UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

or

Commission File Number 001-32354

IOWA TELECOMMUNICATIONS SERVICES, INC.

115 S. Second Avenue West
Newton, Iowa 50208
(Address of principal executive offices)

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

Not Applicable
(Former name, former address and former fiscal year, if changed since last report)

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

Applicable Only to Corporate Issuers

      Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes o or No þ

      The number of shares of the registrant’s common stock, $.01 par value, outstanding as of April 29, 2005 was 30,864,195.

TABLE OF CONTENTS

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PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

IOWA TELECOMMUNICATIONS SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(dollars in thousands)

See notes to condensed consolidated financial statements.

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IOWA TELECOMMUNICATIONS SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands, except per share data)

See notes to condensed consolidated financial statements.

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IOWA TELECOMMUNICATIONS SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(unaudited)
(dollars in thousands)

See notes to condensed consolidated financial statements.

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IOWA TELECOMMUNICATIONS SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(dollars in thousands)

See notes to condensed consolidated financial statements.

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IOWA TELECOMMUNICATIONS SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1. BASIS OF PRESENTATION

The accompanying unaudited consolidated financial statements of Iowa Telecommunications Services, Inc. and Subsidiaries (the “Company”) have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been omitted pursuant to such rules and regulations. In the opinion of the Company’s management, all adjustments (consisting of only normal and recurring accruals) have been made to present fairly the financial positions, the results of operations and cash flows for the periods presented. The results of operations for the periods presented are not necessarily indicative of the results to be expected for the full year. Although the Company believes that the disclosures are adequate to make the information presented not misleading, these financial statements should be read in conjunction with the Company’s audited consolidated financial statements as of and for the year ended December 31, 2004, that are included in the Company’s most recently filed annual report on Form 10-K.

2. EARNINGS PER SHARE

Basic earnings per share is computed based on the weighted average number of common shares outstanding. Diluted earnings per share is computed based on the weighted average outstanding common shares plus equivalent shares assuming exercise of stock options and conversion of outstanding convertible securities, where dilutive. The following is a reconciliation between basic and diluted weighted average shares outstanding:

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As of March 31, 2005 and March 31, 2004, total options outstanding were 1,195,919 and 2,227,714 respectively. At March 31, 2004, 2,227,714 options were outstanding, with exercise prices in excess of the market value of common stock and, therefore, were excluded from the diluted earnings per share calculation.

3. EMPLOYEE BENEFIT PLANS

Retirement Pension Plan

The Company sponsors the Iowa Telecom Pension Plan (the “Plan”), a defined benefit pension plan that covers many former GTE employees and most union employees. The provisions of the Plan were assumed by the Company in connection with the GTE Acquisition. The Plan generally provides for employee retirement at age 65 with benefits based upon length of service and compensation. The Plan provides for early retirement, lump sum death benefits, and various annuity options. No company contributions were made during the first quarter of 2005.

Components of pension benefit costs are as follows:

Post Retirement 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.

Components of postretirement benefit costs and weighted average actuarial assumptions are as follows:

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4. LONG-TERM DEBT

Credit Facilities

As a part of our initial public offering and the related debt refinancing, we entered into new credit facilities with a group of lenders, including the Rural Telephone Finance Cooperative, providing for a total of up to $577.8 million in term and revolving credit facilities and retired the previously outstanding senior credit facility with the Rural Telephone Finance Corporation. As of March 31, 2005, we had outstanding $477.8 million of senior debt under the new term facilities and $34.0 million drawn under the $100.0 million revolving credit facility. The details of the facilities are as follows:

The revolving credit facility will expire in 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 million). As of March 31, 2005, $34.0 million was outstanding on the revolving credit facility and $66.0 million was available. Borrowings under the new 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 March 31, 2005, we had $29.0 million outstanding under LIBOR elections at an average all-in rate of 4.7% and $5.0 million outstanding under the base rate election with an all-in rate of 6.75%.

Term Loan B is a $400.0 million senior secured term facility maturing in 2011, bearing interest per annum at either (a) LIBOR plus 2.0% or (b) a base rate plus 1.0%. As of March 31, 2005, $350 million was based upon a LIBOR election effective through June 30, 2005, at an all-in rate of 5.10%. We have entered into an interest rate swap to fix the rate on $350 million of Term Loan B as more fully described below. As of March 31, 2005, the interest rate on the remaining $50 million was based upon a LIBOR election effective through June 9, 2005 at an all-in rate of 4.97%.

Term Loan C is a $70.0 million senior secured term facility maturing in 2011, bearing interest per annum at either (a) a fixed rate or (b) a Rural Telephone Finance Cooperative variable rate plus 0.85%. Upon the expiration of the 6.65% fixed interest rate on Term Loan C in November 2007, the interest rate on such 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 2011, bearing interest per annum at either (a) a fixed rate or (b) a Rural Telephone Finance Cooperative variable rate plus 0.85%. Upon the expiration of the 6.65% fixed interest rate Term Loan D has in November 2007, interest on such term loan will convert to the Rural Telephone Finance Cooperative variable rate plus 0.85%.

