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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

For the fiscal year ended December 31, 2004

For the transition period from                      to                     .

Commission File Number 001-32354

(Exact name of registrant as specified in its charter)

115 S. Second Avenue West

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:

Securities registered pursuant to Section 12(g) of the Act: None

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.  ¨

Indicate by check mark whether the registrant is an accelerated filer (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 on November 18, 2004, the effective date of our initial public offering, was approximately $484,270,155 computed upon the basis of the closing sales price of the Common Stock 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 30,864,195 shares of Common Stock, $0.01 par value, outstanding as of March 25, 2005.

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

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Cautionary 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:

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):

All forward-looking statements included in this document are based on information available to us on the date hereof, and we assume no obligation to update any such forward-looking statements. It is important to note that our actual results could differ materially from those included in such forward-looking statements. Factors that could cause actual results to differ materially from the forward looking statements include risks and uncertainties detailed throughout this Annual Report, and in particular in the “Risk Factors” section at the end of Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” These cautionary statements should be considered in the context of such factors, as well as those disclosed from time to time in the Company’s Reports on Forms 10-Q and 8-K.

We maintain a website at www.iowatelecom.com to provide information to the general public and our shareholders on our products and services, along with general information on Iowa Telecommunications Services, Inc. (“Iowa Telecom”) and its management, career opportunities, financial results and press releases. Copies of our most recent Annual Report on Form 10-K, our Quarterly Reports on Form 10-Q or our other reports filed with the Securities and Exchange Commission, or 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

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calling (641) 787-2089, through an e-mail request from our website at www.iowatelecom.com and clicking on “Investor Relations”, through the SEC’s website by clicking the direct link from our “Investor Relations” website or directly from the SEC’s website at www.sec.gov. Our website and the information contained therein or connected thereto are not intended to be incorporated into this Annual Report on Form 10-K.

Our Board of Directors has adopted a Code of Business Conduct and Ethics that is applicable to all of our directors, officers and employees. Any material changes made to our Code of Business Conduct and Ethics or any waivers granted to any of our directors and executive officers will be publicly disclosed by filing a current report on Form 8-K within five business days of such material change or waiver, for which there were no material changes or waivers in 2004. Copies of the Code of Business Conduct and Ethics, our Corporate Governance Guidelines, as well as charters for our Audit Committee, Nominating and Corporate Governance Committee and Compensation Committee, which comply with the corporate governance rules of New York Stock Exchange, are available on our website www.iowatelecom.com. In addition, a copy of such documents will also be made available to our shareholders upon request by contacting our investor relations department by calling (641) 787-2089 or through an e-mail request from our website at www.iowatelecom.com.

PART I.

ITEM 1. Business

Company Overview

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 we serve. Together with our competitive local exchange carrier subsidiary, we provide services to approximately 267,000 access lines in Iowa.

Our core businesses are local telephone service and the provision of network access to other telecommunications carriers for calls originated or terminated on our network. These businesses generated 78% of our total revenues for the year ended December 31, 2004. Our stable market and subscriber base, predictable capital expenditure requirements and our rural customers’ high degree of reliance on basic wireline services have produced consistent financial results. In 2004 we recorded revenues of $228.1 million, net income from operations of $14.2 million, and Adjusted EBITDA (as defined in Item 6, Selected Financial Data) of $137.9 million.

In addition to our basic local service and network access businesses, we provide long distance service, dial-up and DSL Internet access and other communications services. Our strong incumbent market position gives us a platform to cross-sell these additional services to our customers. From 2002 to 2004, the growth in revenue from these additional services contributed to an increase in our average annual revenue per access line from $737 to $830 excluding the $7.1 million of revenues collected subject to refund in prior years that were recognized in 2004. 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”).

We believe we are building strong consumer loyalty and brand recognition by providing superior, locally-focused customer service and maintaining strong ties to our rural communities. Our stable customer base, combined with the higher costs of offering competitive wireline services, leads to limited competition in rural regions compared to most urban areas.

Our History

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. Many of these large

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providers had decided to focus investment capital and resources on their urban markets and national wireless and business service operations, rather than on their rural markets, which we believe were historically underserved by the large providers. We concluded that GTE Midwest Incorporated’s divestiture of its rural Iowa operations presented an attractive opportunity to improve the financial performance of this business by improving existing networks, offering customers additional services and providing high quality, locally focused customer service. We were incorporated under the laws of the State of Iowa in 1999. 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.”

