in all benefits provided to Affected Employees (and covered dependents) including vacation time, Affected Employees will be credited with their years of service with STS and its Subsidiaries.

(c) In the event that Parent or Newco terminates the employment of any Affected Employee who accepts employment with Parent or Newco and executes the Parent’s confidentiality agreement and non-competition agreement the form of which is attached hereto as Exhibit D (the “Employee Agreements”) without Cause (as defined on Schedule 6.11(c) attached hereto) within six (6) months of the Closing (the “Employment Period”), Parent or Newco shall pay such terminated Affected Employee severance equal to one (1) months’ base pay for such Affected Employee for each month remaining until the conclusion of the Employment Period; provided, however, no such Affected Employee shall be entitled to any severance to the extent such Affected Employee is offered comparable employment within a 30 mile radius of Big Lake, Minnesota with Parent or any of its Affiliates (which term, for these purposes, shall include the Subsidiaries).

(d) Prior to the Closing, STS shall terminate any agreements between STS and its current or former employees, officers or directors that provide for any change of control or severance payments or commitment of employment or payments in the future (the “Change of Control Agreements”) and will pay all amounts due under such agreements. Any such payments shall be deemed to be Bonus Payments for purposes of this Agreement.

(e) Nothing contained in this Section 6.11 shall create any third party beneficiary rights in any manager, officer or employee or former manager, officer or employee (including any beneficiary or dependent thereof) of the Selling Companies in respect of continued employment for any specified period of any nature or kind whatsoever.

(f) Notwithstanding anything to the contrary in this Section 6.11, an Affected Employee shall not be entitled to receive severance payments under this Section 6.11 if he or she voluntarily terminates his or her employment with Parent or Newco.

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(g) Subject to the indemnification obligations set forth in Section 9.1(c), any health savings account, flexible spending account or other such accounts maintained by STS for the Affected Employees set forth on Schedule 6.11(g) attached hereto (the “HSAs”) shall be transferred to Parent or Newco at the Closing, including any and all documentation related thereto. The Board of STS shall take any corporate actions necessary to transfer such HSAs to Parent or Newco.

6.12 Parent Approvals. On or before the date provided in Section 1.4 for the Closing to occur, Parent shall incorporate Newco and cause Newco to adopt this Agreement and approve the Purchase in accordance with the MBCA or other applicable law.

6.13 Upcoming Financial Statements. STS shall deliver to the Parent up and until the Closing Date, prepared in accordance with GAAP, consolidated financial statements for each quarter and year ending on or before the Closing Date (“Upcoming Financial Statements”) in a form reasonably satisfactory to the Parent, with quarterly statements to be delivered no later than thirty (30) days after the completion of the applicable quarter and the annual statements to be prepared in a manner consistent with past practice and audited, with the audited financial statements for fiscal year 2008 to be delivered to the Parent no later than March 31, 2009. If the Parent requires the Upcoming Financial Statements to be reviewed or re-audited, the Parent shall pay any expenses related to such re-audit or review.

6.14 Intentionally Deleted.

6.15 Environmental Review. As soon as is reasonably possible, and in no event no later than sixty (60) days after the date of this Agreement, at the Parent’s expense, Parent shall obtain Phase I Environmental Site Assessments meeting the current ASTM standard and the United States Environmental Protection Agency’s “All Appropriate Inquiry” standard (“Phase I Reports”) for each parcel of real property listed on Schedule 6.15 (“Material Real Property”) that is owned by the Selling Companies and shall cause copies of the same to be delivered to STS. At Parent’s expense, Parent may, in addition to the Phase I Reports, promptly and diligently conduct any other environmental assessments, including but not limited to soil tests, well tests, engineering inspections and environmental site assessments of the Material Real Property (the Phase I Reports and any such additional assessments, collectively, the “Environmental Review”); provided, however, that prior to conducting any invasive “Phase II” type sampling of soils and/or groundwater, the relevant parties shall enter into an access agreement negotiated in good faith and containing commercially reasonable terms. Parent shall use reasonably commercial efforts to complete the Environmental Review within one hundred twenty (120) days after the date of this Agreement, but in any event shall complete the Environmental Review as soon as reasonably possible. STS shall provide reasonable access and information to Parent and otherwise reasonably cooperate with Parent in the Environmental Review. To the extent Parent conducts any invasive testing on the Material Real Property, it shall promptly repair any and all resulting damage to the Material Real Property unless waived by STS in writing. Parent shall cause copies of all reports prepared for Parent as part of the Environmental Review to be delivered to STS promptly after Parent has received the same. Within twenty (20) days after the conclusion of the Environmental Review, Parent will notify STS in writing of any remedial actions that Parent reasonably deems necessary to be taken as a result of the Environmental Review

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(“Environmental Corrections”) in order for the Selling Companies to be brought into compliance with Environmental Law, or to prevent Parent or Newco from incurring material liability or Environmental Costs under Environmental Law. Environmental Corrections shall not include any remedial actions the costs of which, in the aggregate, would not reasonably be expected to exceed Seventy-Five Thousand Dollars ($75,000). STS will have twenty (20) days after receipt of Parent’s notice of Environmental Corrections to notify Parent in writing that it is declining to complete the Environmental Corrections, in which case Parent may, at its sole discretion, either terminate this Agreement by written notice given to STS within ten (10) days after receipt of notice that STS has declined to complete the Environmental Corrections, or waive the Environmental Corrections and proceed to Close pursuant to Section 1.4 of this Agreement. If STS does not notify Parent that it is declining to complete the Environmental Corrections as provided in the preceding sentence, then STS will have sixty (60) days after receipt of Parent’s notice of Environmental Corrections to complete or make arrangements for the completion, including the payment, of any Environmental Corrections. If the Environmental Corrections are not completed, or satisfactory arrangements for the completion of such Environmental Corrections are not agreed upon to the Parent’s reasonable satisfaction within sixty (60) days of receipt of Parent’s notice of the Environmental Corrections, Parent may, at its sole discretion (1) subject to Section 9.1(g) with respect to remediation and other response actions related to Releases of Hazardous Materials, undertake to complete the Environmental Corrections either before or after Closing with the reasonable cost thereof being reimbursed to Parent or escrowed by the Selling Companies at Closing; (2) waive the Environmental Corrections and proceed to Close pursuant to Section 1.4 of this Agreement; or (3) postpone Closing until such Environmental Corrections have been completed; provided, however, that if STS has not completed any Environmental Correction within ninety (90) days of receipt of Parent’s notice of the Environmental Corrections despite its commercially reasonable efforts to do so, and provided further that STS has promptly initiated efforts and thereafter has diligently attempted to complete such Environmental Correction, Parent may not exercise the remedy in clause (1) of this paragraph and the Closing shall be postponed until the Environmental Correction has been completed but no later than the Termination Date. Neither the Environmental Review nor a waiver of any or all Environmental Corrections by Parent pursuant to this Section shall limit Parent’s right to indemnification pursuant to Article IX of this Agreement.

The Selling Companies will cooperate with Parent to allow Parent to complete the actions contemplated under this Section 6.15 and will allow Parent and its representatives access to the Material Real Property in order to complete the Environmental Reviews and to consider possible Environmental Corrections.

6.16 Excluded Property; Eddy Family Foundation. The parties hereto acknowledge that those certain directors, officers, employees, Shareholders of the Selling Companies listed on Schedule 6.16 and/or the “Eddy Family Foundation” own personal property located at the Selling Companies set forth in Schedule 6.16 (the “Specifically Excluded Property”). The Specifically Excluded Property shall be removed no later than the Effective Time; provided, however, if the owner of the Specifically Excluded Property fails to remove the Specifically Excluded Property prior to the Effective Time, the Parent agrees that the owner of the Specifically Excluded Property may take an additional ten (10) days to remove the Specifically Excluded Property but neither the Parent nor Newco shall have any responsibility or liability regarding such Specifically Excluded Property during such period and if the Specifically Excluded Property is

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not removed during the ten (10) day period, the Parent or Surviving Corporation may remove such Specifically Excluded Property at the expense of the Shareholders. To the extent the books and records of the Eddy Family Foundation have been maintained at or by a Selling Company, such books and records shall be removed from the Selling Companies immediately prior to the Effective Time and neither Parent nor Newco shall have any further obligations regarding the Eddy Family Foundation.

6.17 Estoppel Certificates. The Selling Companies shall use reasonable efforts to deliver to Parent prior to Closing Date estoppel certificates from each landlord under the leases for any Material Real Property (the “Ground Leases”) in form reasonably acceptable to Parent, stating that the Ground Lease is in full force and effect and that the tenant is not in default and confirming the rental amount, expiration date and existence of any renewal or purchase option under each applicable Ground Lease; provided, that Parent acknowledges such landlords may not be obligated to provide such estoppel certificates, and accordingly, the Selling Companies’ failure to deliver such estoppel certificates after reasonable efforts shall not be a basis for Parent to terminate this Agreement.

6.18 CTC Waiver; UNE Replacement.

(a) Prior to Closing, the Selling Companies shall obtain the written consent and waiver from Consolidated Telephone Company (“CTC”) of CTC’s right of first refusal in accordance with the terms of Section 18A (the “CTC Waiver”) of that certain Partitioning and Asset Purchase Agreement dated March 21, 2007 by and between STS and CTC (the “700 MHz Partition Agreement”). Attached as Exhibit 6.18(a) is a form of CTC Waiver that Parent would accept in substance, or any other reasonable form of consent and waiver that is consistent with the 700 MHz Partition Agreement. If the Selling Companies fail to obtain the CTC Waiver prior to Closing, then the assets and liabilities associated with the 700 MHz Partition Agreement shall be Excluded Assets and Retained Liabilities and the Cash Purchase Price shall be reduced by an amount equal to $1,278,000 as full consideration for the failure to obtain the CTC Waiver (the “CTC Waiver Deduction”). The parties agree that the portion of the Cash Purchase Price allocated to the assets included in the right of first refusal under the 700 MHz Partition Agreement is $1,278,000. The Selling Companies shall have the right to retain any of the proceeds paid to the Selling Companies in connection with the CTC’s exercise of its rights of refusal, and such proceeds shall constitute an Excluded Asset.

(b) Prior to the Closing, the Selling Companies shall complete the UNE Replacement set forth on Schedule 3.1(j). Assuming the Selling Companies obtain the CTC Waiver:

(i) if the Infrastructure Replacement is not completed, the Cash Purchase Price will be reduced by an amount equal to the value of the Incomplete Infrastructure Replacement Costs which shall be determined pursuant to Section 6.18(c) below;

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(ii) if the Selling Companies replace at least 850 Loops by Closing, the Selling Companies will be reimbursed at Closing the Maximum UNE Replacement Reimbursement Amount; or

(iii) if the Selling Companies replace fewer than 850 Loops, the Selling Companies will not be reimbursed for the full UNE Replacement Reimbursement Amount at Closing but will be reimbursed by an amount equal to the Maximum UNE Replacement Reimbursement Amount minus Loop Deficiency (as defined below) multiplied by $685 (the “UNE Reimbursement Reduction”) in addition to the $75,000 reduction called for by Section 3.1(j);

For purposes of this Section 6.18 the “Loop Deficiency” shall equal 850 Loops minus the actual number of Loops replaced.

(c) Calculation of Incomplete Infrastructure Replacement Costs.

(i) At least twenty (20) days prior to the Closing Date, STS will deliver to Parent (a) written certification that the Infrastructure Replacement has been completed such that the 700 MHz system is operable and capable of sustaining customer use for replacing approximately 679 lines in Mora, approximately 505 lines in Cambridge and approximately 302 lines in Princeton (the “Infrastructure Replacement Standard”), or (b) an itemized list of the items still to be completed with respect to the Infrastructure Replacement and a detailed estimate of the cost related to such remaining items (the “Estimated Incomplete Infrastructure Replacement Costs”). If, upon inspection, the Parent determines in good faith that the Infrastructure Replacement does not conform to the Infrastructure Replacement Standard as certified by STS, Parent shall submit to STS an itemized list of items still to be completed with respect to the Infrastructure Replacement, with such list becoming the Incomplete Infrastructure Replacement Costs. The Estimated Incomplete Infrastructure Replacement Costs delivered to Parent or STS shall include all of the supporting schedules setting forth in reasonable detail all amounts included in the Estimated Incomplete Infrastructure Replacement Costs.