As a condition of borrowing under Term Loans C and D, we are required to invest $7.8 million, representing 10% of the total amounts of Term Loans C and D, in Subordinated Capital Certificates (“SCC’s”) of the Rural Telephone Finance Cooperative. SCC’s 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 SCC’s 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 as well as those of all of our current and future subsidiaries. The credit facilities will be guaranteed by all of our current and future subsidiaries.

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

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In addition, the financial covenants under the credit facilities specify, among other things, certain fixed charge coverage ratios and a maximum total leverage ratio, as defined, all of which we were in compliance with at March 31, 2005.

Interest Rate Swap

On November 4, 2004 we entered into an interest rate swap agreement with a nationally recognized commercial bank that effectively fixes the interest rate we will pay on specified portions of our indebtedness under Term Loan B. Pursuant to this swap, from November 5, 2004 through December 30, 2007 the interest on $350.0 million of our indebtedness under Term Loan B will be fixed at a weighted average rate of 5.69%; from December 31, 2007 through December 30, 2008 the interest rate on $285.3 million of such indebtedness will be fixed at a weighted average rate of 5.76%; and from December 31, 2008 through November 4, 2009 the interest rate on $142.7 million of such indebtedness will be fixed at 5.87%.

5. REPURCHASE OF REDEEMABLE CONVERTIBLE PREFERRED STOCK

On March 5, 2004, the Company agreed to repurchase its Series A mandatorily redeemable convertible preferred stock and related accrued preferred stock dividends for an aggregate purchase price of $100 million. The recorded amounts of preferred stock and related accrued preferred stock dividend were $125 million and $32.7 million, respectively, as of closing of the repurchase on March 26, 2004. The repurchase was financed through a combination of funds received from the issuance of $66 million of senior subordinated notes and cash on hand.

6. STOCK INCENTIVE PLAN

The Iowa Telecommunications Services, Inc. 2002 Stock Incentive Plan (the “Incentive Plan”) allows for the issuance of incentive stock options or nonqualified stock options. Under the Incentive Plan, options have been granted for the purchase of 2,227,714 shares of which 1,031,795 have been redeemed for cash and 1,195,919 remain outstanding. No new options will be granted under the 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 in November 2004 vested pursuant to the terms of the 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.

During 2004, the Company adopted the fair value recognition provisions of SFAS No. 123 “Accounting for Stock-Based Compensation,” using the retroactive restatement method described in SFAS No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure”, effective January 1, 2004. Under the fair value recognition provisions of SFAS No. 123, stock-based compensation cost is recognized as expense over the vesting period. In connection with the use of the retroactive restatement method, the Company calculated the fair value of outstanding awards using the minimum value method as if the fair value method of SFAS No. 123 had been applied from its original effective date. The Company recorded less than $1,000 of stock-based compensation expense during the three months ended March 31, 2004. During the three months ended March 31, 2005, the Company recorded $354,000 of stock-based compensation expense to reflect the change in fair value of the outstanding options as a result of the reduction of the exercise price from the declaration of a cash dividend on March 15, 2005.

The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model. There were no options granted during the three months ended March 31, 2005 and 27,028 granted during the three months ended March 31, 2004. The following weighted-average assumptions were used in determining the options’ fair value: dividend yield of 0%; average risk-free interest rate of approximately 5%; and expected lives of 10 years from grant date. Because the Company was not a public entity, the volatility of the stock was excluded in estimating the options’ value, as permitted under SFAS No. 123.

To determine the stock-based compensation expense which arises from the change in fair value of the options upon the reduction of the exercise price resulting from the declaration of a cash dividend, the following weighted-average assumptions were used: dividend yield of 0%; average risk-free interest rate of approximately 5%; and expected

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remaining lives of 4.6 years. Because the Company’s stock had not been publicly traded long enough to establish a reliable historical volatility rate, the average historical volatility rate of 34% for a pool of similar entities was used.

A summary of the status of the Incentive Plan as of March 31, 2005 and 2004, and the changes during the three-month periods then ended is presented below:

The following table summarizes information about stock options outstanding at March 31, 2005:

Pursuant to the 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. However, in accordance with agreements entered into in connection with our initial public offering, the unexercised options generally may not be exercised for a period of at least 180 days after the initial public offering.

7. DISCLOSURES ABOUT FAIR VALUE OF INTEREST RATE SWAP

On November 4, 2004, the Company entered into an interest rate swap agreement in contemplation of the recapitalization which occurred on November 23, 2004. The purpose of the swap agreement is to adjust the interest rate profile of our debt obligations and to achieve a targeted mix of floating and fixed rate debt.

Effective November 23, 2004, the Company designated the swap agreement as a hedge against the variability of interest payments resulting from fluctuations in market interest rates. The hedged item is $350 million of the

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Company’s Term Loan B. In the first quarter ended March 31, 2005, the Company recognized a gain of $7.6 million resulting from the increase in fair market value of the swap instrument. The portion of the gain attributable to hedge ineffectiveness, $1,000, is recorded in the Other income section of the Company’s Consolidated Statement of Operations. The portion of the gain attributable to hedge effectiveness, $7.6 million, is recorded in the Other comprehensive income section of the Company’s Statement of Stockholders’ Equity. In assessing hedge effectiveness, no portion of the gain or loss from the swap is excluded.