Our Strengths

Leading Market Position and Strong Local Brand. We are the largest provider of wireline telecommunications services to rural communities in Iowa. Through our locally focused customer care, community presence and range of quality service offerings, we believe we are developing a strong brand identity that solidifies the loyalty of our customer base. We estimate our market share to be approximately 93% of residential lines and 81% of business lines in the communities we serve. In addition, we are the sole telecommunications company currently providing wireline services in approximately 86% of our communities, which further contributes to our stable cash flows. Our strong incumbent market position also allows us to pursue increased revenue per access line by cross-selling additional services to existing subscribers, including by offering integrated packages, or bundles, of local, long distance and Internet service on a single monthly customer bill.

Favorable Rural Telecom Market Characteristics. In contrast to telecommunications providers in major metropolitan areas, we experience only limited wireline competition in most of our markets. The low customer density of our service area, our high percentage of residential subscribers (approximately 76%), and our strong local presence generally make it more difficult for competitors to enter our communities in comparison to metropolitan areas. There are currently no national cable or wireline operators providing voice services in our incumbent local exchange carrier markets, and we currently face measurable competition from wireline competitive local exchange carriers in approximately 40 of the 425 communities our incumbent local exchange carrier operations serve.

Successful Introduction of New Businesses. Since the GTE Midwest Incorporated acquisition, we have substantially expanded our toll, or long distance, services and have successfully introduced dial-up and DSL Internet access as profitable new businesses. From 2002 to 2004, the revenue growth from these additional services contributed to an increase in our average annual revenue per access line from $737 to $830 excluding the $7.1 million of revenues collected subject to refund in prior years that were recognized in 2004.

Concentrated Geographic Service Region. Unlike many mid-sized rural local exchange carriers that operate in several states across disparate geographies, over 99% of the customers we serve are located in rural communities in a single state. Virtually all of our services are offered in an area that is 20,000 square miles in size, and each of our switching centers is within 30 miles of another of our switching centers. This geographic concentration allows us to efficiently manage our network operations and to cost-effectively generate a local brand identity, and also leads to a higher degree of customer contact. Our single-state focus also raises our profile in Iowa and spares us the complexity, cost and unpredictability of operating under multiple state regulatory regimes.

Limited Risk from Potential Regulatory Change. We believe that our incumbent local exchange carrier is less vulnerable than other rural local exchange carriers to potential regulatory changes, including changes in federal support for universal service and in the rules governing federal interstate access services. Many rural local exchange carriers rely to a significant extent on universal service support, particularly in the form of “high cost loop support” that subsidizes the costs of providing local rural telephone service. By contrast, due to current federal high cost support formulae and GTE’s historical regulatory status, we currently do not receive high cost loop support. In addition, most rural local exchange carriers operate under an intercarrier compensation mechanism that enables them to charge network access rates higher than ours. Our financial performance has

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been achieved while operating under the Federal Communication Commission’s (the “FCC’s”) CALLS Order, which required us to reduce access rates below those charged by most other rural local exchange carriers.

Experienced Leadership. Our senior management team has been responsible for executing our strategies and developing our business since the GTE acquisition. This team averages more than 20 years of telecommunications or other public utility experience, and has a demonstrated track record of acquiring, integrating and operating telecommunications and public utility companies. We are led by Alan L. Wells, our President and Chief Executive Officer, who has 23 years of experience in the telecommunications and electric and gas utility industries. Our entire senior management team is located in Iowa.

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:

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We intend to pursue increased sales of these services to our existing customers and, where appropriate, to test the introduction of new enhanced services.

Products, Services and Revenue Sources

We are a rural local exchange carrier providing a range of services to residential and business customers in over 440 communities throughout Iowa through our local exchange carrier and our competitive local exchange carrier subsidiary. Approximately 76% of our access lines serve residential customers and 24% serve business customers. We generate revenues by providing our customers:

We complement our basic local telephone services by actively marketing products including enhanced local services, long distance services and dial-up and DSL Internet access, all under the Iowa Telecom brand. We believe that our ability to cross-sell to our customer base in this way is bolstered by the fact that we are the sole local telecommunications provider in approximately 86% of the communities we serve.