(ii) Parent or STS shall have ten (10) days after the receipt of the Estimated Incomplete Infrastructure Replacement Costs (the “UNE Review Period”) to accept or reject the Estimated Incomplete Infrastructure Replacement Costs. If the receiving party accepts the Estimated Incomplete Infrastructure Replacement Costs as provided pursuant to Section 6.18(d)(i) above, the amount set forth on the Estimated Incomplete Infrastructure Replacement Costs shall be the Incomplete Infrastructure Replacement Costs for purposes of any reduction to the Cash Purchase Price and the

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Estimated Cash Purchase Price pursuant to Section 3.1 hereof. If the receiving party does not accept or agree with the Estimated Incomplete Infrastructure Replacement Costs (an “Estimated Incomplete Infrastructure Replacement Costs Dispute”), the receiving party will notify the other in writing regarding the nature of the Estimated Incomplete Infrastructure Replacement Costs Dispute no later than the end of business on the final day of the UNE Review Period. The parties shall, in good faith, attempt to resolve any Estimated Incomplete Infrastructure Replacement Costs Dispute for a period of ten (10) days (the “UNE Dispute Period”). If the parties cannot agree upon a resolution to any Estimated Incomplete Infrastructure Replacement Costs Dispute during the UNE Dispute Period, the amount of the Estimated Incomplete Infrastructure Replacement Costs Dispute will be added to the True-Up Reserve Amount and the parties will resolve the Estimated Incomplete Infrastructure Replacement Costs Dispute at a later date according to the procedure set forth in Section 3.4 of this Agreement.

All actions taken by the Selling Companies prior to the Closing pursuant to and in accordance with this Section 6.18 and Section 3.1(j) hereof shall be deemed approved by Parent for purposes of Section 6.1 of this Agreement.

6.19 Easements and Rights of Way. Prior to the Closing the Selling Companies shall provide the Parent Schedule 6.19 in the form attached hereto, which shall set forth (a) for each public right of way described in Section 4.7(k), a map that shows the location and the Selling Companies’ asset at such location, and (b) for each private easement described in Section 4.7(k), the location, the Selling Companies asset at such location, and the identification of the documentation for such private easement. Prior to Closing, the Selling Companies shall deliver to Parent copies of the documentation for each private easement described in Section 4.7(k).

6.20 Capital Calls. In the event a Selling Company receives notification of any mandatory capital calls related to any Equity Investments that is not set forth on Schedule 6.1(h), STS shall notify Parent in writing regarding the details of such capital call and the applicable Selling Company shall make a capital contribution to related to such Equity Investment as a result of such capital call.

6.21 Bonus Payments. The parties hereto agree that STS will, directly or indirectly through a paying agent (the “Payroll Agent”), pay any and all Bonus Payments immediately prior to or at the Closing. The parties hereto acknowledge and agree that regardless of how such Bonus Payments are paid, the consideration to be paid by Parent at the Closing may be in part used to pay such Bonus Payments. For avoidance of doubt, however, regardless of how, when or by whom the such Bonus Payments are paid to the recipients, all documentation and reporting related to such Bonus Payments, as well as applicable withholding, STS’ portion of payroll taxes and payment of any taxes withheld (the “Tax Reporting”) shall be the sole responsibility of STS prior to the Closing Date and shall be completed by STS or the Payroll Agent prior to or at Closing such that neither Parent nor Newco after the Effective Date shall have any liability or

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responsibility, financial, administrative or otherwise, for such Bonus Payments or Tax Reporting. The Shareholders shall be responsible for any claims or Damages related to such Bonus Payments and for any fees, expenses and other obligations or liabilities associated with the Paying Agent to the extent not paid by STS at or prior to the Closing. For purposes of this Agreement, the term “Bonus Payment” means any payments for transaction bonuses, phantom stock payments, stay put payments, change of control payments or other payments due to current or former employees, consultants, officers or directors as a result of the Purchase or other transactions described in this Agreement.

6.22 Transaction Expenses. At or prior to Closing, STS shall pay any fees, costs and expenses incident to the Purchase which remain unpaid at the Effective Time including but not limited to any fees owed to Greene Holcomb & Fisher, LLC, and Leonard, Street and Deinard Professional Association, other advisors, ESOP Trustee, counsel and accountants and other fees, costs and expenses incurred by the Selling Companies in connection with or as a result of the transactions contemplated hereby, including with respect to accountants and other attorneys (including without limitation counsel or other advisors to the ESOP and the ESOP Trustee) (the “Transaction Fees”). For avoidance of doubt, any agreement, written or oral, related to or giving rise to any Transaction Fees shall be Retained Liabilities and shall remain at all times the responsibility of the Selling Companies or the Shareholders if such Transaction Expenses are not paid prior to Closing.

6.23 Name Changes; Dissolution of the Selling Companies; Noncompetition Agreement.

(a) Immediately upon Closing the Selling Companies shall amend their organizational document filed with the Minnesota Secretary of State to (a) change the name of the Selling Companies to a name that is not similar to the current name of any Selling Company and that is approved by Parent (which approval will not be unreasonably withheld), and (b) change the registered offices of each Selling Company to a location that is not owned or leased by Parent or Newco following the Closing. As soon as practical after the Closing Date but in compliance with the MBCA, ERISA and any other Law, all of the Selling Companies except STS will liquidate and terminate their corporate existence.

(b) The parties hereto agree that STS may maintain its corporate existence after the Closing solely for the purpose of winding up its affairs. Notwithstanding the foregoing, after the Closing but prior to the termination of each such entities’ corporate existence, none of the Selling Companies (including STS) shall conduct any business activities nor shall any of the Selling Companies hold any investment in any entity, venture or otherwise that competes in any way with the business of Parent or Newco except that the Selling Companies may conduct limited activities and hold an investment in connection with any Equity Investment that becomes an Excluded Asset pursuant to Section 6.24.

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(c) Notwithstanding anything to the contrary in this Agreement, no provision of this Agreement, including but not limited to this Section 6.23 shall limit or restrict any Selling Companies involvement with any Equity Investment that becomes an Excluded Asset retained by the Selling Companies pursuant to Section 6.24 of the Purchase Agreement, including such Selling Companies involvement as a proprietor, principal, agent, partner, officer, director, governor, stockholder, member, employee, member of any association, consultant or otherwise.

6.24 Equity Investment Transfer; ROFR; Admission Consents.

(a) The Selling Companies will use commercially reasonable efforts to obtain written waivers of all rights of first refusal, options to purchase, or similar features, and all consents or approvals necessary to transfer to Parent or Newco both governance and financial rights associated with the Equity Investments (each a “ROFR”) and all consents or approvals necessary to admit the Parent or Newco as a limited liability company member of each Equity Investment (each an “Admission Consent”) in accordance with the procedures set forth and described on Schedule 7.3(i) attached hereto. For purposes of this Agreement, a ROFR shall be deemed exercised (an “Exercised ROFR”) if the Selling Companies cannot transfer to the Parent or Newco at the Closing all of the financial and governance rights the Selling Companies had in the related Equity Investment. The parties hereto agree that the values set forth on Schedule 6.24 attached hereto for each Equity Investment equal the portion of the Asset Value being paid by the Parent hereunder allocated to each such Equity Investment.

(b) The Equity Investment Deduction for purposes of Section 3.1 shall be calculated in accordance with this paragraph. If there is an Exercised ROFR for a particular Equity Investment, the Equity Investment Deduction shall be an amount equal to the total amount payable by the issuer of such Equity Investment or the other equity holders of such Equity Investment in connection with the Exercised ROFR. Such amount shall be determined according to the applicable governing documents of such Equity Investment (the “ROFR Purchase Price(s)”) and for avoidance of doubt shall not be based upon the purchase price allocation set forth on Schedule 6.24 attached hereto unless such ROFR Purchase Prices are determined to be the same under such governing documents. If there is an Exercised ROFR but the ROFR Purchase Price is not determined at or prior to the Closing Date, then there shall be no Equity Investment Deduction in connection with such undetermined ROFR Purchase Price, and the Selling Companies agree to promptly pay to Parent or Newco upon such determination the amount of the ROFR Purchase Price. The Selling Companies agree that in order to secure the payment of the ROFR Purchase Price owed by the Selling Companies to the Parent at the Closing the Selling Companies will pledge the applicable Equity Investment to Parent or Newco and grant to Parent or Newco a first priority security

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interest in and a general lien upon such Equity Investment, and all cash, securities, interest, distributions, rights and other property at any time and from time to time received, receivable or otherwise distributed in regard of or in exchange for any or all of such Equity Investment and the Selling Companies agree to execute any documents or instruments reasonably necessary to document and perfect the pledge and grant of such security interest contemplated under this Section 6.24 (the “Security Documents”). If an Admission Consent for a particular Equity Investment is not obtained prior to Closing and Parent waives any closing condition contained in Section 7.3(i), then the Equity Investment Deduction shall equal the value set forth on Schedule 6.24.

(c) Notwithstanding anything to the contrary in this Agreement, if any Subsidiary or affiliated entity of the Parent or Newcos that is an equity holder in one of the Equity Investments (the “Parent Entities”) is the equity holder in an Equity Investment that exercises such equity holder’s ROFR, then any Equity Investment Deduction shall be reduced by the amount paid by such Parent Entities, the Selling Companies hereby assign to the Parent without recourse to the Selling Companies all ROFR Purchase Price proceeds payable by the Parent Entities, and Parent shall retain such amount without paying it to the Selling Companies.

(d) Parent and Selling Companies shall agree upon any written communications to third parties, confer where appropriate and otherwise keep each other informed with respect to all actions in obtaining waivers and consents to any ROFRs and in obtaining the Admission Consents. If any ROFR with respect to an Equity Investment is exercised or any Admission Consent is not obtained, the particular Equity Investment shall become an Excluded Asset and any other liabilities or contract obligations related to such Equity Investment in any manner shall become a Retained Liability of the Selling Companies.

(e) Notwithstanding anything to the contrary in attached Schedule 7.3(i) or the related member control agreements, neither the Selling Companies, nor Parent or Newcos, will agree in the ROFR notices to a separate sale of the governance rights and financial rights associated with the Equity Investments.

(f) Parent and Newcos agree to cause the Parent Entities that are members of any of the issuing companies in which the Selling Companies hold Equity Investments to (i) vote as members of such issuing companies, and to cause their representatives on the boards of governors of such issuing companies to vote, in favor of the transfer of the Equity Investments from the Selling Companies to Parent or Newcos (as applicable) as provided in the ROFR notices, (ii) to vote against an exercise of the ROFRs by such issuing companies, (iii) to approve of the transfer of the governance rights from the Selling Companies to Parent or Newcos (as applicable) as

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provided in the ROFR notices, and (iv) to take such other actions as are necessary under the governing documents of such issuing companies to complete the transfer of the Equity Investments from the Selling Companies to Parent or Newcos (as applicable) as provided in the ROFR notices.

(g) Parent and Newcos agree that in the event the Equity Investments become Excluded Assets they will (i) approve, and will cause the Parent Entities to approve, and their representatives of the boards of governors of the issuing companies to approve, of any subsequent transfers of such Equity Investments by the Selling Companies to any third party purchasers, and (ii) take such other actions under the governing documents of such issuing companies to assist the Selling Companies in transferring the entire Equity Investments to such third party purchasers.

6.25 Cable Program Agreements. Within thirty (30) days of the date hereof, the Selling Companies shall provide the Parent Schedule 6.25, which shall set forth a complete list of all of the cable program agreements to which the Selling Companies are a party as well as those that require consent for the transfer thereof. Upon delivery, Schedules 4.17(b) and 6.3 shall be deemed amended and revised solely for the purpose of disclosing the information listed on Schedule 6.25. Prior to Closing, the Selling Companies shall deliver to Parent copies of the cable program agreements described on Schedule 6.25.

