Use these links to rapidly review the documentTABLE OF CONTENTS Item 8. Financial Statements and Supplementary Data.



Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

ý

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended December 31, 2010oro

TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934Commission File Number 000-29660


LOGOSUREWEST COMMUNICATIONS (Exact name of registrant as specified in its charter)California (State or other jurisdiction
of incorporation or organization)

68-0365195 (I.R.S. Employer
Identification No.)8150 Industrial Avenue, Building A, Roseville, California (Address of principal executive offices)

95678 (Zip Code)Registrant's telephone number, including area code (916) 786-6141Securities registered pursuant to Section 12(b) of the Act:Title of each class Common StockWithout Par Value
Common Stock Purchase Rights

Name of each exchange on which registered The NASDAQ Stock Market LLC
The NASDAQ Stock Market LLCSecurities registered pursuant to Section 12 (g) of the Act: None


Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes o        No  ý

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

Yes o        No ý

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 ý        No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and
posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was
required to submit and post such files).

Yes o        No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) 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. o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a small reporting company. See
definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer o

Accelerated filer ý

Non-accelerated filer o (Do not check if a
smaller reporting
company)

Smaller reporting company o


Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).

Yes o        No ý

As of June 30, 2010, the aggregate market value of the shares held by non-affiliates of the registrant's common stock was $79,101,169 based on the closing
price as reported on the NASDAQ Stock Market LLC. The market value calculations exclude shares held on the stated date by registrant's employee benefit plans, directors and officers on the
assumption such shares may be shares owned by affiliates. Exclusion from these public market value calculations does not necessarily conclude affiliate status for any other purpose.

On
February 9, 2011, the registrant had 14,091,342 shares of Common Stock outstanding.

DOCUMENTS
INCORPORATED BY REFERENCE

Portions
of the Registrant's Proxy Statement to be delivered to shareholders in connection with the Annual Meeting of Shareholders to be held on May 25, 2011 are incorporated herein by
reference in Part II and Part III of this Annual Report on Form 10-K. Such proxy statement will be filed with the Securities and Exchange Commission within
120 days of the Registrant's fiscal year ended December 31, 2010.



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TABLE OF CONTENTS



PAGEPART IItem 1.

Business

1Item 1A.

Risk Factors

16Item 1B.

Unresolved Staff Comments

20Item 2.

Properties

20Item 3.

Legal Proceedings

21PART IIItem 5.

Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

22Item 6.

Selected Financial Data

24Item 7.

Management's Discussion and Analysis of Financial Condition and Results of Operations

27Item 7A.

Quantitative and Qualitative Disclosures About Market Risk

61Item 8.

Financial Statements and Supplementary Data

62Item 9.

Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

105Item 9A.

Controls and Procedures

105Item 9B.

Other Information

105PART IIIItem 10.

Directors, Executive Officers and Corporate Governance

106Item 11.

Executive Compensation

106Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

106Item 13.

Certain Relationships and Related Transactions, and Director Independence

106Item 14.

Principal Accountant Fees and Services

106PART IVItem 15.

Exhibits and Financial Statement Schedules

107SIGNATURES

111


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PART I

Note About Forward-Looking Statements

Certain statements in this report, including that which relates to the impact on future revenue sources and potential sharing obligations of pending
and future regulatory orders, continued expansion of the telecommunications network and expected changes in the sources of our revenue and cost structure resulting from our entrance into new
communications markets, are
forward-looking statements and are made pursuant to the safe harbor provisions of the Securities Litigation Reform Act of 1995. These forward looking statements generally are identified by the words
"believe", "expect", "anticipate", "estimate", "intend", "should", "may", "will", "would", "will be", "will continue" or similar expressions. Such forward looking statements involve known and unknown
risks, uncertainties and other factors that may cause actual results, performance or achievements of SureWest Communications to be different from those expressed or implied in the forward-looking
statements. A detailed discussion of these and other risks and uncertainties that could cause actual results and events to differ materially from such forwardlooking statements is
included in the section entitled "Risk Factors" (refer to Part I, Item 1A). We disclaim any intention or obligation to update or revise publicly any forward-looking statements.

Item 1.    Business.    (Dollars in thousands, except per share amounts)

General Development of Business

SureWest Communications (the "Company", "we" or "our") is a California holding company with operating subsidiaries that provide a wide range of
telecommunications, digital video, Internet, data and other facilities-based communications services in Northern California, primarily in the greater Sacramento region ("Sacramento region"), and in
the greater Kansas City, Kansas and Missouri areas ("Kansas City area"). We were incorporated under the laws of the State of California in 1995, and through our predecessor we have operated in the
telecommunications business since 1914.

As
of December 31, 2010, our operating subsidiaries included SureWest Broadband, SureWest TeleVideo, SureWest Kansas, Inc. (with its various direct and indirect subsidiaries, "SureWest
Kansas" or the "Kansas City operations"), SureWest Telephone and SureWest Long Distance. SureWest Telephone has a competitive local exchange carrier division (the "SureWest CLEC") which was authorized
by the California Public Utilities Commission ("CPUC") in 1998 to provide telecommunications services in areas outside the telephone service area of SureWest Telephone, but it is not a separate
subsidiary. The SureWest CLEC is reported in the Broadband segment.

Our
strategy is to be the first choice as an integrated communications provider in the Sacramento region and Kansas City area. We seek to achieve this position by leveraging our existing advanced
fiber network to extend our operations throughout Sacramento, Placer and adjacent counties in California and by providing superior customer service and integrating our systems, products and operating
functions in the Kansas City area.

We
have two reportable business segments: Broadband and Telecommunications ("Telecom"). The Telecom segment includes the Incumbent Local Exchange Carrier ("ILEC") operations of SureWest Telephone and
SureWest Long Distance. The Broadband segment includes substantially all of the rest of

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our
operations. The table that follows reflects the percentage of total operating revenues generated by each of our two business segments for the last three fiscal years:

% of Total Operating RevenuesReporting Segment

2010

2009

2008Broadband


72%


67%


59%Telecom


28%


33%


41%Total operating revenues


100%


100%


100%


All
telecommunications providers continue to face increased competition. As a result of technology changes and industry, legislative and regulatory developments, we too continue to face new
competitive challenges. In recent years, changes in the legislative and regulatory environment have provided us with significant growth opportunities in our Broadband segment. As indicated by the
table above, our Broadband segment has grown to contribute the majority of our total operating revenues. We anticipate Broadband revenues will continue to increase and will offset the anticipated
decline of Telecom segment revenues.

The
Telecom segment provides wholesale access services through the use of its network to the Broadband segment, which enables the Broadband segment to offer high-speed Internet,
Voice-over-Internet-Protocol ("VoIP") services and video services to those customers within SureWest Telephone's service area. These wholesale services are included as
intersegment revenues and expenses in each of the respective segments and eliminated in the consolidated statements of income.

No
customer accounted for more than 10% of our consolidated operating revenues during the years ended December 31, 2010, 2009 and 2008.

Our
products or services that generated 10% or more of our total operating revenues in any of the last three years are as follows:

Total Operating Revenues2010

2009

2008Broadband residential data service

$
48,878

$
45,061

$
39,966Broadband residential video service

$
49,139

$
47,522

$
38,520Broadband residential voice service

$
26,461

$
25,897

$
20,619Broadband business service

$
46,209

$
39,554

$
33,077Telecom residential service

$
17,276

$
24,504

$
32,464Telecom business service

$
34,160

$
35,457

$
38,066Telecom access service

$
16,895

$
19,727

$
23,732


A
summary of net operating revenues from external customers, income from continuing operations, assets and capital expenditures for each of the business segments can be found in Note 12 in the
Notes to Consolidated Financial Statements, in Item 8, which is incorporated herein by reference. A discussion of factors potentially affecting our operations is set forth in "Risk Factors" in
Item 1A, which is incorporated herein by reference.

As
of December 31, 2010, we employed approximately 818 employees, an approximate 8% decline compared to December 31, 2009. The year-over-year decrease in the
number of employees was primarily due to a workforce reduction initiative that eliminated approximately 60 positions during 2010. None of our employees are represented by a union. We believe our
employee relations are positive.

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Broadband



The Broadband segment includes SureWest Broadband, SureWest TeleVideo, SureWest Kansas and the SureWest CLEC. As of December 31, 2010, the
Broadband segment had 104,100 residential subscribers and 236,100 Revenue-generating units ("RGUs").

The
Broadband segment utilizes fiber-to-the-home ("FTTH") and fiber-to-the-node ("FTTN") networks in portions of the Sacramento
region and Kansas City area to offer bundled residential and commercial services that include Internet protocol ("IP")-based digital and high-definition television, high-speed
Internet, VoIP and local and long distance telephone. We continue to expand the use of optical fiber in our networks.

Our
advanced telecommunications network gives us a competitive edge that enables us to provide our customers with high data speeds for Internet service and to deploy multiple services of superior
quality. Technology changes have fostered the development of a wide range of alternatives to traditional telephone and cable television services. Our advanced telecommunications network gives us the
ability to respond to the emerging trends and evolution of our customers' expectations for voice communications and the distribution and viewing of video programming.

In
February 2008 we acquired 100% of the issued and outstanding stock of Everest Broadband, Inc. ("Everest" or "SureWest Kansas" or the "Kansas City Operations") for a total purchase price of
$181,459, including transaction costs. Subsequent to the acquisition, the Kansas City operations have been included in our Broadband segment and consolidated results of operations. SureWest Kansas is
a competitive provider of high-speed data, video and voice services in the Kansas City area. The addition of our Kansas City operations accelerates our growth strategy and has positioned
us as a premier provider of network services to residential and business customers in the markets we serve there, as well as in California.

During
2008, SureWest TeleVideo possessed authorizations to serve areas of Sacramento and Placer counties and the cities of Roseville and Lincoln, California. SureWest TeleVideo has expanded its
services into previously licensed areas of Elk Grove and Natomas, California as well as to other areas within its service area footprint. We are authorized to provide video programming to
substantially all of the residents in the SureWest Telephone service area.

In
2006, the California legislature adopted California Assembly Bill No. 2987, the Digital Infrastructure and Video Competition Act of 2006 ("DIVCA"), which requires providers of multichannel
video services to obtain a state franchise instead of a local franchise, and to replace local franchises with state franchises as they expire. DIVCA also accommodates video service delivery in areas
that are smaller than an entire municipality. On January 1, 2009, the various local cable television franchises of our subsidiaries in California were replaced with a single California state
video franchise that covers our currently served areas plus areas in which we have considered future network expansion.

Our
Kansas City operations possess local or state cable television and/or telecommunications franchises covering the cities of Lenexa, Merriam, Olathe, Overland Park, Prairie Village and Shawnee, in
Kansas; and they also hold a Federal Communications Commission ("FCC") Open Video System certification for parts of Kansas City, Missouri.

SureWest
Broadband procures digital transport capability through a wholesale access agreement with its affiliate, SureWest Telephone, and also through agreements with other carriers. With SureWest
TeleVideo, it has developed an advanced method of delivering video services to subscribers in the Sacramento region using IP, or IP-video capability.

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All of the businesses in the Broadband segment are subject to extensive competition. Competition has grown dramatically in recent years. Except for
the multichannel video delivery business, which requires significant capital investment to serve customers, the barriers to entry are not high, and technology changes force rapid competitive
adjustments.

We
compete against AT&T, Comcast, Frontier, Wave Broadband, DirecTV, Dish and other companies in the Sacramento region. We compete against Comcast, Time Warner Cable, AT&T, DirecTV, Dish and a number
of smaller companies in the Kansas City area.

Numerous
wireless carriers also compete against our subsidiaries in the telecommunications business. Most of our wireless competitors now offer Internet and data connectivity, and they are increasing
their capabilities in delivering video.

We
have found that we can be successful against these competitors by constantly seeking out new sales opportunities in attractive geographic locations and market segments, by maintaining a highly
reliable network that is accessible to new customers and by focusing on the provision of excellent service to our customers. To the extent permitted by law and regulatory requirements, we seek to
operate our business across the Broadband segment in an integrated manner and to run our network as a single integrated facility in each region. The operating units in this segment benefit within the
Sacramento region from the name recognition and reputation of SureWest, and from the active participation of our executives and employees in civic and other groups.

In
most cases, we have entered the cable television service markets as the operator of a second (or subsequent) cable system. While we will benefit from the somewhat reduced regulation that such
entrants enjoy, we nevertheless face the challenge of drawing customers away from the incumbent cable
service provider. The provision of cable television over a closed transmission path has been recognized as possessing certain monopoly characteristics and, therefore, the ability of a second or
subsequent provider to succeed in the marketplace is not assured. Similarly, the possession of comparatively greater size and scale can give an incumbent cable competitor an advantage in both access
to and pricing of the program content needed to operate a cable television business. Comcast (in California and in parts of the Kansas City area) and Time Warner (in the Kansas City area) each possess
significantly greater size and scale than the Company.

Regulation

We operate businesses that are regulated on the Federal, state and local levels.

The
most recent comprehensive revision of the nation's primary law governing telecommunications and cable television occurred in 1996, when the Telecommunications Act of 1996 was enacted. This law
amended the Communications Act of 1934 and significantly altered the regulatory structure for telecommunications providers. It also has directly and indirectly changed the environment for cable
television and Internet providers. Current state and Federal laws and regulations that are applicable to our subsidiaries actively promote competition, but in most cases, maintain varying degrees of
regulation as well.

Some
level of regulation also is exerted over our subsidiaries by agencies other than the FCC and the state commissions. For example, the Federal Trade Commission ("FTC") has asserted jurisdiction
over certain aspects of Internet sales and marketing and the use and misuse of customer information by providers of goods and services.

The
FCC was directed by Congress to develop a National Broadband Plan ("NBP") as part of the American Recovery and Reinvestment Act of 2009. In March 2010, after taking extensive public comment, the
FCC released the full text of its NBP, which contains policy recommendations on a variety of issues that

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the
FCC has linked to expanded broadband deployment. The policy recommendations include guiding principles to foster competition in broadband, telephone, wireless and cable services over the next
decade, including recommendations related to universal service fund ("USF") reform, intercarrier compensation, cable set-top boxes and spectrum reallocation, among others. The NBP
recommendations most relevant to the Company include shifting the current USF mechanisms that support universal voice telephone services to support of universal broadband deployment and the phased
reduction of intercarrier access compensation levels, with a potential phase-out
of all such compensation within ten years. Some of these recommendations only restate pre-existing FCC proposals in current rulemakings while others raise new issues. The FCC has begun
some proceedings to implement aspects of the NBP.

In
an April 6, 2010 decision, a Federal appeals court found that the FCC lacked authority over certain Internet-related practices of Comcast. This decision came during a proceeding that had
been initiated by the FCC to adopt rules related to the conduct of providers of retail Internet services. Notwithstanding the Federal appeals court decision, on December 21, 2010, the FCC
adopted rules requiring that such providers honor certain operating principles, including principles of (i) transparency, (ii) no blocking, (iii) no unreasonable discrimination
and (iv) reasonable network management in connection with their Internet services. The FCC order has already been appealed.

In
addition, the FCC initiated action on February 8, 2011 to again consider reform of the current structure for intercarrier compensation and to consider rules for transitioning the current
universal service fund to support broadband deployment. The FCC's actions in these and future proceedings could significantly alter the structure of these arrangements, and affect the costs and
sources or revenue for affected service providers. Action in any of these proceedings could have a material impact on us. We will continue to monitor these matters, participate in them as we deem
appropriate, and assess the potential impact on our consolidated financial position and results of operations.

The
following narrative summarizes the primary regulatory issues affecting the telecommunications, video services and Internet services of our subsidiaries in the Broadband segment:



Our
subsidiaries that provide telecommunications services are subject to varying degrees of Federal and state regulation. They are also subject to local government regulation in some cases.

The
FCC has jurisdiction over services and facilities that are interstate in nature, and it can also regulate in other circumstances where it has been given statutory authority to act, including
through preemption. State commissions have jurisdiction over most matters that are exclusively intrastate in nature, except for certain matters preempted by the FCC. Telecommunications regulation by
local governmental units is generally limited to matters involving the use of local streets and rights of way. Our Kansas City operations hold certain local telecommunications franchises, for example.

The
FCC and the state commissions do not regulate all providers that come under their jurisdiction in the same way. Incumbent Local Exchange Carriers ("ILECs") remain more highly regulated. While some
regulation of ILECs has eased as competition has increased, that regulation remains more burdensome than the regulation of other telecommunications providers.

Almost
all other providers of regulated services, including local competitors to ILECs, are typically subjected to lighter regulation. This lighter regulation is sometimes characterized as
"non-dominant" regulation. The basis for this asymmetric form of regulation lies in the determination that these other firms do not possess market power in the provision of services, and
as a result will be regulated effectively by market forces. SureWest Telephone is regulated as an ILEC, but our subsidiaries in the Broadband segment are all regulated as non-dominant
providers of telecommunications services.

The
nature and extent of regulation by the FCC and by state commissions is constantly evolving as a result of ongoing events, changes in public policy, initiatives by carriers and customer interest
groups, judicial

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decisions
and other factors. The application of some rules that were once reserved for comprehensively regulated providers alone has now been expanded in some cases to cover lightly regulated
companies as well. Examples include the expansion of 911 access obligations, network outage reporting, protection of customer privacy and compliance with the Communications Assistance for Law
Enforcement Act.

Among
our subsidiaries in the Broadband segment, the following addresses the nature of their regulation:

SureWest
CLEC, SureWest TeleVideo, and SureWest Kansas each offer telecommunications services, and when engaged in providing telecommunications, each is subjected to a lighter form of regulation than
ILECs face. In addition, regulations that are intended to promote the growth of competition and that are restrictive when applied to ILECs may actually be of benefit to these subsidiaries. For
example, a mandatory resale requirement applied to AT&T in California and/or Kansas allows the SureWest CLEC and our Kansas City operations to gain access to special access services and other
connections that can be used in the provision of services to our customers.

Ongoing
proceedings at the FCC and at the state level are addressing a number of critical telecommunications issues within their respective jurisdictions. A number of these proceedings have been
active for many years. Others were newly instituted in 2010. Some of the issues being addressed include the nature of interconnection between different types of networks; the pricing of access and
interconnection; the regulation of special access services; the interrelationship between traditional circuit switched telephone services and newer services that use IP and other advanced technologies
and standards; the treatment of VoIP; the manner in which broadband services can be made more widely available; the nature and extent of any rules and regulations dealing with the provision of
Internet access services, including rules requiring nondiscrimination in the treatment of applications providers; the future of the various Federal and state universal service support funds and the
mechanisms that support them; the structure of intercarrier compensation and the future direction and organization of the agency itself. During calendar year 2009, Congress passed legislation making
funding available for the expanded deployment of broadband services in certain areas of the country. Some of that funding
may be made available to our competitors, allowing them to invest in facilities in defined underserved areas, and helping them to directly or indirectly finance competitive activities. Even if the
areas are not areas in which we do business, the availability of Federal funding can free up other capital funds for use in areas in which we compete. The implementation of the broadband program by
the FCC and the National Telecommunications and Information Administration is ongoing. The impact of some of these proceedings on the ILEC is separately discussed below under
TelecomRegulation.

Common
carriers activities are generally exempt by law from direct FTC regulation, but carriers can be subject to FTC regulation to the extent that they offer non-common carrier services.
The FTC's interest in telecommunications and related issues appears to have increased recently, particularly in areas related to privacy.



Our
cable television subsidiaries each require a state or local franchise or other authorization in order to provide cable service to customers. Each of these subsidiaries is subject to regulation
under a framework first added to the Communications Act as Title VI in 1984, substantially amended in 1992 and further amended by the Telecommunications Act of 1996.

Under
this framework, the responsibilities and obligations of franchising bodies and cable operators have been carefully defined. The law addresses such issues as the use of local streets and rights
of way; the carriage of public, educational and governmental channels; the provision of channel space for leased commercial access; the amount and payment of franchise fees; consumer protection; the
enforcement and/or termination of a franchise; and similar issues. In addition, Federal laws place limits on the common ownership of cable systems and competing multichannel video distribution
systems, and on the common ownership of cable systems and local telephone systems in the same geographic area. Many provisions of

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the
Federal law have been implemented through FCC regulations. These matters are subject to ongoing oversight by the FCC. The FCC has expanded its oversight and regulation of the cable
television-related matters recently. In some cases, FCC action has created opportunities for the Company against incumbent cable operators.

The
Telecommunications Act of 1996 also added to the Communications Act a number of provisions addressing the implementation and operation of open video systems ("OVS"). An OVS is a form of
multichannel video delivery that is distinct from a traditional cable television delivery system and Congress identified a distinct regulatory structure to be applied to it. OVS were intended to
accommodate unaffiliated providers of video programming on the same network. The OVS regulatory structure also offered a means for a single provider to serve less than an entire community. Our Kansas
City operations in Missouri utilize an OVS that allows us to operate in only a part of Kansas City.

A
number of state and local provisions also affect the operation of our cable systems. The enactment of DIVCA in California sought to encourage further the entrance of telephone companies and other
new cable operators to compete against the large incumbent cable operators. DIVCA changed preexisting California law to require new franchise applicants to obtain franchise authorizations on the state
level. In addition, DIVCA established a general set of state-defined terms and conditions to replace numerous terms and conditions that had applied uniquely in local municipalities, and it repealed a
state law that had prohibited local governments from adopting terms for new competitive franchises that differed in any material way from the incumbent's franchise, even if competitive circumstances
were very different. Some portions of this law are also available to incumbent cable operators with existing local franchises who compete against us.

A
state franchising law also has been enacted in Kansas. While these laws have reduced franchise burdens on our subsidiaries, and have made it easier for them to seek out and enter new markets, they
also have reduced the entry barriers for others who may want to enter our cable television markets.

Federal
law and regulation also affects numerous issues related to video programming and other content.

Under
Federal law, certain local television broadcast stations (both commercial and non-commercial) can elect, every three years, to take advantage of rules that require a cable operator
to distribute the station's content to the cable system's customers without charge, or to forego this "must-carry" obligation and to negotiate for carriage on an arm's length contractual
basis, which typically involves the payment of a fee by the cable operator, and sometimes involves other consideration as well.

If
the station and the cable operator can come to an agreement, the station grants "retransmission consent" for the term of the agreement, typically for the entire three year period. The current
three-year cycle commenced on January 1, 2009. Fees under retransmission consent agreements generally underwent marked increases for the 2009-2011 period. New
three-year elections will occur in late 2011 and would generally apply for the 2012-2014 period. We expect stations again to seek significantly higher fees for retransmission
consent rights covering this period.

Federal
law and regulation regulate access to certain programming content that is delivered by satellite. The 1992 amendment to the Communications Act put in place a ban on exclusive contracts between
cable operators and certain affiliated satellite programmers. The ban has been extended by the FCC until October 5, 2012. It will expire at that time unless it is extended again. The FCC
recently adopted an order banning exclusive contracts between affiliates where the programming is sent via terrestrial media, and banning certain other unfair acts, making it clear that the
withholding of regional sports programming and high definition television programming by content affiliates of incumbent cable operators would receive special attention. Unlike the satellite
provisions, the new rules would not expire. The FCC's order is under appeal and a decision in this matter is anticipated during 2011.

In
connection with the FCC's approval of a cable transaction involving Comcast and Time Warner in July 2006, the parties' regional sports networks also remain subject to certain program access rules
until July

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2012.
In early 2010, Comcast proposed to enter into a joint venture with NBC Universal, through which it would acquire control of numerous NBC properties, including both broadcast and cable television
programming operations of NBC. In early 2011, the FCC and the Department of Justice ("DOJ") approved the transaction, with a significant number of conditions related to program access and carriage,
non-discrimination, bundling and the relationship of the joint venture to emerging on-line competition. Most of the conditions will have a duration of seven years. A few of the
conditions are marginally favorable for the Company's cable operations, in part because they would qualify as small cable operators. The FCC and DOJ conditions may give the Company additional options
in bargaining for video programming content licenses with the joint venture, and promote more equal treatment in comparison with larger cable competitors. Other conditions relate to the continued
independence of the NBC operations from Comcast in dealing with cable operators on certain issues, as well as the expansion of content alternatives in a number of areas that may ultimately become
available to the Company.

The
contractual relationships between cable operators and most providers of content who are not television broadcast stations generally are not subject to FCC oversight or other regulation. The
majority of providers of content to our subsidiaries, including content providers affiliated with incumbent cable operators such as Comcast, but who are not subject to any FCC or DOJ conditions, do so
through arm's length contracts where the parties have mutually agreed upon the terms of carriage and the applicable fees.

The
transition to digital television ("DTV") has led the FCC to adopt and implement new rules designed to ease the shift. These rules can be expected to make broadcast content more accessible over the
air to smartphones, personal computers and other non-television devices. Local television broadcast stations will also be able to offer more content over their assigned digital spectrum
after the DTV transition, including additional channels. The FCC is considering whether it should modify its must carry rules to cover any new digital channels offered by local television broadcast
stations entitled to must carry treatment. This could cause additional costs and compliance burdens for cable operators, including our cable subsidiaries.

The
Company continues to monitor the emergence of video content options for customers that have become available over the Internet, and that may be made available free, by individual subscription or
in conjunction with a separate cable service agreement. In some cases, this involves the ability to watch episodes of desirable network television programming and to procure additional content related
to programs carried on linear cable channels. These options have increased significantly, and can lead cable television customers to terminate or reduce their level of services. At this time, these
"over-the-top" programming options do not purport to duplicate the nature or extent of desirable programming carried by cable systems, and the market is still
comparatively nascent, but in light of changing technology and events such as the Comcast-NBC transaction, the "over-the-top" market will continue to grow and
evolve rapidly.

Cable
operators depend to some degree upon their ability to utilize the poles (and conduit) of electric and telephone utilities. The terms and conditions under which such attachments can be made were
established in the Federal Pole Attachment Act of 1978, as amended. The Pole Attachment Act outlined the formula for calculating the fee to be charged for the use of utility poles, a formula that
assesses fees based on the proportionate amount of space assigned for use and an allocation of certain qualified costs of the pole owner. The FCC has put in place a structure for pole attachment
regulation that has covered cable operators and other types of providers. A proceeding is currently pending in which the FCC proposes to examine its current formula and to determine whether a single
rate should apply equally to all providers who use poles, whether they are cable operators, telecommunications providers, or Internet providers, even if they use the attachment to offer more than one
service. States have the option to opt out of the Federal formula and to regulate pole attachments independently. Kansas and Missouri follow the FCC pole attachment framework. California has elected
to separately regulate pole attachments and pole attachment rates. FCC action may affect the rates paid for pole attachments by our Kansas City operations, and may indirectly affect the way in which
the state of California regulates pole attachments. It also could increase our costs for such attachments.

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Cable
operators are subject to longstanding cable copyright obligations where they pay copyright fees for some types of programming that are considered secondary retransmissions. The copyright fees
are updated from time to time, and are paid into a pool administered by the United States Copyright Office for distribution to qualifying recipients.