The fair value of our interest rate swap has been calculated by discounting the future cash flows of both the fixed rate and variable rate interest payments. The discount rate was derived from a yield curve created by a nationally recognized financial institution. The fair value and the carrying amount of the interest rate swap as of March 31, 2005 was approximately $9.0 million and is recorded in the Intangible and Other Assets section of our Consolidated Balance Sheets. The entry to adjust the fair value of the interest rate swap has not been tax effected as valuation allowance has been provided at March 31, 2005 for the net deferred tax assets due to the Company’s cumulative losses. The Company did not have any interest rate swaps at any time during the first quarter ended March 31, 2004.

8. COMMITMENTS AND CONTINGENCIES

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

9. NEW ACCOUNTING PRONOUNCEMENT

In December 2004, the FASB issued SFAS No. 123 (Revised), “Share-Based Payment.” This statement replaces SFAS No. 123, “Accounting for Stock-Based Compensation” and supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees.” SFAS 123R 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 to awards modified, repurchased, or cancelled after that date. In addition, we are required to record compensation expense (as previous awards continue to vest) for the unvested portion of previously granted awards that remain outstanding at the date of adoption, if any. On April 14, 2005 the Securities and Exchange Commission announced the adoption of a rule that defers the effective date for adoption to the first fiscal year beginning after June 15, 2005. Adoption of this standard is not expected to have a material effect on the Company’s financial position, results of operations or cash flows as all of our outstanding stock options were fully vested at the date of issuance of SFAS 123R. Modifications to outstanding stock options after the effective date of the standard may result in additional compensation expense pursuant to the provisions of SFAS 123R.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Information contained herein contains “forward-looking statements” which can be identified by the use of forward-looking terminology such as “believes”, “expects”, “may”, “will”, “should”, or “anticipates” or the negative thereof or variations thereon or comparable terminology, or by discussions of strategy. No assurance can be given that the future results covered by the forward-looking statements will be achieved. Some of the matters set forth in the “Risk Factors” section of our Annual Report on Form 10-K for the year ended December 31, 2004 constitute cautionary statements identifying factors with respect to such forward-looking statements, including certain risks and uncertainties, that could cause actual results to vary materially from the future results indicated in such forward-looking statements. Other factors could also cause actual results to vary materially from the future results indicated in such forward-looking statements.

Overview

General

We are the largest provider of wireline local exchange telecommunications services to residential and business customers in rural Iowa, serving over 440 communities across the state. We are the second-largest local exchange carrier in Iowa and estimate that we are the fifteenth largest in the United States. We operate 294 telephone exchanges as the incumbent or “historical” local exchange carrier and are currently the sole telecommunications company providing wireline services in approximately 86% of the communities where we serve as the incumbent. Together with our competitive local exchange carrier subsidiary, we provide services to approximately 266,400 access lines in Iowa.

Our core businesses are 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 77% of our total revenues in the first quarter of 2005, we provide long distance service, dial-up and DSL Internet access and other communications services. In 2002, as part of our strategy of pursuing low-cost growth beyond our current service area, we began to compete for customers in adjacent markets in Iowa through our competitive local exchange carrier subsidiary, Iowa Telecom Communications, Inc. (ITC).

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:

1.	the effect on our revenues of flat or declining numbers of access lines 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;
2.	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;
3.	the effect of elections made on or after July 1, 2005 to deregulate retail local exchange services in accordance with the new statutory provisions enacted in March 2005;
4.	our ability to control our variable operating expenses, such as sales and marketing expense; and
5.	the development of our competitive local exchange carrier strategy.

Revenues

We derive our revenues from four sources:

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Local Telephone Services. We receive revenues from providing local exchange telephone services. These revenues include monthly subscription charges for basic service, as well as charges for extended area service (mandatory expanded calling service to selected nearby communities at a flat monthly rate), local private line services and enhanced calling features, such as voice mail, caller ID and 3-way calling. During the quarter ended March 31, 2004, we also received revenues from expanded local calling plans (optional service to additional selected nearby communities at an additional flat monthly rate). We discontinued these expanded local calling plans in the third quarter of 2004.

Network Access Services. We receive revenues from charges established to compensate us for the origination, transport and termination of calls of long distance and other interexchange carriers. These include subscriber line charges imposed on end users, and switched and special access charges paid by carriers. In addition, we receive federal funds, representing approximately 1% of our total revenue in 2004, as universal service support as a result of the switched access support provisions of the FCC’s CALLS Order. Switched access charges for long distance services within Iowa are based on rates approved by the Iowa Utilities Board. Switched and special access charges for interstate and international services are based on rates approved by the FCC.

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

Other Services and Sales. We receive revenues from monthly recurring charges for dial-up and DSL Internet access services. Other services and sales also include revenues from directory publishing, inside line care and the sale and maintenance of customer premise equipment.

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

Access Line Trends. The number of access lines served is a fundamental factor affecting a telecommunications provider’s revenues. Reflecting a general trend in the rural local exchange carrier industry in the past few years, the number of access lines we serve as an incumbent local exchange carrier has been gradually decreasing. We expect that this trend will continue. As 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 a direct 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 consists of leveraging our strong incumbent market position to increase revenue per access line 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 obtain some new access lines as we pursue limited expansion of our service area through our competitive local exchange carrier subsidiary and, potentially, through selected acquisitions of 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, average revenue per access line is also a significant metric for us.