ARTICLE VII.

CONDITIONS TO CONSUMMATION OF THE PURCHASE

7.1 Conditions to Each Party’s Obligations to Effect the Purchase. The respective obligations of each party to effect the Purchase are subject to the satisfaction at or prior to the Effective Time of the following conditions:

(a) Shareholder Approval. The Purchase and this Agreement shall have been duly approved by the Shareholders in accordance with applicable law and the Articles of Incorporation, as amended, of STS.

(b) Injunction. There shall not be in effect any statute, rule, regulation, executive order, decree, ruling or injunction or other order of a court or governmental or regulatory agency of competent jurisdiction directing that the transactions contemplated herein not be consummated or that would create a Company or Parent Material Adverse Effect.

(c) Governmental Filings and Consents. All Required Consents and Governmental Authorizations, orders and approvals (i) set forth on Schedule 7.1(c), and (ii) the waiting periods under the HSR Act shall have expired or been terminated and the FCC and applicable state regulatory bodies issuing consents and orders pursuant to State Communications Laws and Regulations shall have issued final orders that are not subject to appeal, reversal, reconsideration or stay.

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7.2 Conditions to the Selling Companies’ Obligations to Effect the Purchase. The obligations of the Selling Companies to effect the Purchase are subject to the satisfaction at or prior to the Effective Time of the following additional conditions:

(a) The representations and warranties of Parent and Newco contained in this Agreement shall be true and correct at and as of the Effective Time as though made on and as of such date except (i) for changes specifically permitted by this Agreement, (ii) that those representations and warranties which address matters only as of a particular date shall remain true and correct as of such date and (iii) for such exceptions that do not individually or in the aggregate constitute a Parent Material Adverse Effect) and the Selling Companies shall have received a certificate of the President or a Vice President of Newco to the foregoing effect.

(b) Parent and Newco shall have performed and complied with in all material respects their obligations under this Agreement to be performed or complied with on or prior to the Effective Time, and the Selling Companies shall have received a certificate of the President or a Vice President of Newco to the foregoing effect.

(c) The transactions contemplated under the Real Property Purchase Agreements shall have closed.

7.3 Conditions to the Parent’s and Newco’s Obligations to Effect the Purchase. The obligations of Parent and Newco to effect the Purchase are subject to the satisfaction at or prior to the Effective Time of the following additional conditions:

(a) The representations and warranties of the Selling Companies contained in this Agreement shall be true and correct at and as of the Effective Time as though made on and as of such date (except (i) for changes specifically permitted by this Agreement, (ii) that those representations and warranties which address matters only as of a particular date shall remain true and correct as of such date and (iii) for such exceptions that do not individually or in the aggregate constitute a Company Material Adverse Effect), and the Parent shall have received a certificate of the President of each Selling Company to the foregoing effect.

(b) The Selling Companies shall have performed and complied with in all material respects their obligations under this Agreement to be performed or complied with on or prior to the Effective Time, and Parent shall have received a certificate of the President of each Selling Company to the foregoing effect.

(c) There shall not have been commenced any proceeding by any governmental authority or other Person (i) challenging or seeking to make illegal or otherwise restrain or prohibit consummation of the Purchase or seeking to obtain material damages relating to consummation of the

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Purchase or (ii) seeking to restrain or prohibit Parent’s ownership or operation of all or any material portion of the Assets or Business of the Selling Companies, taken as a whole, or to compel Parent or to dispose of all or any material portion of the Business or Assets of the Selling Companies, taken as a whole.

(d) Each Majority Shareholder shall have executed a non-competition agreement in the form attached thereto as Exhibit E (the “Shareholder Non-Competition Agreement”).

(e) The Selling Companies shall have repaid any and all bank debt and capital lease obligations and any other Indebtedness owed by either of STS or any wholly-owned Subsidiaries of STS and to release any guarantees or Liens related to such bank debt or capital lease obligations and obtained releases of all Liens securing such Indebtedness;

(f) The transactions contemplated under the Real Property Purchase Agreements shall have closed.

(g) Intentionally Deleted.

(h) If required by Parent and at the expense of Parent, STS shall have prepared re-audited financial statements for the two (2) prior fiscal years completed as of the Closing Date as well as reviewed interim financial statements as required by the SEC in a form and condition satisfactory to the Parent to be included in the Parent’s current and periodic reports filed with the SEC as well as any consent from the auditors of such financial statements or information required for the Parent to use and include such financial statements and information in the Parent’s financial statements or periodic reports.

(i) The procedures described on Schedule 7.3(i) attached hereto related to the complete transfer of each of the Equity Investments shall have been completed such that the status of the transfer of each of the Equity Investments to the Parent or Newco shall be sufficiently determined so as to confirm if an Equity Investment will or will not be transferred to Parent or Newco.

(j) Parent shall have obtained any necessary waivers or amendments from the RTFC as required by the Commitment Letter, as administrative agent for the Parent’s Amended and Restated Credit Agreement, including but not limited to a release regarding the obligation to require any Subsidiary of STS to provide a subsidiary guarantee.

(k) The Rural Telephone Finance Cooperative shall be legally and financially able to provide the financing in the Commitment Letter, or Parent is otherwise able to obtain financing from another source in amounts and on terms at least as favorable to Parent as those in the Commitment Letter. In

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the event that Parent terminates the Agreement pursuant to this paragraph (k), Parent will reimburse STS for its fees and expenses (including without limitation attorney fees and costs, accountants fees and costs) in connection with the Agreement and the transactions contemplated thereby up to a maximum of $500,000.

7.4 Closing Deliverables.

(a) On the Closing Date, the Selling Companies shall deliver to the Parent or Newco the following:

(i) any documentation required to be delivered pursuant to Section 7.3 above;

(ii) each of the Selling Companies shall deliver to the Parent an officers and incumbency certificate, which shall include the following: (a) certified organizational documents and governing documents for each of the Selling Companies; (b) resolutions of the board of directors and equity holders of each of the Selling Companies, and good standing certificates for each of the Selling Companies.

(iii) an executed bill of sale in the form attached hereto as Exhibit F (“Bill of Sale”);

(iv) an executed assumption agreement attached here as Exhibit G (“Assignment and Assumption Agreement”);

(v) an executed assignment of intellectual property in the form attached here as Exhibit H (“IP Assignment and Assumption Agreement”);

(vi) any deeds or other documentation or instruments required to be delivered under Real Estate Purchase Agreement;

(vii) any other conveyance documents required to be executed and delivered by the Parent;

(viii) an executed Escrow Agreement;

(ix) the Required Consents and Governmental Authorization set forth on Schedule 7.1(c);

(x) any Contract Waivers obtained prior to the Closing;

(xi) documentation related to the CTC Waiver, if any;

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(xii) any other executed ancillary documents contemplated under this Agreement; and

(xiii) any Security Documents.

(b) On the Closing Date Parent and/or Newco shall deliver to the Selling Companies at Closing:

(i) any documentation required to be delivered pursuant to Section 7.2 above;

(ii) the Estimated Cash Purchase Price less the Escrow Amount;

(iii) the executed Escrow Agreement;

(iv) the executed Assignment and Assumption Agreement;

(v) the executed IP Assignment Agreement;

(vi) each of the Parent and any Newco shall deliver to the Selling Companies an officers and incumbency certificate, which shall include the following: (a) certified organizational documents and governing documents for each of the Parent and any Newco; (b) resolutions of the board of directors of Parent authorizing the transactions contemplated hereunder, and good standing certificates for each of the Parent and any Newco.

(vii) any other executed ancillary documents contemplated under this Agreement; and

(viii) any documentation or instruments required to be delivered under the Real Estate Purchase Agreements.

ARTICLE VIII.

TERMINATION; AMENDMENT; WAIVER

8.1 Termination by Mutual Consent. This Agreement may be terminated and the Purchase may be abandoned at any time prior to the Effective Time, by the mutual written consent of Parent and STS.

8.2 Termination by Either Parent or the Selling Companies. This Agreement may be terminated and the Purchase may be abandoned by Parent or the Selling Companies (collectively but not singularly) if (i) any court of competent jurisdiction in the United States or some other governmental body or regulatory authority shall have issued an order, decree or ruling or taken any other action permanently restraining, enjoining or otherwise prohibiting the Purchase and such order, decree, ruling or other action shall have become final and non-appealable, or (ii) the STS Shareholder Approval shall not have been received at the Shareholder Meeting duly called and held or any adjournment or postponement thereof, or (iii) the Effective Time shall not have

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occurred on or before May 31, 2009, provided, that either Parent or the Selling Companies may upon written notice to the other party unilaterally extend such date from May 31, 2009 to July 31, 2009 (the latter of such applicable dates referred to in this Agreement as the “Termination Date”); provided, that the right to terminate this Agreement pursuant to this Section 8.2(iii) shall not be available to any party whose failure to fulfill any of its obligations under this Agreement results in such failure to close.

8.3 Termination by Parent. This Agreement may be terminated by Parent and the Purchase may be abandoned at any time prior to the Effective Time, if (i) any Selling Company shall have failed to perform in any material respect any of its material obligations under this Agreement or the Real Estate Purchase Agreements to be performed at or prior to such date of termination, which failure to perform is not cured, within thirty (30) days after the receipt by the Selling Companies of written notice of such failure or a longer period of time if the Selling Companies are diligently pursuing such cure, or (ii) any breach of a representation or warranty of the Selling Companies contained in this Agreement shall have occurred that would cause the condition set forth in Section 7.3(a) not to be satisfied; provided, that such failure to satisfy such condition is not cured, within thirty (30) days after the receipt by STS of written notice of such failure or a longer period of time if the Selling Companies are diligently pursuing such cure.

8.4 Termination by STS. On behalf of the Selling Companies, this Agreement may be terminated by STS and the Purchase may be abandoned at any time prior to the Effective Time if (i) Newco or Parent shall have failed to perform in any material respect any of their material obligations under this Agreement or the Real Estate Purchase Agreements to be performed at or prior to such date of termination, which failure to perform is not cured, within thirty (30) days after the receipt by Parent of written notice of such failure or a longer period of time if the Parent and/or Newco are diligently pursuing such cure, or (ii) any breach of a representation or warranty of Newco or Parent contained in this Agreement shall have occurred that would cause the condition set forth in Section 7.2(a) not to be satisfied; provided, that such failure to satisfy such condition is not cured, within thirty (30) days after receipt by Parent of written notice of such failure or a longer period of time if Parent and/or Newco are diligently pursuing such cure.

8.5 Effect of Termination. Each party’s right of termination under this Article VIII is in addition to any other rights it may have under this Agreement or otherwise, and the exercise of a right of termination will not be an election of remedies. If this Agreement is terminated pursuant to Article VIII, all further obligations of the parties under this Agreement will terminate, except that the obligations in Sections 8.6, 9.5, 9.1, 9.2 and the last two sentences of 6.4, Articles X and XII and any other provisions hereunder that by their nature are intended to survive termination; provided that if this Agreement is terminated by a party because of the breach of the Agreement by the other party or because one or more of the conditions to the terminating party’s obligations under this Agreement is not satisfied as a result of the other party’s failure to comply with its obligations under this Agreement, the terminating party’s right to pursue all legal remedies will survive such termination unimpaired.

8.6 Extension; Waiver. At any time prior to the Effective Time, each of Parent, Newco and STS (on behalf of all Selling Companies) may (i) extend the time for the performance of any of the obligations or other acts of the other party, (ii) waive any inaccuracies

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in the representations and warranties of the other party contained herein or in any document, certificate or writing delivered pursuant hereto or (iii) waive compliance by the other party with any of the agreements or conditions contained herein. Any agreement on the part of either party hereto to any such extension or waiver shall be valid only if set forth in any instrument in writing signed on behalf of such party. The failure of any party hereto to assert any of its rights hereunder shall not constitute a waiver of such rights.

ARTICLE IX.