There
are numerous other regulations applicable to cable operators and/or to cable systems that apply in diverse ways. For example, the FCC has adopted a rule that governs the disposition of inside
wiring installed by a cable operator in multiple dwelling units when another cable provider seeks to serve a customer there. The FCC also has invalidated exclusivity provisions in agreements between
multiple dwelling unit owners and cable providers (the FCC is still considering proposals to prohibit related exclusive marketing agreements and bulk billing arrangements altogether). The FCC also has
adopted rules to promote the use of plug-and-play televisions and to eliminate the need for set top boxes, but is reassessing its policies in light of rapid changes in
technology and the emergence of broadband access to video content through the Internet.

The
FCC has so far declined to require that cable operators allow unaffiliated Internet service providers to gain access to customers by using the network of the operator's cable system. The FCC also
has considered the benefits of a requirement that cable operators offer programming on their systems on an a la carte or themed basis, but to date has not adopted regulations requiring such action.
These matters may resurface in the future, particularly as the "over-the-top" market grows. In light of the fact that programming is increasingly being made available through
Internet connections, some cable operators have considered their own a la carte alternatives. Content owners with linear channels also are moving toward greater "on demand" programming, offerings that
maintain the value of their linear channels for customers.

The
outcome of pending matters cannot be determined at this time but can lead to increased costs for the Company in connection with our provision of cable services, and can affect our ability to
compete in the markets we serve.



During
2010, SureWest TeleVideo, SureWest CLEC and our Kansas City operations provided retail Internet services, and/or facilities for the transport of Internet services.

The
provision of Internet access services is not significantly regulated by either the FCC or the state commissions. However, the FCC has been moving toward the imposition of some controls on the
provision of Internet access. In 2002, in part to place cable modem service and Digital Subscriber Line ("DSL") service on an equal competitive footing, the FCC asserted jurisdiction
over these services as "information services" under Title I of the Communications Act, and removed them from treatment under Title II of the Act, but to date it has not determined what regulatory
framework, if any, is appropriate for Internet services under Title I.

The
FCC has also adopted policy principles to signal its objectives with respect to high speed Internet and related services. These principles are intended to encourage broad customer access to the
content and applications of their choice, to promote the unrestricted use of lawful equipment by users of Internet services and to promote competition among providers. Some parties have sought action
by the FCC to convert these policy principles to formal rules.

The
FCC has used its authority in individual Internet-related situations through ad hoc decision making. For example, it has fined providers who have engaged in network management practices that
affect, and in some cases restrict, customers' use of the Internet or their access to content. In 2009, the FCC proposed to enact rules related to Internet access services, relying in part on the
policy principles that it had earlier adopted, but expanding their reach and adding additional provisions. The adoption of the rules as they have been proposed would prohibit discrimination with
respect to applications providers, among other things, subject to reasonable network management by an Internet access service provider.

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The Federal appeals court decision in April 2010 reassessed the FCC's authority over Internet services under the Communications Act, and invalidated action taken by the FCC
that was based on authority that the FCC thought it possessed. The FCC continues to evaluate its jurisdictional options in light of this decision, and it has continued to assert jurisdictional
authority in some areas related to the promotion of an open Internet. Its adoption of rules in this regard in December 2010, has been appealed to a Federal appeals court. The extent of the FCC's
jurisdiction in connection with the Internet will not be resolved for some time. The Company is unable to predict the outcome of current proceedings.

The
FTC is currently assessing certain advertising and marketing practices of Internet-related companies. A recent FTC report encourages disclosure by providers about the way in which search-related
information of a consumer may be used for targeted marketing of goods and services, and further encourages these providers to obtain prior consent from consumers for such use. It also has issued a
report promoting options for Internet users to prohibit the tracking of their usage. It is currently unclear whether the FTC initiatives will lead to new rules or new law.

The
outcome of pending matters cannot be determined at this time but can lead to increased costs for the Company in connection with our provision of Internet services, and can affect our ability to
compete in the markets we serve.

Telecom



The Telecom segment includes SureWest Telephone and SureWest Long Distance, which provide landline telecommunications services, wholesale access
services, domestic and international long distance services and certain non-regulated services. The services provided by the subsidiaries in this segment are available only in the
Sacramento region. SureWest Telephone, which is the principal operating subsidiary of the Telecom segment, provides local services, regional toll telephone services, network access services and
certain non-regulated services. Some services are provided through connections with other carriers serving adjacent areas, including AT&T, and also through service agreements with numerous
interexchange carriers, including national interexchange carriers. SureWest Long Distance provides long distance services. Revenues from this segment have decreased as a percentage of our consolidated
revenues from continuing operations over the past several years due to declining voice RGUs (and a corresponding reduction in the use of services) and most recently, the acquisition of Everest, which
is included in the Broadband segment. In addition, many customers are choosing to subscribe to our Broadband Digital Phone offering instead of the traditional circuit-switched phone service offered by
SureWest Telephone. Despite these events, we expect this segment to continue to provide a large proportion of our earnings in 2011.

The
Telecom segment will continue to experience decreases in access revenues through 2011 due to scheduled reductions in California High Cost Fund ("CHCF") subsidies and the elimination of transport
interconnection revenue effective January 1, 2011. We anticipate Telecom revenue declines to slow over the next several years with the completion of the phased subsidy reductions. Despite these
events, during 2011 we expect this segment to continue to generate the majority of our income from continuing operations.

SureWest
Telephone continues to benefit from past investments to enhance the copper network and build an advanced fiber network, creating a next-generation platform. Through our network,
we offer services such as fiber-optics-based high-speed Internet, customized data and Ethernet transport services, data center and disaster recovery solutions, traditional landline and
scalable IP communications platform. As a result, declines in business revenues have slowed as the climate for small and medium sized businesses begins to stabilize. Additionally, we supply wholesale
access and DSL services through our network to the Broadband segment, enabling them to offer high-speed Internet, VoIP, video and wireless backhaul

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services
to customers within the Telecom service territory. The expansion of the Broadband segment customer base and backhaul services has caused wholesale revenues to grow over the past three years.

SureWest
Telephone operates as an ILEC with a service area of approximately 83 square miles, covering Roseville and Citrus Heights, California, and adjacent areas in Placer and Sacramento Counties. We
hold a non-exclusive perpetual franchise granted by Section 7901 of the California Public Utilities Code. The area served by SureWest Telephone has been one of the most rapidly
growing areas in California during the past two decades causing it to attract new competitors, but the pace of growth has slowed in recent years as the area has become more developed and as the
economy has moved through a recession.

SureWest
Telephone provides services to residential, business and carrier customers, and continues to be subject to the competitive and regulatory challenges faced by ILECs both nationally and in
California. As a result of competitive pressures, SureWest Telephone experienced a 25% decrease in voice RGUs and a 7% decline in business customers from December 31, 2009 to
December 31, 2010. As of December 31, 2010, SureWest Telephone served approximately 28,900 voice RGUs and approximately 7,900 business customers. We believe that the economic downturn in
the area in recent years, expanding competition and service substitution have impacted, and will continue to reduce, the number of voice RGUs and business customers.

SureWest
Long Distance offers intrastate, interstate and international long distance services, including calling card and 800 services. SureWest Long Distance is a resale business that utilizes other
national and international carriers for wholesale transport, switching and other capabilities. SureWest Long Distance maintains agreements with Sprint Communications Company L.P. and
Level 3 Communications, LLC to diversify its risks related to its wholesale providers. The rates offered to SureWest Long Distance by these companies are competitive; however, changes in
the wholesale marketplace in the recent past have provided recurring opportunities to long distance resellers to further reduce their costs.



In recent years, competition to serve customers in the SureWest Telephone service area has increased significantly. SureWest Telephone competes
against AT&T and a number of other certificated carriers, Comcast and numerous other companies in both the business and residential telecommunications and information transport markets in its
telephone service area. Its competitors offer traditional telecommunications services as well as IP-based services and other emerging data-based services. Some competitors have
extended their own network facilities in the SureWest Telephone service area. Changes in technology have made it possible for customers to receive services in new ways at competitive rates. To meet
the competition, SureWest Telephone has responded in part by introducing new services and service "bundles", offering services in convenient groupings with package discounts and billing advantages and
by investing in its network and business operations. Changing technology requires that we continue to adapt our network and the manner in which we provide service. Within our telephone service area,
services are provided over an integrated network making extensive use of optical fiber. SureWest Telephone deploys fiber optic facilities to broaden the reach and capacity of our services requiring
additional bandwidth. In some instances, fiber optics is deployed directly to a customer's premises. Because bandwidth is limited by distance when utilizing copper facilities, we are also deploying
equipment throughout our service area to enable the improved provision of services over copper. Certain of our facilities take advantage of IP, which allows for more efficient use of bandwidth.

See
Item 7"Management's Discussion and Analysis of Financial Condition and Results of Operations" for further discussion regarding SureWest Telephone's revenues that are subject to
the competitive environment in which SureWest Telephone operates.

We
anticipate that our businesses will continue to experience competition and that the nature and extent of such competition will increase. Competitors to the SureWest Telephone business include
competitive local exchange carriers, interexchange carriers (including interexchange carriers which serve customers directly

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without
using facilities of local exchange carriers), traditional video providers expanding into voice and data services, wireless service providers, providers of IP-based calling services
(including SureWest Broadband), customers which are telecommunications self-providers and a range of other providers that specialize in certain niche areas of telecommunications.
Technology change has accelerated the pressure on established carriers, including SureWest Telephone, by virtue of software-defined businesses and innovations related to packet switching and the use
of the Internet and IP capabilities.



Some of the general aspects of telecommunications regulation on the Federal and state levels are outlined above in the discussion of regulation as it
applies to the Broadband segment. SureWest Telephone, as an ILEC, is subject to significant regulation by both the CPUC and the FCC. In particular, SureWest Telephone's revenues are influenced greatly
by the actions of the CPUC and the FCC. However, since SureWest Telephone is not a retail provider of Internet access service, the FCC's actions to regulate certain aspects of how Internet service is
made available are expected to have little direct impact on it.

Intrastate
telecommunications service rates of SureWest Telephone are subject to regulation by the CPUC. The provision of access to the networks of interexchange carriers for long distance calling is
governed by access tariffs and by intercarrier agreements, which are subject to the jurisdiction of the CPUC or FCC, or both, depending upon the nature of the transmissions. SureWest Telephone has a
tariff on file with the FCC for all elements of interstate access services except carrier common line charges, for which SureWest Telephone concurs with the tariff of the National Exchange Carrier
Association.

The
characterization of traffic as interstate or intrastate, and as a telecommunications or information service has been a significant source of dispute among carriers and others in recent years, as
those characterizations can impact the regulatory treatment of the traffic and the payment obligations of the providers which are involved. The characterization of: (i) traffic involved in
intercarrier interconnection, (ii) Internet traffic and (iii) traffic that utilizes IP and other transmission technologies are examples of issues that are currently subject to analysis
on the state and federal levels, and that are expected to be subject to regulatory action in the future. Both the FCC and CPUC have initiated proceedings to evaluate the appropriate level of
regulation for providers of telecommunications services and for IP-enabled services. In addition, various proceedings at the FCC are pending that could lead to significant alteration of
the existing compensation arrangements among providers of telecommunications services, and that could adversely impact the amount of the payments we receive from carriers and others for use of our
network.

The
FCC monitors SureWest Telephone's interstate earnings through the use of annual cost separation studies prepared by SureWest Telephone, which utilize estimated cost information and projected
demand usage. The FCC establishes rules that carriers must follow in the preparation of the annual studies. Additionally, under current FCC rules governing rate making, SureWest Telephone is required
to establish interstate rates based on projected demand usage for its various services and determine the actual earnings from these rates once actual volumes and costs are known.

With
respect to its regulatory authority over SureWest Telephone's rates, the CPUC also has the power, among other things, to establish terms and conditions of intrastate service, to prescribe uniform
systems of accounts and to regulate the mortgaging or disposition of public utility properties.

A
CPUC decision in August 2005 allowed SureWest Telephone to continue receiving our $11,500 annual interim draw from the CHCF. The CHCF was previously authorized by the CPUC to offset SureWest
Telephone's intrastate regulated operating expenses on an interim basis. In August 2006, we requested permission from the CPUC to implement a graduated phase-down of our annual $11,500
interim draw. In September 2007, the CPUC issued Decision 07-09-002 which provides for SureWest Telephone to phase-down its interim annual CHCF draw over a
five-year period. The phase-down of the interim draw

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began
in January 2007, initially reducing the annual $11,500 interim draw to $10,200, and in each subsequent year will be incrementally reduced by $2,040.

In
an ongoing proceeding relating to the New Regulatory Framework (under which SureWest Telephone has been regulated since 1996), the CPUC adopted Decision 06-08-030 in 2006,
which grants carriers broader pricing freedom in the provision of telecommunications services, bundling of services, promotions and customer contracts. This decision adopted a new regulatory
framework, the Uniform Regulatory Framework ("URF"), which among other things (i) eliminates price regulation and allows full pricing flexibility for all new and retail services except basic
residential services, which could only be raised up to $3.25 per year for 2009 and 2010 as described below, (ii) allows new forms of bundles and promotional packages of telecommunication
services, (iii) allocates all gains and losses from the sale of assets to shareholders and (iv) eliminates almost all elements of rate of return regulation, including the calculation of
shareable earnings. On September 18, 2008, the CPUC adopted Decision 08-09-042, which allows URF ILECs to increase their basic residential rate by up to $3.25 per year
over the next two years. Beginning January 1, 2011, the URF ILECs are allowed full pricing flexibility for the basic residential rate. On December 31, 2010, the CPUC issued a ruling to
initiate a new phase to assess whether, or to what extent, the level of competition in the telecommunications industry is sufficient to control prices for the four largest ILECs in the state,
including SureWest Telephone. The CPUC's actions in this and future proceedings could lead to new rules and an increase in government regulation.

In
December 2007, the CPUC issued a final decision in a proceeding investigating the continued need for an intrastate access element called the transport interconnection charge ("TIC"). The final
decision capped SureWest Telephone's intrastate access charges through 2010 and the TIC was eliminated effective January 1, 2011. SureWest Telephone will have an opportunity to recover all or
part of our lost TIC revenue elsewhere, including residential rate adjustments, as well as through growth of our Broadband segment. We anticipate a reduction in our 2011 intrastate access revenues of
approximately $2,050.

These
actions of the CPUC and of the FCC, as noted above, can affect the rates charged for access and interconnection, and, as a result, the revenues we derive from access and related services.
SureWest Telephone's future operations also may be impacted by other proceedings at the FCC and CPUC, including proceedings that address interstate access and other rates and charges, the nature of
interconnection between ILEC carriers and others, the collection and distribution of support payments required to assure universal access to basic telephone services, the charges that can be assessed
for new forms of service that directly or indirectly utilize carrier networks, the expansion of broadband services, the treatment of Internet access and VoIP services as telecommunications or
information services under the Communications Act and the promotion of Internet openness (sometimes characterized as network neutrality). The general nature of regulation of telecommunications
companies, including SureWest Telephone, is also addressed above in the section captioned BroadbandRegulation.

The
long distance business is recognized as being fully competitive and there are many providers of long distance services. Because of the level of competition, regulation of this area of the
telecommunications business is light or has been removed altogether. Where it exists, regulation is focused on specific public policy concerns, such as customer account slamming and other consumer
protection issues, rather than the rates, terms and conditions of service.

The
FCC has opened a number of investigative proceedings to establish policies and/or rules to maintain and promote universal service, to reform the structure of intercarrier compensation and to
address the provision of broadband services. Further regulatory actions with respect to these matters may have a material impact on us. We will continue to monitor these matters and the potential
effects on our consolidated financial position and results of operations.

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Current Business Developments



In February 2009, we sold our fifty-two wireless communications towers ("Tower Assets") owned by our subsidiary West Coast
PCS, LLC ("West Coast PCS") to Global Tower Partners. West Coast PCS was a component of our Broadband segment. The sale was completed for an aggregate cash purchase price of $9,222, resulting
in a gain of $2,525, net of tax. Proceeds from the sale of the Tower Assets were used to repay a portion of outstanding long-term debt.



In May 2008, we completed the sale of the operating assets of our Wireless business, SureWest Wireless, to Verizon Wireless ("Verizon") for an
aggregate cash purchase price of $69,746, resulting in a gain of $18,864, net of tax. Under the agreement, Verizon acquired the spectrum licenses and operating assets of SureWest Wireless, excluding
our owned communication towers. SureWest Wireless was previously reported as a separate reportable segment.



In February 2008, we acquired 100% of the issued and outstanding stock of SureWest Kansas Inc., formerly Everest Broadband, Inc. for a
total purchase price of $181,459, including transaction costs. Subsequent to the acquisition, the Kansas City operations have been included in our Broadband segment and consolidated results of
operations. SureWest Kansas is a competitive provider of high-speed data, video and voice services in the Kansas City area. The addition of our Kansas City operations accelerates our
growth strategy and has positioned us as a premier provider of network services to residential and business customers in the markets we serve.

Executive Officers of the Registrant

Our executive officers are appointed by, and serve at the discretion of, our board of directors. Each executive officer is a full-time
employee. There is no family relationship between any of our executive officers or directors. Our executive officers as of February 1, 2011 were as follows:

Steven C. Oldham; age 60; President and Chief Executive Officer

Mr. Oldham has served as President and Chief Executive Officer since January 2006 and as a member of the Board of Directors since 2004. Prior
to joining the Company,
Mr. Oldham served from 2002 to 2005 as a Senior Advisor for The Brattle Group, which provides consulting services in economics, finance and regulation. He also served as Senior Vice President,
Energy Supply for Sierra Pacific Resources, where he worked for 27 years in various positions of increasing responsibility.

Fred A. Arcuri; age 58; Senior Vice President and Chief Operating Officer

Mr. Arcuri has served as Senior Vice President and Chief Operating Officer since January 2006. From 2002 to 2005, he served as Senior Vice
President and Chief Operating Officer of SureWest Broadband, after being elected a Vice President in 2000.

L. Scott Sommers; age 53; Senior Vice President, Finance and Corporate Development

Mr. Sommers has served as Senior Vice President, Finance and Corporate Development since March 2008. Prior to his appointment to Senior Vice
President, he served as Vice President, Treasurer since he joined the Company in 2006. Prior to joining the Company, Mr. Sommers served from 2005 to 2006 as Managing Director of Investment
Banking for Cantor Fitzgerald. Before joining Cantor Fitzgerald, Mr. Sommers served as First Vice President for Mellon Financial from 1998 to 2005.

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Scott K. Barber; age 50; Vice President and General Manager of Operations, California

Mr. Barber has served as Vice President and General Manager of Operations, California since March 2008. Prior to his appointment to General
Manager of Operations, California, he served as Vice President, Network Operations from 2003 to 2008 and as Executive Director, Network Services from 2000 to 2003.

Dan T. Bessey; age 45; Vice President and Chief Financial Officer

Mr. Bessey has served as Chief Financial Officer since March 2008 after being appointed to Vice President, Finance in 2007. Prior to his
appointment to Vice President, he served as Controller from 2003 to 2007 and as Director of Corporate Finance from 2000 to 2003.

Edwin B. Butler; age 47, Vice President, Sales

Mr. Butler was named Vice President, Sales in December 2009. Prior to his appointment to Vice President, he served as Executive Director,
Business Sales Kansas since he joined the company in 2008 as part of our acquisition of Everest. Prior to joining the Company, Mr. Butler served as the Vice President, Business Solutions for
Everest from 2002 to 2008.

Timothy J. Dotson; age 50; Vice President and Chief Information Officer

Mr. Dotson has served as Vice President, Chief Information Officer since March 2007. Prior to his appointment to Vice President, he served in
various leadership roles with increasing responsibilities in Information Technology for over sixteen years with the Company. He served as Chief Information Officer from 2006 to 2007, Executive
Director Information Technology Solutions from 2004 to 2006 and Information Technology Director from 2002 to 2004.

Peter C. Drozdoff; age 55; Vice President, Marketing

Mr. Drozdoff has served as Vice President, Marketing since 2002. From 2000 to 2002, he served as Executive Director, Corporate Marketing.

Kenneth E. Johnson; age 47; Vice President and Chief Technology Officer

Mr. Johnson was named Chief Technology Officer in November 2010. Prior to his appointment as Chief Technology Officer, he served as Vice
President, General Manager of Operations, Kansas since February of 2008. Mr. Johnson joined the Company as part of our acquisition of Everest in 2008. Prior to joining the Company,
Mr. Johnson served as the Chief Technology Officer for Everest from 2003 to 2008.

Karlyn S. Oberg; age 51; Vice President, Administration

Ms. Oberg has served as Vice President, Administration since September 2008. Prior to her appointment as Vice President, she served as
Executive Director, Enterprise Initiatives from 2006 to 2008. She also served as Director of Investor Relations from 2005 to 2006 and as Director, ITS Program Office from 2003 to 2005.

Darla J. Yetter; age 50; Corporate Secretary

Ms. Yetter was elected Corporate Secretary in 2003. Since 1994, she has served as Assistant to the President.

Available Information

Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K
and amendments to reports filed pursuant to Sections 13(a) or 15(d) of the Securities Exchange Act of 1934, as

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amended,
are available free of charge on our web site atwww.surw.com/ir/, as soon as reasonably practicable after we electronically file such material
with, or furnish it to, the Securities and Exchange
Commission ("SEC"). Our website also contains copies of our Code of Ethics and charter of each committee of our Board of Directors. Copies are also available free of charge upon request to SureWest
Communications, P.O. Box 969, Roseville, CA 95678, Attn: Investor Relations Manager. The information found on our web site is not part of this or any other report we file with or furnish
to the SEC. The public may read and copy any materials we file with the SEC at the SEC's Public Reference Room at 100 F Street, NE, Washington, DC 20549. The public may obtain
information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site that contains reports, proxy and
information statements, and other information regarding our filings at http://www.sec.gov.

Item 1A.    Risk Factors.

Our operations and financial results are subject to various risks and uncertainties, including but not limited to those described below, that could
adversely affect our business, financial condition, results of operations, cash flows and the trading price of our common stock.



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Item 1B.    Unresolved Staff Comments.

None.

Item 2.    Properties.

Our corporate headquarters and administrative offices are located in Placer County, California and consist of approximately 111,000 square feet of
owned office space. We also own office facilities and related equipment for administrative personnel, central office buildings, and operations with approximately 298,000 square feet of space in
Roseville, Citrus Heights, Granite Bay and other locations in Sacramento and Placer Counties in California, as well as approximately 20,000 square feet of space in Lenexa, Kansas in Johnson County. We
own approximately 21 acres of undeveloped land in Roseville, California.

We
lease approximately 77,000 square feet for central office facilities, operations and warehouse space in Sacramento County. Our leased Sacramento County facilities are primarily located at McClellan
Park. The terms of the McClellan Park lease were renewed January 1, 2011. Through the terms of the new lease agreement, the amount of leased square footage at McClellan Park decreased by over
70%, to approximately 58,000 square feet, primarily as the result of workforce consolidations into our other facilities in California. The leased McClellan Park facilities are utilized by our
Broadband segment.

We
lease an approximate 55,000 square foot facility in Lenexa, Kansas which is utilized by our Broadband segment. We have appropriate easements, rights of way and other arrangements for the
accommodation of our pole lines, underground conduits, aerial and underground cables and wires. See Note 9 in the Notes to Consolidated Financial Statements and Part II,
Item 7"Management's Discussion and Analysis of Financial Condition and Results of Operations" for information regarding our lease obligations.

As
a result of efficiencies realized through cost controls and efficiencies gained through our recent acquisitions, certain of our owned and leased facilities are currently not being utilized to their
full capacity and can accommodate future growth and expansion. In connection with our efforts to evaluate and potentially monetize our under-utilized assets, during 2009 we identified and began to
actively market for sale an approximate 66,000 square foot building and 21 acres of undeveloped land, both in Roseville, California. During the quarter ended December 31, 2009, we completed our
plan to sell these assets and as a result they were classified as assets held for sale. As of December 31, 2010, these assets continue to be actively marketed for sale and classified as assets
held for sale.

In
addition to land and structures, our property consists of equipment necessary for the provision of communication services including central office equipment, customer premises equipment and
connections, pole lines, video head-end, remote terminals, aerial and underground cable and wire facilities, vehicles, furniture and fixtures, computers and other equipment. We also own
certain other communications equipment held as inventory for sale or lease.

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In
addition to plant and equipment that we wholly-own, we utilize poles, towers and cable and conduit systems jointly-owned with other entities, and lease space on facilities to other
entities. These arrangements are in accordance with written agreements customary in the industry.

Item 3.    Legal Proceedings.

We are not aware of any material pending legal proceedings, other than ordinary routine litigation incidental to our business, to which we are a
party or to which any of our property is subject. However, SureWest Telephone, one of our subsidiaries, is a regulated utility subject to ongoing regulatory proceedings which can have a material
impact on results of operations. For a detailed discussion regarding our ongoing regulatory proceedings, see Part II, Item 7"Management's Discussion and Analysis of
Financial Condition and Results of Operations".

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PART II

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

SureWest Communications' (the "Company", "we" or "our") common stock is traded on The NASDAQ Stock Market LLC ("NASDAQ") under the symbol
"SURW". As of
February 9, 2011, there were approximately 9,525 beneficial owners of the Company's common stock, based on the number of record holders of the Company's common stock. The following table
indicates the range of stock closing prices of the Company's common stock as reported on the NASDAQ, for each of the quarters ending on the dates indicated:

NASDAQ National MarketHigh

LowMarch 31, 2009

$
11.74

$
7.50June 30, 2009

$
11.05

$
6.22September 30, 2009

$
13.50

$
10.45December 31, 2009

$
12.55

$
8.23March 31, 2010

$
10.35

$
7.54June 30, 2010

$
8.70

$
5.97September 30, 2010

$
7.45

$
5.66December 31, 2010

$
10.75

$
7.11


In
April 2008, our Board of Directors announced the decision to discontinue the quarterly dividend payment of $0.25 per share for the foreseeable future in an effort to foster our growth strategy by
reinvesting the approximate $13,900 of annual dividend distributions back into the Company. Consequently, we did not pay any cash dividends on our common stock during the years ended 2010 or 2009.
Additional information concerning dividends may be found in "Selected Financial Data" in Item 6, which is incorporated herein by reference.

During
the year ended December 31, 2010, we did not sell any equity securities of the Company, which were not registered under the Securities Act of 1933, as amended.

Share Repurchases

As discussed in Part II, Item 7"Management's Discussion and Analysis of Financial Condition and Results of Operations",
our Board of Directors has authorized the repurchase of up to 3.5 million shares of our common stock. Shares are purchased from time to time in the open market or through privately negotiated
transactions, subject to overall financial and market conditions. As of December 31, 2010, we had remaining authorization from the Board of Directors to repurchase approximately
1.2 million additional outstanding shares.

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Performance Graph

The following graph shows a five-year comparison of cumulative total shareholder return of our common stock (assuming dividend
reinvestment) with the
Dow Jones US Telecommunications Index (a published index which measures the stock performance of U.S. companies in the Telecommunications sector) and the Russell 2000 Index. The comparison of total
return on investment (change in year-end stock price plus reinvested dividends) for each of the periods assumes that $100 was invested on December 31, 2005 respectively in each of
SureWest Communications, the Russell 2000 Index and the Dow Jones US Telecommunications Index. The stock performance shown on the graphs below is not necessarily indicative of future price
performance.

COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*Among SureWest Communications, the Russell 2000 Index  and the Dow Jones US Telecommunications Index

GRAPHIC



Fiscal Years Ending December 31,2005

2006

2007

2008

2009

2010SureWest Communications

$
100

$
109

$
71

$
49

$
43

$
46Russell 2000

$
100

$
118

$
117

$
77

$
98

$
124Dow Jones US Telecommunications

$
100

$
137

$
151

$
101

$
111

$
131


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Item 6.    Selected Financial Data.

The selected financial data set forth below should be read in conjunction with Item 7"Management's Discussion and Analysis of
Financial Condition and Results of Operations", our consolidated financial statements and the related notes, and other financial data included elsewhere in this annual report. Historical results are
not necessarily indicative of the results to be expected in future periods.

2010

2009

2008(1)

2007

2006(Dollars in thousands, except per share amounts)Statements of Income Data:Total operating revenues

$
243,499

$
241,700

$
230,373

$
174,257

$
170,982Operating income


15,194


13,573


15,141


8,387


10,416Net income:Income from continuing operations


3,355


667


826


5,223


2,004Income from discontinued operations(2)(3)(4)





2,499


18,107


57,717


3,734Net income

$
3,355

$
3,166

$
18,933

$
62,940

$
5,738Per Share DataEarnings Per Share and Dividends:Basic earnings per share:Income per share from continuing operations(5)

$
0.24

$
0.05

$
0.06

$
0.36

$
0.14Income per share from discontinued operations(5)





0.18


1.28


3.99


0.25Net income per basic share

$
0.24

$
0.23

$
1.34

$
4.35

$
0.39Diluted earnings per share:Income per share from continuing operations(5)

$
0.24

$
0.05

$
0.06

$
0.36

$
0.14Income per share from discontinued operations(5)





0.18


1.28


3.98


0.25Net income per diluted share

$
0.24

$
0.23

$
1.34

$
4.34

$
0.39Cash dividends per share(6)

$


$


$
0.50

$
1.00

$
1.00Balance Sheet Data:Total assets

$
603,181

$
622,863

$
633,809

$
484,767

$
445,750Long-term obligations

$
189,773

$
207,409

$
226,045

$
118,189

$
123,722Shareholders' equity

$
272,058

$
269,183

$
261,345

$
271,003

$
225,776Statements of Cash Flows Data:Net cash provided by operating activities from continuing operations

$
63,553

$
71,842

$
50,778

$
50,830

$
45,089Other Data:(7)Adjusted EBITDA(7a)

$
82,511

$
77,898

$
69,239

$
57,295

$
64,324Free cash flow(7b)

$
12,620

$
2,061

$
(30,636
)
$
(4,473
)
$
(2,760
)


(1)In
February 2008, we acquired 100% of the issued and outstanding stock of SureWest Kansas, Inc., formerly Everest
Broadband, Inc. (the "Kansas City operations") for a total purchase price of $181,459, including transaction costs. Subsequent to the acquisition date of February 13, 2008, the operating
results for the Kansas City operations have been included in our consolidated financial statements.


24

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Table of Contents

(2)In
February 2009, we sold our fifty-two wireless communication towers ("Tower Assets"). The operating results of our Tower Assets
are included in income from discontinued operations for the years ended on or before December 31, 2009.(3)In
May 2008, we sold the operating assets of our Wireless business, SureWest Wireless. The operating results and the net gain from the sale of
SureWest Wireless are included in income from discontinued operations for the years ended on or before December 31, 2009.(4)In
February 2007, we sold 100% of the stock of SureWest Directories, our directory publishing business. The operating results and the net gain
from the sale of SureWest Directories are included in income from discontinued operations for the years ended on or before December 31, 2007.(5)Shares
used in the computation of basic earnings per share are based on the weighted average number of common shares and restricted common
stock units ("RSUs") outstanding, excluding unvested restricted common shares and unvested RSUs. Shares used in the computation of diluted earnings per share are based on the weighted average number
of common shares, restricted common shares and RSUs outstanding, along with other potentially dilutive securities outstanding in each period.(6)In
2008, our Board of Directors announced its decision to discontinue the quarterly dividend payment of $0.25 per share subsequent to the
payment of the second quarter dividend paid to shareholders of record as of May 15, 2008. Additional information concerning dividends may be found in "Share Repurchases" in Item 5, which
is incorporated herein by reference. Cash dividends per share were based on the actual dividends per share, as declared by our Board of Directors. On each date that we paid a cash dividend to the
holders of our common stock, we credited to the holders of RSUs an additional number of RSUs equal to the total number of whole RSUs and additional RSUs previously credited to the holders multiplied
by the dollar amount of the cash dividend per share of common stock. Any fractional RSUs resulting from such calculation were included in the additional RSUs.(7)In
addition to the results reported in accordance with United States generally accepted accounting principles ("US GAAP" or "GAAP"), we
also use certain non-GAAP measures including Adjusted EBITDA and free cash flow to evaluate operating performance and to facilitate the comparison of our historical results and trends.
These financial measures are not a measure of financial performance under US GAAP and should not be considered in isolation or as a substitute for net income from continuing operations as a
measure of performance and net cash provided by operating activities as a measure of liquidity. The calculation of these non-GAAP measures may not be comparable to similarly titled
measures used by other companies. Reconciliations to the most directly comparable GAAP measure are provided below.(7a)Adjusted
EBITDA represents net income from continuing operations excluding amounts for income taxes; depreciation and amortization;
non-cash pension and certain post-retirement benefits; non-cash stock compensation; severance and other related termination costs; and all other
non-operating income and expenses. Adjusted EBITDA is a common measure of operating performance in the telecommunications industry. Adjusted EBITDA helps us evaluate our performance by
removing from our operating results non-cash items and items which do not relate to our core operating performance.


25

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Table of Contents

The
following table is a reconciliation of income from continuing operations to Adjusted EBITDA:


2010

2009

2008

2007

2006Income from continuing operations

$
3,355

$
667

$
826

$
5,223

$
2,004Add (subtract):Income tax expense (benefit)


3,354


2,006


3,139


(367
)

1,383Other (income) expense, net


8,485


10,900


11,176


3,531


7,029Depreciation and amortization


61,825


59,724


55,027


43,636


48,410Impairment loss











5,454


Non-cash pension and post-retirement expense (income)


1,503


2,591


(1,808
)

(1,159
)

4,279Non-cash stock compensation expense


2,845


2,010


879


977


1,219Severance and other related termination costs


1,144











Adjusted EBITDA

$
82,511

$
77,898

$
69,239

$
57,295

$
64,324


(7b)We
define free cash flow as net income from continuing operations plus depreciation and amortization expense less capital expenditures. Free
cash flow is used to measure operating cash flows available for corporate purposes after providing sufficient fixed asset additions to maintain current productive capacity.
The
following table is a reconciliation of net cash provided by operating activities from continuing operations to consolidated free cash flow:


2010

2009

2008

2007

2006Net cash provided by operating activities from continuing operations

$
63,553

$
71,842

$
50,778

$
50,830

$
45,089Less: Adjustments for all non-cash items and net changes in operating assets and liabilities


(60,198
)

(71,175
)

(49,952
)

(45,607
)

(43,085
)Income from continuing operations


3,355


667


826


5,223


2,004Add: Depreciation and amortization


61,825


59,724


55,027


43,636


48,410Less: Capital expenditures


(52,560
)

(58,330
)

(86,489
)

(53,332
)

(53,174
)Free cash flow

$
12,620

$
2,061

$
(30,636
)
$
(4,473
)
$
(2,760
)




26

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Table of Contents

Item 7.    Management's Discussion and Analysis of Financial Condition and Results of Operations.

(Amounts in thousands, except selected operating metrics and share and per share amounts)

Reference
is made to Part I, Item 1 "Note About Forward Looking Statements" and Item 1A "Risk Factors" which describes important factors that could cause actual results to differ
from expectations and non-historical information contained herein. In addition, the following Management's Discussion and Analysis ("MD&A") is intended to help the reader understand the
results of operations and financial condition of SureWest Communications (the "Company", "we" or "our"). MD&A should be read in conjunction with our audited consolidated financial statements and
accompanying notes to the consolidated financial statements ("Notes") as of and for each of the three years in the period ended December 31, 2010 included elsewhere in this Annual Report on
Form 10-K.

Throughout
MD&A, we refer to measures that are not a measure of financial performance in accordance with United States generally accepted accounting principles ("US GAAP" or "GAAP"). We believe
the use of these non-GAAP measures on a consolidated and segment basis provides the reader with additional information that is useful in understanding our operating results and trends.
These measures should be viewed in addition to, rather than as a substitute for, those measures prepared in accordance with GAAP. See the Non-GAAP Measures section below for a more
detailed discussion on the use and calculation of these measures.

Overview

We are one of the leading providers of integrated communications services and are the bandwidth leader in the markets we serve. We provide data,
video and voice services to residential and business customers in the greater Sacramento, California ("Sacramento region") and greater Kansas City, Kansas and Missouri areas ("Kansas City area"). We
continue to expand the use of optical fiber in our networks. We increasingly deploy our services by combining fiber-to-the-home ("FTTH") and
fiber-to-the-node ("FTTN") facilities with the use of Internet Protocol ("IP") based communications protocol. Our advanced telecommunications networks give us a
competitive edge that enables us to provide our customers with higher data speeds for Internet service and deploy multiple services at superior quality through our high bandwidth capacity. Our IP
based communication protocol enables us to provide dedicated bandwidth at symmetrical data speeds to each of our customers in the Sacramento region. We classify our operations in two reportable
segments: Broadband and Telecommunications ("Telecom").



Our Broadband segment generates approximately 72% of our consolidated operating revenues, primarily from subscriptions to our data, video and voice
services ("broadband services"). We market our broadband services to residential and business customers, either individually or as part of a bundled package. As of December 31, 2010, our
broadband services served
approximately 104,100 residential subscribers, of which 81% subscribed to two or more of our broadband services, including 46% that subscribed to all three of our broadband services ("triple play").
As of December 31, 2010, we had approximately 7,800 business customers. During 2010, new products and features including Advanced Digital TV ("ADTV"), faster data speeds, increased high
definition ("HD") channels, home networking and Internet security software created enhanced subscriber value for our broadband services. We continue to successfully offset industry-wide
declines of operating revenues in the Telecom segment with our long-term strategy to grow our Broadband operations.

Our
data service can provide high-speed Internet access at symmetrical speeds of up to 50 megabits per second ("Mbps"), depending on the nature of the network facilities that are
available, the level of service selected and the geographic market availability. Our advanced telecommunications networks gives us the ability to offer our customers both faster and symmetrical data
speeds, meaning Internet speeds downstream are the same as those upstream, than our competitors. Customers can use the faster speeds

27

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Table of Contents

for
enhanced online gaming and faster uploading and downloading of multimedia such as music, photos and video content. During 2010, our data customers continued to demand higher data speeds. As of
December 31, 2010, approximately 61% and 28% of our data customers subscribed to speeds of 5 Mbps and 15 Mbps or greater, respectively. In the Sacramento region, approximately 40% of our data
customers subscribe to plans with speeds at or higher than 15 Mbps. As of December 31, 2010, approximately 32% of the homes in the areas we serve subscribed to one of our high-speed
Internet services.

Our
video services range from a limited basic service to our new product offering ADTV, powered by Microsoft® Mediaroom. Depending on the service selected and subject to
geographic market availability, our video service subscribers have access to over 310 channels, including premium and pay-per-view channels (which include concerts, wrestling,
boxing, sporting events and movies); video on demand ("VOD") service (which allows access to a library of movies and the ability to start a selection at any time and to pause, rewind,
fast-forward and replay); premium VOD channels, music channels and an interactive, on-screen program guide (which allows the subscriber to navigate the channel lineup, the VOD
library and recorded programs). Digital video subscribers may also subscribe to our advanced services, which consist of high-definition television ("HDTV"), and/or digital video recorders
("DVR"). Our ADTV product, which is currently available in the Sacramento region only, includes a Whole Home DVR, which allows customers the ability to watch recorded shows on any television in the
house, record multiple shows at one time and utilize an intuitive on-screen guide and user interface. We anticipate the deployment of a Whole Home DVR in the Kansas City area during 2011.
As of December 31, 2010, approximately 23% of the homes in the areas we serve subscribed to one of our video services.

Our
Voice over Internet Protocol ("VoIP") digital phone product is available in the Sacramento market, including those customers residing in the Telecom segment service territory. Customers can select
individual services or bundled packages that may include unlimited local calling or unlimited
local and domestic long distance calling plans. Our voice products also include value-added services such as voicemail, call waiting, caller identification and many other calling feature options. As
of December 31, 2010, approximately 18% of the homes in our Sacramento market have subscribed to our VoIP phone service. We also offer traditional circuit-switched voice services in some of the
areas we serve. The total voice penetration in the markets we serve was approximately 24% as of December 31, 2010.

We
provide a variety of business communications services to small, medium and large business customers. The services we offer to our business customers include: fiber-optics-based
high-speed Internet, customized data and Ethernet transport services, data center and disaster recovery solutions, traditional landline and VoIP phone services, wireless backhaul and
digital TV. Utilizing our existing fiber-optic network, we have successfully secured contracts to serve over 350 wireless carrier backhaul sites, primarily in the Sacramento region. We anticipate
wireless backhaul revenue will continue to grow as wireless carriers, faced with escalating consumer and business demand for mobile broadband traffic, are forced to increase backhaul capacity.



Our Telecom segment, which operates only in the Sacramento region, offers a broad selection of telecommunications services including traditional
circuit-switched voice services, long distance services and a number of lightly-regulated or non-regulated services. Most long distance services are offered by our subsidiary SureWest Long
Distance, which is a reseller of long distance services.

The
Telecom segment provides a variety of business service offerings to small, medium and large business customers, including many services over our advanced fiber network. The services we offer to
our business customers include, but are not limited to high-speed Internet, customized data and Ethernet transport services, data center and disaster recovery solutions, traditional
landline and scalable IP communication systems. During 2010, business customers decreased 7% to 7,900, as a result of the strained economic conditions. We anticipate the Telecom segment's business
customer count will stabilize and begin to trend favorably as the real estate market initiates a recovery and commercial vacancy rates decline.

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Table of Contents

The
Telecom segment also provides wholesale access services through the use of its network to the Broadband segment, which enables the Broadband segment to offer high-speed Internet,
VoIP and video services to those customers within SureWest Telephone's service area. We anticipate the wholesale access services revenue stream will continue to increase as customers within the
Telecom segment service territory continue to demand broadband services.

Telecom
segment revenues have decreased as a percentage of our consolidated revenues from continuing operations over the past several years. During 2010, the Telecom segment generated 28% of our
consolidated revenues from continuing operations, a decrease of 5% from 2009. The decline in revenues is primarily the result of an industry wide trend of declining circuit-switched voice
Revenue-generating units ("RGUs") and a corresponding reduction in the use of related services. Many customers are choosing to subscribe to our Broadband Digital Phone product instead of the
traditional circuit-switched phone service offered by SureWest Telephone. In addition, the Telecom segment revenues have been impacted by scheduled reductions in the subsidies we receive from
governmental regulatory agencies. However, the Telecom segment remains an important part of our long-term growth strategy as it continues to generate the majority of our income from
continuing operations and free cash flow, which has been used in the current year to reduce long-term debt and fund network enhancements.

Current Business Developments

In connection with our efforts to evaluate and potentially monetize excess assets, during 2009 we identified and began to actively market for sale
certain of our real estate assets. These regulated assets, which are included in the Telecom segment, include 21 acres of undeveloped land and an office building. During the quarter ended
December 31, 2009, we completed our plan to sell these assets and as a result they were classified as assets held for sale. We expect the land will sell in the range of $3,000 to $5,000. In
connection with the classification to assets held for sale, the carrying value of the office building was reduced to its estimated fair value, less selling costs, based on the current market
conditions and listed selling price. As a result, an impairment charge of $1,199 was recorded against accumulated depreciation during 2009, in accordance with regulated telephone plant and equipment
composite group remaining life methodology. We evaluated the estimated fair value of the assets held for sale as of December 31, 2010 and determined there was not a significant change.
Therefore, no additional impairment charge was recorded during the year ended December 31, 2010. As of December 31, 2010, these assets continue to be actively marketed for sale and
classified as assets held for sale.

In
February 2009, we sold fifty-two wireless communications towers ("Tower Assets") owned by our subsidiary West Coast PCS, LLC ("West Coast PCS") to Global Tower Partners. West
Coast PCS was a component of our Broadband segment. The sale was completed for an aggregate cash purchase price of $9,222, resulting in a gain of $2,525, net of tax. Proceeds from the sale of the
Tower Assets were used to repay a portion of outstanding long-term debt.

In
May 2008, we completed the sale of the operating assets of our Wireless business, SureWest Wireless, to Verizon Wireless ("Verizon") for an aggregate cash purchase price of $69,746, resulting in
a gain of $18,864, net of tax. As part of the agreement, Verizon acquired the spectrum licenses and operating assets of SureWest Wireless, excluding our owned communication towers. SureWest Wireless
was previously reported as a separate reportable segment.

In
February 2008, we acquired 100% of the issued and outstanding stock of SureWest Kansas, Inc., formerly Everest Broadband, Inc. ("Everest", "SureWest Kansas" or the "Kansas City
operations") for a total purchase price of $181,459, including transaction costs. Subsequent to the acquisition, the Kansas City operations have been included in our Broadband segment and consolidated
results of operations. SureWest Kansas is a competitive provider of high-speed data, video and voice services in the Kansas City area. The addition of our Kansas City operations
accelerates our growth strategy and has positioned us as a premier provider of network services to residential and business customers in the markets we serve there, as well as in California.

29

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Table of Contents

Results of Operations

Consolidated Overview

The tables below reflect certain financial data (on a consolidated and segment basis) and select operating metrics for each of our reportable
segments as of and for the years ended December 31, 2010, 2009 and 2008.

Financial Data

%Change2010

2009

2008

2010 vs.
2009

2009 vs.
2008Operating revenues(1)Broadband

$
174,546

$
161,222

$
135,341


8
%

19
%Telecom


68,953


80,478


95,032


(14
)

(15
)Operating revenues


243,499


241,700


230,373


1


5Income (loss) from operationsBroadband


(14,793
)

(23,550
)

(27,261
)

37


14Telecom


29,987


37,123


42,402


(19
)

(12
)Income from operations


15,194


13,573


15,141


12


(10
)Income (loss) from continuing operationsBroadband


(12,873
)

(20,782
)

(23,684
)

38


12Telecom


16,228


21,449


24,510


(24
)

(12
)Income from continuing operations


3,355


667


826


403


(19
)Net cash provided by operating activities from continuing operations


63,553


71,842


50,778


(12
)

41Adjusted EBITDA(2)Broadband


37,473


25,590


12,899


46


98Telecom


45,038


52,308


56,340


(14
)

(7
)Adjusted EBITDA


82,511


77,898


69,239


6


13Free cash flow(2)Broadband


(7,196
)

(21,398
)

(49,930
)

66


57Telecom


21,146


24,459


20,527


(14
)

19Corporate


(1,330
)

(1,000
)

(1,233
)

(33
)

19Free cash flow


12,620


2,061


(30,636
)

512


107


(1)External
customers only.(2)A
non-GAAP measure. See the Non-GAAP Measures section below for additional information and reconciliation to the most
directly comparable GAAP measure.


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Table of Contents

Select Operating Metrics

%Change2010

2009

2008

2010 vs.
2009

2009 vs.
2008BroadbandTotal residential subscribers(1)(5)


104,100


103,100


103,000


1
%

0
%Broadband residential Revenue-generating units(2)(5)


236,100


228,500


220,300


3


4Data


99,400


98,300


97,100


1


1Video


61,800


58,900


60,000


5


(2
)Voice


74,900


71,300


63,200


5


13Total business customers(3)(5)


7,800


7,300


6,800


7


7TelecomVoice Revenue-generating units(4)


28,900


38,500


54,000


(25
)

(29
)Total business customers(3)


7,900


8,500


9,200


(7
)

(8
)
  (1)Total
residential subscribers are customers who receive one or more residential data, video or voice services from one of our subsidiaries in
the Broadband segment.(2)We
can deliver multiple services to a customer. Accordingly, we maintain statistical data regarding RGUs for video, voice and data, in
addition to the number of subscribers. For example, a single customer who purchases video, voice and data services would be reflected as three RGUs.(3)Total
business customers are customers who receive business data, voice or video services and represent a distinct customer account.(4)Voice
RGUs are residential customers who subscribe to one or more voice access lines.(5)During
the third quarter of 2010, we revised our methodology of counting Broadband residential subscribers, RGUs and business customer counts.
The revised methodology facilitates the consistent application of customer counts within the Broadband segment. Accordingly, the Broadband segment metrics previously reported for 2009 have been
revised to conform to current practice.


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Table of Contents

Consolidated Overview

Financial Data(In millions)

GRAPHIC

For
Broadband and Telecom results, see the Financial Data table above.



Our Broadband segment contributes the majority of our consolidated operating revenues as Telecom revenues continue to decline as a result of a
decline in traditional regulatory support mechanisms and continuing competitive challenges within the communications industry. As we maintain our focus on growing the Broadband segment, the Telecom
segment continues to comprise a smaller percentage of total revenues and adjusted EBITDA. However, the Telecom segment remains an important part of our long-term growth strategy as it
continues to generate the majority of our income from continuing operations and free cash flow, which has been used in the current year to reduce long-term debt and fund network
enhancements. Our long-term strategy remains to continue growing our Broadband operations to counter the industry-wide trend of declines in Telecom revenues.



Operating revenues in the Broadband segment increased $13,324 in 2010 compared to 2009 due to the continued growth in residential and business
services. Broadband residential revenues increased $5,998 in 2010 compared to 2009 as a result of a 3% increase in RGUs and higher pricing for video and data services during 2010. The launch of our
new ADTV video product in the Sacramento market in 2010 also contributed to the growth in residential revenue and RGUs.

We
offer a broadband VoIP phone service in the Sacramento market, including in the Telecom segment service territory. The VoIP phone service provides us with a competitive triple-play
offering and has mitigated past declines in consolidated operating revenue and voice RGUs by allowing us to migrate those customers to voice RGUs in the Broadband segment rather than those moving to
our competitors. Broadband voice RGUs in the Sacramento market increased 12% as of December 31, 2010 compared to the prior year.

Broadband
business revenues increased $6,655, or 17%, in 2010 compared to 2009. Business customers increased 7% as of December 31, 2010 compared to the prior year as a result of growth
primarily in the Kansas City market. The variety of our product offerings and our ability to offer customized service

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packages
to businesses of all sizes contributed to the current year growth in business revenue and will continue to provide us with new opportunities in the commercial market.

Utilizing
our existing fiber-optic network, we are able to acquire more diversified business customers and create new long-term revenue opportunities, such as wireless carrier backhaul and
data center services. Growth in these services also contributed to the current year increase in business revenue as the demand for wireless data continues to grow. We will continue to invest in new
opportunities as they emerge in order to develop and enhance the broadband infrastructure and the residential and business services we offer, while focusing on the generation of new customers and
increasing residential penetration on our existing marketable homes.

Operating
revenues in the Telecom segment decreased $11,525 in 2010 compared to 2009. Residential services decreased $7,228 in 2010 compared to 2009 and were largely impacted by our customers'
migration toward alternative communication services, including those offered by our Broadband segment, as discussed above, which contributed to a 25% decline in the Telecom segment voice RGUs as of
December 31, 2010. Business revenues decreased $1,297 in 2010 compared to 2009 as a result of a 7% decline in business customers due to the economic impact on small and medium sized businesses
in the California market. However, the decline was mitigated by higher pricing for data services in 2010, which were implemented during the third quarter. The decrease in operating revenues for the
Telecom segment was also impacted by the scheduled reduction in support received from the California High Cost Fund ("CHCF") of $2,040 during 2010 compared to 2009. See the Regulatory Matters section
below for a further discussion regarding the regulatory subsidies we receive.

The
Telecom segment also provides wholesale access services through the use of its network to the Broadband segment, which enables the Broadband segment to offer high-speed Internet, VoIP,
video and wireless backhaul services to those customers within SureWest Telephone's service area. These wholesale services are included as intersegment revenues and expenses in each of the respective
segments and eliminated in the consolidated statements of income.



Consolidated operating expenses, excluding depreciation and amortization, decreased $1,923 in 2010 compared to 2009. During the quarter ended
June 30, 2010, we implemented a workforce reduction initiative in which approximately 60 positions were eliminated as we continue to improve operating efficiencies and align our operating costs
with the decline in Telecom revenues. Affected employees were provided a range of benefits and resources, including severance. As a result, severance and other related termination costs of $1,428 were
incurred during 2010.

Cost
of services and products expense increased $2,642 in 2010 compared to 2009 largely due to increases in programming and network costs related to providing video and data services. These costs
result from an increase in programming fees per subscriber and the growth in business services. However, labor costs have declined as a result of a reduction in headcount through the workforce
reduction initiative and the outsourcing of certain network and property maintenance services in 2010.

Customer
operations and selling expense decreased $680 in 2010 compared to 2009. Sales and advertising costs declined as a result of a reduction in radio advertising in the current year. However,
selling costs, primarily sales labor and commissions, increased related to the launch and promotion of our new ADTV product during the first and second quarters of 2010.

General
and administrative expenses decreased $3,885 in 2010 compared to 2009. Labor costs decreased resulting from a reduction in headcount and a decline in pension expense associated with our
defined benefit pension plan ("Pension Plan"), which was offset in part by employee severance costs of $935 incurred during 2010 related to the workforce reduction initiative. Professional fees also
decreased as a

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Table of Contents

result
of lower annual rates and a reduction in information technology project support costs in the current year.

Our
consolidated depreciation and amortization expense increased $2,101 in 2010 compared to 2009 primarily due to the continued expansion of the network and success-based capital projects undertaken
within the residential and business broadband service territories. The change in depreciation and amortization expense was also impacted by a change in accounting estimate recorded during 2010, as
described below.

During
the first quarter of 2010, we completed our triennial review that evaluated the appropriateness of the estimated useful lives of our property, plant and equipment for all segments. The
evaluation considered our investment and business strategy, reliability and historical performance data of certain assets, as well as the impacts of competition and anticipated technological change.
As a result of this evaluation, effective January 1, 2010, we increased the estimated useful lives of general purpose software, general purpose hardware and certain central office equipment. We
decreased the lives of certain of our customer premise equipment and outside plant categories. During the year ended December 31, 2010, this change in estimate decreased consolidated
depreciation and amortization expense by $1,241 and increased consolidated net income by $741 ($0.05 per share).



Income from operations and adjusted EBITDA increased $1,621 and $4,613, respectively, in 2010 compared to 2009 as a result of the continued growth in
our broadband services and a reduction in operating expenses through cost containment efforts implemented during 2010. We continue to maintain positive adjusted EBITDA growth by successfully replacing
the declines in the Telecom segment with growth in our Broadband segment.



Certain amounts in our 2009 and 2008 consolidated financial statements have been reclassified to conform to the presentation of our 2010 consolidated
financial statements. Operating expenses have been reclassified for a change during the third quarter of 2010 in the classification of customer technical support costs from customer operations and
selling to cost of services and products. Prior period costs have been reclassified to conform to the current year presentation.