The table below indicates the total number of access lines served by us, the number of customers subscribing to the indicated types of service, and average revenue per access line, as of the dates and for the periods shown:

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We believe that one of the primary reasons for our loss of 11,500 incumbent local exchange carrier access lines between March 31, 2004 and March 31, 2005 was customer response to the rate increases we have instituted pursuant to our April 2004 rate settlement with the Iowa Utilities Board.

We will continue our strategy of increasing revenues by cross selling services to our existing customer base, in the form of both bundled service packages and individual additional services. Our numbers of long distance service subscribers increased by 20% from March 31, 2004 to March 31, 2005. While our dial-up Internet customers decreased by 4,600 from March 31, 2004 to March 31, 2005 as some dial-up Internet access service customers migrated to our DSL offering, our DSL Internet access service customers increased by 11,000 over that same period. Even though our total access line count fell by 0.4% from March 31, 2004 to March 31, 2005, average revenue per access line grew by 7.5%. The primary contributor to our ability to maintain our revenue stream during a time of decreasing access lines has been our success at selling additional services and our ability to increase our pricing.

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

Cyclical Economic and Industry Factors. We believe that the general downturn in economic conditions since 2000 has had a negative effect on our access line count. We expect that improved performance in the Iowa economy will stabilize this cyclical factor. In addition, incumbent local exchange carriers generally experienced an unusual increase in access line demand during the late 1990’s, for example, as households purchased additional lines devoted to dial-up Internet access. In our view, this spike in access line demand was not sustainable over the long term, and current access line levels are more indicative of underlying demand.

Competition. When we purchased GTE Midwest Incorporated’s assets in June 2000, competitive local exchange carriers had begun to offer service, or were in the process of network overbuilding, in approximately 31 of the 425 incumbent local exchange carrier communities we serve, and we have experienced line losses to these competitive

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local exchange carriers. We believe that these competitive local exchange carrier incursions and subsequent line losses were related to customer dissatisfaction with the previous provider’s service. Since 2001, we believe we have slowed significantly the loss of customers to competitive local exchange carriers by providing additional service offerings, focusing our marketing efforts and implementing competitive pricing.

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 the threat of wireless competition by offering bundled service packages that include blocks of long distance minutes 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.

In response to the inroads that competitors have made in certain markets, the Iowa Utilities Board initiated a proceeding in 2004 to consider deregulating local service in exchanges where competitors have gained significant market share. The Iowa Utilities Board determined that effective competition existed in 14 exchanges where we operate as the incumbent local exchange carrier and issued an order deregulating local service in these exchanges. In addition, in early 2005, the Iowa Utilities Board approved our request to modify our rates for local exchange services in three exchanges in order to respond to a competitor’s lower rates. We believe implementation of the Iowa Utilities Board’s orders deregulating the 14 exchanges and approving competitively responsive rates in the three exchanges will enhance our ability to compete and regain market share in these exchanges. Also, in March 2005 the Iowa legislature enacted new statutory provisions allowing a price regulated carrier like us to elect, after July 1, 2005, deregulation of all retail local exchange services except single line flat-rated business and residential service, and further providing that single line flat-rated business and residential service shall be deregulated as of July 1, 2008 unless the Iowa Utilities Board determines that the public interest requires it to extend its jurisdiction over such services to July 1, 2010. We believe that the gradual deregulation of our business will enable us to better respond to competitive offerings by other providers.

Exchange Sales. We currently have agreed to two additional exchange sale transactions, subject to certain regulatory approvals and conditions, in which we will sell approximately 800 lines and 2,200 lines, respectively. In each of these cases, we believe the sale price makes the disposal economically compelling. We expect that the two pending sales will result in $13.2 million of net cash, and as part of one transaction we have already purchased the buyer’s dial-up and DSL Internet businesses since this component of the transaction did not require regulatory approval.

Ancillary Effects of our Data Businesses. Part of our decreasing line count has been an ancillary effect of our strategic focus on growing our DSL Internet access service business. As our Internet service provider business expanded, some of our smaller competitors have cancelled their connections to our network, connections that we had 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 obviates the need for a second line. We believe that the revenue generated by our dial-up and DSL Internet access services outweighs the effect of this type of access line loss.

Our Rate and Pricing Structure

Basic business and residential telephone service, intra-state switched access, extended area service, 911 and E911 services, white pages directory listings and dual party relay service are all regulated as “basic communications services” by the Iowa Utilities Board. The Iowa statutory price regulation plan pursuant to which we operate provides a mechanism to adjust our rates for basic communications services to reflect the impact of inflation. On April 2, 2004, we entered into a settlement agreement relating to an Iowa Utilities Board rate proceeding we had initiated in 2002. As a result of the settlement agreement, effective April 23, 2004, our monthly charges for basic local service in all of our exchanges was $16.60 for residential customers and $32.09 for business. Pursuant to our settlement agreement relating to the Iowa Utilities Board rate proceeding, most of the resulting incremental revenues we will receive as a result of these rate increases must be expended on capital improvements to our network. Effective January 17, 2005, our monthly charges for basic local services became $16.98 for residential customers and $32.98 for business customers pursuant to an inflationary increase allowed under the existing Iowa statutory price regulation plan. During the first quarter of 2004, average monthly basic local services charges across all of our exchanges were $12.15 and $25.09, respectively.