INDEMNIFICATION

9.1 Indemnification by the Selling Companies and Majority Shareholders.

(a) The Shareholders and the Selling Companies will jointly and severally indemnify in full Parent and/or Newco and their respective shareholders, directors, officers, employees, agents, successors and assigns and hold it harmless against any Damages arising from, relating to or constituting (i) any breach or inaccuracy in any of the representations and warranties contained in Article IV of this Agreement or any closing certificate delivered by or on behalf of the Selling Companies pursuant to this Agreement, or (ii) any Additional Indemnified Item (as defined in Section 9.1(c)) (collectively, “Parent Damages”).

(b) The Selling Companies and Shareholders will indemnify Parent and/or Newco and their respective shareholders, directors, officers, employees, agents, successors and assigns for Parent Damages pursuant to Section 9.1(a)(i) only if the aggregate amount of all Parent Damages attributable thereto exceeds Seven Hundred Fifty Thousand Dollars ($750,000) (the “Deductible Amount”), in which case the Selling Companies and Shareholders will be liable for any amounts in excess of the Deductible Amount.

(c) Except for the following (each an “Additional Indemnified Item” and collectively, the “Additional Indemnified Items”) the Shareholders’ and the Selling Companies’ liability for Parent Damages will not exceed the aggregate amount of the Indemnification Amount:

(i) Any Damages related to any fraudulent or willful misconduct by the Shareholders or the Selling Companies;

(ii) Any Damages related to any breach of the representations and warranties set forth in Sections 4.1, 4.2, 4.3 and 4.9;

(iii) Any Damages related to any breach of any of Sections 6.2, 6.9, 6.10, 6.11(d), 6.21 or 6.22 by the Selling Companies or any Shareholder;

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(iv) Any amounts for which the Selling Companies or Shareholders are responsible pursuant to Section 3.4(c) or the last sentence of Section 6.10(b);

(v) Any Damages related to any Taxes (or the non-payment thereof) of either of the Selling Companies or the Shareholders for all taxable periods ending on or before the Closing Date and the portion through the end of the Closing Date for any taxable period that includes (but does not end on) the Closing Date, including but not limited to Taxes imposed on the Selling Companies or the Shareholders resulting from the consummation of the transactions contemplated by the Agreement;

(vi) Any Damages related to any liability of the Selling Companies, whether known or unknown and whether realized or contingent, existing as of the Closing Date under any Environmental Law or with respect to any Hazardous Material (except with respect to Laws or Orders relating solely to worker health and safety such as the Federal Occupational Safety and Health Act), regardless of whether a breach of a representation or warranty has occurred;

(vii) Any Damages related to a Selling Companies’ ownership of St. Cloud Wireless Holdings, LLC and/or the St. Cloud Wireless Transaction, including any indemnification obligations under the agreements relating to the sale of that business or any costs or expenses related to STS’s role as tax matters partner for St. Cloud Wireless Holdings, LLC;

(viii) Any Damages related to liabilities with respect to any Employee Benefit Plan and any other incentive, compensation or benefit provided to the employees of the Selling Companies, including but not limited to the ESOP, but excluding any Employee Benefit Plan assumed by Parent or Newco pursuant to Section 6.10 or 6.11 hereof, and all liabilities related thereto;

(ix) Any Damages related to any amounts paid or promised to be paid on any Dissenter’s Shares;

(x) Any monetary obligations specifically enumerated in the Agreement to be paid by the Shareholders or the Selling Companies including but not limited to expenses under Sections 6.16 and 12.1 or any Real Estate Purchase Agreement to the extent not paid by STS at or prior to Closing.

(xi) Any Damages related to the Retained Liabilities set forth in items (b), (c), (d), (e) and (k) of the Retained Liabilities.

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Indemnification for any Additional Indemnified Items shall not be paid from the Indemnification Escrow Amount without Parent’s consent but shall be paid by the Shareholders directly to the Parent and shall not be subject to the Deductible Amount or any limitations pursuant to Section 9.4. Shareholders obligation to indemnify the Parent for Damages for any Additional Indemnification Item that arise under Section 9.1(c) shall survive the Closing Date as follows: (i) obligations under Sections 9.1(c)(iv), (vii), (viii), (ix) and (x) shall survive as long as amounts due under such sections are due or can arise, (ii) obligations under Section 9.1(c)(vi) shall survive for a period that expires on the tenth (10th) anniversary of the Closing Date, (iii) obligations under Sections 9.1(c)(i) or (ii) shall survive indefinitely, and (iv) obligations under for any other Additional Indemnification Items shall survive as long as Parent can experience any Damages for any reason for such Additional Indemnification Item or, to the extent determinable, the statutes of limitation applicable to any such Additional Indemnification Item expires; provided, however, that Parent Damages shall include any Damages incurred by Parent in a dispute with any third party regarding the expiration of the statute of limitation related to any such Additional Indemnification Item.

(d) Notwithstanding anything herein to the contrary, payments for any Parent Damages or Additional Indemnified Items shall be limited to the amount of Parent Damages, if any, that remains after deducting therefrom (i) any Tax benefits that are actually realized by Parent with respect to such Parent Damages, to the extent such benefits are readily identifiable, (ii) any insurance proceeds and any indemnity contribution or other similar payment actually recovered by Parent from any third party with respect thereto, and (iii) any provision or reserve provided for the item in question reflected as a current liability on the face of the Latest Balance Sheet.

(e) If Parent has a claim for indemnification under this Section 9.1, Parent will deliver to the Shareholders’ Representative one or more written notices of Parent Damages under clause (i) of Section 9.1(a) (each a “Parent Claim”), prior to 18 months following the Closing Date. If Parent has a claim for indemnification for an Additional Indemnification Item or a claim under clause (iii) of Section 9.1(a), Parent will deliver to the Shareholders’ Representative one or more written notices of such claims (“Additional Claims”) prior to the applicable time limit set forth in Section 9.1(c). The Selling Companies and the Shareholders will have no liability under Section 9.1(a) unless the written notices required by the two preceding sentences are given by the dates specified. Any Parent Claim or Additional Claim will state in reasonable detail the basis for such Parent Damages to the extent then known by Parent and the nature of the Damages for which indemnification is sought, and it may state the amount of the Damages claimed. If such Parent Claim or Additional Claim (or an amended Parent Claim or Additional Claim) states the amount of the Damages claimed and Shareholders’ Representative notifies Parent that the Shareholders’ Representative does not dispute the claim described in such notice or fails to notify Parent within 20 business days after delivery of such notice by Parent whether the Shareholders dispute the claim described in such notice, the Damages in the amount specified in Parent’s notice will be admitted by Shareholders (an “Admitted Claim”), and Shareholders will pay the amount of such Damages to Parent either in accordance with Section 9.1(f) or directly. If Shareholders’ Representative has timely disputed the liability of Shareholders with respect to a Parent Claim or Additional Claim (or an amended Parent Claim) stating the amount of any Damages claimed, Shareholders’ Representative and Parent will proceed in good faith to negotiate a resolution of such dispute. If a claim for indemnification has not been resolved

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within sixty (60) days after delivery of the Shareholders’ Representative’s notice, Parent may pursue arbitration in accordance with Section 10.1 hereof. If a Parent Claim or Additional Claim does not state the amount of the Parent Damages claimed, such omission will not preclude Parent from recovering from the Shareholders the amount of the Damages described in such Parent Claim or Additional Claim if any such amount or an estimate thereof is subsequently provided in an amended Parent Claim or Additional Claim within ninety (90) days of the original delivery of the Parent Claim or Additional Claim. In order to assert its right to indemnification under this Article IX, Parent will not be required to provide any notice except as provided in this Section 9.1(e).

(f) Parent and the Shareholders will cause the amount of any Parent Damages for a Parent Claim, or at Parent’s option an Additional Claim, to be released to Parent from the Indemnification Amount within 10 days following the determination of Shareholders liability for and the amount of a Parent Damage (whether such determination is made pursuant to the procedures set forth in this Section 9.1, by agreement between Parent and the Shareholders’ Representative or by arbitration award). To the extent funds are available in the Indemnification Amount, the Escrow Agent shall satisfy the Shareholders obligation for a Parent Claim, or at Parent’s option an Additional Claim, by transfer of monies in the Indemnification Amount to Parent. The Shareholders shall pay the amount of any Parent Damages for an Additional Claim not paid from the Indemnification Amount as provided in this Section to be paid to Parent within (10) days following the determination of Shareholders’ liability for such Damages.

(g) Notwithstanding anything to the contrary herein, if any remediation or other response action is required in connection with a Release of Hazardous Materials for which Shareholders are liable under this Article IX, Parent shall give written notice to Shareholders’ Representative stating in reasonable detail the nature and extent of the Release and the remediation or other response action required to the extent then known to Parent, and Shareholders’ Representative may, at its option and expense, participate in such remediation or response action as provided in this Section 9.1(g). Parent and/Newco shall furnish to Shareholders’ Representative copies of all relevant reports and other documentation in its possession or under its control, without charge but subject to the Confidentiality Agreement, and Shareholders’ Representative shall notify Parent of its election to participate in the remediation or other response action, in writing, within twenty (20) days after receiving Parent’s written notice and all relevant documentation. If Shareholders’ Representative elects to participate in the remediation or other response action, Parent shall obtain Shareholders’ Representative’s advance approval of any contractors or consultants and Parent’s plans for the same (which approvals shall not be unreasonably withheld, conditioned or delayed), shall perform the same diligently as required under the circumstances, shall keep Shareholders’ Representative informed of any progress, and shall furnish copies of reports and other material documentation to Shareholders’ Representative without charge but subject to the Confidentiality Agreement. Parent and the Surviving Corporation shall grant access to and otherwise cooperate with Shareholders’ Representative and its agents, contractors and consultants, without charge but subject to the Confidentiality Agreement, as required to permit them to participate in such remediation or other response action.

(h) Notwithstanding any other provision of this Agreement, Parent agrees that the liability of the Shareholders other than the Majority Shareholders shall be limited to their portion

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of the Indemnification Amount held by the Escrow Agent from time to time. Parent agrees that any claims made against Shareholders other than with respect to the Indemnification Amount will be made only against the Majority Shareholders, and the Majority Shareholders agree that they shall have joint and several liability for the entire amount owed to Parent with respect to such claims, without reduction of any kind for any portion of such amount that might for any reason be attributable to the Shareholders other than the Majority Shareholders.

9.2 Indemnification by Parent.

(a) Parent and Newco, if any, will jointly and severally indemnify in full the Selling Companies and their respective shareholders, directors, officers, employees, agents, successors and assigns and hold them harmless against any Damages arising from, relating to or constituting (i) any breach or inaccuracy in any of the representations and warranties contained in Article V of this Agreement or in any certificate delivered by or on behalf of Parent or Newco pursuant to this Agreement, (ii) any breach of any of the agreements of Parent contained in this Agreement, (iii) any Assumed Liabilities or (iv) except as otherwise provided in Section 9.1, conduct of the business and ownership and operation of Parent, Newco or the Business and the Real Property after the Closing Date ( the “STS’ Damages”).

(b) Parent and Newco will indemnify Selling Companies and their respective shareholders, directors, officers, employees, agents, successors and assigns for STS’ Damages pursuant to Section 9.2(a)(i) only if the STS’ Damages attributable thereto exceeds the Deductible Amount, in which case Parent will be liable for the STS’ for any amounts in excess of the Deductible Amount; provided, that any STS’ Damages that arise pursuant to Sections 5.1, 5.2, Section 9.2(a)(iii) or Section 11.5 shall not be subject to the Deductible Amount.

(c) With the exception of STS’ Damages resulting from fraudulent or willful misconduct by Parent, or with respect to any Assumed Liabilities, liability for STS’ Damages will not exceed the aggregate amount of the Indemnification Amount.