In
addition, the calculation of certain select operating metrics has been revised to reflect the consistent application of customer counts within the Broadband segment. Accordingly, where necessary,
prior period metric calculations have been revised to conform to current practice.

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Table of Contents

Segment Results of Operations

Broadband

2010

2009

$Change

%ChangeResidential revenues:Data

$
48,878

$
45,061

$
3,817


8
%Video


49,139


47,522


1,617


3Voice


26,461


25,897


564


2Total residential revenues


124,478


118,480


5,998


5Business


46,209


39,554


6,655


17Access


2,235


1,628


607


37Other


1,624


1,560


64


4Total operating revenues from external customers


174,546


161,222


13,324


8Intersegment revenues


564


438


126


29Operating expenses:Cost of services and products(1)


101,205


93,308


7,897


8Customer operations and selling


21,878


24,025


(2,147
)

(9
)General and administrative


17,199


20,518


(3,319
)

(16
)Total operating expenses


140,282


137,851


2,431


2Depreciation and amortization


49,621


47,359


2,262


5Loss from operations


(14,793
)

(23,550
)

8,757


37Loss from continuing operations


(12,873
)

(20,782
)

7,909


38Adjusted EBITDA(2)


37,473


25,590


11,883


46


(1)Exclusive
of depreciation and amortization.(2)A
non-GAAP measure. See the Non-GAAP Measures section below for additional information and reconciliation to the most
directly comparable GAAP measure.


Broadband Segment Overview

Adjusted EBITDA and loss from operations for the Broadband segment has continued to improve over the last three years and is reflective of our
long-term strategy to invest in and grow the Broadband business. The investment in our network over the last several years has created a next-generation platform, which enables
us to grow revenues through increased penetration of our existing network as well as create new long-term revenue opportunities with only nominal capital expenditures. We continue to
successfully migrate Telecom customers to our Broadband VoIP product mitigating the loss of Telecom voice RGUs. The successful launch during 2010 of our ADTV product in the Sacramento market and
switched digital video and DOCSIS 3.0 in our Kansas City market has enabled us to capture customers who seek the high data speeds and enhanced products our superior network provides. As a result,
data, video and voice revenues continued to increase for both residential and business services. Growth in business revenues significantly contributed to the increase in adjusted EBITDA in 2010 as a
result of an increase in business customers primarily in the Kansas City market. Data center and wireless carrier backhaul services in the Sacramento market also contributed to the increase in
business revenues. We anticipate continued growth in both data center and wireless carrier backhaul services as consumer demand for managed services and wireless data continues to increase.

In
addition, during 2010, we implemented a strategic restructuring designed to improve operating efficiencies and enhance our focus on the growth of the Broadband segment. This cost cutting initiative
resulted in cost savings as a result of a reduction in the workforce and reduced professional fees.

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Table of Contents

Broadband Segment Operating Revenues

Residential Revenues

Broadband residential revenues increased $5,998 in 2010 compared to 2009. The increase in Broadband operating revenues was due in part to the growth
of Broadband residential RGUs of 3% as of December 31, 2010 compared to 2009. Broadband residential revenues also increased as a result of higher pricing for video and data services during
2010. We are realizing the benefits of the investment we made in our network over the last several years. Our superior fiber network enables us to cost effectively provide our customers with faster
data speeds, offer new services and upgrade existing services as we continue to enhance the value of our broadband services for our customers. The launch of DOCSIS 3.0 in our Kansas City market
significantly enhanced our hybrid fiber coaxial ("HFC") network, which enables us to offer our customers faster data speeds and additional HD channels. The success of our ADTV product in our
Sacramento market has resulted in higher take rates for our triple-play services as a bundled package. We anticipate continued growth in residential broadband RGUs and average revenue per
user resulting from our VoIP phone service, our ADTV product which launched in January 2010 and an increase in residential fiber marketable homes in 2011 through the expansion of our network in our
Kansas City market.



We offer high speed Internet access at symmetrical speeds of up to 50 Mbps, depending on the nature of the network facilities that are available, the
level of service selected and the location. The reliability and high speeds of the data service in both the Sacramento and Kansas City markets enhance other services such as VoIP and Digital Phone,
where customers manage phone services through the online SureWest portal. Through the SureWest portal, customers can manage their VoIP or Digital Phone service and access a variety of value added
features and enhancements that are designed to take advantage of the speed of the Internet service we provide.

Our
residential data revenues increased $3,817 in 2010 compared to 2009 primarily as a result of a 1% increase in data RGUs and higher price points on our data services, as discussed above.



Our video services range from limited basic service to our newest product offering ADTV. ADTV is currently deployed through our copper and fiber
networks in the greater Sacramento region. The integration of the new Mediaroom platform includes a Whole Home DVR, which allows customers the ability to watch recorded shows on any
television in the house,
record multiple shows at one time and utilize an intuitive on-screen guide and user interface. Our services primarily are delivered utilizing FTTH and FTTN networks, which allow us to
offer a high quality experience with digital TV packages. Our full digital video package provides access to approximately 330 and 320 channels in our California and Kansas City markets, respectively,
including premium and pay-per-view channels, VOD service, premium VOD channels, music channels and an interactive, on-screen program guide. Digital video
subscribers can also subscribe to additional services, including a DVR and HDTV. We offer 74 and 67 HD channels in our California and Kansas City markets, respectively.

Residential
video revenues increased $1,617 in 2010 compared to 2009. Revenues increased as a result of a 5% increase in video RGUs and higher pricing on many of our video service offerings, as
discussed above. During 2010, we continued to enhance the subscriber value for our broadband services by offering new products and features including ADTV, a Whole Home DVR, faster data speeds and
additional channels including premium, VOD and HD channels.

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We offer phone services that provide local and long-distance calling and include features such as caller ID and call waiting. Our VoIP
phone service is offered in the Sacramento market and is available in packages ranging from basic telephone service to unlimited local and domestic long distance calling plans. Nearly all of our VoIP
phone service plans include enhanced calling features such as caller ID on TV, Find Me/Follow Me, sequential ringing and selective call acceptance and rejection. Voice RGUs in the Sacramento market
increased 12% as of December 31, 2010 compared to 2009. As of December 31, 2010, approximately 18% of the homes in our Sacramento market have subscribed to our VoIP phone service. Our
VoIP phone service in the Sacramento market offers our customers, including those in the Telecom service territory an alternative to traditional circuit switched land line service and presents our
customers with a more competitive triple-play offering with increased options and multiple packages.

Residential
voice revenues increased $564 in 2010 compared to 2009 primarily as a result of growth in voice RGUs of 5% in that same time period. The continued success in migrating telecom customers to
our Broadband VoIP product significantly contributed to the increase in voice RGUs.

Business Revenues

We provide a variety of business communications services to small, medium and large business customers. The services we offer to our business
customers include: fiber-optics-based high-speed Internet, customized data and Ethernet transport services, data center and disaster recovery solutions, traditional landline and VoIP phone
services, wireless backhaul and digital TV.

Business
revenues increased $6,655 due primarily to a 7% increase in business customers as of December 31, 2010 compared to 2009. Our Kansas City operations contributed a significant portion of
the business revenue growth. Average monthly revenue per user ("ARPU") also increased 6% in 2010 compared to 2009 as a result of new revenue opportunities such as wireless backhaul services.

Wireless
backhaul revenue also contributed to the growth in the business revenue during 2010. We anticipate backhaul revenue will continue to grow as wireless carriers, faced with escalating consumer
and business demand for mobile broadband traffic, are forced to increase backhaul capacity. Our existing fiber-optic network provides the capacity to secure new wireless carrier backhaul agreements
and create new long-term revenue opportunities without significant additional capital expenditures.

Access Revenues

Access revenues increased $607 in 2010 compared to 2009. The increase was mostly attributable to cash settlements received during the quarter ended
March 31, 2010 from certain telecommunications carriers relating to disputed carrier access charges which were fully reserved in prior year periods.

Broadband Segment Operating Expenses

Total operating expenses in the Broadband segment increased $2,431 in 2010 compared to 2009.

Cost
of services and products (exclusive of depreciation and amortization) increased $7,897 in 2010 compared to 2009. The increase in costs in the current year was largely due to direct costs incurred
to provide our voice, video and data services. Video programming fees are paid to programming networks to license the programming we distribute to our video customers. Video programming costs continue
to increase due to the growth in residential video RGUs, the expansion of channels offered and an increase in costs on a per subscriber basis and per program channel, particularly for sports and HD
channels.

We
also incur network access and transport costs to provide data and voice services to our customers. Transport costs increased as a result of growth in our business customer base primarily in the
Kansas City market. In addition, due to the rising demand for our VoIP product in the Sacramento market and the

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additional
capacity required to handle the increasing volume of data usage, network access costs have increased in the current year period. Network access costs include costs paid to external vendors
as well as our Telecom segment, in accordance with the provisions of a wholesale access agreement. The wholesale access agreement enables the Broadband segment to offer high-speed
Internet, VoIP, video and wireless backhaul services to its customers within the Telecom segment territory.

Customer
operations expense decreased $2,147 in 2010 compared to 2009. Product marketing and advertising costs declined as a result of a reduction in radio advertising in the current year. However,
selling expenses, primarily salaries and wages, commissions and customer events, increased to promote the launch of our new ADTV product during 2010.

General
and administrative expense decreased $3,319 in 2010 compared to 2009. The decrease in costs was primarily due to (i) a decline in labor costs resulting from a reduction in headcount,
(ii) a decrease in professional fees and (iii) a reduction in information technology costs related to system maintenance and development. However, severance costs of approximately $451
were incurred during 2010 related to the workforce reduction initiative, as discussed in the consolidated overview section above.

Depreciation
and amortization increased $2,262 in 2010 compared to 2009 due primarily to the continued expansion and enhancement of the broadband network and success-based capital projects.

Telecom

2010

2009

$Change

%ChangeResidential

$
17,276

$
24,504

$
(7,228
)

(29
)%Business


34,160


35,457


(1,297
)

(4
)Access


16,895


19,727


(2,832
)

(14
)Other


622


790


(168
)

(21
)Total operating revenues from external customers


68,953


80,478


(11,525
)

(14
)Intersegment revenues


20,637


19,897


740


4Operating expenses:Cost of services and products(1)


23,012


26,977


(3,965
)

(15
)Customer operations and selling


9,938


8,843


1,095


12General and administrative


14,449


15,067


(618
)

(4
)Total operating expenses


47,399


50,887


(3,488
)

(7
)Depreciation and amortization


12,204


12,365


(161
)

(1
)Income from operations


29,987


37,123


(7,136
)

(19
)Income from continuing operations


16,228


21,449


(5,221
)

(24
)Adjusted EBITDA(2)


45,038


52,308


(7,270
)

(14
)


(1)Exclusive
of depreciation and amortization.(2)A
non-GAAP measure. See the Non-GAAP Measures section below for additional information and reconciliation to the most
directly comparable GAAP measure.


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Table of Contents

Telecom Segment Overview

Telecom revenues continue to experience an overall decline resulting from an industry-wide trend of access line attrition and scheduled
reductions in the subsidies we receive from governmental regulatory agencies. Access revenues will continue to decline through 2011 due to scheduled reductions in the CHCF subsidy and the elimination
of transport interconnection revenue, which is effective January 1, 2011. However, we anticipate Telecom revenue declines to slow over the next several years as the scheduled phased reductions
of our subsidies are complete. Revenues earned by the Telecom segment through a wholesale access agreement with the Broadband segment increased during 2010. We anticipate the wholesale revenue stream
to continue to trend favorably as consumers within the Telecom segment service territory continue to demand more broadband services. As technology and the regulatory environment changes within the
communications industry, the Telecom segment will increasingly consist of services that generate higher margins such as business and wholesale services. Business and wholesale services comprised 61%
of total Telecom revenues at December 31, 2010 compared to 55% and 50% in 2009 and 2008, respectively.

Despite
the reduction in subsidies and industry-wide declines in access lines, the Telecom segment was able to maintain favorable margins during 2010 through cost containment efforts
including a strategic restructuring that reduced our consolidated workforce by approximately 60 positions and a reduction in professional fees. The Telecom segment also continues to contribute the
majority of our income from continuing operations and free cash flow.

Telecom Segment Operating Revenues

Residential Revenues

SureWest Telephone offers several different phone service options, from basic local service packages to unlimited California and nationwide
flat-rate plans. All of the plans include options for voicemail and other calling features such as caller ID and call forwarding. SureWest Telephone residential revenues decreased $7,228
in 2010 compared to 2009 as we continue to be impacted by the industry-wide decline in residential access lines and competition from wireless, wireline, and digital phone competitors
(including SureWest Broadband). Residential subscribers and voice RGUs declined 25% as of December 31, 2010 compared to the same period in 2009. We continue to mitigate additional voice access
line and operating revenue losses through our VoIP phone service offered to customers within the Telecom service area through our Broadband
segment. As a result, we expect a portion of the Telecom segment's voice revenue will continue to shift to the VoIP service being offered by our Broadband segment. As of December 31, 2010, 38%
of the decline in Telecom voice RGUs in 2010 was due to customers who have transferred to SureWest Broadband's VoIP phone service rather than moving to competitors. See the Broadband segment
residential revenue section above for a more detailed discussion regarding VoIP and other services offered by SureWest Broadband.

Business Revenues

We provide a variety of business service offerings to small, medium and large business customers, including many services over our advanced fiber
network. The services we offer to our business customers include, but are not limited to high-speed Internet, customized data and Ethernet transport services, data center and disaster
recovery solutions, traditional landline and scalable IP communication systems.

SureWest
Telephone business revenues decreased $1,297 in 2010 compared to 2009. The decrease in revenue was mostly due to the 7% decline in business customers which resulted from the strained economic
conditions for small and medium sized businesses and continued strong competitive pressures, as discussed above. The decrease in business revenue was mitigated in part by a price increase for data
services effective during the third quarter of 2010 resulting in an increase to ARPU of 4% as of December 31, 2010 compared to the same period in 2009.

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Access Revenues

Access revenues, which include interstate and intrastate switched access revenue, interstate common line ("CL") revenue and support
payments from the CHCF, decreased $2,832 in 2010 compared to 2009. As anticipated, CHCF support received during the year ended December 31, 2010 decreased $2,040 compared to the prior year as a
result of the scheduled reduction in subsidies received from the CHCF. Switched access revenue also decreased in 2010 compared to 2009 due to a decline in carrier access usage associated with the
reduction in access lines. See the Regulatory Matters section below for a more detailed discussion regarding SureWest Telephone's regulated revenues.

Intersegment Revenues

Intersegment revenues consist predominately of revenues earned through a wholesale access agreement between the Telecom and Broadband segments. The
Telecom segment supplies wholesale access services through its network to the Broadband segment, which enables the Broadband segment to offer high-speed Internet, VoIP, video and wireless
backhaul services to customers residing within the Telecom service territory. Wholesale access and Digital Subscriber Line ("DSL") intersegment revenue increased in 2010 compared to
2009 and is anticipated to continue to increase with heightened demand for the Broadband segment's VoIP and ADTV products offered in the Telecom segment service territory. See the Broadband operating
revenue section above for more detailed discussion of the Broadband revenues and product offerings.

Telecom Segment Operating Expenses

Total operating expenses for the Telecom segment decreased $3,488 in 2010 compared to 2009. During 2010, we implemented cost reduction initiatives in
an effort to improve operating efficiencies and align operating costs with the decline in Telecom revenues.

Cost
of services and products (exclusive of depreciation and amortization) decreased $3,965 in 2010 compared to 2009. Costs to support local and long distance services decreased as a result of the
decline in residential voice RGUs and business customers. Rent and utility costs also declined as a result of cost savings from a consolidation of office space. In addition, labor costs decreased due
to a reduction in headcount and the outsourcing of certain network and property maintenance services in 2010.

Customer
operations expense increased $1,095 in 2010 compared to 2009. The increase in the current year was mostly attributable to an increase in advertising, promotion, and sales force costs to
support product offerings in the Telecom segment service territory.

General
and administrative expense decreased $618 in 2010 compared to 2009. The decrease in costs was due primarily to (i) a reduction in professional fees as a result of lower annual rates,
(ii) a decline in pension expense associated with our frozen defined benefit pension plan and (iii) lower information technology project support costs in the current year. The decrease
was offset in part by employee severance costs of approximately $484 incurred during 2010 related to the workforce reduction initiative, as discussed in the consolidated overview section above.

Regulatory Matters

Revenues subject to regulation, which include such telecommunications services as local telephone service, network access service and toll service,
are derived from various sources, including:



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Certain
of our interstate telecommunications service rates are subject to regulation by the Federal Communications Commission ("FCC"). Interstate switched and special access rates are established
through a SureWest Telephone tariff filed with the FCC. For interstate CL charges, SureWest Telephone concurs with tariffs filed by National Exchange Carrier Association ("NECA"). Intrastate service
rates are subject to regulation by state commissions. Prices for intrastate telecommunications services are established through tariffs or through other regulatory mechanisms, including, in
California, service guides. Pending and future regulatory actions may have a material impact on our consolidated financial position and results of operations.



Under current FCC rules governing rate making, SureWest Telephone is required to establish rates for its interstate telecommunications services based
on projected demand usage for the various services. SureWest Telephone projects its earnings through the use of annual cost separation studies, which utilize estimated total cost information and
projected demand usage. Carriers are required to follow FCC rules in the preparation of these annual studies. SureWest Telephone determines actual earnings from its interstate rates as actual volumes
and costs become known. The FCC monitors SureWest Telephone's interstate earnings.

The
FCC requires SureWest Telephone to prepare and submit periodic cost separation studies related to certain NECA CL accounts receivable balances. As a result of the cost separation filings, SureWest
Telephone may change its estimates for certain NECA CL accounts receivable balances related to the prior year monitoring periods. During the years ended December 31, 2010 and 2009 we did not
record any significant changes in estimates related to prior year monitoring periods.

The
FCC was directed by Congress to develop a National Broadband Plan ("NBP") as part of the American Recovery and Reinvestment Act of 2009. In March 2010, after taking extensive public comment, the
FCC released the full text of its NBP, which contains policy recommendations on a variety of issues that the FCC has linked to expanded broadband deployment. The policy recommendations include guiding
principles to foster competition in broadband, telephone, wireless and cable services over the next decade, including recommendations related to universal service fund ("USF") reform, intercarrier
compensation, cable set-top boxes and spectrum reallocation, among others. The NBP recommendations most relevant to the Company include shifting the current USF mechanisms that support
universal voice telephone services to support of universal broadband deployment and the phased reduction of intercarrier access compensation levels to local reciprocal compensation levels, with a
potential phase-out of all such compensation
within ten years. Some of these recommendations only restate pre-existing FCC proposals in current rulemakings while others raise new issues. The FCC has begun some proceedings to
implement aspects of the National Broadband Plan.

In
an April 6, 2010 decision, a Federal appeals court found that the FCC lacked authority over certain Internet-related practices of Comcast. This decision came during a proceeding that had
been initiated by the FCC to adopt rules related to the conduct of providers of retail Internet services. Notwithstanding the Federal appeals court decision, on December 21, 2010, the FCC
adopted rules requiring that such providers honor certain operating principles, including principles of (i) transparency, (ii) no blocking, (iii) no unreasonable discrimination
and (iv) reasonable network management in connection with their Internet services. The FCC order has already been appealed.

In
addition, the FCC initiated action on February 8, 2011 to again consider reform of the current structure for intercarrier compensation and to consider rules for transitioning the current
universal service fund to support broadband deployment. The FCC's actions in these and future proceedings could significantly alter the structure of these arrangements, and affect the costs and
sources or revenue for affected service

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Table of Contents

providers.
Action in any of these proceedings could have a material impact on us. We will continue to monitor these matters, participate in them as we deem appropriate, and assess the potential impact
on our consolidated financial position and results of operations.



A CPUC decision in August 2005 allowed SureWest Telephone to continue receiving our $11,500 annual interim draw from the CHCF. The CHCF was
previously authorized by the CPUC to offset SureWest Telephone's intrastate regulated operating expenses on an interim basis. In August 2006, we requested permission from the CPUC to implement a
graduated phase-down of our annual $11,500 interim draw. In September 2007, the CPUC issued Decision 07-09-002 which provides for SureWest Telephone to
phase-down its interim annual CHCF draw over a five-year period. The phase-down of the interim draw began in January 2007, initially reducing the annual $11,500
interim draw to $10,200, and in each subsequent year will be incrementally reduced by $2,040. In 2010 our interim CHCF draw was $4,080. We anticipate our 2011 interim CHCF draw will be $2,040.

In
an ongoing proceeding relating to the New Regulatory Framework (under which SureWest Telephone has been regulated since 1996), the CPUC adopted Decision
06-08-030 in 2006, which grants carriers broader pricing freedom in the provision of telecommunications services, bundling of services, promotions and customer contracts. This
decision adopted a new regulatory framework, the Uniform Regulatory Framework ("URF"), which among other things (i) eliminates price regulation and allows full pricing flexibility for all new
and retail services except basic residential services, which limits increases to $3.25 per year during 2009 and 2010, (ii) allows new forms of bundles and promotional packages of
telecommunication services, (iii) allocates all gains and losses from the sale of assets to shareholders and (iv) eliminates almost all elements of rate of return regulation, including
the calculation of shareable earnings. Beginning January 1, 2011, the URF Incumbent Local Exchange Carriers ("ILECs") are allowed full pricing flexibility for the basic residential rate. On
December 31, 2010, the CPUC issued a ruling to initiate a new phase to assess whether, or to what extent, the level of competition in the telecommunications industry is sufficient to control
prices for the four largest ILECs in the state, including SureWest Telephone. The CPUC's actions in this and future proceedings could lead to new rules and an increase in government regulation.

In
December 2007, the CPUC issued a final decision in a proceeding investigating the continued need for an intrastate access element called the transport interconnection charge ("TIC"). The final
decision capped SureWest Telephone's intrastate access charges through 2010 and the TIC was eliminated effective January 1, 2011. SureWest Telephone will have an opportunity to recover all or
part of our lost TIC revenue elsewhere, including residential rate adjustments, as well as through growth of our Broadband segment. We anticipate a reduction in our 2011 intrastate access revenues of
approximately $2,050.



We are also subject to a number of regulatory proceedings occurring at the federal and state levels that may have a material impact on our
operations. The FCC and state commissions have authority to issue rules and regulations related to our business. A number of proceedings are pending or anticipated that are related to such
telecommunications issues as competition, interconnection, access charges, intercarrier compensation, broadband deployment, consumer protection and universal service reform. Some proceedings may
authorize new services to compete with our existing services. Proceedings that relate to our cable television operations include rulemakings on set top boxes, carriage of programming, industry
consolidation and ways to promote additional competition. There are various on-going legal challenges to the scope or validity of FCC orders that have been issued. As a result, it is not
yet possible to determine fully the impact of the related FCC rules and regulations on our operations.

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Non-Operating Items



Consolidated interest expense decreased $2,972 in 2010 compared to 2009, primarily due to a decrease in long-term debt and a decline in
interest rates on our outstanding debt subject to London Interbank Offered Rates.

We
received patronage dividends of $979 and $963 during 2010 and 2009, respectively. We earn patronage dividends from CoBank, ACB ("CoBank") based on our share of the net income earned by CoBank. We
record the receipt of the patronage dividends against interest expense.



Income taxes increased $1,348 in 2010 compared to 2009 due primarily to an increase in income before income taxes, an increase in state deferred
income taxes related to apportionment factor changes in 2010 resulting from the acquisition of our Kansas City operation and offset by a decrease in permanent differences related to stock compensation
in 2010. Changes in state apportionment factors, based on operational results, may affect future effective tax rates. The effective federal and state income tax rates for continuing operations were
50% and 75% for the years ended December 31, 2010 and 2009, respectively. The decrease in the effective tax rate in the current year compared to the prior year was due primarily to a reduction
in permanent differences related to stock compensation.

We
have federal net operating loss carryforwards of approximately $37,701 ($1,528, of which are subject to additional limitations) which will begin to expire in 2026 if not used. It is reasonably
likely that federal net operating loss carryforwards will increase during 2011 as a result of bonus depreciation provisions included in the Tax Relief Act of 2010. We have state net operating loss
carryforwards of approximately $36,820 which will begin to expire in 2016 if not used. We also have approximately $1,847 and $1,834 of state income tax hiring credit carryforwards as of
December 31, 2010 and 2009, respectively, which do not expire. Management believes that the future utilization of these credits is uncertain and has placed a full valuation allowance on these
credits. The valuation allowance increased $9 and $77 during 2010 and 2009, respectively.

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Table of Contents

2009 versus 2008

Segment Results of Operations

Broadband

2009

2008

$Change

%ChangeResidential revenues:Data

$
45,061

$
39,966

$
5,095


13
%Video


47,522


38,520


9,002


23Voice


25,897


20,619


5,278


26Total residential revenues


118,480


99,105


19,375


20Business


39,554


33,077


6,477


20Access


1,628


1,453


175


12Other


1,560


1,706


(146
)

(9
)Total operating revenues from external customers


161,222


135,341


25,881


19Intersegment revenues


438


539


(101
)

(19
)Operating expensesCost of services and products(1)


93,308


79,053


14,255


18Customer operations and selling


24,025


22,098


1,927


9General and administrative


20,518


21,499


(981
)

(5
)Total operating expenses


137,851


122,650


15,201


12Depreciation and amortization


47,359


40,491


6,868


17Loss from operations


(23,550
)

(27,261
)

3,711


14Loss from continuing operations


(20,782
)

(23,684
)

2,902


12Adjusted EBITDA(2)


25,590


12,899


12,691


98


(1)Exclusive
of depreciation and amortization.(2)A
non-GAAP measure. See the Non-GAAP Measures section below for additional information and reconciliation to the most
directly comparable GAAP measure.


Broadband Segment Operating Revenues

Operating revenues from external customers in the Broadband segment increased $25,881 in 2009 compared to 2008. The increase in operating revenues
was due in part to the
acquisition of Everest in February 2008, as described above, as well as from growth in residential RGUs and business customers.

Residential Revenues

Broadband residential revenues increased $19,375 in 2009 compared to 2008. Broadband residential RGUs increased 4% as of December 31, 2009
compared to the same period in 2008.



Our residential data revenues increased $5,095 in 2009 compared to 2008 as a result of higher price points on our data services, which were effective
beginning in January and November 2009, and the addition of our Kansas City operations. Data RGUs increased 1% as of December 31, 2009 compared to the same period in 2008.

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Residential video revenues increased $9,002 in 2009 compared to 2008. Revenues increased as a result of higher pricing on our video services, which
were effective beginning in January and November 2009, and demand for enhanced video offerings such as VOD, DVR and HDTV.



Residential voice revenues increased $5,278 in 2009 compared to 2008. The increase was due in part to the growth in voice RGUs of 13% as of
December 31, 2009 compared to the same period in 2008. The launch of our VoIP Digital Phone product in the Sacramento market in March 2008, including in the Telecom service territory, resulted
in elevated take rates and an increase in Broadband residential triple-play RGUs. As of December 31, 2009, approximately 14% of the homes in our Sacramento market have subscribed to
our VoIP phone service. The total voice penetration in the markets we serve was 23% as of December 31, 2009.