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The following table shows our revenues and sales for each of the years ended December 31, 2002, 2003 and 2004 by category of service, in dollar terms and as a percentage of total revenues and sales:

Local Services

Basic Local Service. Basic local service, which is the key to our historically stable revenues and cash flow, enables customers to make and receive telephone calls within a defined local calling area for a flat monthly fee. The maximum amount that we may charge for basic local service is determined by the Iowa price regulation plan under which we operate. As is customary in the telecommunications industry, we charge our business customers somewhat higher rates than our residential customers. In 2003, the average of our monthly rates for residential service was $12.15, and for business service was $25.09. As a result of a settlement agreement with the Iowa Utilities Board regarding a rate proceeding involving our incumbent local exchange carrier, effective April 23, 2004, our monthly charge for basic local service became $16.60 for residential customers and $32.09 for business customers in all of our exchanges. 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. These rates are exclusive of Extended Area Services (EAS), a mandatory expanded calling service to selected nearby communities at a flat monthly rate which is also considered to be a basic monthly service.

Enhanced Local Services. In addition to subscribing to basic local telephone services, our customers may choose from a variety of enhanced or non-basic communications 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. We have pricing flexibility for such services, although under our Iowa price regulation plan we may not increase our prices for some regulated enhanced local services by more than 6% on a revenue-weighted basis in any twelve-month period. Offering such services to local customers through bundled service packages is an important part of our strategy to increase average revenue per subscriber. Our average monthly revenues from these services was $2.04 per line in 2004, a 19% increase over 2003.

Future Deregulation of Basic and Enhanced Local Services. As more fully discussed under Item 1, “Regulation—State Regulation”, in accordance with new statutory provisions enacted on March 15, 2005, after July 1, 2005 we may elect to deregulate our retail charges for all of our business and residential local exchange services except single line flat-rated basic local residential and business service and extended area service. Our monthly charge for single line flat-rated basic local residential service could be raised by up to $1.00 per twelve-month period between July 1, 2005 and June 30, 2008, but could not exceed $19.00, exclusive of regulatory charges, extended area service charges, taxes and other fees, prior to July 1, 2008. Our monthly charge for single line flat-rated basic local business service could be raised by up to $2.00 per twelve-month between July 1, 2005 and June 30, 2008, but could not exceed $38.00, exclusive of regulatory charges, extended area service charges, taxes and other fees, prior to July 1, 2008.

Our monthly charges for single line flat-rated basic local residential and business service will be deregulated on July 1, 2008 unless the Iowa Utilities Board decides to extend its jurisdiction over those services for a period

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not to exceed two years, during which period we could increase our monthly charges for single line flat-rated basic local residential and business service by up to $2.00 per year in addition to an increase to reflect the annual rate of inflation.

In addition, during each twelve-month period between July 1, 2005 and June 30, 2008 or, if the Iowa Utilities Board elects to extend its jurisdiction, June 30, 2010, our monthly charges for single line flat-rated basic local residential and business service could be further increased to reflect the annual rate of inflation, and could be modified by the Iowa Utilities Board to reflect exogenous factors beyond our control.

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.

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

Additionally, we bill subscriber line charges, or 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 also bill wireless carriers for certain traffic transport and termination services unrelated to intrastate or interstate access service. These charges are governed by interconnection agreements with such wireless carriers.

Toll Services

We began offering toll, or long distance, services in July 2000 and have increased our revenues from this business to $23.2 million in 2004 through sales to our established customer base. We have leveraged our strong customer relationships and single billing approach to achieve this revenue growth with minimal need for additional capital expenditures. The following table shows our number of toll service subscribers as of the date shown:

We market long distance service under our Iowa Telecom brand name, but we provide service through resale arrangements we have with Iowa Network Services, Inc. and another carrier. 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.

Other Services and Sales

This revenue source consists largely of our dial-up and DSL Internet access services.

Immediately following the GTE Midwest Incorporated acquisition, we began offering dial-up Internet access, which GTE Midwest Incorporated had not previously made available. At the time of the acquisition we

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committed to the Iowa Utilities Board to provide dial-up Internet service in all of our markets by December 31, 2000, and within our first six months of operations we offered dial-up access in all of our exchanges.

We began offering DSL Internet access service in a few markets in late 2001. As of March 24, 2005, we have DSL equipment installed in 255 exchanges. We estimate that we are currently capable of providing DSL Internet access service to approximately 70% of our access lines. Approximately 25% of our access line customers also subscribe to our dial-up or DSL Internet service. The following table shows our number of dial-up and DSL Internet access service subscribers as of the dates shown.