(d) If STS has a claim for indemnification under Section 9.2(a)(i), STS will deliver to Parent one or more written notices of STS’ Damages prior to the 18 months following the Closing Date. If STS has a claim for indemnification for a claim under clauses (ii), (iii) or (iv) of Section 9.2(a), STS will deliver to Parent one or more written notices of such claims. Parent will have no liability under Section 9.2(a)(i) unless the written notice required by the first sentence of this Section 9.2(d) is given by the date specified. Any written notice will state in reasonable detail the basis for such STS Damages to the extent then known by STS and the nature of STS Damages for which indemnification is sought, and it may state the amount of STS Damages claimed. If such written notice (or an amended notice) states the amount of STS Damages claimed and Parent notifies STS that Parent does not dispute the claim described in such notice or fails to notify STS within twenty (20) business days after delivery of such notice by STS whether Parent disputes the claim described in such notice, STS Damages in the amount specified in STS’ notice will be admitted by Parent, and Parent will pay the amount of such STS Damages to STS in accordance with Section 9.2(e). If Parent has timely disputed its liability with respect to such claim, Parent and STS will proceed in good faith to negotiate a resolution of such dispute. If a claim for indemnification has not been resolved within sixty (60) days after delivery of Parent’s notice, STS may pursue arbitration in accordance with Section 10.01 hereof.

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If a written notice does not state the amount of STS Damages claimed, such omission will not preclude STS from recovering from Parent the amount of STS Damages with respect to the claim described in such notice if any such amount is promptly provided once determined. In order to assert its right to indemnification under this Article IX, STS will not be required to provide any notice except as provided in this Section 9.2(d).

(e) Parent shall pay the amount of any STS’ Damages to STS within ten (10) days following the determination of Parent’s liability for such amount of STS’ Damages (whether such determination is made pursuant to the procedures set forth in this Section 9.2, by agreement between STS’ and Parent or by arbitration award).

9.3 Third-Party Actions.

(a) Subject to the limitations provided in this Article IX, the Selling Companies and the Shareholders will jointly and severally, indemnify, defend and hold harmless each of Parent, and Newco and their officers, directors, employees, agents, shareholders and Affiliates (collectively, the “Parent Indemnified Parties”) against any Damages arising from, relating to or constituting any Litigation instituted by any third party arising out of the actions or inactions of Shareholders or the Selling Companies (or allegations thereof) with respect to the period up to and including the Closing Date that are or may be Parent Damages (any such third party action or proceeding being referred to as a “Third-Party Action”). A Parent Indemnified Party will give Shareholders’ Representative prompt written notice of the commencement of a Third-Party Action. The complaint or other papers pursuant to which the third party commenced such Third-Party Action will be attached to such written notice. The failure to give prompt written notice will not affect any Parent Indemnified Party’s right to indemnification unless such failure has materially and adversely affected Shareholders’ ability to defend successfully such Third-Party Action.

(b) Subject to Section 9.3, Parent will have the right to contest and defend such Third-Party Action on its own behalf. Notice of the intention to so contest and defend will be given to Shareholders’ Representative by the Parent Indemnified Party within twenty (20) business days after the Parent Indemnified Party’s receipt of notice of such Third-Party Action (but, in all events, at least five business days prior to the date that a response to such Third-Party Action is due to be filed). Such contest and defense will be conducted by reputable attorneys retained by Parent. Shareholders’ Representative will be entitled at any time, at its own cost and expense, to participate in such contest and defense and to be represented by attorneys of their own choosing. If Shareholders’ Representative elects to participate in such defense, the Parent will cooperate with Shareholders’ Representative in the conduct of such defense. A Parent Indemnified Party will cooperate with Shareholders’ Representative to the extent reasonably requested by Shareholders’ Representative in the contest and defense of such Third-Party Action, including providing reasonable access (upon reasonable notice) to the books, records and employees of the Parent Indemnified Party if relevant to the defense of such Third-Party Action.

(c) If Parent does not contest and defend a Third-Party Action or if Shareholders’ Representative reasonably determines that Parent is not adequately representing or, because of a conflict of interest, may not adequately represent any interests of Shareholders’ Representative at any time, Shareholders’ Representative will be entitled to conduct its own defense and to be represented by an attorney of its own choosing, all at Shareholders’ cost and expense.

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(d) Neither a Parent Indemnified Party nor Shareholders may concede, settle or compromise any Third-Party Action without the consent of the other party, which consents will not be unreasonably withheld. Notwithstanding the foregoing, (i) if a Third-Party Action seeks the issuance of an injunction, the specific election of an obligation or similar remedy or (ii) if the subject matter of a Third-Party Action relates to the ongoing business of any Parent Indemnified Party, which Third-Party Action, if decided against any Parent Indemnified Party, would materially adversely affect the ongoing business or reputation of any Parent Indemnified Party, the Parent Indemnified Party alone will be entitled to settle such Third-Party Action in the first instance and, if the Parent Indemnified Party does not settle such Third-Party Action, Shareholders will then have the right to contest and defend (but not settle) such Third-Party Action.

9.4 Escrow. Except for indemnification obligations arising under section 9.1(c), the indemnification obligations of the Selling Companies or the Shareholders in this Article IX will be satisfied solely from the Indemnification Amount, and except as otherwise set forth herein, Parent shall not have any recourse against any current or former director, officer, employee or shareholder of the Selling Companies in connection with any indemnification claim or any other claim of any nature.

9.5 Sole and Exclusive Remedy. Prior to or in connection with the Closing, the parties will have available to them all remedies available at law or in equity, including specific performance or other equitable remedies. After the Closing, the rights set forth in Sections 9.1, 9.2 and, to the extent applicable, 9.3 will be the exclusive remedy for breach or inaccuracy of any of the representations and warranties contained in Articles IV through V of this Agreement and will be in lieu of contract remedies. Notwithstanding the foregoing, nothing in this Agreement will prevent any party from bringing an action based upon fraud or willful misconduct by the other party in connection with this Agreement.

9.6 Tax Adjustment. Any payment to Parent under this Article IX or elsewhere in this Agreement will be, for Tax purposes, to the extent permitted by Law, an adjustment to the Purchase Price.

ARTICLE X.

GENERAL PROVISIONS

10.1 Binding Arbitration.

(a) Any controversy or claim arising out of or relating to this Agreement, the breach, termination or validity thereof, or the transactions contemplated herein (including any question arising as to whether or not any dispute falls within the terms of this Section or the selection of arbitrators) shall be settled by binding arbitration in accordance with the Commercial Arbitration Rules of the American Arbitration Association, as modified herein. The arbitration shall be governed by the Federal Arbitration Act

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(9 U.S.C. §§ 1 et seq.), and judgment upon the award rendered by the arbitrator may be entered by any court having jurisdiction thereof. The arbitration shall be conducted in Hennepin County, Minnesota.

(b) The parties shall have the discovery rights as provided by the Federal Rules of Civil Procedure.

(c) The parties shall bear their own costs in connection with the arbitration and shall share equally the fees and expenses of the arbitrators, except as the arbitrators may otherwise determine.

(d) The parties hereto (and after the Closing, the Shareholders’ Representative) agree that any legal proceeding instituted to enforce an arbitration award hereunder will be brought in a state or federal court of competent jurisdiction (either state or federal) located in Hennepin County, Minnesota and hereby submit to personal jurisdiction therein and irrevocably waive any objection as to venue therein, and further agree not to plead or claim in any such court that any such proceeding has been brought in an inconvenient forum.

(e) Nothing herein shall be construed to prevent any party from seeking equitable relief in any court of competent jurisdiction to compel specific performance or restrain or prohibit any breach or threatened breach of any covenant of the parties set forth in this Agreement.

ARTICLE XI.

ADDITIONAL AGREEMENTS

11.1 Cooperation on Tax Matters. Parent, Newco and the Selling Companies shall cooperate fully in any Tax audits, examination, litigation or other proceeding relating to the Selling Companies or the Business (each, a “Tax Proceeding”). Such cooperation shall include, but shall not be limited to, the retention and (upon the other party’s request) the provision of records and information that are reasonably relevant to any Tax Proceeding and making employees available on a mutually convenient basis to provide additional information and explanation of any material provided hereunder. Parent, Shareholders’ Representative and Newco and the Selling Companies agree (A) to retain all books and records with respect to Tax matters pertinent to the Selling Companies relating to any pre-Closing period and any period that includes the Closing Date until the expiration of the statute of limitations of the respective Tax periods, and to abide by all record retention agreements entered into with any taxing authority, and (B) to give the other party reasonable written notice prior to transferring, destroying or discarding any such books and records and, if the other party so requests, allow the other party to take possession of such books and records.

11.2 Tax Adjustment. In connection with the Purchase, Parent shall pay to the Selling Companies, as additional Cash Purchase Price (the “Tax Adjustment”), an amount equal to any additional amount of tax payable by the Shareholders as a result of the Purchase being structured as an asset acquisition hereunder when compared to the amount of tax payable by the

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Shareholders if the transactions contemplated hereunder occurred as a stock purchase (the “Differential Tax Amount”), plus an additional amount (the “Gross-up Amount”) equal to the tax payable by the Shareholders on the receipt of the Differential Tax Amount and the Gross-up Amount. The Parent and the Shareholders agree that the Tax Adjustment shall be calculated in accordance with the methodology displayed on Schedule 11.2 attached hereto (the “Tax Adjustment Methodology”). The Parent and the Shareholders agree that the assumed effective tax rates set forth in the Tax Adjustment Methodology shall be adjusted in the event of a change in the maximum federal and state tax rates applicable to ordinary income and capital gain if such change would apply to the Shareholders in connection with and arising out of the transactions contemplated under this Agreement and this Section 11.2.

11.3 Section 1060 Allocation; Reporting. For purposes of reporting the transactions contemplated hereby, the parties agree that the Purchase Price as determined, shall be allocated among the Assets in accordance with and as provided by Section 1060 of the Code (the “Section 1060 Allocation”). The parties shall mutually agree to such allocation contemporaneously with the final determination of the allocation of the Asset Value among the Assets. The parties agree that any tax returns will be prepared and filed consistently with such agreed upon Section 1060 Allocation. Each party agrees to timely file an IRS Form 8594 reflecting the Section 1060 Allocation among the Purchased Assets for the taxable year that includes the Effective Time and to timely file any comparable or similar forms required by applicable state, local, and foreign tax laws.

11.4 Calculation and Payment of Tax Adjustment.

(a) Pre-Closing Appraisal. After the date hereof but prior to the Closing Date, Parent shall engage at its expense a nationally recognized appraisal firm (the “Appraiser”) to begin to confirm and estimate the value of the assets of STS and its Subsidiaries (the “Valuation”) in a manner and in accordance with generally accepted standards necessary to provide both the Parent and the Selling Companies the documentation necessary to support the Section 1060 Allocation. Selling Companies and the Shareholders agree to fully cooperate with the Parent and the Appraiser to conduct the Valuation and provide complete access to all of their records, facilities and staff in order for the Appraiser to complete the Valuation. Parent shall require that the Appraiser make available to the Shareholders as requested any supporting documentation prepared by the Appraiser in connection with the Valuation. The parties hereto acknowledge that the Valuation is not intended to be completed as of or prior to the Closing and is commencing prior to the Closing to potentially facilitate the timely calculation of the Tax Adjustment.

(b) Proposed Tax Adjustment; Estimated Tax Adjustment Amount. As of the date hereof, the parties assume the Tax Adjustment to be paid will be approximately Five Million Five Hundred Thousand Dollars ($5,500,000) (the “Proposed Tax Adjustment”), Three Million Five Hundred Thousand Dollars ($3,500,000) of which will be paid at Closing, unless adjusted as set forth below (as so adjusted, the “Closing Tax Adjustment Payment”),

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and Two Million Dollars ($2,000,000) of which, unless adjusted as set forth below, shall be placed in an escrow account with the Escrow Agent (as so adjusted, the “Tax Adjustment Escrow”). The parties hereto acknowledge that this Proposed Tax Adjustment Payment is based on information such as existing estimates and valuations of the assets and certain tax rates that may change prior to the Closing as a result of the portion of the Valuation completed as of the Closing or other changes. In order to facilitate any such changes and to mitigate any overpayment or underpayment of the Tax Adjustment, at least ten (10) days prior to the Closing the Parent shall deliver to STS a calculation of any changes to Closing Tax Adjustment Payment (the “Estimated Tax Adjustment Amount”). If the Estimated Tax Adjustment Amount is more or less than $3,500,000, the amount of the Closing Tax Adjustment Payment shall be increased or decreased accordingly and the Tax Adjustment Escrow shall be adjusted to equal the difference between $5,500,000 and amount of the Closing Tax Adjustment Payment. Parent shall pay to STS, in cash, the Estimated Tax Adjustment Amount at Closing.