Business Revenues

Business revenues increased $6,477 in 2009 compared to 2008 due primarily to a 7% increase in business customers as of December 31, 2009
compared to the same period in 2008. A significant portion of the business revenue growth was due to our Kansas City operations.

Broadband Segment Operating Expenses

Total operating expenses in the Broadband segment increased $15,201 in 2009 compared to 2008. The increase was due in part to the addition of our
Kansas City operations in February 2008 and an approximate $1,475 increase in costs related to our Pension Plan.

Cost
of services and products (exclusive of depreciation and amortization) increased $14,255 in 2009 compared to 2008. The increase in costs in 2009 was largely due to direct costs incurred to provide
video services. Costs to provide data and voice services increased due to the additional capacity required to handle the increasing volume of data usage, including our VoIP digital phone product in
the Sacramento market.

Customer
operations expense increased $1,927 in 2009 compared to 2008. The increase in 2009 was mostly attributable to an increase in salaries and wages and advertising costs in the Kansas City
market. We experienced a modest decrease in the Sacramento market in sales and advertising costs due to decreases in radio and television advertising in 2009.

General
and administrative expense decreased $981 in 2009 compared to 2008 primarily due to decreases in (i) information technology costs related to system maintenance and development,
including integration of our Kansas City operations and increased production support projects in the prior year period and (ii) headcount in 2009.

Depreciation
and amortization increased $6,868 in 2009 compared to 2008 due primarily to the acquisition of the Kansas City operations in February 2008, as well as the continued expansion of the
broadband network and success-based capital projects.

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Telecom

2009

2008

$Change

%ChangeResidential

$
24,504

$
32,464

$
(7,960
)

(25
)%Business


35,457


38,066


(2,609
)

(7
)Access


19,727


23,732


(4,005
)

(17
)Other


790


770


20


3Total operating revenues from external customers


80,478


95,032


(14,554
)

(15
)Intersegment revenues


19,897


18,455


1,442


8Operating expenses:Cost of services and products(1)


26,977


28,915


(1,938
)

(7
)Customer operations and selling


8,843


10,841


(1,998
)

(18
)General and administrative


15,067


16,793


(1,726
)

(10
)Total operating expenses


50,887


56,549


(5,662
)

(10
)Depreciation and amortization


12,365


14,536


(2,171
)

(15
)Income from operations


37,123


42,402


(5,279
)

(12
)Income from continuing operations


21,449


24,510


(3,061
)

(12
)Adjusted EBITDA(2)


52,308


56,340


(4,032
)

(7
)


(1)Exclusive
of depreciation and amortization.(2)A
non-GAAP measure. See the Non-GAAP Measures section below for additional information and reconciliation to the most
directly comparable GAAP measure.


Telecom Segment Operating Revenues

Operating revenues from external customers in the Telecom segment decreased $14,554 in 2009 compared to 2008.

Residential Revenues

SureWest Telephone residential revenues decreased $7,960 in 2009 compared to 2008 as we continued to experience decreases in revenue due to
competition from wireless, wireline, and digital phone competitors (including SureWest Broadband). Residential subscribers and voice RGUs declined approximately 29% as of December 31, 2009
compared to the same period in 2008. In addition, some competitors initiated marketing campaigns to include voice services targeted directly to residential subscribers within SureWest Telephone's
service area.

Business Revenues

SureWest Telephone business revenues decreased by $2,609 in 2009 compared to 2008 largely due to the economic impact on small to medium sized
businesses and the continued strong competitive pressures. In addition, subsequent to the sale of our Wireless business in May 2008 to Verizon, SureWest Telephone recorded additional business revenues
of approximately $1,099 during the year ended December 31, 2008 for long distance services provided to Verizon during the transition of the wireless business to Verizon. The additional revenue
in the prior year period temporarily increased ARPU during those periods. While our business customer base declined 8% as of December 31, 2009 compared to the same period in 2008, ARPU remained
relatively flat, but would have shown an increase without the additional revenue from Verizon recognized in the same prior year period.

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Access Revenues

Access revenues, which include switched access revenue, interstate CL revenue and draws from the CHCF, decreased $4,005 in 2009 compared to 2008. As
anticipated, subsidies received during 2009 from the CHCF decreased by $2,040 compared to 2008. Switched access revenues also declined by approximately $2,710 in 2009 compared to 2008 due to declines
in minutes of use associated with the reduction of residential voice services previously discussed. The decline in access revenues was partially offset by an increase in interstate CL settlements
received from NECA of approximately $1,200 during the year ended December 31, 2009 as a result of a shift in revenue recovery from end users to the NECA pool. The increase in the interstate CL
settlements includes a change in estimate to the NECA CL accounts receivable balance which resulted in a decrease to access revenue of $923 during the year ended December 31, 2009. See the
Regulatory Matters section above for a more detailed discussion regarding SureWest Telephone's regulated revenues.

Telecom Segment Operating Expenses

Total operating expenses for the Telecom segment decreased $5,662 in 2009 compared to 2008. As discussed in the Residential Revenue section above,
during 2009 we
experienced a decline in voice RGUs due in part to subscribers opting to initiate VoIP digital phone service offered by our Broadband segment. As a result, certain of the operating costs associated
with these subscribers are now included in the Broadband segment. The decrease in operating expenses in 2009 was offset in part by an increase in costs related to our Pension Plan of approximately
$2,777.

Cost
of services and products (exclusive of depreciation and amortization) decreased $1,938 in 2009 compared to 2008. This decrease was predominately due to the decline in local and long distance
expenses as a result of decreases in voice RGUs and business customers of 29% and 8%, respectively, as of December 31, 2009 compared to the same prior year period. Additionally, during 2009
property maintenance costs declined through a consolidation of office space and cost cutting initiatives.

Customer
operations expense decreased $1,998 in 2009 compared to 2008. The decrease in customer operations expense was due predominately to the decline in voice RGUs and business customers base, as
discussed above, and to reduced spending on sales and advertising, which included radio and television advertising during 2009 in the Telecom segment service territory.

General
and administrative expense decreased $1,726 in 2009 compared to 2008. The decrease was primarily due to (i) a decline in consulting and advisory fees and (ii) the incurrence in
the prior year period of additional information technology costs related to production support projects.

Depreciation
and amortization decreased $2,171 in 2009 compared to 2008. This decrease was due predominately to a portion of aerial and underground cable becoming fully depreciated in 2009 and a
portion of general purpose software becoming fully depreciated during the third quarter of 2008.

Non-Operating Items



Consolidated investment income decreased $555 in 2009 compared to 2008. During 2008, we had higher cash and investment balances due primarily to the
receipt of proceeds from the sale of certain non-core assets, including our Wireless business. The higher cash and investment balances in the prior year periods resulted in a decrease in
investment
income in the current year periods. Further, decreases in interest rates on our invested balances have also contributed to the reduction of investment income.

Consolidated
interest expense decreased $808 in 2009 compared to 2008, primarily due to (i) the receipt of patronage dividends of $963 and $400 during 2009 and 2008, respectively,
(ii) the impact of the loss on the

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Table of Contents

extinguishment
of debt of $607 recorded during the quarter ended March 31, 2008 and (iii) offset by a decrease in capitalized interest of approximately $340.



Income taxes decreased $1,133 in 2009 compared to 2008 due primarily to a decrease in income before income taxes, a decrease in state deferred income
taxes related to apportionment factor changes in 2008 resulting from the acquisition of our Kansas City operations, offset by an increase in permanent differences resulting from the decrease in our
tax-exempt interest income, a decrease in deductible dividends and a decrease in the tax deductions for certain stock compensation vesting in 2009. Changes in state apportionment factors,
based on operational results, may affect our future effective tax rates. The effective federal and state income tax rates for continuing operations were 75.0% and 79.2% for the years ended
December 31, 2009 and 2008, respectively. The decrease in the effective tax rate in 2009 compared to 2008 was due primarily to deferred state income tax related to apportionment changes offset
by changes to permanent differences related to tax-exempt income, deductible dividends and stock compensation.

We
had federal net operating loss carryforwards of approximately $16,869 ($1,528, of which are subject to additional limitations) which will begin to expire in 2026 if not used. We had state net
operating loss carryforwards of approximately $11,726 which will begin to expire in 2016 if not used. We also had approximately $1,834 and $1,716 of state income tax hiring credit carryforwards as of
December 31, 2009 and 2008, respectively, which do not expire. Management believes that the future utilization of these credits is uncertain and has placed a full valuation allowance on these
credits. The valuation allowance increased $77 and $631 during 2009 and 2008, respectively.

Non-GAAP Measures

In addition to the results reported in accordance with US GAAP, we also use certain non-GAAP measures including Adjusted EBITDA
and free cash flow to evaluate operating performance and to facilitate the comparison of our historical results and trends. These non-GAAP measures are also used to manage and evaluate the
operating performance of our reportable segments. These financial measures are not a measure of financial performance under US GAAP and should not be considered in isolation or as a substitute
for net income from continuing operations as a measure of performance and net cash provided by operating activities as a measure of liquidity. The calculation of these non-GAAP measures
may not be comparable to similarly titled measures used by other companies. Reconciliations to the most directly comparable GAAP measure are provided below.



Adjusted EBITDA represents net income (loss) from continuing operations excluding amounts for income taxes; depreciation and amortization;
non-cash pension and certain post-retirement benefits; non-cash stock compensation; severance and other related termination costs; and all other
non-operating income and expenses. Adjusted EBITDA is a common measure of operating performance in the telecommunications industry. Adjusted EBITDA helps us evaluate our performance by
removing from our operating results non-cash items and items which do not relate to our core operating performance.

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The
following tables are a reconciliation of income (loss) from continuing operations to Adjusted EBITDA for the years ended December 31, 2010, 2009 and 2008:

2010

Broadband

Telecom

ConsolidatedIncome (loss) from continuing operations

$
(12,873
)
$
16,228

$
3,355Add (subtract):Income tax expense (benefit)


(9,893
)

13,247


3,354Other (income) expense


7,973


512


8,485Depreciation and amortization


49,621


12,204


61,825Non-cash pension and post-retirement expense


727


776


1,503Non-cash stock compensation expense


1,449


1,396


2,845Severance and other related termination costs(1)


469


675


1,144Adjusted EBITDA

$
37,473

$
45,038

$
82,511


(1)As
discussed in the Consolidated Overview section above, severance and other related termination costs were incurred as a result of the
workforce reduction initiative implemented during the quarter ended June 30, 2010 in which approximately 60 positions were eliminated. Amounts exclude the termination costs related to stock
compensation expense, which are included in non-cash stock compensation expense of the Adjusted EBITDA reconciliation.


2009

Broadband

Telecom

ConsolidatedIncome (loss) from continuing operations

$
(20,782
)
$
21,449

$
667Add (subtract):Income tax expense (benefit)


(13,453
)

15,459


2,006Other (income) expense


10,685


215


10,900Depreciation and amortization


47,359


12,365


59,724Non-cash pension and post-retirement expense


779


1,812


2,591Non-cash stock compensation expense


1,002


1,008


2,010Adjusted EBITDA

$
25,590

$
52,308

$
77,898




2008

Broadband

Telecom

ConsolidatedIncome (loss) from continuing operations

$
(23,684
)
$
24,510

$
826Add (subtract):Income tax expense (benefit)


(15,157
)

18,296


3,139Other (income) expense


11,580


(404
)

11,176Depreciation and amortization


40,491


14,536


55,027Non-cash pension and post-retirement expense


(738
)

(1,070
)

(1,808
)Non-cash stock compensation expense


407


472


879Adjusted EBITDA

$
12,899

$
56,340

$
69,239


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We define free cash flow as net income from continuing operations plus depreciation and amortization expense less capital expenditures. Free cash
flow is used to measure operating cash flows available for corporate purposes after providing sufficient fixed asset additions to maintain current productive capacity.

The
following table is a reconciliation of net cash provided by operating activities from continuing operations to consolidated free cash flow for the years ended December 31, 2010, 2009 and
2008:

2010

2009

2008Net cash provided by operating activities from continuing operations

$
63,553

$
71,842

$
50,778Less: Adjustments for all non-cash items and net changes in operating assets and liabilities


(60,198
)

(71,175
)

(49,952
)Income from continuing operations


3,355


667


826Add: Depreciation and amortization


61,825


59,724


55,027Less: Capital expenditures


(52,560
)

(58,330
)

(86,489
)Free cash flow

$
12,620

$
2,061

$
(30,636
)By segment:Broadband

$
(7,196
)
$
(21,398
)
$
(49,930
)Telecom


21,146


24,459


20,527Corporate


(1,330
)

(1,000
)

(1,233
)Free cash flow

$
12,620

$
2,061

$
(30,636
)


Liquidity and Capital Resources

Overview

We generate significant cash flows from operating activities. We believe that we will be able to meet our current and long-term liquidity
and capital requirements through our cash flow from operating activities, existing cash, cash equivalents and investments; through available borrowings under our existing credit facilities; and
through our ability to obtain future external financing. Our primary use of cash in 2010 was for capital expenditures and scheduled payments of long-term debt (including interest). We
anticipate continuing to use a substantial portion of our cash flow to fund our capital expenditures, invest in new business opportunities, fund network expansion, meet scheduled payments of
long-term debt and fund the authorized share repurchase plan.

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The
following table summarizes our cash flows:

Years Ended December 31,2010

2009

2008Cash Flows Provided By (Used In)Operating Activities:Continuing operations

$
63,553

$
71,842

$
50,778Discontinued operations





(562
)

(1,605
)Investing Activities:Continuing operations


(46,945
)

(46,587
)

(183,292
)Discontinued operations








(176
)Financing Activities:Continuing operations


(21,160
)

(20,044
)

106,021Increase (Decrease) In Cash and Cash Equivalents

$
(4,552
)
$
4,649

$
(28,274
)


Cash Flows Provided By Operating Activities

Net cash provided by continuing operating activities was $63,553 during 2010. Adjustments to net income of $3,355 to arrive at cash provided by
operating activities primarily include non-cash charges of (i) depreciation and amortization of $61,825 due to capital investments principally in the Broadband segment,
(ii) deferred income taxes of $2,699 and (iii) stock compensation expense of $2,845. Cash provided by operating activities was offset in part by a decrease in (i) accrued
compensation of $2,174 related in part to the payment in the current year of 2009 incentive compensation and (ii) accrued liabilities of $5,709 related to the timing of various expenditures in
the current year. As compared to 2009, the decrease in cash provided by continuing operations was primarily due to income tax refunds of $5,860 received in 2009 as compared to income taxes paid of
$153 in 2010.

Cash Flows Used In Investing Activities

Net cash used in continuing investing activities was $46,945 during 2010 and was related to capital expenditures that were partially offset by
proceeds from the sale of our auction rate security.



Capital expenditures continue to be our primary recurring investing activity and were $52,560 in 2010. A significant portion of our capital spending
has been invested into success-based capital projects within our Broadband segment as we continue to expand and enhance the network within the Sacramento region and Kansas City area. During 2010, we
added 900 fiber marketable homes and upgraded 29,600 copper homes within the ILEC service territory to be video service capable. We also increased our capital investment in business services in order
to optimize new long-term revenue opportunities and support the growth in wireless backhaul services. In 2011, we plan to continue to invest in our network through success-based capital
projects and network
expansion which will include the addition of 10,000 fiber marketable homes in the Kansas City area. Capital expenditures for 2011 are expected to be $60,000 to $70,000 of which approximately 25% are
planned for network expansion and 55% are projected for success-based projects.



In May 2008, we sold the operating assets of our Wireless business, SureWest Wireless, to Verizon for an aggregate cash purchase price of $69,746. A
portion of the purchase price equal to $3,450 was placed in escrow, half of which was received during the quarter ended June 30, 2009 and the balance of which was received during the quarter
ended June 30, 2010.

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As of December 31, 2009, we held one $3,700 par value auction rate security ("ARS") purchased from UBS Financial Services, Inc., a
subsidiary of UBS AG ("UBS") with an estimated fair value of $3,054, which was measured using a discounted cash flow model. As of December 31, 2009, we also held an offer ("Right" or "put
option") entitling us to sell at par our ARS anytime during a two-year period from June 30, 2010 through July 2, 2012.

As
of December 31, 2009, the ARS and Right were classified as current assets in short-term investments on our consolidated balance sheet, as a result of our put option period under
the Right. We continued to earn and receive interest on our ARS, as specified in the terms of the prospectus, during 2009.

On
January 6, 2010, UBS exercised their rights under the Right to purchase our ARS at par of $3,700 and we recorded a gain of $646 on the ARS in the condensed consolidated statements of income
during the quarter ended March 31, 2010. The gain was largely offset by a loss of $621 recorded on the Right resulting from the cancellation of our put option under the Right.

Cash Flows Provided By Financing Activities

Net cash provided by financing activities consists primarily of our proceeds and principal payments on long-term borrowings and planned
repurchases of our common stock.



On January 29, 2010, we entered into a letter agreement with CoBank amending certain terms of the Third Amended and Restated Credit Agreement
("Credit Agreement"). The Credit Agreement included a provision which required permanent reductions of the Revolving Loan facility of $7,500 at December 31, 2009 and 2010. The letter agreement
amended those provisions and included (i) an increase in the total Revolving Loan facility of $7,500, (ii) CoBank's share of the Revolving Loan facility will be permanently reduced by
$5,000 (rather than $7,500) on December 31, 2010 and (iii) the total Revolving Loan facility will be $57,500. As a result of this letter agreement, our combined revolving commitment
balance on our Revolving Loan and Swingline Loan facilities was $60,000.

As
of December 31, 2010, $10,909 and $36,000 were outstanding on the Series A and Series B Senior Notes, respectively. As of December 31, 2010, $120,000, $30,000, $8,500
and zero were outstanding on the CoBank Term Loan A, Term Loan B, Revolving Loan and Swingline Loan facilities, respectively. We had no short-term borrowings as of December 31,
2010.

As
of December 31, 2010, our combined revolving commitment balance was $55,000 ($60,000 less $5,000 permanent reduction on December 31, 2010). The available balance on the revolving
commitments, as of December 31, 2010 was approximately $46,500.



Our Series A and Series B Senior Notes and the Credit Agreement contain financial and operating covenants that may restrict, among
other things, the repurchase of the Company's common stock, the payment of dividends, the making of certain other restricted payments and the incurrence of additional indebtedness. The covenants also
require us to maintain certain financial ratios and minimum levels of tangible net worth. If we fail to comply with the covenants and
other restrictions, such as making timely interest or principal payments, it could lead to an event of default and the acceleration of our obligations under those agreements. As of December 31,
2010, we were in compliance with all of our debt covenants.

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Our
financial covenants as defined in the Series A and Series B Senior Notes and the Credit Agreement, measured quarterly, are as follows:

Financial Covenant

Required Ratio Level

Actual Performance at
December 31, 2010Leverage ratio

Not more than 3.75

2.58Interest coverage ratio

Not less than 3.00

9.55Consolidated net worth

Not less than $160,000

$272,058Debt to capitalization

Not more than 0.55

0.43


At
December 31, 2010 and 2009, retained earnings of $112,058 and $109,183, respectively, were available for the payments described above.



In September 2010, our Board of Directors authorized the repurchase of up to an additional 1 million shares of our common stock, supplementing
the previously authorized share repurchase program. The share repurchase program was originally approved in February 2000, and expanded in June 2002 and November 2006. This additional authorization
increases the total number of shares available for repurchase under the program to 3.5 million. Shares are purchased from time to time in the open market or through privately negotiated
transactions, subject to overall financial and market conditions. As of December 31, 2010, under the share repurchase program approximately 2.3 million shares of common stock have been
repurchased and approximately 1.2 million additional outstanding shares remain authorized for repurchase by the Board of Directors.

We
repurchased approximately 430 thousand shares, 108 thousand shares and 553 thousand shares during 2010, 2009 and 2008, respectively. The purchase of common shares did not have
a substantive effect on the average number of common shares outstanding or the calculation of basic and diluted earnings per share for the years ended December 31, 2010, 2009 or 2008.

Sufficiency of Cash Resources

We had cash, cash equivalents and short-term investments at December 31, 2010 of $3,708. As discussed in the Long-term
Debt section above, we have additional long-term borrowing capacity of approximately $55,000 available to us through our Revolving Loan facility of which, $8,500 was outstanding as of
December 31, 2010. We believe our operating cash flows and our borrowing capacity are sufficient to satisfy our liquidity requirements for the next twelve months, while maintaining adequate
cash and cash equivalents.

Our
most significant use of funds in 2011 is expected to be for (i) budgeted capital expenditures of $60,000 to $70,000, (ii) scheduled payments of long-term debt of $15,636
and (iii) anticipated interest payments of $8,000. As discussed above, throughout the year we may repurchase shares of the Company's common stock in the open market at the prevailing market
price up to an amount authorized by the Board of Directors.

A
portion of the 2011 budgeted capital expenditures is at our discretion and dependent upon our working capital position, operating cash flows and ability to borrow. We can modify our planned
construction and commitments if the results of operations or available capital so require. A significant portion of our 2011 budgeted capital expenditures are success based and is partially dependent
on our ability to manage our growth and expansion. We are required to comply with our cable franchise agreements to continue our build-out in the franchise areas.

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Contractual Obligations

As of December 31, 2010, our contractual obligations were as follows:

Less than
1 Year

1-3 Years

3-5 Years

Thereafter

TotalLong-term debt

$
15,636

$
189,773

$


$


$
205,409Interest on long-term debt(1)


7,982


3,834








11,816Operating leases


1,118


1,751


1,702


1,067


5,638Unconditional purchase obligations:Unrecorded(2)


3,695


1,056


2





4,753Recorded(3)


10,938











10,938Liabilities for unrecognized tax benefits including interest and penalties(4)


109


67





91


267Pension funding(5)


1,965


3,835








5,800


(1)Interest
on long-term debt includes amounts due on fixed and variable rate debt. As of December 31, 2010, $118,500 of the
long-term debt was subject to variable rates, as described above. In determining our future interest obligations, we used the rates in effect at December 31, 2010. The weighted
average rate was approximately 2.56%.(2)Unrecorded
purchase obligations include binding commitments for future capital expenditures and services.(3)Recorded
obligations include amounts in accounts payable and accrued expenses for external goods and services received as of
December 31, 2010 and expected to be settled in cash.(4)The
settlement period for unrecognized tax benefits and potential interest and penalties of $91 cannot be reasonably determined; however, the
liabilities are not expected to become due within the next twelve months.(5)We
contribute to our frozen Pension Plan an actuarially determined amount as deemed necessary and in accordance with applicable federal income
tax regulations. A carryover balance of approximately $2,000 will reduce the required cash contribution for the 2011 Pension Plan year to approximately $3,800. See the Defined Benefit Pension Plan
section below and Note 8 for more detailed discussion about the Plan.




As required, we contribute to our frozen Pension Plan, Supplemental Executive Retirement Plan and certain post-retirement benefits other
than pensions ("Other Benefits Plan") (collectively the "Plans"), which provide retirement benefits to certain eligible employees. Contributions are intended to provide for benefits attributed to
service to date. Our funding policy is to contribute annually an actuarially determined amount consistent with applicable federal income tax regulations.

The
cost to maintain our Pension Plan and future funding requirements are affected by several factors including the expected return on investment of the assets held by the Pension Plan, changes in the
discount rate used to calculate pension expense and the amortization of unrecognized gains and losses. Returns generated on Plan assets have historically funded a significant portion of the benefits
paid under the Pension Plan. We estimate the long term rate of return of Plan assets will be 8.0%. However, the significant decline in the equity markets precipitated by the credit crisis in recent
years has negatively affected the value of our Pension Plan assets. The Pension Plan invests in marketable equity securities which are exposed to changes in the financial markets. If the financial
markets experience a downturn and returns fall below our estimate, as seen in recent years, we could be required to make a material contribution to the Pension Plan, which could adversely affect our
cash flows from operations.

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Our
minimum funding requirement for 2011 related to the Pension Plan is expected to be approximately $5,800. However, due to a carryover balance of approximately $2,000 and the timing of the quarterly
installments, we are not required to make a cash contribution until January 2012. We will continue to evaluate the future funding requirements of the Plans and fund them as necessary. See
Note 8 for a more detailed discussion regarding our Pension Plan and Other Benefits Plan and the
Contractual Obligations table above for information related to the funding requirement of our Pension Plan.



The timing of cash payments for income taxes, which is governed by the Internal Revenue Service and other taxing jurisdictions, will differ from the
timing of recording tax expense and deferred income taxes, which are reported in accordance with GAAP. For example, tax laws currently in effect for 2010 through 2012 regarding accelerated or "bonus"
depreciation for tax reporting may result in less cash payments than the GAAP tax expense. Acceleration of tax deductions could eventually result in situations where cash payments will exceed GAAP tax
expense. Changes in tax laws create uncertainty as to when or if this situation will occur within the next three years.

Our
deferred tax assets are expected to be realized through the reversal of deferred tax liabilities and through the generation of future taxable income from ordinary and recurring operations.
Deferred tax assets that are dependent on specific business segments generating future taxable income were determined to be more likely than not to be realized since those segments have at least
10 years in which to generate the estimated required taxable income. Approximately $1,500 of future taxable income is estimated to be required to realize these deferred tax assets.

Historically,
pre-tax earnings for financial reporting purposes have exceeded the amount of taxable income reported for income tax purposes. This has primarily occurred due to the
acceleration of depreciation deductions for income tax reporting purposes.

Regulatory Matters

As discussed more fully in the Regulatory Matters section above, the CPUC issued a final decision which will phase down our annual CHCF interim draw
by approximately $2,040 annually, over a 5-year period ending on January 1, 2012. In addition, SureWest Telephone's intrastate access element, the TIC, was eliminated effective
January 1, 2011 in accordance with previous CPUC final decisions. We anticipate a reduction in our 2011 intrastate access revenues of approximately $2,050 when the TIC is eliminated. SureWest
Telephone will have an opportunity to recover all or part of the lost TIC revenue elsewhere, including residential rate adjustments.

Critical Accounting Estimates

Our significant accounting policies and estimates are discussed in the Notes to our Consolidated Financial Statements. We prepare our consolidated
financial statements in accordance with generally accepted accounting principles in the United States. The preparation of financial statements requires management to make estimates and assumptions
that affect reported amounts of assets, liabilities, revenues and expenses. These estimates and assumptions are affected by management's application of our accounting policies. Our judgments are based
on historical experience and various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making estimates about the carrying values of
assets and liabilities that are not readily apparent from other sources. However, because future events and the related effects cannot be determined with certainty, actual results may differ from our
estimates and assumptions and such differences could be material. Management believes that the following accounting estimates are the most critical to understanding and evaluating our reported
financial results.

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Goodwill

As discussed more fully in Note 1, in accordance with Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC")
Topic 350,Intangibles-Goodwill and Other("ASC 350") (formerly Statement of Financial Accounting Standards ("SFAS") No. 142, Goodwill and other Intangible
Assets), goodwill is reviewed for impairment annually or more frequently if an event occurs or circumstances change that
would indicate potential impairment. We perform our annual fair value evaluation on November 30.