Competitive Local Exchange Carrier Services

We currently provide competitive local exchange carrier services through our wholly-owned subsidiary, ITC. ITC offers a broad range of traditional and enhanced wireline communications services to business and residential customers in 18 exchanges throughout Iowa, serving approximately 15,200 total access lines as of December 31, 2004. We view our competitive local exchange carrier business as a cost-effective way to leverage our Iowa Telecom brand and corporate infrastructure in pursuit of customer acquisitions in markets adjacent to those served by our incumbent local exchange carrier operations. Our primary strategy has been to target contiguous rural 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 a new contractual arrangement in January 2005 with the incumbent provider for switching services and leased lines. Our current contracted rates range from $17.46 to $18.99 per line per month. We will consider installing owned communications equipment in a community only after we have achieved sufficient scale and such investment can be cost effective.

ITC began operations in February 2002, and as of December 31, 2004 served approximately 4,300 business and 10,900 residential access lines. ITC currently accounts for 5.7% of Iowa Telecom’s total access lines. In 2004, ITC had revenues of $5.5 million and a net operating loss of $1.4 million. As of December 31, 2004, our total investment in ITC was $3.3 million. 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 2005, we plan to maintain this very limited investment approach as we continue to grow our competitive local exchange carrier business.

Sales and Marketing

We have established a sales and marketing organization that centralizes marketing strategies and deploys sales and customer services resources locally. We have a dedicated sales force for business customers and have opened 16 local offices at which customers can contact us in person to address their needs.

We believe that customers in rural communities are concerned with the fact that historically they have had access to less sophisticated telecommunications products and services than consumers in urban locations. We

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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 16 customer offices and three customer contact centers. These functions historically had been provided from out-of-state locations. 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 developing Iowa Telecom’s brand identity as a responsive, locally oriented provider. We believe this reputation also enhances our potential to cross-sell additional services to our existing subscriber base.

We have also begun to market local telephone services in attractively priced bundled packages including long distance, enhanced local services and dial-up and DSL Internet access 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 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 measurable competition from other providers of local services in approximately 40 of the 294 exchanges our incumbent local exchange carrier serves. We believe that in 37 of these exchanges, independent local exchange carriers operating in adjacent exchanges and municipal utilities have constructed networks to provide competitive local exchange carrier services to customers in our exchanges. In other exchanges, competitive local exchange carriers are reselling our services or using their own facilities in combination with ours to provide telecommunications services. We estimate that our largest competitive local exchange carrier competitor serves approximately 5,000 lines in 10 of the exchanges in which we are the incumbent local exchange carrier. We estimate that our second largest competitive local exchange carrier competitor serves approximately 3,500 lines in three of the exchanges in which we are the incumbent local exchange carrier, and that our remaining competitive local exchange carrier competitors serve an average of fewer than 1,000 lines per exchange in four or fewer exchanges in which we are the incumbent local exchange carrier. In the 2004 Telecom Survey Report, the Iowa Utilities Board estimates that our market share in the communities where we face competition from competitive local exchange carriers, considered as a group, is 85% of residential lines and 67% of business lines. When all of the communities we serve are considered, our market share has been estimated by the Iowa Utilities Board to be 93% of residential lines and 81% of business lines.

In November 2004, an organization called “Opportunity Iowa” was formed to encourage municipalities to build their own fiber to the home communications networks. The Iowa Legislature is currently considering legislation that would provide procedural safeguards to ensure that citizens can make informed decisions when voting on referenda necessary to approve such ventures. We cannot predict the likelihood or extent of success of Opportunity Iowa, the likelihood of passage of pending legislation, or the effect of such legislation on Opportunity Iowa or on our business.

Wireless and Emerging Technology Competition. We estimate that wireless service providers served approximately 1.34 million subscribers in Iowa as of December 2003, based on the most recent FCC data available and wireless industry national subscriber growth estimates. 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.

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Iowa Communications Network. The Iowa Communications Network is a state-owned communications network consisting of more than 3,000 miles of fiber optic cable extending into all 99 Iowa counties and capable of providing a variety of voice, data and video communications services. The Iowa Communications Network currently provides certain voice, data and video communications services to authorized educational and governmental institutions, including accredited public and private schools and colleges, public libraries, state and federal agencies and the United States 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 Subsidiary. Our competitive local exchange carrier subsidiary, ITC, provides services in 18 of Qwest’s Iowa exchanges. ITC generally offers the same local exchange services as those offered by Qwest and provides DSL Internet access service in 13 of the 18 exchanges, using either Qwest’s wholesale service or owned facilities.