(c) Post Closing Reconciliation. As soon as practicable after the Closing, but in no event more than ninety (90) days after the completion of both the Valuation and the final determination of the Closing Date Balance Sheet, Parent shall calculate and deliver to STS a statement that sets forth the final Tax Adjustment calculated in accordance with Tax Adjustment Methodology (the “Final Tax Adjustment Amount”). The confirmation of or resolution of any disputes related to the Final Tax Adjustment Amount shall then be determined in accordance with the procedures set forth in Section 3.4 hereof.

11.5 Tax Adjustment Indemnification. Parent agrees to indemnify in full and hold harmless STS from any Damages incurred by STS arising from or relating to the Tax Adjustment, including without limitation, any costs and expenses related to any accounting, legal or other professional services (including fees, costs and expenses) in connection with any audit matters after the Closing Date that relate to the Tax Adjustment; provided, that the foregoing indemnification shall not include any portion of any costs and expenses related to non-Tax Adjustment matters.

11.6 Access to Information. After the Closing, to the extent reasonably required, the Selling Companies shall both permit the Parent and Newco and any person authorized by either of the Parent and Newco to have reasonable access, during regular business hours and upon reasonable advance notice, to the books and records of the Selling Companies relating to the Business (to the extent same have not been handed over to the Parent or Newco). After the Closing the Selling Companies shall also furnish Parent or Newco or such authorized persons any information relating to the Business that either Parent or Newco may reasonably request. After Closing to the extent reasonably required, Parent and Newco shall both permit the Selling Companies and the Shareholders’ Representative to have reasonable access, during regular business hours and upon reasonable advance notice, to the former employees of the Selling Companies and to the books and records of the Selling Companies relating to the Business.

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After the Closing the Parent or Newco shall also furnish the Selling Companies or the Shareholders’ Representative any information relating to the Business that the Selling Companies or the Shareholders’ Representative may reasonably request.

ARTICLE XII.

MISCELLANEOUS AND GENERAL

12.1 Payment of Expenses. Except as otherwise expressly provided for in this Agreement, the parties will each pay all expenses directly incurred by each of them, respectively, in connection with the transactions contemplated by this Agreement, including legal, accounting, investment banking and consulting fees and expenses incurred in negotiating, executing and delivering this Agreement and the other agreements, exhibits, documents and instruments contemplated by this Agreement (whether the transactions contemplated by this Agreement are consummated or not). Any expenses of the Selling Companies or the Shareholders’ Representative will be paid on or before the Closing Date. With respect to any regulatory filings: (a) each party will be responsible for its own expenses related to any HSR Act compliance (including any applicable filing fee), (b) Selling Companies shall be responsible for and bear all costs related to any filings with the MPUC (except for Parent’s attorneys fees incurred to review such filings), (c) Parent shall be responsible for and bear any costs related to any filings with the IUB (except for the Selling Companies’ attorneys fees incurred to review such filings), and (d) Parent shall be responsible for and bear all costs related to any filings with the FCC (except that each party shall bear their own attorneys fees related to such filings and review).

12.2 Survival of Confidentiality. This Section 12.2 shall not limit any covenant or agreement of the parties hereto which by its terms applies or is to be performed after the Effective Time. The Confidentiality Agreement shall survive any termination of this Agreement, and the provisions of such Confidentiality Agreement shall apply to all information and material delivered by any party hereunder.

12.3 Modification or Amendment. Subject to the applicable provisions of the MBCA, at any time prior to the Effective Time, the parties hereto may modify or amend this Agreement, by written agreement executed and delivered by duly authorized officers of the respective parties; provided, however, that after approval of this Agreement by the Shareholders, no amendment shall be made which changes the consideration payable in the Purchase by more than one percent (1%) or adversely affects the rights of the Shareholders hereunder without the approval of such Shareholders.

12.4 Waiver of Conditions. The conditions to each of the parties’ obligations to consummate the Purchase are for the sole benefit of such party and may be waived by such party in whole or in part to the extent permitted by applicable law.

12.5 Counterparts. For the convenience of the parties hereto, this Agreement may be executed in any number of counterparts, each such counterpart being deemed to be an original instrument, and all such counterparts shall together constitute the same agreement.

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12.6 Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Minnesota, without giving effect to the principles of conflicts of law thereof.

12.7 Notices. Any notice, request, instruction or other document to be given hereunder by any party to the other parties shall be in writing and shall be deemed duly given when delivered personally or one business day after being sent by overnight courier or three business days after being sent by registered or certified mail, postage prepaid, or when sent by facsimile transmission (with a confirming copy sent by overnight courier), as follows:

If to Selling Companies:

Sherburne Tele Systems, Inc.

440 Eagle Lake Road North

P.O. Box 310

Big Lake, MN 55309

Attn: Robert K. Eddy

rkeddy@sts.izoom.net

Facsimile No.: (763) 262-7711

If to Shareholders’ Representative:

Robert K. Eddy

161 Hill Circle W

P.O. Box 510

Big Lake, MN 55309-0510

rkeddy@izoom.net

Facsimile No.: (763) 262-4187

With a copy to:

Leonard, Street and Deinard, P.A.

150 South Fifth Street

Suite 2300

Minneapolis, MN 55402

Attn: Steven D. DeRuyter, Esq.

Steven.DeRuyter@leonard.com

Facsimile No.: (612) 335-1657

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If to Parent or Newco:

Iowa Telecommunications Services, Inc.

403 West Fourth Street North

Newton, IA 50208

Attn: Donald Henry

don.henry@iowatelecom.com

Facsimile No.: (641) 787-2593

With a copy to:

Fredrikson & Byron, P.A.

200 South Sixth Street, Suite 4000

Minneapolis, MN 55402

Attn: Steven J. Dickinson, Esq.

sdickinson@fredlaw.com

Facsimile No.: (612) 492-7077

or to such other persons or addresses as may be designated in writing by the party to receive such notice.

12.8 Entire Agreement; Assignment. This Agreement (including the documents and the instruments referred to herein and contemplated hereby ), the Ancillary Documents and the Confidentiality Agreement (the “Transaction Documents”) (a) constitute the entire agreement among the parties with respect to the subject matter hereof, and (b) shall not be assigned by operation of law or otherwise; provided, however, that Parent may assign any of its rights under any of the Transaction Documents to the Newcos and no such assignment shall release Parent of any of its obligations or liabilities under any of these Transaction Documents for which Parent and Newcos shall be jointly and severally responsible.

12.9 Parties in Interest. This Agreement shall be binding upon and inure solely to the benefit of each party hereto and their respective successors and assigns. Nothing in this Agreement, express or implied, other than from and after the Effective Time the right to receive the consideration payable in the Purchase pursuant to Article III hereof is intended to or shall confer upon any other Person any rights, benefits or remedies of any nature whatsoever under or by reason of this Agreement.

12.10 Certain Definitions. As used in this Agreement, each of the following terms has the meaning given in this Section 12.10 or in the Section referred to below:

“Additional Amount” has the meaning specified in Section 3.4.

“Affected Employees” has the meaning specified in Section 6.12.

An “Affiliate” of, or a Person “affiliated” with, a specific Person is a Person that directly, or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with, the Person specified.

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“Ancillary Document” has the meaning specified in Section 4.28.

“Agreement” means this Agreement, as amended, supplemented and/or modified from time to time.

“Assets” means all assets used or usable in the Business, except the Excluded Assets. For the avoidance of doubt, Assets includes:

(a) All Real Property of the Selling Companies, including but not limited to the Real Property described on Schedule 4.7 attached hereto (the “Owned Real Property”);

(b) All Tangible Property, including but not limited to those items described on Schedule 4.21 attached hereto (the “Tangible Property”);

(c) All inventory, property, plants and equipment, materials and supplies;

(d) All Cash on Hand, except as specifically excluded on Exhibit B;

(e) All items specifically identified on the model balance sheet attached hereto as Exhibit B-1 (the “Model Balance Sheet”) as Assets to be acquired hereunder;

(f) All of the Selling Companies’ Contracts (the “Selling Companies’ Contracts”) and all outstanding offers or solicitations made by or to the Selling Companies to enter into any Contract; provided however if the Selling Companies fail to obtain a Required Consent (except for those set forth on Schedule 7.1(c)) related to any such Selling Companies’ Contract, such Selling Companies’ Contract shall no longer be an Asset (or an Assumed Liability) but shall be an Excluded Asset (and a Retained Liability of the Selling Companies) until such time as the Selling Companies obtain such consent;

(g) All Permits, Governmental Authorizations and all pending applications therefor, in each case to the extent transferable to the Parent and/or Newco, including but not limited to those listed on Schedule 4.18 attached hereto;

(h) All data and records related to the operations of the Business by the Selling Companies, including but not limited to client and customer lists and records, referral sources, research and development reports and records, production reports and records, service and warranty records, equipment logs, operating guides and manuals, financial and accounting records, creative materials, advertising materials, promotional materials, studies, reports, correspondence and other similar documentations, documents and records and subject to the legal requirements, copies of all personnel records and other records described above;

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(i) All of the intangible rights and property of the Selling Companies including but not limited to licenses, business and trade names, intellectual property rights, domain names, going concern value, goodwill, telephone, telecopy and email addresses and listings and those items listed on Schedule 12.10(i) attached hereto;

(j) All insurance benefits, including rights and proceeds arising from or relating to the Assets or the Assumed Liabilities prior to the Effective Time, unless excluded in accordance with this Agreement;

(k) All claims of Selling Companies against third parties relating to the Assets, other than the Selling Companies, right to bring claims against persons who may be responsible for contamination at the Real Property, if any, to the extent that indemnification claims therefor are asserted under this Agreement against STS, any Selling Company, or their respective shareholders, directors, officers, employees, agents, successors and assigns, whether choate or inchoate, known or unknown, contingent or non-contingent, including all such claims listed on Schedule 12.10(k) attached hereto;

(l) Any Employee Benefit Plan transferred pursuant to Section 6.10 or 6.11 hereof;

(m) Except for those items specifically enumerated as an Excluded Asset, all of the Selling Companies’ Equity Investments.

“Associates” has the meaning specified in Rule 12b-2 promulgated under the Exchange Act.

“Assumed Liabilities” shall mean any liability of the Selling Companies except for (i) the Retained Liabilities, (ii) any Contract Waiver Agreement for which the Selling Companies have not obtained a Contract Waiver (but such Contract Waiver Agreements shall become Assumed Liabilities to the extent and at the times provided in Section 3.5(b)(iii) or (iv)), (iii) any other liability of the Selling Companies that shall remain a liability of the Selling Companies because consent or waiver of the transfer thereof is not obtained pursuant to the terms of this Agreement, or (vi) any liability specifically identified on the Model Balance Sheet as a Retained Liability.

“Bonus Payments” has the meaning specified in Article VI.

“Board of Directors” has the meaning specified in the introductory paragraphs of this Agreement.

“Business Day” shall mean any day, other than a Saturday or Sunday, on which commercial banks are open for business in the City of New York, and the City of Minneapolis, Minnesota.

“Cash on Hand” has the meaning specified in Section 3.1.

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“Claim” has the meaning specified in Section 6.6.

“Closing” means the closing of the Purchase and the consummation of the other transactions contemplated by this Agreement as specified in Section 1.4.

“Closing Date” means the date on which the Closing occurs.

“Closing Date Statement” has the meaning specified in Section 3.4.

“Code” means the Internal Revenue Code of 1986, as amended.

“Company Disclosure Schedule” means the Company Disclosure Schedule attached hereto.