The
impairment test for goodwill requires us to estimate the fair value at the reporting unit level. Our goodwill is allocated to the Kansas City operations reporting unit and the Telephone reporting
unit. The Broadband segment includes the Kansas City operations reporting unit. The Telecom segment includes the Telephone reporting unit. At December 31, 2010 the goodwill allocated to the
Kansas City operations reporting unit and the Telephone reporting unit was $43,643 and $2,171, respectively.



For the Kansas City operations reporting unit, the estimated fair value of the reporting unit is determined using a combination of a discounted cash
flow ("DCF") model and market based approaches. The assumptions used in estimating fair value are based upon a combination of historical results and trends, new industry developments, future cash flow
projections, and relevant comparable company valuation multiples for the market based approach. Such assumptions are subject to change as a result of changing economic and competitive conditions. The
market based approach used in the valuation effort includes the guideline public companies method and the guideline transaction method. The various valuation methods are weighted to reach a fair value
conclusion for the Kansas City operating reporting unit. Assumptions used in the DCF model include the following:



At
November 30, 2010 the fair value of the Kansas City operations reporting unit was estimated at $237,000 and the associated carrying value was $198,000. When determining the fair value, the
use of different estimates or assumptions within the DCF model could result in a different fair value. As a sensitivity calculation, if the discount rate in our DCF model was increased 1% to 15%, the
fair value would decrease from $237,000 to $223,000, which would not result in an impairment of goodwill recorded at the Kansas City operations reporting unit, assuming there are no changes to the
market-based approaches used in the valuation. Assuming the discount rate in our DCF model was to increase 2%, the terminal growth rate decreased by 2% and the market-based valuation approaches
decreased in value by 5%, the fair value of $237,000 would decrease by approximately $40,000, which may indicate an impairment as the carrying value would exceed the fair value by $1,000 in this
scenario. As discussed above, the other market-based approaches are subject to change as a result of changing economic and competitive conditions. Negative changes relating to the Kansas City
operations could result in potential impairment of goodwill recorded at the Kansas City operations reporting unit. Changes in the overall weighting of the DCF model and the market based approach
valuation models
may also impact the resulting fair value and could result in potential impairment of goodwill recorded at the Kansas City operations reporting unit.

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For the Telephone reporting unit, the estimated fair value is determined using a DCF model. Assumptions used in the DCF model for the Telephone
reporting unit include the following:



At
November 30, 2010, the fair value of the Telephone reporting unit was $85,000 and the associated carrying value was $(48,000). When determining the fair value, the use of different estimates
or assumptions within the DCF model could result in a different fair value. As a sensitivity calculation, if the discount rate were to increase 2% and the terminal growth rate decreased by 2%, the
fair value would decrease by approximately $9,000, but would not result in an impairment of goodwill recorded at the Telephone reporting unit.

Revenue Recognition

As discussed more fully in Note 6, total revenues from telephone services are affected by rates authorized by various regulatory agencies. The
FCC monitors SureWest Telephone's interstate earnings through its tariff review procedures and the use of annual cost separation studies prepared by SureWest Telephone. The FCC establishes rules that
carriers must follow in the filing of tariffs and the preparation of the annual studies. Based on these rules, we are required to prospectively set our interstate rates based on the aforementioned
cost separation studies. These cost studies include estimates and assumptions regarding various financial data including operating expenses, taxes and investment in property, plant and equipment.
Non-financial data estimates are also utilized in the preparation of these cost studies, including projected demand usage and detailed network information. We must also make estimates of
the jurisdictional separation of this data to assign current financial and operating data to the interstate or intrastate jurisdiction. These estimates are finalized in future periods as actual data
becomes available to complete the separation studies. We also participate in the NECA Common Line pool for certain interstate services and derive revenues from that pool.

As
a result of estimates and assumptions, it is reasonably possible that management's estimates of SureWest Telephone's interstate access revenues and shareable earnings obligations could change in
the near term, and the amounts involved could be material.

Allowances For Doubtful Accounts

As discussed more fully in Note 1, we maintain allowances for doubtful accounts for estimated losses resulting from the potential inability of
our customers to make required payments. In evaluating the collectability of our accounts receivable, we assess a number of factors including a specific customer's or carrier's ability to meet its
financial obligations to us, the length of time the receivable has been past due and historical and future expectations of conditions that may impact our ability to collect our accounts receivable. If
circumstances change or economic conditions worsen such that our past collection experience is no longer relevant, our estimate of the recoverability of our accounts receivable could be further
reduced from the levels reflected in our consolidated balance sheet. If uncollectibility of our billed revenue changes by 1%, we would expect an increase in uncollectible expense of approximately
$2,500. As of December 31, 2010, we had three customers that accounted for approximately 4% of our consolidated accounts receivable, net of allowances. Although management believes that these
customers are creditworthy, a severe adverse impact on their business operations could have a corresponding material effect on their ability to pay timely and, therefore, to our results of operations,
cash flows and financial

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condition.
In addition, certain revenues are subject to refund if the customer terminates services or returns equipment within a stipulated time period, or if certain performance criteria are not met.
Accordingly, we maintain accounts receivable allowances and recognize certain customer refund liabilities, through charges to revenues, based on our best estimates of the resolution of these
contingencies, which are based on historical experience.

Income Taxes

As discussed more fully in Notes 1 and 7, we account for income taxes using the liability method. Under this method, deferred tax assets and
liabilities are determined based on differences between the financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that are expected to be in
effect when the differences are expected to reverse. As we operate in more than one state, changes in our state apportionment factors, based on operational results, may affect our future effective tax
rates and the value of our deferred tax assets and liabilities. We account for income taxes in accordance with ASC Topic 740,Income Taxes("ASC 740")
(formerly FASB Interpretation No. 48,Accounting for Uncertainty in Income Taxes) which clarifies the accounting for uncertainty in income taxes
recognized in a company's financial statements. Under ASC 740, we do not recognize any benefit in our financial statements for any uncertain income tax position if we believe the position in the
aggregate has less than a 50% likelihood of being sustained. If we believe there is greater than 50% likelihood that the position will be sustained, a benefit would be recognized in the financial
statements equal to the largest amount that is believed more likely than not to be sustained upon an audit.

Pension Plan

As discussed more fully in Note 8, the cost to maintain our frozen Pension Plan and future funding requirements for the Pension Plan are
affected by several factors including the expected return on investment of the Pension Plan assets, changes in the discount rate used to calculate pension expense and the amortization of unrecognized
gains and losses. Changes in these estimates and other factors could significantly impact our benefit costs and obligations to maintain the Pension Plan.

Returns
generated on Pension Plan assets have historically funded a significant portion of the benefits paid under the Pension Plan. We estimate the long-term rate of return of Pension
Plan assets will be 8.0%. The Pension Plan invests in marketable equity securities which are exposed to changes in the financial markets. If the financial markets experience a downturn and returns
fall below our estimate, as seen in recent years, we could be required to make a material contribution to the Pension Plan, which could adversely affect our cash flows from operations.

For
2010 the discount rate used to determine net periodic benefit cost for the Pension Plan was 6.0%. The discount rate was determined based on current yields on high quality corporate fixed-income
investments with maturities corresponding to the expected duration of the benefit obligations. A one percentage-point increase or decrease in the discount rate would have the following effects on net
periodic benefit cost:

1-Percentage-
Point Increase

1-Percentage-
Point Decrease$(1,156)

$  1,337


Recently Issued Accounting Pronouncements

In December 2010, the FASB issued Accounting Standards Update ("ASU") No. 2010-29,Business Combinations
(Topic 805)Disclosure of Supplementary Pro Forma Information for Business Combinationsa consensus of the FASB Emerging Issues Task Force("ASU
2010-29"). ASU 2010-29 requires a public entity to disclose pro forma revenue and earnings for a business combination occurring in the current year as though the business
combination occurred as of the beginning of the year or, if comparative statements are presented, pro forma amounts are required to be presented as though the business combination took place

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as
of the beginning of the comparative year. ASU 2010-29 also expands the supplemental pro forma disclosures to include a description of the nature and amount of material, nonrecurring pro
forma adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings. We will apply ASU 2010-29 prospectively to business
combinations consummated subsequent to January 1, 2011. We are currently evaluating the impact this update will have on our consolidated financial statements.

In
December 2010, the FASB issued ASU No. 2010-28,IntangiblesGoodwill and Other (Topic 350)When to Perform Step 2 of the Goodwill
Impairment Test for Reporting Units with Zero or Negative Carrying amountsa consensus of the FASB Emerging Issues Task Force("ASU 2010-28"). ASU
2010-28 provides guidance on (i) the circumstances under which step 2 of the goodwill impairment test must be performed for reporting units with zero or negative carrying amounts
and (ii) the qualitative factors to be taken into account when performing step 2 in determining whether it is more likely than not that an impairment exists. For public entities, the provisions
of ASU 2010-28 will be effective for fiscal years and interim periods within those years beginning after December 15, 2010. We are currently evaluating the impact this update will
have on our consolidated financial statements.

In
October 2009, the FASB issued ASU No. 2009-13,Revenue Recognition (Topic 605): Multiple-Deliverable Revenue Arrangementsa consensus of the
FASB Emerging Issues Task Force("ASU 2009-13"). ASU 2009-13 addresses the accounting for
multiple-deliverable arrangements to enable vendors to account for products or services separately rather than as a combined unit and modifies the manner in which the transaction consideration is
allocated across the separately identified deliverables. ASU 2009-13 significantly expands the disclosure requirements for multiple-deliverable revenue arrangements. ASU
2009-13 will be effective for the first annual reporting period beginning on or after June 15, 2010, and may be applied retrospectively for all periods presented or prospectively to
arrangements entered into or materially modified after the adoption date. We are currently evaluating the impact this update will have on our condensed consolidated financial statements.

Recently Adopted Accounting Pronouncements

In July 2010, the FASB issued ASU No. 2010-20,Receivables (Topic 310)Disclosures about the
Credit Quality of Financing Receivables and the Allowance for Credit Losses("ASU 2010-20"). ASU 2010-20 requires entities to provide additional
disclosures concerning financing receivables and allowance for credit losses. Specifically, the new disclosures include (i) the nature of credit risk inherent in the entity's portfolio of
financing receivables, (ii) the factors considered in analyzing such risk in arriving at the allowance for credit losses and (iii) the changes and reasons for those changes in the
allowance for credit losses. Public entities are required to adopt the provisions of ASU 2010-20 related to disclosures of financing receivables as of the end of a reporting period for
interim or annual reporting periods ending on or after December 15, 2010. The financing receivables disclosures related to activity that occurs during a reporting period are effective for
interim or annual reporting periods beginning on or after December 15, 2010. Our adoption of this guidance had no impact on our consolidated financial statements.

In
February 2010, the FASB issued ASU No. 2010-09,Subsequent Events (Topic 855)Amendments to Certain Recognition and Disclosure
Requirements("ASU 2010-09"). ASU 2010-09 amends ASC Topic 855 to remove the requirement for an SEC filer to disclose the date through which subsequent
events have been evaluated both in issued and revised financial statements. ASU 2010-09 was effective immediately. Our adoption of this guidance had no impact on our condensed consolidated
financial position and results of operations.

In
January 2010, the FASB issued ASU No. 2010-06,Fair Value Measurements and Disclosures (Topic 820)Improving Disclosures about Fair Value
Measurements("ASU 2010-06"). ASU 2010-06 amends ASC Topic 820,Fair Value Measurements and Disclosures("ASC 820") to require additional disclosures regarding fair value measurements. Specifically, ASU 2010-06 requires entities to disclose additional information

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regarding
(i) the reconciliation of recurring Level 3 measurements about purchases, sales, issuances and settlements on a gross basis, (ii) the amounts of significant transfers
between Level 1 and Level 2 of the fair value hierarchy and the reasons for these transfers and (iii) the reasons for any transfers in or out of Level 3. In addition to
these new disclosure requirements, ASU 2010-06 also amends ASC 820 to further clarify existing guidance pertaining to the level of disaggregation at which fair value disclosures should be
made and the requirements to disclose information about the valuation techniques and inputs used in estimating Level 2 and Level 3 fair value measurements. Our adoption of this guidance
on January 1, 2010, except for the requirement to separately disclose information about purchases, sales, issuances, and settlements in the reconciliation of recurring Level 3
measurements on a gross basis which becomes effective for fiscal years (and interim periods within those fiscal years) beginning after December 15, 2010, did not have a material impact on our
consolidated financial position or results of operations.

Regulatory and Legal Matters

Significant portions of our telecommunication rates and charges are subject to regulation by the FCC and state commissions. Many of these rates and
charges are based on various tariffs or service guides filed by SureWest and others, including those filed by the NECA for CL charges. Pending and future regulatory actions, with respect to these and
other matters and the filing of new or amended tariffs, may have a material impact on our consolidated financial position and results of operations. In addition, the emergence of a range of products
and services that operate partially or entirely outside traditional regulatory frameworks but that compete with regulated service offerings has created new challenges for both us and the regulators.

Our
consolidated financial condition and results of operations have been and will be affected by recent and future proceedings before the state commissions and FCC. Pending before the FCC and state
commissions are proceedings that, among other things, are considering:



There
are a number of pending and anticipated other regulatory proceedings occurring at the federal and state levels that may have a material impact on SureWest Telephone and also on subsidiaries in
the Broadband segment. These regulatory proceedings also include newer issues, such as consideration of broadband deployment and regulation of IP-enabled services. The outcomes and impact
of these proceedings and related court matters on the Telecom segment, the Broadband segment and the Company as a whole cannot be determined at this time.

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Item 7A.    Quantitative and Qualitative Disclosures About Market Risk.

The primary objective of the following information is to provide forward-looking quantitative and qualitative information about our potential
exposure to market risks. The term "market risk" refers to the risk of loss arising from adverse changes in interest rates and credit risk. The disclosure is not meant to be a precise indicator of
expected future losses, but rather an indicator of reasonably possible losses. Our exposure to market risk is primarily related to the impact of interest rate fluctuations of our debt obligations.



We enter into debt obligations to fund acquisitions, operations and planned capital expenditures. At December 31, 2010, we had
long-term debt outstanding of $205,409. Of this amount, $86,909, or 42%, bears interest at fixed rates with a weighted average rate of 5.88%. Additionally, we had $118,500 of outstanding
borrowings on our credit facility bearing interest at London Interbank Offered Rate ("LIBOR") based rates with a weighted average rate of 2.56%. Based on borrowing rates currently available for loans
with similar terms and maturities, the estimated fair value of all of our long-term debt as of December 31, 2010 was $203,549. We currently have no outstanding
short-term debt obligations as of December 31, 2010.

Based
on our variable-rate debt outstanding at December 31, 2010, each 25 basis point increase or decrease in the level of interest rates would, respectively, increase or decrease
our annual interest expense and related cash payments by approximately $300. Such potential increases or decreases are based on certain simplifying assumptions, including a constant level of
variable-rate debt and an immediate, across-the-board increase or decrease in the level of interest rates with no other subsequent changes for the remainder of the
period. We continually monitor our interest rate risk exposures and may consider entering into interest rate swaps or interest rate cap contracts to manage the impact of the interest rate changes on
earnings and operating cash flows.

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Item 8.    Financial Statements and Supplementary Data.



PageManagement's Report on Internal Control Over Financial Reporting

63Reports of Independent Registered Public Accounting
Firm

64Consolidated Statements of Income for each of the three years in the period ended
December 31, 2010

66Consolidated Balance Sheets as of December 31, 2010 and 2009

67Consolidated Statements of Shareholders' Equity for each of the three years in
the period ended December 31, 2010

68Consolidated Statements of Cash Flows for each of the three years in the period ended
December 31, 2010

69Notes to Consolidated Financial Statements

70


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Management's Report on Internal Control Over Financial Reporting

To
the Board of Directors and Shareholders of SureWest Communications

The
Company's management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in the Securities Exchange Act of 1934, as amended
Rules 13a-15(f). Under the supervision and with the participation of our management, including our principal executive officer and our principal financial officer, we conducted an
evaluation of the effectiveness of our internal control over financial reporting based on the criteria established in Internal ControlIntegrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission. Based on our evaluation under the framework in Internal
ControlIntegrated Framework, we have concluded that the Company's internal control over financial reporting was effective as of December 31, 2010.

Ernst &
Young LLP, an independent registered public accounting firm, has audited our consolidated financial statements included in this Annual Report on Form 10-K and,
as part of its audit, has issued an attestation report dated February 25, 2011, on the effectiveness of our internal control over financial reporting.

February 25,
2011

/s/ STEVEN C. OLDHAM Steven C. Oldham
President and Chief Executive Officer



/s/ DAN T. BESSEY Dan T. Bessey,
Vice President
and Chief Financial Officer


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Report of Independent Registered Public Accounting Firm

The
Board of Directors and Shareholders of SureWest Communications

We
have audited SureWest Communications' internal control over financial reporting as of December 31, 2010, based on criteria established in Internal ControlIntegrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). SureWest Communications' management is responsible for maintaining effective internal control over
financial reporting, and for its assessment of the effectiveness of internal control
over financial reporting included in the accompanying Management's Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the company's internal control
over financial reporting based on our audit.

We
conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing
such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A
company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements
for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain
to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.

Because
of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In
our opinion, SureWest Communications maintained, in all material respects, effective internal control over financial reporting as of December 31, 2010, based on the COSO criteria.

We
also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of SureWest Communications as of
December 31, 2010 and 2009, and the related consolidated statements of income, shareholders' equity and cash flows for each of the three years in the period ended December 31, 2010 of
SureWest Communications and our report dated February 25, 2011 expressed an unqualified opinion thereon.

/s/
Ernst & Young LLP

Sacramento,
California
February 25, 2011

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Report of Independent Registered Public Accounting Firm

The
Board of Directors and Shareholders of SureWest Communications

We
have audited the accompanying consolidated balance sheets of SureWest Communications as of December 31, 2010 and 2009, and the related consolidated statements of income, shareholders' equity
and cash flows for each of the three years in the period ended December 31, 2010. These financial statements are the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.

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

In
our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of SureWest Communications at December 31, 2010 and
2009, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2010, in conformity with U.S. generally accepted accounting
principles.

We
also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), SureWest Communications' internal control over financial reporting as of
December 31, 2010, based on criteria established in Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our
report dated February 25, 2011 expressed an unqualified opinion thereon.

/s/
Ernst & Young LLP

Sacramento,
California
February 25, 2011

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SUREWEST COMMUNICATIONS  CONSOLIDATED STATEMENTS OF INCOME(amounts in thousands, except per share amounts)

Years Ended December 31,2010

2009

2008Operating revenues:Broadband

$
174,546

$
161,222

$
135,341Telecom


68,953


80,478


95,032Total operating revenues


243,499


241,700


230,373Operating expenses:Cost of services and products (exclusive of depreciation and amortization)


105,719


103,077


92,509Customer operations and selling


29,637


30,317


30,108General and administrative


31,124


35,009


37,588Depreciation and amortization


61,825


59,724


55,027Total operating expenses


228,305


228,127


215,232Income from operations


15,194


13,573


15,141Other income (expense):Investment income


77


121


676Interest expense


(8,346
)

(11,318
)

(12,126
)Other, net


(216
)

297


274Total other income (expense), net


(8,485
)

(10,900
)

(11,176
)Income from continuing operations before income taxes


6,709


2,673


3,965Income tax expense


3,354


2,006


3,139Income from continuing operations


3,355


667


826Discontinued operations, net of tax:Income (loss) from discontinued operations





(69
)

103Gain on sale of discontinued operations





2,568


18,004Total discontinued operations





2,499


18,107Net income

$
3,355

$
3,166

$
18,933Basic and diluted earnings per common share:Income from continuing operations

$
0.24

$
0.05

$
0.06Discontinued operations, net of tax





0.18


1.28Net income per basic and diluted common share

$
0.24

$
0.23

$
1.34Dividends per share

$


$


$
0.50Shares of common stock used to calculate earnings per share:Basic


13,836


13,996


14,096Diluted


13,836


13,996


14,099


See
accompanying notes.

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SUREWEST COMMUNICATIONS  CONSOLIDATED BALANCE SHEETS(amounts in thousands)

December 31,2010

2009ASSETSCurrent assets:Cash and cash equivalents

$
2,937

$
7,489Short-term investments


771


4,306Accounts receivable (less allowances of $2,365 and $3,532 at December 31, 2010 and 2009, respectively)


20,298


19,734Income tax receivable


1,782


2,221Prepaid expenses


3,792


3,704Deferred income taxes


2,284


3,373Other current assets





1,760Assets held for sale


6,009


6,009Total current assets


37,873


48,596Property, plant and equipment, net


514,639


522,493Intangible and other assets:Customer relationships, net


2,632


3,847Goodwill


45,814


45,814Deferred charges and other assets


2,223


2,11350,669


51,774$
603,181

$
622,863LIABILITIES AND SHAREHOLDERS' EQUITYCurrent liabilities:Current portion of long-term debt

$
15,636

$
15,636Accounts payable


2,885


2,547Other accrued liabilities


12,847


18,315Advance billings and deferred revenues


8,035


8,580Accrued compensation


6,998


9,172Total current liabilities


46,401


54,250Long-term debt


189,773


207,409Deferred income taxes


56,661


54,856Accrued pension and other post-retirement benefits


33,815


32,451Other liabilities and deferred revenues


4,473


4,714Commitments and contingenciesShareholders' equity:Common stock, without par value; 100,000 shares authorized, 13,866 and 14,148 shares issued and outstanding at December 31, 2010 and
December 31, 2009, respectively


143,309


146,844Accumulated other comprehensive loss


(15,081
)

(15,280
)Retained earnings


143,830


137,619Total shareholders' equity


272,058


269,183$
603,181

$
622,863


See
accompanying notes.

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SUREWEST COMMUNICATIONS  CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY(amounts in thousands)

Common StockNumber
of Shares

Amount

Other
Comprehensive
Income (Loss)

Retained
Earnings

TotalBalance at December 31, 2007


14,514

$
158,870

$
(3,530
)
$
115,663

$
271,003Issuance and amortization of restricted common stock, net of forfeitures and stock surrenders


121


671





84


755Stock repurchases


(553
)

(13,034
)




6,530


(6,504
)Other comprehensive (loss)








(15,718
)




(15,718
)Cash dividends











(7,124
)

(7,124
)Restricted Stock Units dividends





51





(51
)

Net Income











18,933


18,933Balance at December 31, 2008


14,082


146,558


(19,248
)

134,035


261,345Issuance and amortization of restricted common stock, net of forfeitures and stock surrenders


174


1,533





93


1,626Stock repurchases


(108
)

(1,165
)




243


(922
)Other comprehensive income








3,968





3,968Restricted Stock Units dividends





(82
)




82


Net Income











3,166


3,166Balance at December 31, 2009


14,148


146,844


(15,280
)

137,619


269,183Issuance and amortization of restricted common stock, net of forfeitures and stock surrenders


148


1,788





571


2,359Stock repurchases


(430
)

(5,323
)




2,285


(3,038
)Other comprehensive income








199





199Net Income











3,355


3,355Balance at December 31, 2010


13,866

$
143,309

$
(15,081
)
$
143,830

$
272,058


See
accompanying notes.

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SUREWEST COMMUNICATIONS  CONSOLIDATED STATEMENTS OF CASH FLOWS(amounts in thousands)

Years Ended December 31,2010

2009

2008Cash flows from operating activities:Net income

$
3,355

$
3,166

$
18,933Less income from discontinued operations, net of tax





(2,499
)

(18,107
)Income from continuing operations


3,355


667


826Adjustments to reconcile income from continuing operations to net cash provided by operating activities:Depreciation and amortization


61,825


59,724


55,027Loss (gain) on put option


621


762


(1,383
)(Gain) loss on auction rate security


(646
)

(929
)

1,575Provision for deferred income taxes


2,699


7,161


4,708Provision for doubtful accounts


1,479


2,944


2,772Stock-based compensation


2,845


2,105


963Other, net


(803
)

(258
)

(557
)Net changes in:Receivables


(2,043
)

(1,263
)

239Refundable and accrued income taxes, net


439


843


(4,057
)Prepaid expenses and other current assets


180


1,566


395Accounts payable


338


(251
)

(2,101
)Accrued liabilities, other liabilities and deferred credits


(6,736
)

(1,229
)

(7,629
)Net cash provided by continuing operations


63,553


71,842


50,778Net cash used in discontinued operations





(562
)

(1,605
)Net cash provided by operating activities


63,553


71,280


49,173Cash flows from investing activities:Business acquisition, net of cash acquired








(179,749
)Proceeds from sale of discontinued operations


1,725


10,947


66,296Proceeds from sale of property and equipment


227


830


Capital expenditures for property, plant and equipment


(52,560
)

(58,330
)

(86,489
)Purchases of available-for-sale securities


(37
)

(34
)

Proceeds from sale of available-for-sale securities


3,700





16,650Net cash used in continuing operations


(46,945
)

(46,587
)

(183,292
)Net cash used in discontinued operations








(176
)Net cash used in investing activities


(46,945
)

(46,587
)

(183,468
)Cash flows from financing activities:Proceeds from issuance of long-term debt


8,069


10,500


109,500Proceeds from short-term borrowings








60,000Repayment of short-term borrowings








(30,000
)Dividends paid








(7,124
)Principal payments of long-term debt and capital lease obligations


(25,705
)

(29,143
)

(19,643
)Repurchases and surrenders of common stock


(3,524
)

(1,401
)

(6,712
)Net cash provided by (used in) financing activities


(21,160
)

(20,044
)

106,021Increase (decrease) in cash and cash equivalents


(4,552
)

4,649


(28,274
)Cash and cash equivalents at beginning of year


7,489


2,840


31,114Cash and cash equivalents at end of year

$
2,937

$
7,489

$
2,840


See accompanying notes.

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SUREWEST COMMUNICATIONS  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  YEARS ENDED DECEMBER 31, 2010, 2009 AND 2008

1.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Business and Basis of Accounting

SureWest Communications (the "Company", "we" or "our") is a holding company with operating subsidiaries that provide communications services in
Northern California, primarily the greater Sacramento region ("Sacramento region"), and the greater Kansas City, Kansas and Missouri areas ("Kansas City area"). Our operating subsidiaries are SureWest
Broadband, SureWest TeleVideo, SureWest Kansas, Inc., formerly Everest Broadband, Inc. ("Everest", "SureWest Kansas" or the "Kansas City operations"), SureWest Telephone and SureWest
Long Distance.

As
discussed in Note 4, we acquired 100% of the issued and outstanding stock of Everest in February 2008. We sold the operating assets of our Wireless business, SureWest Wireless, in May 2008
and our communication tower assets in February 2009. Accordingly, the financial results of SureWest Wireless and our communication tower assets have been reported as discontinued operations for all
periods presented in accordance with Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") Topic 360,Property, Plant and
Equipment(formerly Statement of Financial Accounting Standards ("SFAS") No. 144,Accounting for the Impairment or Disposal of
Long-Lived Assets). The notes to consolidated financial statements ("Notes") reflect historical amounts exclusive of discontinued operations, unless otherwise
noted.

We
expect that the sources of our revenues and our cost structure may be different in future periods, both as a result of our entry into new communications markets and competitive forces in each of
the markets in which we have operations.