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Certain local telecommunications services regulated by the Iowa Utilities Board not classified as basic communications services, such as caller ID, call waiting, call forwarding and other enhanced calling services, are regulated as “non-basic communications services.” We are allowed to increase our rates each year for some or all of the non-basic communications services we provide by amounts that will generate revenues from non-basic communications services that are 6% higher than the revenues from such services during the prior year.

Our rates for other services we provide, including local services like voice messaging, centrex station lines, private lines and directory assistance, long-distance services and data services like dial-up and DSL Internet access, are not price regulated.

In the first quarter of 2005, 75.7% of our total revenues were generated from services that were either unregulated or regulated in a manner that would allow us to increase our rates to match or exceed that year’s rate of inflation up to 6%.

Effective July 1, 2005, we may elect further deregulation of rates for some of our services under legislation enacted in March 2005.

Operating Expenses

Categories of Operating Expense

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

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

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

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

Our Ability to Control Operating Expenses

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

Development of our Competitive Local Exchange Carrier Strategy

Part of our business strategy is to use our competitive local exchange carrier subsidiary, ITC, to pursue customers in markets adjacent to our rural local exchange carrier markets. We plan to continue this strategy by seeking growth opportunities on a low-cost, selective basis.

As of March 31, 2005, ITC served approximately 5,000 business and 12,400 residential access lines. ITC accounted for 6.5% of Iowa Telecom’s total access lines as of March 31, 2005. As of March 31, 2005, our investment in ITC was $3.1 million, the majority of which relates to customer acquisition and marketing expense. Throughout 2005, we plan to maintain this limited investment approach as we continue to grow our competitive local exchange carrier business.

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Results of Operations

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

Three Months Ended March 31, 2005 and 2004

Revenues and Sales

The table below sets forth the components of our revenues and sales for the three months ended March 31, 2005 compared to the three months ended March 31, 2004:

Local Services. Local services revenues increased $1.0 million, or 5.9%, for the first three months of 2005 as compared to 2004, primarily due to $2.5 million of additional revenue as a result of the new rates established pursuant to a rate increase settlement agreement we entered into on April 2, 2004, with the Iowa Utilities Board. The new rates established under the settlement agreement became effective on April 23, 2004. Enhanced local services revenue also increased by $246,000 for first quarter of 2005 as compared to 2004, due to the growth of bundled product offerings. The increased revenues were partially offset by a loss of $1.6 million in revenues resulting from the discontinuance of the expanded local area calling plans during the third quarter of 2004.

Our historical ability to provide expanded local calling plans at favorable margins depended on the existence of an agreement for mutual exchange of traffic with another telecommunications provider. Expanded local calling plans allowed customers, for a fixed monthly fee, to increase the geographic range of their local calling areas. That agreement terminated on July 31, 2004. As a result, we have discontinued the expanded local calling plans and encouraged customers who subscribed to our expanded local calling plans to replace those plans with substitute toll services.

Network Access Services. Our network access service revenues increased $1.8 million, or 7.8%, for the first three months of 2005 as compared to the same period in 2004. Revenues from switched access services increased approximately $2.1 million, due primarily to an increase in access minutes per line which is due in part to the elimination of the expanded local calling plans. That increase was partially offset by a $326,000 decrease in revenue from the Universal Service Fund.

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Toll Services. Our toll services revenues increased by $413,000, or 7.4%, for the first three months of 2005 as compared to the same period in 2004. This revenue growth was attributable to an increase in the number of long distance customers of approximately 23,200, or 20%, offset by a decrease in average minutes of use per customer and average revenue per minute. Our growth in long distance customers from March 31, 2004 to March 31, 2005 can be attributed in significant part to the elimination of the expanded local calling plans.

Other Services and Sales. Other services and sales revenues increased by $773,000, or 12.0%, for the first three months of 2005 as compared to the first three months of 2004. The revenue increase was primarily due to growth in the number of DSL Internet customers. DSL Internet access service revenues increased $1.1 million, or 101.0%, due primarily to customer growth. We believe the decline in dial-up Internet access service customers is the result of customer migration to broadband products such as DSL.

Operating Costs and Expenses

The table below sets forth the components of our operating costs and expenses for first three months of 2005 as compared to 2004.

Cost of Services and Sales. Cost of services and sales increased $2.7 million, or 20.9%, for the first three months of 2005 as compared to the same period in 2004. As a result of customer growth, we experienced an increase in competitive local exchange carrier access lines which, in turn, raised costs for providing this service by $1.0 million for the first three months of 2005 as compared to the same period in 2004. The increase in long distance customers coupled with the termination of the historical agreement for the exchange of traffic related to our discontinued local calling plans, resulted in approximately $1.9 million of additional cost to deliver long distance traffic.

Selling, General and Administrative Costs. Selling, general and administrative costs increased $925,000, or 10.1%, for the first three months of 2005 as compared to the same period in 2004. The increase is primarily attributable to higher salary, wages and benefits and additional costs related to being a publicly traded company. Contributing to the increase in salary, wages and benefits was $354,000 of non-cash compensation expense related to exercise price reductions on outstanding stock options.