“Company Material Adverse Effect” shall mean any adverse change, or change, event or occurrence reasonably expected to have an adverse change, in the financial condition, business, results of operations of STS and its Subsidiaries, taken as a whole, excluding any (i) changes or effects resulting from general changes in economic, market, financial or capital market, regulatory or political conditions, and changes in conditions generally applicable to the industries in which STS and its Subsidiaries are involved, which in each case have not had and are not reasonably expected to have a disproportionate effect on STS and its Subsidiaries taken as a whole; (ii) changes in any applicable laws or interpretations thereof by Governmental Entity; or (iii) changes which result from the announcement or the consummation of the transactions contemplated hereby.

“Competing Transaction” has the meaning specified in Section 6.2.

“Confidentiality Agreement” has the meaning specified in Section 6.4.

“Contract Waiver Escrow” shall be an amount equal to no more than the aggregate amount set forth on Schedule 3.5(b), with the final amount finally determined at Closing pursuant to Section 3.5(b) hereof.

“Damages” means any and all damages, losses, claims, liabilities, lost tax benefit, Taxes, demands, charges, suits, penalties, costs, expenses, (including court costs and reasonable attorneys’ fees and expenses incurred in investigating and preparing for any action or proceeding, but excluding punitive, special, consequential and incidental damages) or diminutions of value, whether or not involving a Third-Party Claim.

“Disclosure Schedule” means, as applicable, the Company Disclosure Schedule or the Parent Disclosure Schedule.

“Effective Time” has the meaning specified in Section 1.4.

“Employee Benefit Plans” has the meaning specified in Section 4.10.

“EN-TEL” means EN-TEL Communications, LLC, a Minnesota limited liability company.

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“Equity Investments” has the meaning specified in Section 4.25 and, for avoidance of doubt, includes all governance and financial rights related to such Equity Investments.

“Escrow Agent” means an escrow agent selected by Parent and reasonably acceptable to the Selling Companies.

“Escrow Agreement” has the meaning specified in Section 3.5.

“Escrow Amount” means the sum of the Indemnification Amount, the True-Up Reserve Amount, the Tax Adjustment Escrow and, subject to Section 3.5(b) hereof, the Contract Wavier Escrow.

“ESOP Trustee” means the independent ESOP trustee of the ESOP.

“Estimated Cash Purchase Price” has the meaning specified in Section 3.1.

“Estimated Tax Adjustment Amount” has the meaning specified in Section 11.4.

“Exchange Act” means the Securities Exchange Act of 1934, as amended.

“Excluded Assets” means:

(a) Except as included in the Closing Date Working Capital, all cash and cash equivalents.

(b) All marketable securities (including the RTFC certificates, RTFC membership interests and capital credits), securities accounts and bank accounts.

(c) All minute books, stock records and corporate seals of the Selling Companies;

(d) The shares of capital stock of the Selling Companies;

(e) All life insurance policies set forth on Schedule 12.10(e) and rights thereunder;

(f) All the Selling Companies’ Contracts listed on Schedule 12.10(f) attached hereto (“Excluded Contracts”) or any such Selling Companies Contract that is a Contract Waiver Agreement for which a Consent Waiver is not obtained either prior to the Closing or prior to the expiration of the Contract Waiver Period;

(g) All personnel records and other records of the Selling Companies that the Selling Companies are required by law to retain in their possession; provided, however, to the extent the Selling Companies must retain such a record, a complete and exact copy of any such record shall be included as an Asset and conveyed to Parent or Newco at the Closing;

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(h) All claims for refund for Taxes and other governmental charges of whatever nature;

(i) All rights of the Selling Companies under this Agreement, any Bill of Sale, any Assignment and Assumption Agreement, the Real Property Purchase Agreements and the Escrow Agreement;

(j) the Specifically Excluded Property and any property and assets expressly designated on Schedule 12.10(j) attached hereto; and

(k) any balance sheet item specifically identified on the Model Balance Sheet as an Excluded Asset.

“FCC” has the meaning specified in Section 4.4.

“FCC Rules” shall mean the Communications Act of 1934, as amended, including as amended by the Telecommunications Act of 1996, and the rules and regulations adopted by the FCC thereunder.

“Final Downward Adjustment” means the amount by which the Estimated Cash Purchase Price exceeds the Cash Purchase Price.

“Final Order” shall mean an action or decision that has been granted by the FCC as to which (a) no request for a stay or similar request is pending, no stay is in effect, the action or decision has not been vacated, reversed, set aside, annulled or suspended and any deadline for filing such request that may be designated by statute or regulation has passed, (b) no petition for rehearing or reconsideration or application for review is pending and the time for the filing of any such petition or application has passed, (c) the FCC does not have the action or decision under reconsideration on its own motion and the time within which it may effect such reconsideration has passed, and (d) no appeal is pending, including other administrative or judicial review, or in effect and any deadline for filing any such appeal that may be designated by statute or rule has passed.

“Final Upward Adjustment” means the amount by which the Cash Purchase Price exceeds the Estimated Cash Purchase Price.

“Final Tax Adjustment Amount” has the meaning specified in Section 11.4.

“Final Working Capital” means the Close Date Working Capital calculated as of the Closing.

“GAAP” means generally accepted accounting principles, as recognized by the U.S. Financial Accounting Standards Board (or any generally recognized successor).

“Governmental Entity” means any national, state, county or municipal government, domestic or foreign, any agency, board, bureau, commission, court, department or other instrumentality of any such government, or any arbitrator in any case that has jurisdiction over STS, Parent or any of their respective Subsidiaries, properties or assets.

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“Hazardous Materials” has the meaning specified in Section 4.14(a)(v).

“HSR Act” has the meaning specified in Section 4.4.

“Indebtedness” means, as of the date of calculation, all obligations or other liabilities of the Selling Companies (i) for borrowed money, (ii) in respect of letters of credit, bankers’ acceptances or other similar instruments or reimbursement obligations with respect thereto, (iii) to pay the deferred purchase price of any asset, property or right, (iv) under capitalized leases, (v) under an interest rate, currency or other swap, cap, floor or collar agreement, hedge agreement, forward contract, or other similar instrument or agreement or foreign currency hedge, exchange, purchase or similar instrument or agreement, and (vi) under any mortgage, deed of trust, indenture, security agreement or other agreement securing any of the foregoing obligations.

“Indemnification Amount” means ten percent (10%) of the Estimated Cash Purchase Price initially, and after Closing, any and all interest credited under the Escrow Agreement to the Indemnification Amount less any withdrawals used to satisfy indemnification liabilities under Article IX.

“Indemnified Party” means the directors, managers, officers, employees, members, stockholders, agents, advisors, attorneys, accountants, consultants and affiliates of the Person specified.

“Knowledge” of the Selling Companies shall mean unless otherwise set forth in this Agreement, the actual knowledge of Robert K. Eddy, G. George Wallin, Thomas Campbell, Rhonda Klein, Paavo A. Pyykkonen and John Schell.

“Leased Real Property” has the meaning specified in Section 4.7(c).

“Lien” means any lien, license, mortgage, security interest, pledge, deposit, production payment, restriction, burden, encumbrance, right of purchase, right of a vendor under any title retention or conditional sale agreement, or lease or other arrangement substantially equivalent thereto.

“MBCA” means the Chapter 302A of the Minnesota Statutes or the Minnesota Business Corporation Act.

“Newco” has the meaning specified in the Recitals.

“Outstanding Shares” has the specified meaning in Section 4.2.

“Owned Real Property” has the meaning specified in Section 4.7(b).

“Parent” has the meaning specified in the introductory paragraph of this Agreement.

“Parent Disclosure Schedule” means the Parent Disclosure Schedule attached hereto (prior to execution, Parent advised no representations or warranties required qualification so no disclosure schedules were delivered).

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“Parent Material Adverse Effect” shall mean any adverse change, or change, event or occurrence reasonably expected to have an adverse change, in the financial condition, business or results of operations of Parent and its Subsidiaries, taken as a whole, excluding (i) any changes or effects resulting from general changes in economic, market, regulatory or political conditions, and changes in conditions generally applicable to the industries in which Parent and its Subsidiaries are involved, which in each case have not had and are not reasonably expected to have a disproportionate effect on STS and its Subsidiaries taken as a whole or (ii) changes which result from the announcement or the consummation of the transactions contemplated hereby.

“Permits” has the meaning specified in Section 4.17.

“Permitted Liens” means: (i) Liens for taxes, assessments or other governmental charges or levies if the same shall not at the particular time in question be due and delinquent or are being contested in good faith by appropriate proceedings, (ii) Liens of carriers, warehousemen, mechanics, laborers, materialmen, landlords, vendors, workmen and operators arising by operation of law in the ordinary course of business or by a written agreement for sums not delinquent or being contested in good faith by appropriate proceedings, (iii) inchoate Liens incurred in the ordinary course of business in connection with workers’ compensation, unemployment insurance and other social security legislation (other than ERISA) which would not and will not, individually or in the aggregate, materially impair the value of the Assets of STS and its Subsidiaries or interfere with the ordinary conduct of the Business of STS and its Subsidiaries, (iv) Liens incurred in the ordinary course of business to secure the performance of bids, tenders, trade contracts, leases, statutory obligations, surety and appeal bonds, performance and repayment bonds and other obligations of a like nature which would not and will not, individually or in the aggregate, materially impair the value of the Assets of STS and its Subsidiaries or interfere with the ordinary conduct of the Business of STS and its Subsidiaries or rights to any of its assets, (v) Liens, easements, rights-of-way, restrictions, servitudes, permits, conditions, covenants, exceptions, reservations and other similar encumbrances existing on property which would not and will not materially impair the value of the assets of STS and its Subsidiaries or interfere with the ordinary conduct of the business of STS and its Subsidiaries or rights to any of its assets, and (vi) any defects, irregularities or deficiencies in title to easements, leases, licenses, rights-of-way or other use agreements which would not and will not materially impair the value of the assets of STS and its Subsidiaries or interfere with the ordinary conduct of the business of STS and its Subsidiaries or rights to any of its assets. Notwithstanding any other provision of this Agreement, no Lien relating to a violation of an Environmental Law, a Release of Hazardous Materials or an imposition of Environmental Costs shall constitute a Permitted Lien except as expressly provided in Section 6.15.

“Person” means an individual, corporation, partnership, limited liability company, association, trust, unincorporated organization, entity or group (as defined in the Exchange Act).

“Purchase” has the meaning specified in Section 1.1.

“Information Statement” has the meaning specified in Section 3.6.

“Representative” has the meaning specified in Section 6.4.

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“Retained Liabilities” shall mean the following (and only the following) liabilities of the Selling Companies:

(a) Any liability under (a) any Contract to which a Selling Company is a party not assumed by the Parent or Newco, (b) any Selling Companies’ Contract set forth on Schedule 6.3 for which the Selling Companies fail to obtain consent to the transfer thereof, and (c) any liability arising out of or relating to Selling Companies’ credit facilities or any security interest related thereto;

(b) Any liability of the Selling Companies, whether known or unknown and whether realized or contingent, existing as of the Closing Date under any Environmental Law or with respect to any Hazardous Material (except with respect to Laws or Orders relating solely to worker health and safety such as the Federal Occupational Safety and Health Act);

(c) Any Employee Benefit Plan and any other incentive, compensation or benefit provided to the employees of Selling Companies, including but not limited to the ESOP, but excluding any Employee Benefit Plan assumed by Newco or Parent pursuant to Sections 6.10 or 6.11 hereof and all liabilities relating thereto;

(d) Any liability to any current or former employee of the Selling Companies and any officer, director for any Bonus Payments;

(e) Any liability of the Selling Companies to any Shareholder, including without limitation any claim for dissenters’ rights pursuant to 302A.471 of the MBCA;

(f) Any liability to indemnify, reimburse or advance amounts to any officer, director, employee or agent of the Selling Companies or the Shareholders’ Representative if, and only if, such amount (i) is covered by the directors and officers liability insurance described in Section 6.6 or (ii) relates to a claim, action, suit, demand, proceeding or investigation related to the ESOP Trustee’s misstatement or omission of or failure to disclose a material fact related to the transactions contemplated under this Agreement to the ESOP Participants;

(g) Any liability of the Selling Companies described on Schedule 12.10(g) attached hereto;

(h) Any liability to distribute to any of the STS Shareholders all or any part of the consideration received hereunder;

(i) Any liability of the Selling Companies under this Agreement or any other document executed in connection with the transactions contemplated hereunder;

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(j) Any liability of the Selling Companies based upon the Selling Companies’ acts or omissions occurring after the Effective Time;

(k) Any indemnification or payment obligations of STS under that certain Membership Interest Purchase Agreement, dated June 12, 2007 among Sprint Spectrum, L.P., and STS, Central Stearns Comsis, Inc., Communications Alternatives, Inc., Lakedale Cellular, Inc., Northern PCS Services, LLC and St. Cloud Wireless Holdings, LLC (the “St. Cloud Wireless LLC Transaction”);

(l) Any liability associated with the Excluded Assets; and

(m) Any liability identified on the Model Balance Sheet as a Retained Liability.