Preparation
of the financial statements in conformity with accounting principles generally accepted in the United States and pursuant to the rules and regulations of the Securities and Exchange
Commission (the "SEC") requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual results may differ materially from those estimates. Our critical accounting policies include (i) revenue recognition and accounts
receivable allowances (Notes 1 and 2), (ii) impairment evaluations associated with property, plant and equipment and intangible assets (Note 1), (iii) the determination of
deferred tax asset and liability balances (Notes 1 and 7) and (iv) pension plan and other post-retirement costs and obligations (Note 8). Events subsequent to
the balance sheet date have been evaluated for inclusion in the accompanying consolidated financial statements through the date of issuance.

Principles of Consolidation

The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany
transactions have been eliminated.

The
Telecom segment provides wholesale access services through the use of its network to the Broadband segment, which enables the Broadband segment to offer high-speed Internet,
Voice-over-Internet-Protocol and video services to those customers within SureWest Telephone's service area. These wholesale services are included as intersegment revenues and
expenses in each of the respective segments and are eliminated in the consolidated statements of income.

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SUREWEST COMMUNICATIONS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
YEARS ENDED DECEMBER 31, 2010, 2009 AND 2008

1.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Concentration of Credit Risk

Financial instruments that potentially subject us to a concentration of credit risk consist primarily of accounts receivables, cash and cash
equivalents and corporate equity securities. Our concentration of credit risk with respect to accounts receivable is limited due to our large number of customers. Cash and investments are deposited
with financial institutions that management believes are of high credit quality.

Cash and Cash Equivalents

We invest our excess cash in money market mutual funds and in highly liquid investments. We consider all highly liquid investments with an original
maturity of three months or less to be cash equivalents. As of December 31, 2010 and 2009, all of our cash equivalents consisted of money market mutual funds. The carrying amount of cash
equivalents approximates its fair value due to their short maturities. We had the following cash and cash equivalents as of December 31, 2010 and 2009, respectively:

2010

2009Cash

$
2,853

$
2,143Cash equivalents


84


5,346$
2,937

$
7,489


Investments

As of December 31, 2010 and 2009, our available-for-sale investments consisted of corporate equity securities (common
stock), which are recorded at fair value and determined by quoted market prices. Unrealized gains and losses on our available-for-sale investments are recorded in accumulated
other comprehensive income.

All
of our available-for-sale investments are subject to a periodic impairment review. We recognize an impairment charge when a decline in the fair value of our investments
below the cost basis is judged to be other-than-temporary. We consider various factors in determining whether to recognize an impairment charge, including the length of time
and extent to which the fair value has been less than our cost basis, the financial condition and our intent and ability to hold the investment for a period of time sufficient to allow for any
anticipated recovery in the market value.

During
the year ended December 31, 2009, we held a tax exempt auction rate security ("ARS") which was classified as a trading security and recorded at fair value. We also held an offer ("Right"
or "put option") entitling us to sell at par our ARS. The ARS and Right were classified as current assets in short-term investments on our consolidated balance sheet as a result of our
Right. Fair values for the ARS and Right were determined based on discounted cash flow models. See Note 3 for detail regarding the ARS and Right.

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SUREWEST COMMUNICATIONS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
YEARS ENDED DECEMBER 31, 2010, 2009 AND 2008

1.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

The
following is a summary of our short-term investments as of December 31, 2010 and 2009:

2010

2009Investment in common stock

$
771

$
631Auction rate securities





3,054Put option (Right)





621$
771

$
4,306


Fair Value of Financial Instruments

In accordance with ASC Topic 820,Fair Value Measurements and Disclosures("ASC 820")
(formerly SFAS No. 157,Fair Value Measurements), we measure our cash equivalents (money market funds) and short-term investments
(equity securities, ARS and Right) at fair value. ASC 820 clarifies that fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a
liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in
pricing an asset or a liability. A financial asset or liability's classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement.
As a basis for considering such assumptions, ASC 820 establishes a three-tier value hierarchy, which prioritizes the inputs used in the valuation methodologies in measuring fair
value:

Level 1 

Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.Level 2 

Inputs that reflect quoted prices in active markets for similar assets or liabilities, quoted prices for identical or similar assets or liabilities in inactive markets and inputs other than quoted prices that are
directly or indirectly observable in the marketplace.Level 3 

Unobservable inputs which are supported by little or no market activity.


Allowance for Doubtful Accounts

We maintain an allowance for doubtful accounts for estimated losses, which result from the inability of our customers to make required payments. Such
allowance is based on the likelihood of recoverability of accounts receivable based on past experience and management's best estimates of current bad debt exposures. We perform ongoing credit
evaluations of our customers' financial condition and management believes that adequate allowances for doubtful accounts have been provided. Accounts are determined to be past due if customer payments
have not been received in accordance with the payment terms. Uncollectible accounts are charged against the allowance for doubtful accounts and removed from the accounts receivable balances when
internal collection efforts have been unsuccessful in collecting the amount due. In addition, certain revenues are subject to refund if the customer terminates services or returns equipment within a
stipulated time period, or if certain performance criteria are not met. Accordingly, we maintain accounts receivable allowances and recognize certain customer refund liabilities, through charges to
revenues, based on our best estimates of the resolution of these contingencies, which are based on historical experience. For the years ended December 31, 2010, 2009 and 2008, we
wrote-off certain accounts receivable balances related to continuing operations aggregating $3,659, $3,171 and

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SUREWEST COMMUNICATIONS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
YEARS ENDED DECEMBER 31, 2010, 2009 AND 2008

1.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

$3,072,
respectively. During the years ended December 31, 2010, 2009 and 2008, we recovered $663, $451 and $529, respectively, of accounts receivable balances previously written-off
against such allowance.

Property, Plant and Equipment

Property, plant and equipment is recorded at cost. Additions and substantial improvements are capitalized. Repairs and maintenance costs are charged
to expense as incurred. Retirements and other reductions of property, plant and equipment were approximately $16,989, $24,492 and $7,106 in 2010, 2009 and 2008, respectively. Retirements or
impairments of regulated telephone plant and equipment are charged against accumulated depreciation with no gain or loss recognized in accordance with the composite group remaining life methodology
utilized for telephone plant assets. When property applicable to non-telephone operations is sold or
retired, the asset and related accumulated depreciation are removed from the accounts and the associated gain or loss is recognized.

We
capitalize the cost of internal-use network and non-network software which has a useful life in excess of one year. Subsequent additions, modifications or upgrades to
internal-use network and non-network software are capitalized only to the extent that they allow the software to perform a task it previously did not perform. Software
maintenance and training costs are expensed in the period in which they are incurred. Also, we capitalize interest associated with the development of internal-use network and
non-network software.

Property,
plant and equipment consisted of the following as of December 31, 2010 and 2009:

2010

2009

Estimated
Useful
LivesLand

$
2,824

$
2,824Buildings


76,483


76,363

35 yearsCentral office equipment


336,168


312,338

3-12 yearsOutside plant equipment


495,418


481,099

5-40 yearsInternal-use software


59,807


58,714

5-7 yearsOther


59,498


56,974

3-25 yearsTotal plant in service


1,030,198


988,312Less accumulated depreciation and amortization


525,427


481,639Plant in service


504,771


506,673Plant under construction


5,344


10,557Construction inventory


4,524


5,263Property, plant and equipment, net

$
514,639

$
522,493


Construction
inventory, which is stated at weighted average cost, consists primarily of network construction materials and supplies that when issued are predominately capitalized as part of new
customer installations and the construction of the network.

During
the first quarter of 2010, we completed our triennial review that evaluated the appropriateness of the estimated useful lives of our property, plant and equipment for all segments. The
evaluation

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SUREWEST COMMUNICATIONS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
YEARS ENDED DECEMBER 31, 2010, 2009 AND 2008

1.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

considered
our investment and business strategy, reliability and historical performance data of certain assets, as well as the impacts of competition and anticipated technological change. As a result
of this evaluation, effective January 1, 2010, we increased the estimated useful lives of general purpose software, general purpose hardware and certain central office equipment. We decreased
the lives of certain of our customer premise equipment and outside plant categories. During the year ended December 31, 2010, this change in estimate decreased consolidated depreciation expense
by $1,241 and increased consolidated net income by $741 ($0.05 per share).

We
record depreciation and amortization using the straight-line method over estimated useful lives. The useful lives are estimated at the time the assets are acquired and are based on
historical experience with similar assets, anticipated technological changes and the expected impact of our strategic operating plan on our network infrastructure. Depreciation expense was $55,521,
$52,843 and $46,478 and amortization expense was $6,304, $6,881 and $8,549 in 2010, 2009 and 2008, respectively. Average annual composite depreciation and amortization rates were 6.1%, 6.1% and 6.2%
in 2010, 2009 and 2008, respectively.

As
a result of our analysis related to ASC Topic 350, IntangiblesGoodwill and Other ("ASC 350"), as described in the Intangible Assets section below, we performed an analysis in
accordance with the provision of ASC Topic 360, Property, Plant, and Equipment ("ASC 360") (formerly SFAS No. 144, Accounting for Disposal for Impairment or Disposal of
Long-Lived Assets) as of November 30, 2010. In accordance with ASC 350, property, plant and equipment is reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset group may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset group to
estimated undiscounted future cash flows expected to be generated by the asset group. If the carrying amount of an asset group exceeds its estimated future cash flows, an impairment charge is
recognized in the amount by which the carrying amount of the asset group exceeds the fair value of the asset group.

Intangible Assets

Goodwill and intangible assets that are not subject to amortization are tested for impairment annually or more frequently when events or changes in
circumstances indicate that the asset might be impaired. Goodwill is the excess of the acquisition cost of a business over the fair value of the identifiable net assets acquired.

Goodwill
is not amortized but instead evaluated annually for impairment using a two-step process. In the first step of the impairment test, the fair value of each of our two reporting
units is compared to its carrying amount, including goodwill. We determined that goodwill should be applied to the reporting units within the business segments that benefit from the assets whose fair
value exceeds their carrying amount. As a result, goodwill has been allocated to the Kansas City operations reporting unit, within the Broadband segment, and the Telephone reporting unit, within the
Telecommunications ("Telecom") segment. The recorded goodwill for the Telecom and Broadband segments was $2,171 and $43,643 as of December 31, 2010 and 2009, respectively.

The
estimated fair value of the reporting unit is determined using a combination of a discounted cash flow ("DCF") model and a market based approach. The assumptions used in the estimate of fair value
are based upon a combination of historical results and trends, new industry developments, future cash flow projections, as well as relevant comparable company earnings multiples for the market based
approach.

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SUREWEST COMMUNICATIONS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
YEARS ENDED DECEMBER 31, 2010, 2009 AND 2008

1.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Such
assumptions are subject to change as a result of changing economic and competitive conditions. We use a weighting of the results derived from the valuation approaches to estimate the fair value
of the Kansas City operations reporting unit. We use a DCF model to estimate the fair value of the Telephone reporting unit. If the carrying value of the reporting unit exceeds its fair value, the
second step of the impairment test is performed to measure the amount of impairment loss. In measuring the fair value of our reporting units as previously described, we consider the combined carrying
and fair
values of our reporting units in relation to our overall enterprise value, measured as the publicly traded stock price multiplied by the fully diluted shares outstanding plus the value of outstanding
debt. Our reporting unit fair value models are consistent with a range in value indicated by both the preceding three month average stock price and the stock price on the valuation date, plus an
estimated acquisition premium which is based on observable transactions of comparable companies, if applicable.

The
second step compares the implied fair value of the reporting unit goodwill with the carrying amount of that goodwill. The implied fair value is determined by allocating the fair value of the
reporting unit to all of the assets and liabilities other than goodwill in a manner similar to a purchase price allocation. The excess of the fair value of a reporting unit over the amounts assigned
to its assets and liabilities is the implied fair value of goodwill. If the carrying amount of goodwill is greater than the implied fair value of that goodwill, then an impairment charge would be
recorded equal to the difference between the implied fair value and the carrying value.

Our
intangible assets that do not have indefinite lives (customer relationships) are amortized over their useful lives and are reviewed for impairment in accordance with ASC 360, whenever
events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. If any indications were present, we would test for recoverability by comparing the carrying
amount of the asset to the net undiscounted cash flows expected to be generated from the asset. If those net undiscounted cash flows do not exceed the carrying amount (i.e., the asset is not
recoverable), we would perform the next step, which is to determine the fair value of the asset and record an impairment, if any. We reevaluate the useful life determinations for these intangible
assets each reporting period to determine whether events and circumstances warrant a revision in their remaining useful lives.

The
gross carrying amount, accumulated amortization and net carrying value of our acquisition-related intangible assets (customer relationships) were $6,240, $3,608 and $2,632, respectively, as of
December 31, 2010. Customer relationships are definite-life assets and have a weighted average useful life from the date of purchase of 5 years. The expected amortization
expense for customer relationships is $1,215 for 2011 and 2012 and $202 in 2013, for a total of $2,632.

Income Taxes

We account for income taxes using the liability method. Under this method, deferred tax assets and liabilities are determined based on differences
between the financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that are expected to be in effect when the differences are expected to
reverse. As we operate in more than one state, changes in our state apportionment factors, based on operational results, may affect our future effective tax rates and the value of our deferred tax
assets and liabilities.

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SUREWEST COMMUNICATIONS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
YEARS ENDED DECEMBER 31, 2010, 2009 AND 2008

1.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Pension Plan and Other Post-Retirement Benefits

We maintain a frozen noncontributory defined benefit pension plan ("the Pension Plan") and provide certain post-retirement benefits other
than pensions ("Other Benefits" Plan") to certain eligible employees. We also maintain an unfunded Supplemental Executive Retirement Plan ("SERP") to provide incremental pension payments to certain of
our retired executives.

We
recognize pension expense during the current period in the consolidated income statement using certain assumptions, including the expected long-term rate of return on plan assets,
interest cost implied by the discount rate and the amortization of unrecognized gains and losses. Refer to Note 8 for further details regarding the determination of these assumptions.

We
recognize the overfunded or underfunded status of our defined benefit post-retirement plan as either an asset or liability in the consolidated balance sheet. We recognize changes in
that funded status in the year in which the changes occur through comprehensive income, net of applicable income taxes, including unrecognized actuarial gains and losses and prior service costs and
credits.

Share-based Compensation

Our share-based compensation consists of the issuance of restricted stock awards ("RSAs"), restricted stock units ("RSUs"), performance shares, stock
options and stock appreciation rights. Associated costs are based on an award's estimated fair value at the date of the grant and are recognized over a period in which any related services are
provided. Our policy is to recognize the costs on a straight-line basis over the requisite service period using the straight line method, generally from immediate vest to a
four-year vesting period. See Note 10 for further details regarding share-based compensation.

Earnings Per Share

Shares used in the computation of basic earnings (loss) per share are based on the weighted average number of common shares and RSUs outstanding,
excluding RSAs and unvested RSUs. Shares used in the computation of diluted earnings per share are based on the weighted average number of common shares, RSAs and RSUs outstanding, along with other
potentially dilutive securities outstanding in each period.

The
following table presents a reconciliation of the denominators used in the earnings per share calculations:

Years Ended December 31,2010

2009

2008Weighted average common shares


13,836


13,996


14,096Potentially dilutive common equivalent shares:Unvested RSAs and RSUs








3Weighted average common shares and RSUs outstanding and potentially dilutive common equivalent shares


13,836


13,996


14,099


Unvested
RSAs and unvested RSUs, in the aggregate of 373 and 309 were excluded from the computation of diluted earnings per share for the years ended December 31, 2010 and 2009, respectively.
The per share value of the unvested RSAs and RSUs, including the amount of compensation cost not yet recognized, was

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SUREWEST COMMUNICATIONS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
YEARS ENDED DECEMBER 31, 2010, 2009 AND 2008

1.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

greater
than the average market price of the shares which would have resulted in an anti-dilutive effect to diluted earnings per share.

Advertising Costs

Advertising costs are expensed as incurred. Advertising expense was $4,878, $6,548 and $7,411 in 2010, 2009 and 2008, respectively.

Statements of Cash Flows Information

During 2010, 2009 and 2008, we made payments for interest and income taxes as follows:

2010

2009

2008Interest, net of amounts capitalized ($106, $393 and $727 in 2010, 2009 and 2008, respectively)

$
9,117

$
12,309

$
11,752Income taxes (received) paid, net

$
153

$
(5,860
)
$
3,627


Other Comprehensive Income

Significant components of our other comprehensive income are as follows:

Years Ended December 31,2010

2009

2008Net income

$
3,355

$
3,166

$
18,933Minimum pension and post-retirement benefit (liability) net of income taxes (benefit) of $168, $2,691 and $(10,579) in 2010, 2009 and 2008,
respectively


158


3,960


(15,602
)Unrealized (loss) gain on available-for-sale investments, net of income taxes (benefit) of $27, $(4) and $(77) in 2010, 2009 and 2008,
respectively


41


(8
)

(116
)Reclassification adjustment for losses included in net income, net of income taxes of $11 in 2009





16


Comprehensive income

$
3,554

$
7,134

$
3,215


As
of December 31, 2010 and 2009, accumulated other comprehensive loss, net of tax, consisted of the following:

2010

2009Minimum pension and post-retirement liability, net of tax

$
(15,141
)
$
(15,299
)Unrealized gain on available-for-sale investments, net of tax


60


19$
(15,081
)
$
(15,280
)


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SUREWEST COMMUNICATIONS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
YEARS ENDED DECEMBER 31, 2010, 2009 AND 2008

1.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Severance and Termination Costs

In an effort to improve operating efficiencies and align operating costs, during the quarter ended June 30, 2010 we implemented a workforce
reduction initiative in which approximately 60 positions were eliminated. Affected employees were provided a range of benefits and resources, including severance payments and the acceleration
of unvested stock awards (collectively "severance costs"). During 2010 severance costs of $1,428 were recorded to the statements of income, primarily to general and administrative expense. Severance
costs of approximately $613 and $815 were recorded to the Broadband and Telecom segments, respectively. As of December 31, 2010, our obligations related to the severance costs were concluded.

Recently Issued Accounting Pronouncements

In December 2010, the FASB issued Accounting Standards Update ("ASU") No. 2010-29,Business Combinations
(Topic 805)Disclosure of
Supplementary Pro Forma Information for Business Combinationsa consensus of the FASB Emerging Issues Task Force("ASU 2010-29").
ASU 2010-29 requires a public entity to disclose pro forma revenue and earnings for a business combination occurring in the current year as though the business combination occurred
as of the beginning of the year or, if comparative statements are presented, pro forma amounts are required to be presented as though the business combination took place as of the beginning of the
comparative year. ASU 2010-29 also expands the supplemental pro forma disclosures to include a description of the nature and amount of material, nonrecurring pro forma adjustments
directly attributable to the business combination included in the reported pro forma revenue and earnings. We will apply ASU 2010-29 prospectively to business combinations
consummated subsequent to January 1, 2011. We are currently evaluating the impact this update will have on our consolidated financial statements.

In
December 2010, the FASB issued ASU No. 2010-28,IntangiblesGoodwill and Other (Topic 350)When to Perform Step 2 of the
Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying amountsa consensus of the FASB Emerging Issues Task Force("ASU 2010-28"). ASU 2010-28 provides guidance on (i) the circumstances under which step 2 of the goodwill impairment test must be performed for
reporting units with zero or negative carrying amounts and (ii) the qualitative factors to be taken into account when performing step 2 in determining whether it is more likely than not
that an impairment exists. For public entities, the provisions of ASU 2010-28 will be effective for fiscal years and interim periods within those years beginning after
December 15, 2010. We are currently evaluating the impact this update will have on our consolidated financial statements.

In
October 2009, the FASB issued ASU No. 2009-13,Revenue Recognition (Topic 605): Multiple-Deliverable Revenue Arrangementsa consensus
of the FASB Emerging Issues Task Force("ASU 2009-13"). ASU 2009-13 addresses the accounting for multiple-deliverable arrangements to
enable vendors to account for products or services separately rather than as a combined unit and modifies the manner in which the transaction consideration is allocated across the separately
identified deliverables. ASU 2009-13 significantly expands the disclosure requirements for multiple-deliverable revenue arrangements. ASU 2009-13 will be
effective for the first annual reporting period beginning on or after June 15, 2010, and may be applied retrospectively for all periods presented or prospectively to arrangements entered into
or materially modified after the adoption date. We are currently evaluating the impact this update will have on our condensed consolidated financial statements.

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SUREWEST COMMUNICATIONS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
YEARS ENDED DECEMBER 31, 2010, 2009 AND 2008

1.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Recently Adopted Accounting Pronouncements

In July 2010, the FASB issued ASU No. 2010-20,Receivables (Topic 310)Disclosures about the
Credit Quality of Financing Receivables and the Allowance for Credit Losses("ASU 2010-20"). ASU 2010-20 requires
entities to provide additional disclosures concerning financing receivables and allowance for credit losses. Specifically, the new disclosures include (i) the nature of credit risk inherent in
the entity's portfolio of financing receivables, (ii) the factors considered in analyzing such risk in arriving at the allowance for credit losses and (iii) the changes and reasons for
those changes in the allowance for credit losses. Public entities are required to adopt the provisions of ASU 2010-20 related to disclosures of financing receivables as of the end of a
reporting period for interim or annual reporting periods ending on or after December 15, 2010. The financing receivables disclosures related to activity that occurs during a reporting period
are effective for interim or annual reporting periods beginning on or after December 15, 2010. Our adoption of this guidance had no impact on our consolidated financial statements.

In
February 2010, the FASB issued ASU No. 2010-09,Subsequent Events (Topic 855)Amendments to Certain Recognition and Disclosure
Requirements("ASU2010-09"). ASU 2010-09 amends ASC Topic 855 to remove the requirement for an SEC filer to disclose the date through which subsequent
events have been evaluated both in issued and revised financial statements. ASU 2010-09 was effective immediately. Our adoption of this guidance had no impact on our condensed consolidated
financial position and results of operations.

In
January 2010, the FASB issued ASU No. 2010-06,Fair Value Measurements and Disclosures (Topic 820)Improving Disclosures about Fair Value
Measurements("ASU 2010-06"). ASU 2010-06 amends ASC 820 to require additional disclosures regarding fair value measurements. Specifically, ASU
2010-06 requires entities to disclose additional information regarding (i) the reconciliation of recurring Level 3 measurements about purchases, sales, issuances and
settlements on a gross basis, (ii) the amounts of significant transfers between Level 1 and Level 2 of the fair value hierarchy and the reasons for these transfers and
(iii) the reasons for any transfers in or out of Level 3. In addition to these new disclosure requirements, ASU 2010-06 also amends ASC 820 to further clarify existing
guidance pertaining to the level of disaggregation at which fair value disclosures should be made and the requirements to disclose information about the valuation techniques and inputs used in
estimating Level 2 and Level 3 fair value measurements. Our adoption of this guidance on January 1, 2010, except for the requirement to separately disclose information about
purchases, sales, issuances, and settlements in the reconciliation of recurring Level 3 measurements on a gross basis which becomes effective for fiscal years (and interim periods within those
fiscal years) beginning after December 15, 2010, did not have a material impact on our consolidated financial position or results of operations.

Reclassifications

Certain amounts in our 2009 and 2008 consolidated financial statements have been reclassified to conform to the presentation of our 2010 consolidated
financial statements. The reclassifications consist of the following:

Inventories
have been reclassified from current assets to property, plant and equipment on the consolidated balance sheets. Inventories consist primarily of network construction materials and supplies
that when issued are capitalized as part of new customer installations and the construction of the network.

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SUREWEST COMMUNICATIONS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
YEARS ENDED DECEMBER 31, 2010, 2009 AND 2008

1.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

The
proportion of the items included in inventories that are capitalized to property, plant and equipment has increased as a result of the growth in the Broadband business.

Operating
expenses on the consolidated statements of income have been reclassified for a change in the classification during the third quarter of 2010 of customer technical support costs from customer
operations and selling to cost of services and products. Prior period costs have been reclassified to conform to the current year presentation.

2.    REVENUE RECOGNITION

We recognize revenue when (i) persuasive evidence of an arrangement exists between us and the customer, (ii) delivery of the product to the customer has occurred or service has been
provided to the customer, (iii) the price to the customer is fixed or determinable and (iv) collectability of the sales price is reasonably assured. Revenues based on a flat fee, derived
principally from local telephone, dedicated network access, data communications, Internet access service and residential/business broadband service are billed in advance and recognized in subsequent
periods when the services are provided. Revenues based on usage, derived primarily from network access and long distance services, are recognized monthly as services are provided.

When
required as part of providing service, revenues related to nonrefundable, upfront service activation and setup fees are deferred and recognized over the estimated customer life.

Incremental
direct costs of telecommunications service activation are charged to expense in the period in which they are incurred, except when we maintain ownership of wiring installed during the
activation process. In such cases the cost is capitalized and charged to expense over the estimated useful life of the asset.

We
collect and remit Federal Universal Service contributions on a gross basis, which resulted in recorded revenue of $4,476, $3,692 and $3,048 for the years ended December 31, 2010, 2009 and
2008, respectively. We account for all other taxes collected from customers and remitted to the respective government agencies on a flow through basis.

3.    FAIR VALUE MEASUREMENTS



The following is a summary of our short-term available-for-sale investments:

As of December 31, 2010

As of December 31, 2009Adjusted
Cost

Gross
Unrealized
Gains

Gross
Unrealized
Losses

Estimated
Fair
Market
Value

Adjusted
Cost

Gross
Unrealized
Gains

Gross
Unrealized
Losses

Estimated
Fair
Market
ValueEquity securities

$
727

$
44

$


$
771

$
654

$


$
(23
)
$
631




We held $1,115 and $772 in cost method investments which were included in other long-term assets in the consolidated balance sheets as of
December 31, 2010 and 2009, respectively. Our cost method investments

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YEARS ENDED DECEMBER 31, 2010, 2009 AND 2008

3.    FAIR VALUE MEASUREMENTS (Continued)

primarily
consist of our investment in CoBank, ACB ("CoBank") and are related to patronage distributions of restricted equity. Our investment in CoBank is required in accordance with the provisions of
our Credit Agreement (see Note 5) held by CoBank. We periodically monitor our investments for impairment and will record reductions in carrying values if and when necessary. We did not estimate
the fair value of the cost method investments as no events or changes in circumstances that may have a significant adverse effect on the fair value of the investment were identified during the year
ended December 31, 2010. We determined that it was not practicable to estimate the fair value of the investments.



The following table summarizes our financial assets (cash equivalents and short-term investments) measured at fair value on a recurring
basis:

As of December 31, 2010Total

Level 1

Level 2

Level 3Money market funds

$
84

$
84

$


$
Equity securities


771


771





$
855

$
855

$


$





As of December 31, 2009Total

Level 1

Level 2

Level 3Money market funds

$
5,346

$
5,346

$


$
Equity securities


631


631





Auction rate securities


3,054








3,054Put option (Right)


621








621$
9,652

$
5,977

$


$
3,675


The
following table provides a reconciliation of the beginning and ending balances for the assets measured at fair value using significant unobservable inputs (Level 3):

2010

2009Put Option

Auction Rate
Securities

Put Option

Auction Rate
SecuritiesBeginning balance at January 1st

$
621

$
3,054

$
1,383

$
2,125Sale of auction rate security





(3,700
)




Gains (losses) included in earnings


(621
)

646


(762
)

929Ending balance at December 31st

$


$


$
621

$
3,054


As
of December 31, 2009, we held one $3,700 par value ARS purchased from UBS Financial Services, Inc., a subsidiary of UBS AG ("UBS") with an estimated fair value of $3,054, which was
measured using Level 3 inputs. This ARS was collateralized by student loans that are guaranteed primarily by a monoline

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
YEARS ENDED DECEMBER 31, 2010, 2009 AND 2008

3.    FAIR VALUE MEASUREMENTS (Continued)

insurance
company and partially by the Federal Family Education Loan Program ("FFELP"). As of December 31, 2009, we also held a Right entitling us to sell at par our ARS anytime during a
two-year period from June 30, 2010 through July 2, 2012.