Depreciation and Amortization. Depreciation and amortization increased $543,000, or 4.6%, for the first three months of 2005 as compared to the same period in 2004. This was primarily due to higher average plant balances relating mainly to additions to our network facilities.

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Other Income (Expense)

The table below sets forth other income (expense) for the three months ended March 31, 2005 as compared to the same period in 2004.

Interest and Dividend Income. Interest and dividend income decreased $759,000, or 82.7%, primarily due to the reduction in patronage dividend income from the RTFC Subordinated Capital Certificates which were partially redeemed in connection with the initial public offering and debt refinancing in November 2004. Also contributing to the decrease was the reduction in interest income resulting from the use of $34 million of cash on hand to redeem the Series A mandatorily redeemable convertible preferred stock on March 26, 2004.

Interest Expense. Interest expense decreased $5.1 million, or 39.7%, for first three months of 2005 as compared to the first three months of 2004, principally as a result of the reductions in the amount of debt outstanding, and in the average interest rate on our new debt issued in connection with our debt refinancing in November 2004.

Other, Net. Other, net was a net expense of $79,000 for the first quarter of 2005 compared to $0 in the first quarter of 2004, related to the change in the fair value of the interest rate swap agreement.

Income Tax Expense

A valuation allowance has been provided at March 31, 2005 for our net deferred tax assets, due to our cumulative losses. We will continue to assess the recoverability of deferred tax assets and the related valuation allowance. To the extent we generate taxable income in future years and it is determined that such valuation allowance is no longer required, the tax benefit of the remaining deferred tax assets will be recognized at such time. As of March 31, 2005, the balance of the deferred tax asset and the valuation allowance was $18 million. Our unused tax net operating loss carry forward was approximately $212 million, and will expire between 2020 and 2024.

Our initial public offering resulted in an ownership change for purposes of Section 382 of the Internal Revenue Code, and consequently our ability to utilize our net operating losses will be subject to limitation each year. We currently anticipate that, as a result of such ownership change, we will generally be limited by Section 382 to utilizing approximately $19 million of our pre-transaction net operating losses annually. However, Internal Revenue Code Section 338 may allow for an increase in this allowance for tax periods ending in 2005 through 2009. After 2009, the IRC Section 382 limitation will apply. 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 $40 million annually through 2014.

Redemption of Preferred Stock

On March 26, 2004, we repurchased our Series A mandatorily redeemable convertible preferred stock and related accrued dividends for an aggregate purchase price of $100.0 million. The recorded amounts of the preferred stock and the related accrued preferred stock dividend were $125.0 million and $32.7 million, respectively, as of the redemption date of March 26, 2004.

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Liquidity and Capital Resources

Our short-term and long-term liquidity requirements arise primarily from: (i) interest payments related to our credit facilities; (ii) capital expenditures, which totaled $5.6 million in the first three months of 2005; (iii) working capital requirements; (iv) dividend payments on our common stock; and (v) potential acquisitions.

On December 17, 2004, our board of directors declared an initial dividend of $0.175 per share on our common stock. This dividend was paid on January 17, 2005 to shareholders of record at the close of business on December 31, 2004. On March 15, 2005, our board of directors declared a dividend of $0.405 per share on our common stock. The dividend was paid on April 15, 2005 to shareholders of record on March 31, 2005. The dividends represent an indicated annual dividend rate of $1.62 per share. 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. This policy reflects our judgment that our shareholders would be better served if we distributed to them a substantial portion of the cash generated by our business.

We intend to fund our operations, interest expense, capital expenditures, working capital requirements and dividend payments on our common stock from cash from operations. For the three months ended March 31, 2004 and 2005, cash provided by operating activities was $20.7 million and $19.8 million, respectively.

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

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

Based on the dividend policy with respect to our common stock which our board of directors has adopted, we may not have any significant cash available to meet any large unanticipated liquidity requirements, other than available borrowings, if any, under our revolving credit facility. As a result, we may not retain a sufficient amount of cash to finance growth opportunities, including acquisitions, or 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 from cash from operations and our revolving line of credit. The following table summarizes our short-term liquidity, as of March 31, 2005, and December 31, 2004:

The decrease in current liabilities from December 31, 2004 to March 31, 2005 is primarily due to the use of cash generated from operations to reduce the amount outstanding on our revolving line of credit.

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The following table summarizes our sources and uses of cash for the three months ended March 31, 2004 and 2005.

Cash Provided by Operating Activities

For the three months ended March 31, 2004 and 2005, cash provided by operating activities was $20.7 million, and $19.8 million, respectively.

Cash Used in Investing Activities

The table below sets forth the components of cash used in investing activities for the three months ended March 31, 2004 and 2005:

Capital expenditures for the first three months of 2005 decreased by $922,000 as compared to first three months of 2004 primarily due to information systems expenditures during 2004.

Pursuant to the terms of our April 2004 Iowa Utilities Board rate proceeding settlement agreement, substantially all additional revenues generated by the new rates approved pursuant to the agreement are required to be invested in capital improvements identified in a network improvement plan approved by the Iowa Utilities Board on May 10, 2004. This plan was updated in November of 2004 to reflect anticipated improvements to be made in 2005 through 2007.