“ROFR Purchase Price” has the meaning specified in Section 3.1 and for avoidance of doubt shall not be based upon the value allocated for an Equity Investments on Schedule 4.25 unless such ROFR Purchase Prices are determined to be the same as such value pursuant to the terms of the governing documents of each Equity Investment.

“Scheduled Agreement” has the meaning specified in Section 4.17.

“SEC” means the Securities and Exchange Commission.

“Securities Act” means the Securities Act of 1933, as amended.

“SHAL” means SHAL Network, Inc. and/or SHAL, LLC.

“Shares” means, with respect to STS the shares of STS, as defined in STS’s articles and by-laws.

“Shareholder” means the holders of the STS shares as of the date hereof.

“Shareholder Approval” has the meaning specified in Section 4.4(b).

“Shareholders’ Representative” has the meaning specified in Section 3.7.

“Shareholders Meeting” has the meaning specified in Section 3.6.

“State Communications Laws and Regulations” has the meaning specified in Section 4.4.

“Statement of Objections” has the meaning specified in Section 3.4.

“St. Cloud Wireless Transaction” means that certain Membership Interest Purchase Agreement, dated June 12, 2007 among Sprint Spectrum, L.P., and the Company, Central Stearns Comsis, Inc., Communications Alternatives, Inc., Lakedale Cellular, Inc., Northern PCS Services, LLC and St. Cloud Wireless Holdings, LLC.

“STS” has the meaning specified in the introductory paragraph of this Agreement.

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“Subsidiary” means any corporation or other organization, whether incorporated or unincorporated, of which (a) a Person or any other Subsidiary of such Person is a general partner or managing member, or (b) at least a majority of the securities or other interests having by their terms ordinary voting power to elect a majority of the board of directors or others performing similar functions with respect to such corporation or other organization is, directly or indirectly, owned or controlled by a Person or by any one or more of its Subsidiaries, or by such Person and any one or more of its Subsidiaries, or (c) if there is no board of directors, a majority of the voting interests of an entity is, directly or indirectly, owned or controlled by a Person or by any one or more of its Subsidiaries, or by such Person and any one or more of its Subsidiaries. With respect to STS and any representations, warranties, covenants and agreements in this Agreement, Subsidiary means and is limited to: Sherburne County Rural Telephone Co., Sherburne Tel-Com, Inc., Sherburne Cable-Com, Inc., Sherburne Long Distance, Inc., Northstar Access, LLC, Northstar Tele-Com, Inc. and Sherburne Fiber-Con, Inc.

“Target” has the meaning specified in Section 3.1.

“Tax Adjustment” has the meaning specified in Article XI hereof.

“Tax returns” means any return, declaration, report, claim for refund, or information return or statement relating to Taxes, including any schedule or attachment thereto, and including any amendment thereof.

“Tax” or “Taxes” means taxes of any kind, levies or other like assessments, customs, duties, imposts, charges or fees, including income, gross receipts, ad valorem, value added, excise, real or personal property, asset, sales, use, federal royalty, license, payroll, transaction, capital, net worth and franchise taxes, estimated taxes, withholding, employment, social security, workers’ compensation, utility, severance, production, unemployment compensation, occupation, premium, windfall profits, transfer and gains taxes and other governmental taxes imposed or payable to the United States or any state, local or foreign governmental entity, including any subdivision or agency thereof, and in each instance such term shall include any interest, penalties or additions to tax attributable to any such tax, including penalties for the failure to file any Tax return or report.

“Termination Date” has the meaning specified in Section 8.2.

“Third-Party” has the meaning specified in Section 6.2.

“True-Up Reserve Amount” means One Million Dollars ($1,000,000), together with any and all interest credited under the Escrow Agreement to the True-Up Reserve Amount.

“Transaction Expenses” has the meaning specified in Article VI.

12.11 References and Titles. All references in this Agreement to Exhibits, Schedules, Articles, Sections, subsections and other subdivisions refer to the corresponding Exhibits, Schedules, Articles, Sections, subsections and other subdivisions of or to this Agreement unless expressly provided otherwise. Titles appearing at the beginning of any Articles, Sections, subsections or other subdivisions of this Agreement are for convenience only, do not constitute any part of this Agreement, and shall be disregarded in construing the language hereof. The

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words “this Agreement,” “herein,” “hereby,” “hereunder” and “hereof,” and words of similar import, refer to this Agreement as a whole and not to any particular subdivision unless expressly so limited. The words “this Article,” “this Section” and “this Subsection,” and words of similar import, refer only to the Article, Section or subsection hereof in which such words occur. The word “OR” is not exclusive, and the word “including” (in its various forms) means including without limitation. Pronouns in masculine, feminine or neuter genders shall be construed to state and include any other gender, and words, terms and titles (including terms defined herein) in the singular form shall be construed to include the plural and vice versa, unless the context otherwise requires.

12.12 Obligation of Parent. Whenever this Agreement requires Newco to take any action, such requirement shall be deemed to include an undertaking on the part of Parent to cause Newco to take such action.

12.13 Validity. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provisions of this Agreement, each of which shall remain in full force and effect.

12.14 Captions. The Article, Section and paragraph captions herein are for convenience of reference only, do not constitute part of this Agreement and shall not be deemed to limit or otherwise affect any of the provisions hereof.

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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their respective duly authorized officers as of the date first above written.

SHERBURNE TELE SYSTEMS, INC.
By:	/s/ Robert K. Eddy
Name:	Robert K. Eddy
Title:	President
SHERBURNE COUNTY RURAL TELEPHONE CO.
By:	/s/ Robert K. Eddy
Name:	Robert K. Eddy
Title:	President
SHERBURNE TEL-COM, INC.
By:	/s/ Robert K. Eddy
Name:	Robert K. Eddy
Title:	President
SHERBURNE CABLE-COM, INC.
By:	/s/ Robert K. Eddy
Name:	Robert K. Eddy
Title:	President
SHERBURNE LONG DISTANCE, INC.
By:	/s/ Robert K. Eddy
Name:	Robert K. Eddy
Title:	President

NORTHSTAR ACCESS, LLC
By:	/s/ Robert K. Eddy
Name:	Robert K. Eddy
Title:	President
NORTHSTAR TELE-COM, INC.
By:	/s/ Robert K. Eddy
Name:	Robert K. Eddy
Title:	President
SHERBURNE FIBER-COM, INC.
By:	/s/ Robert K. Eddy
Name:	Robert K. Eddy
Title:	President
IOWA TELECOMMUNICATION SERVICES, INC.
By:	/s/ Alan L. Wells
Name:	Alan L. Wells
Title:	Chairman and CEO
MAJORITY SHAREHOLDERS:
/s/ Robert K. Eddy
Robert K. Eddy
/s/ Donna L. Eddy
Donna L. Eddy, as Trustee of the Rolland K. Eddy and Donna L. Eddy Trust U/A/D March 9, 1992
/s/ Eric R. Morales
Eric R. Morales
/s/ Fred I Shiota, Sr.
Fred I. Shiota, Sr.
/s/ Jane Eddy Shiota
Jane Eddy Shiota

EX-21.0

EXHIBIT 21

List of Subsidiaries of Iowa Telecommunications Services, Inc.

Iowa Telecom Communications, Inc., an Iowa corporation

d/b/a Iowa Telecom

Iowa Telecom Technologies, LLC, an Iowa limited liability company

Iowa Telecom Data Services, L.C., an Iowa limited liability company

IT Communications, LLC, an Iowa limited liability company

d/b/a Iowa Telecom

IWA Holdings, LLC, an Iowa limited liability company

IWA Services, LLC, an Iowa limited liability company

Baker Communications, Inc., an Iowa corporation

Montezuma Mutual Telephone Company, an Iowa corporation

Bishop Communications Corporation, a Minnesota corporation

Communications Sales and Leasing, Inc., a Minnesota corporation

Lakedale Telephone Company, a Minnesota corporation

Lakedale Communications, LLC, a Minnesota limited liability company

Lakedale Link, Inc., a Minnesota corporation

Lakedale Link, LLC, a Minnesota limited liability company

Heart of the Lakes Cable Systems, Inc., a Minnesota corporation

EN-TEL Communications, LLC, a Minnesota limited liability company

EX-23.1

EXHIBIT 23.1

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We consent to the incorporation by reference in Registration Statements No. 333-125167, 333-127102, 333-145302 and 333-145303 on Form S-8 of our reports dated February 27, 2009 (which reports expressed an unqualified opinion and included an explanatory paragraph relating to the adoption of Statement of Financial Accounting Standards No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, as of December 31, 2006), relating to the financial statements of Iowa Telecommunications Services, Inc. and subsidiaries (the “Company”), and the effectiveness of the Company’s internal control over financial reporting, appearing in this Annual Report on Form 10-K of the Company for the year ended December 31, 2008.

/s/    Deloitte & Touche LLP

Des Moines, Iowa

February 27, 2009

EX-31.1

EXHIBIT 31.1

SARBANES-OXLEY SECTION 302(a) CERTIFICATION

I, Alan L. Wells, Chief Executive Officer of Iowa Telecommunications Services, Inc., certify that:

1. I have reviewed this annual report on Form 10-K of Iowa Telecommunications Services, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal controls which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls over financial reporting.

Date: March 2, 2009	/S/    ALAN L. WELLS
	Alan L. Wells President, Chief Executive Officer and Director Principal Executive Officer Iowa Telecommunications Services, Inc.

EX-31.2

EXHIBIT 31.2

SARBANES-OXLEY SECTION 302(a) CERTIFICATION

I, Craig A. Knock, Chief Financial Officer of Iowa Telecommunications Services, Inc., certify that:

1. I have reviewed this annual report on Form 10-K of Iowa Telecommunications Services, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal controls which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls over financial reporting.

Date: March 2, 2009	/S/    CRAIG A. KNOCK
	Craig A. Knock Vice President, Chief Financial Officer and Treasurer Principal Executive Officer Iowa Telecommunications Services, Inc.

EX-32.1

EXHIBIT 32.1

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report of Iowa Telecommunications Services, Inc., (the “Company”) on Form 10-K for the fiscal year ending December 31, 2008 (the “Report”), I, Alan L. Wells, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:

(1) The Report fully complies with the requirements of section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934 as amended; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: March 2, 2009	/S/    ALAN L. WELLS
	Alan L. Wells President, Chief Executive Officer and Director Principal Executive Officer Iowa Telecommunications Services, Inc.

EX-32.2

EXHIBIT 32.2

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report of Iowa Telecommunications Services, Inc. (the “Company”) on Form 10-K for the period ending December 31, 2008 (the “Report”), I, Craig A. Knock, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, created by Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:

(1) The Report fully complies with the requirements of section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934, as amended; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: March 2, 2009	/S/    CRAIG A. KNOCK
	Craig A. Knock Vice President, Chief Financial Officer and Treasurer Principal Accounting Officer Iowa Telecommunications Services, Inc.