Long Distance. We face significant competition in the long distance market. There are more than 80 interexchange carriers and a substantial number of local exchange carriers providing long distance service in Iowa. AT&T, Sprint, and MCI 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 50% of our local access lines are also subscribed to one of our long distance services.

Dial-up and DSL Internet Access. In many markets we face competition from other dial-up and broadband Internet access service providers. Many such dial-up competitors are neighboring incumbent local exchange carriers, small proprietors with service in only a few communities or, in some circumstances near larger Iowa 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 Communications), 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 dial-up and DSL Internet access service sales.

Customers

Our incumbent local exchange carrier operates 294 local telephone exchanges in 425 largely rural communities. Our business is largely concentrated in the eastern and southern portions of Iowa. 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; 26 with a population between 2,000 and 5,000; and more than 385 with a population under 2,000. The largest five communities in our service area in Iowa are (2000 population figures in parentheses): Newton (15,579); Pella (9,832); Fairfield (9,509); Grinnell (9,105); and Mount Pleasant (8,751). These five communities represent approximately 15% of the access lines we serve.

Approximately 76% of our incumbent local exchange carrier access lines serve residential customers. We do, however, provide service to several large businesses in our service area, including Maytag Corporation (headquartered in Newton), Pella Corporation (headquartered in Pella) and Vermeer Manufacturing Company (also headquartered in Pella). In addition, Grinnell and Pella are the respective homes of four-year universities, Grinnell College and Central College. No single local service customer represented more than 5% of our revenues from 2002 to 2004.

As a competitive local exchange carrier, we operate in 18 local telephone exchanges with an aggregate population of 245,000 or approximately 8.4% of the state’s population. According to the 2000 U.S. Census, our

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CLEC service area includes 10 communities with a population over 10,000 and six communities with a population between 5,001 and 10,000. The largest five communities served by our competitive local exchange carrier are (2000 population figures in parentheses): Clinton (27,772); Ankeny (27,117); Burlington (26,839); Marshalltown (26,009); and Ottumwa (24,998). These five communities represent approximately 42% of the total access lines in our competitive local exchange carrier markets. Approximately 72% of the access lines in our competitive local exchange carrier markets serve residential customers.

No customer accounted for more than 10% of our revenues from 2002 through 2004.

Network Facilities

All of our exchanges are served by digital switches that we own, the majority of which were manufactured by Nortel Networks. All of our switches are capable of providing one-plus equal access for long distance service and are linked through a combination of aerial, underground and buried cable, including approximately 2,750 miles of fiber optic cable. Most of our primary network routes have been upgraded from copper to fiber optic cable. The advantages of fiber optic cable compared to copper facilities are greater capacity and flexibility and enhanced transmission quality and reliability. Our network operations and monitoring services are provided on a contract basis by Iowa Network Services, Inc., which also provides those services for its own network and for other local exchange carriers in Iowa. Automated alarm systems are in place to alert us to problems with our facilities, and our own technicians are on call to make any necessary repairs to the network.

The network facility upgrades we have completed since the GTE Midwest Incorporated acquisition include the following:

Our 2004 network improvement plan was approved by the Iowa Utilities Board on May 10, 2004. Pursuant to this plan, during 2004 we further transformed our network switching platform and distribution facilities, including our local loops and our facilities for interoffice transport, to better support the advanced communications needs of our subscribers. Our network improvement plan for 2005 through 2007 became effective on January 30, 2005. The additional revenues made available by the settlement of our rate proceeding in April 2004 will fund our network improvement plans and will allow us to accelerate the rate at which we deploy DSL and other broadband services, replace analog carrier technology, upgrade switching platforms, install fiber, and otherwise support and deploy new voice and data services.

Employees

We employ approximately 650 full-time employees, all of whom are based in Iowa. A total of approximately 425 employees are located at our headquarters in Newton, Iowa and our operations center in Grinnell, Iowa.

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We have a collective bargaining agreement with the Communications Workers of America, or CWA, which covers approximately 189 of our employees and expires in June 2007. We also have a collective bargaining agreement with the International Brotherhood of Electrical Workers, or IBEW, which covers approximately 25 of our employees and expires in June 2009. There have been no work stoppages or strikes by our IBEW and CWA employees in the past 10 years, and we consider our employee relations to be good.

Intellectual Property

We believe we have the trademarks, trade names and licen