We expect that capital expenditures will be approximately $30.0 million in fiscal 2005. We estimate that approximately $25.8 million of this amount will be used to maintain and enhance our network infrastructure, as directed by our rate settlement agreement, and that approximately $4.2 million of this amount will be used for information technology or other capital expenditures. We expect to fund all of these capital expenditures through cash generated by our business. Although the amount of our capital expenditures will fluctuate from quarter to quarter, on an annual basis we do not expect capital expenditures for our existing operations beyond 2005 to vary significantly from our estimated amounts.

Our capital expenditure obligations pursuant to our rate settlement agreement may be affected by the new Iowa deregulation law. We are currently determining what, if any, effect the newly-enacted legislation will have on such obligations if we elect deregulation as provided for in the new provisions.

On August 4, 2004, the FCC adopted an order increasing the obligations of carriers to report service outages to the FCC. Most significantly, the order required us to report certain non-customer affecting events related to our fiber rings. As part of an industry wide-effort to convince the FCC to reconsider this requirement, we stated to the FCC, in industry wide hearings held on November 19, 2004, that compliance would cause Iowa Telecom to incur at least

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$16 million of additional capital expenditures over a period of three to five years. As a result of the industry efforts, on December 20, 2004, the FCC prevented the rule from going into effect until the FCC has reconsidered the matter. At this time, we cannot predict the result of this FCC reconsideration, the financial or operational effects or the impact the final rules may have on our operations.

Cash Used in Financing Activities

For the three months ended March 31, 2005, net cash used in financing activities was $12.9 million as compared to $44.2 million for the same period in 2004, due primarily to the use of cash on hand in 2004 to redeem the Redeemable Convertible Preferred Stock, and the net impact of our initial public offering and the related refinancing on our 2005 levels.

Long-Term Debt and Revolving Credit Facilities

Credit Facilities

As a part of our initial public offering and the related debt refinancing, we entered into new credit facilities with a group of lenders, including the Rural Telephone Finance Cooperative, providing for a total of up to $577.8 million in term and revolving credit facilities, and retired the previously outstanding senior credit facility with the Rural Telephone Finance Corporation. As of March 31, 2005, we had outstanding $477.8 million of senior debt under the new term facilities, and had $34.0 million drawn under the $100.0 million revolving credit facility. The details of the facilities are as follows:

The revolving credit facility will expire in 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 million). As of March 31, 2005, $34.0 million was outstanding on the revolving credit facility and $66.0 million was available. Borrowings under the new 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 March 31, 2005, we had $29.0 million outstanding under LIBOR elections at an average all-in rate of 4.7% and $5.0 million outstanding under the base rate election with an all-in rate of 6.75%.

Term Loan B is a $400.0 million senior secured term facility maturing in 2011, bearing interest per annum at either (a) LIBOR plus 2.0% or (b) a base rate plus 1.0%. As of March 31, 2005, $350 million was based upon a LIBOR election effective through June 30, 2005, at an all-in rate of 5.10%. We have entered into an interest rate swap to fix the rate on $350 million of Term Loan B as more fully described below. As of March 31, 2005, the interest rate on the remaining $50 million was based upon a LIBOR election effective through June 9, 2005 at an all-in rate of 4.97%.

Term Loan C is a $70.0 million senior secured term facility maturing in 2011, bearing interest per annum at either (a) a fixed rate or (b) a Rural Telephone Finance Cooperative variable rate plus 0.85%. Upon the expiration of the 6.65% fixed interest rate on Term Loan C in November 2007, the interest rate on such 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 2011, bearing interest per annum at either (a) a fixed rate or (b) a Rural Telephone Finance Cooperative variable rate plus 0.85%. Upon the expiration of the 6.65% fixed interest rate Term Loan D has in November 2007, interest on such term loan will convert to the Rural Telephone Finance Cooperative variable rate plus 0.85%.

As a condition of borrowing under Term Loans C and D, we are required to invest $7.8 million, representing 10% of the total amounts of Term Loans C and D, in Subordinated Capital Certificates (“SCC’s”) of the Rural Telephone Finance Cooperative. SCC’s 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 SCC’s in proportion to our principal repayments on Term Loans C and D.

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The credit facilities are secured by substantially all of our tangible and intangible assets, properties and revenues as well as those of all of our current and future subsidiaries. The new credit facilities will be guaranteed by all of our current and future subsidiaries.

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

In addition, the financial covenants under the credit facilities specify, among other things, certain fixed charge coverage ratios and a maximum total leverage ratio, as defined, all of which we were in compliance with at March 31, 2005.

Interest Rate Swap

On November 4, 2004, we entered into an interest rate swap agreement with a nationally recognized commercial bank that effectively fixes the interest rate we will pay on specified portions of our indebtedness under Term Loan B. Pursuant to this swap, from November 5, 2004 through December 30, 2007 the interest on $350.0 million of our indebtedness under Term Loan B will be fixed at a weighted average rate of 5.69%; from December 31, 2007 through December 30, 2008 the interest rate on $285.3 million of such indebtedness will be fixed at a weighted average rate of 5.76%; and from December 31, 2008 through November 4, 2009 the interest rate on $142.7 million of such indebtedness will be fixed at 5.87%.

Obligations and Commitments

Our ongoing capital commitments include capital expenditures and debt service requirements. For the three months ended March 31, 2005, capital expenditures were $5.6 million.

The following table sets forth our contractual obligations as of March 31, 2005.

As of March 31, 2005, no letters of credit were outstanding.

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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.

We are required to perform an annual impairment review of goodwill as required by Statement of Financial Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible Assets. No impairment of goodwill or other long-lived assets resulted from the annual valuation of goodwill we conducted in August 2004.

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.

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

Income Taxes. Management calculates the income tax provision, current and deferred income taxes, along with the valuation allowance based upon various complex estimates and interpretations of income tax laws and regulations. Deferred tax assets are reduced by a valuation allowance to the extent that it is more likely than not they will not be realized. As of March 31, 2005, the balance of the deferred tax asset and the valuation allowances was $18 million. To the extent we begin to generate taxable income in future years and it is determined the valuation allowance is no longer required, the tax benefit for the remaining deferred tax assets will be recognized at such time.

At March 31, 2005, our unused tax net operating loss carry forward was $212 million, and will expire between 2020 and 2024. The amount of net operating loss allowable to offset income after a change in ownership is limited under Internal Revenue Code (“IRC”) Section 382. Additionally, IRC Section 338 may allow for an increase in this allowance for the periods ending in 2005 through 2009. IRC Section 382 will continue to apply after 2009.

Employee-Related Benefits. We incur certain employee-related benefits associated with pensions and other post-retirement health care benefits (“OPEB”). We use third party specialists to assist management in appropriately

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measuring the expenses associated with these employee-related benefits. In order to measure the expense associated with these employee-related benefits, management must make a variety of estimates, including discount rates used to measure the present value of certain liabilities, assumed rates of return on assets set aside to fund these expenses, compensation increases, employee turnover rates, anticipated mortality rates and anticipated healthcare costs. The estimates used by management are based on our historical experience, as well as current facts and circumstances. Different estimates could result in our recognizing different amounts of expense over different time periods. We evaluate our critical assumptions at least annually, and selected assumptions are based on the following factors:

	•	The discount rate is based on a hypothetical portfolio of high quality bonds with cash flows matching our expected benefit payments.
	•	The expected return on plan assets is based on our asset allocation mix and our historical return, taking into consideration current and expected market conditions.
	•	The healthcare costs trend rate is based on our historical rates of inflation and expected market conditions.

The following table presents the key assumptions used to measure pension and OPEB expense for 2005 and the estimated impact on pension and OPEB expense for the first three months of 2005 relative to a change in those assumptions:

Off-Balance Sheet Risk and Concentration of Credit Risk

The Company has no 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 and cash and temporary cash investments.

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 an interest rate swap agreement 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 payer under the interest rate swap agreement is a nationally recognized commercial bank, which has been accorded ratings similar to other large commercial banks by primary rating agencies. We periodically monitor these credit ratings. While we may be exposed to losses due to non-performance of the bank or the calculation agent, we consider the risk remote and do not expect the settlement of this transaction to have a material effect on our financial condition or results of operations.

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New Accounting Pronouncements

In December 2004, the FASB issued SFAS No. 123 (Revised), “Share-Based Payment.” This statement replaces SFAS No. 123, “Accounting for Stock-Based Compensation” and supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees.” SFAS 123R 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 to awards modified, repurchased, or cancelled after that date. In addition, we are required to record compensation expense (as previous awards continue to vest) for the unvested portion of previously granted awards that remain outstanding at the date of adoption, if any. On April 14, 2005, the Securities and Exchange Commission announced the adoption of a rule that defers the effective date for adoption to the first fiscal year beginning after June 15, 2005. Adoption of this standard is not expected to have a material effect on the Company’s financial position, results of operations or cash flows as all of our outstanding stock options were fully vested at the date of issuance of SFAS 123R. Modifications to outstanding stock options after the effective date of the standard may result in additional compensation expense pursuant to the provisions of SFAS 123R.

Inflation

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

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

For information regarding our exposure to certain market risks, see Item 7A, QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK, in our Annual Report on Form 10-K for the year ended December 31, 2004. There have been no significant changes in our market risk exposures from December 31, 2004.

ITEM 4. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) as of March 31, 2005 (the “Evaluation Date”). Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of the Evaluation Date, our disclosure controls and procedures were effective to ensure that information required to be disclosed by us in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms.

Changes in internal controls

There were no changes in our internal control over financial reporting during our most recently completed fiscal quarter that has materially affected, or is reasonably likely to affect, our internal control over financial reporting.

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PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

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

ITEM 6. EXHIBITS

See Exhibit Index following the signature page of this Report

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	Iowa Telecommunications Services, Inc. (Registrant)
Date: May 12, 2005	By:	/S/ Alan L. Wells
		Alan Wells
		President and Chief Executive Officer (Principal Executive Officer)
Date: May 12, 2005	By:	/S/ Craig A. Knock
		Craig A. Knock
		Vice President, Chief Financial Officer (Principal Financial Officer and Chief Accounting Officer)

EXHIBIT INDEX

IOWA TELECOMMUNICATIONS SERVICES, INC.
FORM 10-Q FOR QUARTER ENDED MARCH 31, 2005

* Filed herewith.