As
of December 31, 2009, the ARS and Right were classified as current assets in short-term investments on our consolidated balance sheet, as a result of our put option period under
the Right. We continued to earn and receive interest on our ARS, as specified in the terms of the prospectus, during 2009.

On
January 6, 2010, UBS exercised their rights under the Right to purchase our ARS at par of $3,700 and we recorded a gain of $646 on the ARS to other income (expense), other, net in the
condensed consolidated statements of income during the quarter ended March 31, 2010. The gain was largely offset by a loss of $621 recorded on the Right resulting from the cancellation of our
put option under the Right.



We had no short-term borrowings as of December 31, 2010 and 2009. The fair value of our long-term debt and capital
leases was estimated using a DCF analyses based on incremental borrowing rates for similar types of borrowing arrangements.

As of December 31, 2010

As of December 31, 2009Carrying Value

Fair Value

Carrying Value

Fair ValueLong-term debt and capital leases (including current maturities)

$
205,409

$
203,459

$
223,045

$
221,323


4.    ACQUISITION & DIVESTITURES

Acquisition



In February 2008, we acquired 100% of the issued and outstanding stock of Everest for a total purchase price of $181,459, including transaction
costs. Subsequent to the acquisition, the Kansas City operations have been included in our Broadband segment. SureWest Kansas is a competitive provider of high-speed data, video and voice
services in the Kansas City area. The addition of our Kansas City operations accelerates our growth strategy and has positioned us as a premier provider of network services to residential and business
customers in the markets we serve.

The
acquisition has been accounted for using the purchase method in accordance with ASC Topic 805,Business Combinations. Accordingly, the net assets
acquired were recorded at their estimated fair values and Everest's operating results are included in our consolidated financial statements from the date of acquisition.

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YEARS ENDED DECEMBER 31, 2010, 2009 AND 2008

4.    ACQUISITION & DIVESTITURES (Continued)

The
purchase accounting relating to the Everest acquisition was complete as of December 31, 2008, as follows:

February 13, 2008Current assets

$
12,952Property, plant and equipment


149,793Intangible assets


6,240Goodwill


43,643Other long-term assets


2,244Total assets acquired


214,872Current liabilities


9,603Long-term liabilities


1,257Deferred income taxes


22,553Total liabilities acquired


33,413Net assets acquired

$
181,459


The
acquired intangible assets of $6,240 were derived from the associated value of a significant number of residential and business customers. The intangible assets are being amortized over the
estimated useful life of 5 years. During the years ended December 31, 2010, 2009 and 2008, we recorded amortization expense of approximately $1,215, $1,215 and $1,178, respectively,
relating to the customer relationships. Goodwill of $43,643 has been accounted for as an indefinite lived asset and will be tested annually for impairment at November 30 or at interim dates if
potential impairment indicators arise. Goodwill is not deductible for income tax purposes. For further discussion regarding the goodwill impairment testing, see the Intangible Assets section in
Note 1 above.

Our
purchase accounting included an accrued liability of $1,255 relating primarily to the termination (the "Severance Plan") of certain members of Everest's management. The Severance Plan required
payments to be made over a course of nine to eighteen months. During the year ended December 31, 2008, we paid $468 relating to the Severance Plan and in January 2009 we elected to pay the
final severance payments early in the amount of $681, which concluded our obligations under the Severance Plan.

Unaudited Pro Forma Results

The following unaudited pro forma information presents our results of operations as if the acquisition of Everest occurred at the beginning of the
fiscal periods presented. The pro forma information below does

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YEARS ENDED DECEMBER 31, 2010, 2009 AND 2008

4.    ACQUISITION & DIVESTITURES (Continued)

not
purport to present what the actual results would have been if the acquisition had in fact occurred at the beginning of the fiscal periods presented, nor does the information project results for
any future period.

2008Operating revenues

$
237,930Income from operations


16,787Income from continuing operations


1,180Net income


19,287Basic earnings per common share:Income from continuing operations

$
0.08Net income

$
1.37Diluted earnings per common share:Income from continuing operations

$
0.08Net income

$
1.37


Discontinued Operations



In May 2008, we completed the sale of the operating assets of our Wireless business, SureWest Wireless, to Verizon Wireless ("Verizon") for an
aggregate cash purchase price of $69,746, resulting in a gain of $18,864, net of tax. A portion of the purchase price equal to $3,450 was placed in escrow, half of which was received during the
quarter ended June 30, 2009 and the balance of which was received during the quarter ended June 30, 2010. As part of the sale, Verizon acquired the spectrum licenses and operating assets
of SureWest Wireless, excluding our owned communication towers. See the Communication Tower Assets section below for further discussion
regarding our owned communication towers. SureWest Wireless was previously reported as a separate reportable segment.

The
results of SureWest Wireless are reported as a discontinued operation in our consolidated financial statements for all periods presented.

The
following table summarizes the financial information for SureWest Wireless' operations:

2009

2008Operating revenues

$


$
10,055Operating expenses including depreciation and amortization





9,962Income from operations





93Other income (expense)





(7
)Income tax expense





66Income from discontinued operations

$


$
20Gain on sale of discontinued operations, net of taxes of $30 and $13,088 in 2009 and 2008, respectively

$
43

$
18,821


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YEARS ENDED DECEMBER 31, 2010, 2009 AND 2008

4.    ACQUISITION & DIVESTITURES (Continued)

In
connection with the sale, we entered into a short-term Transition Services Agreement ("TSA") with Verizon to provide certain operating services during the transition of the Wireless
business to Verizon. The TSA concluded during the third quarter of 2008. During the transition period, our Telecom and Broadband segments provided certain services including long distance and
interconnect services to Verizon. Such services, which were provided to SureWest Wireless prior to the sale and eliminated in our consolidated financial statements, were $1,869 for the year ended
December 31, 2008.



In February 2009, we sold fifty-two wireless communications towers ("Tower Assets") owned by our subsidiary West Coast PCS, LLC
("West Coast PCS") to Global Tower Partners. West Coast PCS was a component of our Broadband segment. The sale was completed for an aggregate cash purchase price of $9,222, resulting in a gain of
$2,525, net of tax.

The
results of the Tower Assets have been reported as a discontinued operation in our consolidated financial statements for all periods presented.

The
following table summarizes the financial information for the operations of the Tower Assets:

Years Ended December 31,2009

2008Operating revenues

$
249

$
1,616Operating expenses including depreciation and amortization


365


1,476Income (loss) from operations


(116
)

140Income tax expense (benefit)


(47
)

57Income (loss) from discontinued operations

$
(69
)
$
83Gain on sale of discontinued operations, net of taxes of $1,684 in 2009

$
2,525

$





In 2007, we sold 100% of the stock of SureWest Directories, our directory publishing business, to GateHouse Media, Inc. for an aggregate cash
purchase price of $110,123, resulting in a gain of $59,339, net of tax. SureWest Directories was previously included in the Telecom segment. During the quarter ended September 30, 2008, the
gain on sale of discontinued operations was reduced by $817, net of tax of $548, related to disputed claims owed to us under a transitional service agreement for billing services performed after the
sale date.

Assets Held For Sale

In connection with our efforts to evaluate and potentially monetize excess assets, during 2009 we identified and began to actively market for sale
certain of our real estate assets. These regulated assets, which are included in the Telecom segment, include 21 acres of undeveloped land and an office building. During the quarter ended
December 31, 2009, we completed our plan to sell these assets and as a result they were

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YEARS ENDED DECEMBER 31, 2010, 2009 AND 2008

4.    ACQUISITION & DIVESTITURES (Continued)

classified
as assets held for sale. As of December 31, 2010, these assets continue to be actively marketed for sale and classified as assets held for sale.

The
following is the carrying value of the assets held for sale as of December 31, 2010 and 2009:

Undeveloped land

$
1,556Office building


4,453$
6,009


We
expect that the land will sell in the range of $3,000 to $5,000. In connection with the classification to assets held for sale, the carrying value of the office building was reduced to its
estimated fair value less selling costs as determined based on the current market conditions and listed selling price. As a result, an impairment charge of $1,199 was recorded against accumulated
depreciation in 2009, in accordance with regulated telephone plant and equipment composite group remaining life methodology. We evaluated the estimated fair value of the assets held for sale as of
December 31, 2010 and determined there was not a significant change. Therefore, no additional impairment charge was recorded during the year ended December 31, 2010.

5.    CREDIT AGREEMENTS

Long-term debt outstanding as of December 31, 2010 and 2009 consisted of the following:

Weighted Average Interest
Rates at December 31,2010

2009

Maturities

2010

2009Unsecured Series A Senior Notes


6.30%


6.30%


December 2013

$
10,909

$
14,545Unsecured Series B Senior Notes


4.74%


4.74%


March 2013


36,000


48,000Unsecured Term Loan A credit facility


3.97%


5.39%


May 2012


120,000


120,000Unsecured Term Loan B credit facility


2.56%


3.66%


May 2012


30,000


30,000Unsecured Revolving Loan credit facility


2.56%


4.81%


May 2012


8,500


10,500Total long-term debt











205,409


223,045Less current portion











15,636


15,636Total long-term debt, net of current










$
189,773

$
207,409


At
December 31, 2010, the aggregate maturities of long-term debt were (i) $15,636 in 2011, (ii) $174,137 in 2012 and (iii) $15,636 in 2013, for a total of
$205,409. We had no short-term borrowings as of December 31, 2010 and 2009.

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YEARS ENDED DECEMBER 31, 2010, 2009 AND 2008

5.    CREDIT AGREEMENTS (Continued)

Our long-term debt consists of unsecured Senior Notes and an unsecured Third Amended and Restated Credit Agreement ("Credit Agreement") with CoBank. The Senior Notes have interest payable
semi-annually at their respective fixed interest rates. Principal payments on the Senior Notes are due in equal annual installments. The Credit Agreement includes term and revolving loan
facilities. The Credit Agreement's interest payments are due at, the shorter of, their interest rate reset date or quarterly. All principal payments due on the Credit Agreement are due on the maturity
date.

On
January 29, 2010, we entered into a letter agreement with CoBank amending certain terms of the Credit Agreement. The Credit Agreement included a provision which required permanent reductions
of the Revolving Loan facility of $7,500 at December 31, 2009 and 2010. The letter agreement amended those provisions and included (i) an increase in the total Revolving Loan facility of
$7,500, (ii) a permanent reduction in CoBank's share of the Revolving Loan facility of $5,000 (rather than $7,500) on December 31, 2010 and (iii) setting the total Revolving Loan
facility at $57,500. As a result of this letter agreement, our combined revolving commitment balance on our Revolving Loan and Swingline Loan facilities was $60,000.

As
of December 31, 2010, our combined revolving commitment balance was $55,000 ($60,000 less $5,000 permanent reduction on December 31, 2010). The available balance on the revolving
commitments, as of December 31, 2010 was approximately $46,500.

Our
Series A and Series B Senior Notes and the Credit Agreement contain financial and operating covenants that may restrict, among other things, the repurchase of the Company's common
stock, the payment of dividends, the making of certain other restricted payments and the incurrence of additional indebtedness. The covenants also require us to maintain certain financial ratios and
minimum levels of tangible net worth. If we fail to comply with the covenants and other restrictions, such as making timely interest or principal payments, it could lead to an event of default and the
acceleration of our obligations under those agreements. As of December 31, 2010, we were in compliance with all of our debt covenants.

Our
financial covenants as defined in the Series A and Series B Senior Notes and the Credit Agreement, measured quarterly, are as follows:

Financial Covenant

Required Ratio Level

Actual Performance at
December 31, 2010Leverage ratio

Not more than 3.75

2.58Interest coverage ratio

Not less than 3.00

9.55Consolidated net worth

Not less than $160,000

$272,058Debt to capitalization

Not more than 0.55

0.43


At
December 31, 2010 and 2009, retained earnings of $112,058 and $109,183, respectively, were available for the payments described above.

6.    REGULATORY MATTERS

Certain of our interstate telecommunications service rates are subject to regulation by the Federal Communications Commission ("FCC"). Interstate switched and special access rates are established
through a SureWest Telephone tariff filed with the FCC. For interstate common line ("CL") charges, SureWest Telephone concurs with tariffs filed by the National Exchange Carrier
Association ("NECA"). Intrastate service rates are subject to regulation by state commissions. Prices for intrastate

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
YEARS ENDED DECEMBER 31, 2010, 2009 AND 2008

6.    REGULATORY MATTERS (Continued)

telecommunications
services are established through tariffs or through other regulatory mechanisms, including, in California, service guides. Pending and future regulatory actions may have a material
impact on our consolidated financial position and results of operations.



Under current FCC rules governing rate making, SureWest Telephone is required to establish rates for its interstate telecommunications services based
on projected demand usage for the various services. SureWest Telephone projects its earnings through the use of annual cost separation studies, which utilize estimated total cost information and
projected demand usage. Carriers are required to follow FCC rules in the preparation of these annual studies.

SureWest
Telephone determines actual earnings from its interstate rates as actual volumes and costs become known. The FCC monitors SureWest Telephone's interstate earnings.

The
FCC requires SureWest Telephone to prepare and submit periodic cost separation studies related to certain NECA CL accounts receivable balances. As a result of the cost separation filings, SureWest
Telephone may change its estimates for certain NECA CL accounts receivable balances related to the prior year monitoring periods. During the years ended December 31, 2010 and 2009 we did not
record any significant changes in estimates related to prior year monitoring periods.



A CPUC decision in August 2005 allowed SureWest Telephone to continue receiving our $11,500 annual interim draw from the California High Cost Fund
("CHCF"). The CHCF was previously authorized by the CPUC to offset SureWest Telephone's intrastate regulated operating expenses on an interim basis. In August 2006, we requested permission from the
CPUC to implement a graduated phase-down of our annual $11,500 interim draw. In September 2007, the CPUC issued Decision 07-09-002 which provides for SureWest
Telephone to phase-down its interim annual CHCF draw over a five-year period. The phase-down of the interim draw began in January 2007, initially reducing the
annual $11,500 interim draw to $10,200, and in each subsequent year will be incrementally reduced by $2,040. In 2010 our interim CHCF draw was $4,080.

In
an ongoing proceeding relating to the New Regulatory Framework (under which SureWest Telephone has been regulated since 1996), the CPUC adopted Decision 06-08-030 in 2006,
which grants carriers broader pricing freedom in the provision of telecommunications services, bundling of services, promotions and customer contracts. This decision adopted a new regulatory
framework, the Uniform Regulatory Framework ("URF"), which among other things (i) eliminates price regulation and allows full pricing flexibility for all new and retail services except basic
residential services, which limits increases to $3.25 per year during 2009 and 2010, (ii) allows new forms of bundles and promotional packages of telecommunication services,
(iii) allocates all gains and losses from the sale of assets to shareholders and (iv) eliminates almost all elements of rate of return regulation, including the calculation of shareable
earnings. Beginning January 1, 2011, the URF Incumbent Local Exchange Carriers ("ILECs") are allowed full pricing flexibility for the basic residential rate. On December 31, 2010, the
CPUC issued a ruling to initiate a new phase to assess whether, or to what extent, the level of competition in the telecommunications industry is sufficient to control prices for the four largest
ILECs in the state, including

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YEARS ENDED DECEMBER 31, 2010, 2009 AND 2008

6.    REGULATORY MATTERS (Continued)

SureWest
Telephone. The CPUC's actions in this and future proceedings could lead to new rules and an increase in government regulation.

7.    INCOME TAXES

We account for income taxes in accordance with ASC Topic 740,Income Taxes("ASC 740") (formerly FASB Interpretation No. 48, Accounting for Uncertainty in Income
Taxes) which clarifies the accounting for uncertainty in income taxes recognized in a company's financial
statements. Specifically, this guidance prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be
taken in a tax return. ASC 740 also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition of uncertain tax
positions.

We
had a liability for uncertain tax positions of $267, $203 and $257 at December 31, 2010, 2009 and 2008, respectively. Included in our liability for uncertain tax positions at
December 31, 2010 was $167 of accrued interest and penalties. Our policy is to recognize interest and penalties related to uncertain tax positions in income tax expense. We did not accrue
significant amounts of interest and penalties related to unrecognized tax benefits during 2010, 2009 or 2008.

The
total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate was $176 and $129 at December 31, 2010 and 2009, respectively. We anticipate the release
of up to $109 of the unrecognized tax benefits within the next twelve months as a result of the expiration of the statute of limitations.

As
of December 31, 2010, the following tax years and related taxing jurisdictions were open:

Tax Year

Taxing Jurisdiction2002, 2004, 2007 - 2010

Federal2004, 2006 - 2010

California2006 - 2010

Kansas and Missouri


Income
tax expense (benefit) consists of the following components:

2010

2009

2008Current expense (benefit):Federal

$
777

$
(5,359
)
$
(1,588
)State


(122
)

204


19Total current expense (benefit)


655


(5,155
)

(1,569
)Deferred expense:Federal


1,609


6,492


2,760State


1,090


669


1,948Total deferred expense


2,699


7,161


4,708Total income tax expense

$
3,354

$
2,006

$
3,139


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
YEARS ENDED DECEMBER 31, 2010, 2009 AND 2008

7.    INCOME TAXES (Continued)

Income
tax expense (benefit) differs from the amounts computed by using the statutory federal tax rate (35% in all years presented) due to the following:

2010

2009

2008Computed at statutory rates

$
2,348

$
936

$
1,388Increase (decrease):State taxes, net of federal benefit


322


209


415State taxes attributable to change to multi-state apportionment


249


325


863Tax exempt interest





(14
)

(160
)Interest and penalties


64





549KSOP dividends








(127
)Deferred compensation


217


482


123Other, net


154


68


88Income tax expense

$
3,354

$
2,006

$
3,139Effective federal and state tax rate


50.0
%

75.0
%

79.2
%


The
significant components of our deferred income tax assets and liabilities were as follows at December 31, 2010 and 2009:

Deferred Income Taxes2010

2009Assets

Liabilities

Assets

LiabilitiesProperty, plant and equipment-primarily due to timing of recognition of depreciation expense

$


$
85,601

$


$
74,277Differences in the timing of recognition of revenues


2,429





3,183


488Net operating losses


13,595





5,999


Post-retirement and post-employment benefits


13,215





12,872


Accrued compensation


1,292





1,367


Other, net


2,288


394


1,701


648Total deferred income taxes


32,819


85,995


25,122


75,413Valuation allowance


(1,201
)




(1,192
)

Total deferred income taxes, net of valuation allowance

$
31,618

$
85,995

$
23,930

$
75,413Net deferred income tax liability




$
54,377




$
51,483


We
have federal net operating loss carryforwards of approximately $37,701 ($1,528 of which is subject to additional limitations), which will begin to expire in 2026, if not used. We have state net
operating loss carryforwards of approximately $36,820 which will begin to expire in 2016, if not used. We also have approximately $1,847 and $1,834 of state income tax hiring credit carryforwards as
of December 31, 2010 and 2009, respectively, which do not expire. Management believes that the future utilization of these credits is uncertain and has placed a full valuation allowance on
these credits. The valuation allowance increased $9 and $77 during 2010 and 2009, respectively.

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YEARS ENDED DECEMBER 31, 2010, 2009 AND 2008

8.    PENSION PLAN AND OTHER POST-RETIREMENT BENEFITS

We maintain a Pension Plan which covers certain eligible employees. Benefits are based on years of service and the employee's average compensation during the five highest consecutive years of the last
ten years of credited service. Our funding policy is to contribute annually an actuarially determined amount consistent with applicable federal income tax regulations. Contributions are intended to
provide for benefits attributed to service to date. Pension Plan assets are primarily invested in domestic equity securities, fixed income and international equity securities.

We
also maintain an unfunded SERP, which provides supplemental retirement benefits to certain of our retired executives. The SERP provides for incremental pension payments to partially offset the
reduction in amounts that would have been payable under the Pension Plan if it were not for limitations imposed by federal income tax regulations.

In
addition, we provide an Other Benefits Plan to certain eligible employees of our California location, including life insurance benefits and a stated reimbursement for Medicare supplemental
insurance.

Effective
April 1, 2007, we amended our Pension Plan, SERP and Other Benefits Plan (collectively the "Plans") such that the Plans were frozen so that no person is eligible to become a new
participant on or following that date and all future benefit accruals for existing participants under the Plans cease.

The
following tables set forth the change in benefit obligation, change in plan assets and funded status of the Plans as of December 31, 2010 and 2009:

Pension Plan and SERP

Other Benefits Plan2010

2009

2010

2009Change in benefit obligationBenefit obligation at beginning of the year

$
123,417

$
118,636

$
7,712

$
8,481Service cost








62


90Interest cost on projected benefit obligation


7,169


7,234


319


442Plan participant's contributions








375


412Actuarial loss (gain)


5,378


5,073


(390
)

(808
)Benefits paid


(7,762
)

(7,526
)

(816
)

(905
)Benefit obligation at end of the year

$
128,202

$
123,417

$
7,262

$
7,712




Pension Plan and SERP

Other Benefits Plan2010

2009

2010

2009Change in plan assetsFair value of plan assets at beginning of year

$
94,610

$
87,126

$
3,853

$
3,731Actual return on plan assets


10,554


14,787


416


602Employer contribution


212


223


8


13Plan participant's contributions








375


412Benefits paid


(7,762
)

(7,526
)

(816
)

(905
)Fair value of plan assets at end of year

$
97,614

$
94,610

$
3,836

$
3,853Funded status at year end

$
(30,588
)
$
(28,807
)
$
(3,426
)
$
(3,859
)


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SUREWEST COMMUNICATIONS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
YEARS ENDED DECEMBER 31, 2010, 2009 AND 2008

8.    PENSION PLAN AND OTHER POST-RETIREMENT BENEFITS (Continued)

Amounts
recognized in the consolidated balance sheets at December 31, 2010 and 2009 consist of:

Pension Plan and SERP

Other Benefits Plan2010

2009

2010

2009Current liabilities

$
199

$
216

$


$
Noncurrent liabilities

$
30,389

$
28,591

$
3,426

$
3,859


Amounts
recognized in accumulated other comprehensive income for the years ended December 31, 2010 and 2009 consist of:

Pension Plan and SERP

Other Benefits Plan2010

2009

2010

2009Net actuarial loss (gain)

$
28,172

$
28,242

$
(2,344
)
$
(1,997
)Prior service cost





2


(452
)

(544
)$
28,172

$
28,244

$
(2,796
)
$
(2,541
)


Net
periodic pension (income) cost recognized in the consolidated statements of income for the years ended December 31, 2010, 2009 and 2008 under the Plans included the following components:

Pension Plan and SERP

Other Benefits Plan2010

2009

2008

2010

2009

2008Service cost-benefits earned during the year

$


$


$


$
62

$
90

$
107Interest cost on projected benefit obligation


7,169


7,234


7,153


319


441


438Expected return on plan assets


(7,280
)

(6,685
)

(9,065
)

(269
)

(245
)

(360
)Amortization of:Prior service cost


2


2


2


(92
)

(92
)

(92
)Net actuarial gain (loss)


2,173


2,593


23


(190
)

(45
)

(107
)Net pension and other benefits (income) cost during the year

$
2,064

$
3,144

$
(1,887
)
$
(170
)
$
149

$
(14
)


The
following table summarizes other changes in plan assets and benefit obligations recognized in other comprehensive income, before tax effects, during 2010 and 2009:

Pension Plan and SERP

Other Benefits Plan2010

2009

2010

2009Actuarial loss (gain), net

$
2,104

$
(3,029
)
$
(537
)
$
(1,164
)Recognized actuarial (loss) gain


(2,173
)

(2,593
)

190


45Recognized prior service (cost) credit


(2
)

(2
)

92


92Total amount recognized in other comprehensive income, before tax effects

$
(71
)
$
(5,624
)
$
(255
)
$
(1,027
)


The
estimated net loss, net prior service cost and transition obligation for the defined benefit pension plans that will be amortized from accumulated other comprehensive income in net periodic
benefit cost over the

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SUREWEST COMMUNICATIONS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
YEARS ENDED DECEMBER 31, 2010, 2009 AND 2008

8.    PENSION PLAN AND OTHER POST-RETIREMENT BENEFITS (Continued)

next
fiscal year are $2,311, $0 and $0, respectively. The estimated net gain, net prior service credit and transition obligation for the other defined benefit post-retirement plans that
will be
amortized from accumulated other comprehensive income in net periodic benefit cost over the next fiscal year are $172, $92 and $0, respectively.

The
weighted-average assumptions used to determine projected benefit obligations as of December 31, 2010 and 2009 were as follows:

Pension Plan and SERP

Other Benefits Plan2010

2009

2010

2009Discount rate


5.60%


6.00%


4.22%


4.80%


The
weighted-average assumptions used to determine net periodic benefit cost for the years ended December 31, 2010, 2009 and 2008 were as follows:

Pension Plan and SERP

Other Benefits Plan2010

2009

2008

2010

2009

2008Discount rate


6.00%


6.25%


6.00%


4.80%


6.00%


5.50%Expected long-term return on plan assets


8.00%


8.00%


8.00%


8.00%


8.00%


8.00%Rate of compensation increase


NA


NA


NA


NA


NA


NA


The
expected rate of return on plan assets is the weighted average of expected long-term asset return assumptions.

Assumed
health care cost trend rates at December 31, 2010 and 2009 were as follows:

2010

2009Health care cost trend assumed for the next year


10.50%


9.00%Rate to which the cost trend is assumed to decline (the ultimate trend rate)


5.00%


5.00%Year that the rate reaches the ultimate trend rate


2018


2013


Assumed
health care cost trend rates have a significant effect on the amounts reported for the Other Benefits Plan. A one-percentage-point change in assumed health care cost trend rates
would have the following effects:

1-Percentage-
Point Increase

1-Percentage-
Point DecreaseEffect on total of service and interest cost

$
1

$
(2)Effect on post-retirement benefit obligation as of January 1, 2010

$
33

$
(43)


Plan Assets

Our investment strategy is designed to provide a stable environment to earn a rate of return over time to satisfy the benefit obligations and
minimize the reliance on contributions as a source of benefit security. The objectives are based on a long-term (5 to 15 year) investment horizon, so that interim fluctuations

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SUREWEST COMMUNICATIONS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
YEARS ENDED DECEMBER 31, 2010, 2009 AND 2008

8.    PENSION PLAN AND OTHER POST-RETIREMENT BENEFITS (Continued)

should
be viewed with appropriate perspective. The assets of the fund are to be invested to achieve the greatest return for the Pension Plan consistent with a prudent level of risk.

The
asset return objective is to achieve, as a minimum over time, the passively managed return earned by managed index funds, weighted in the proportions outlined by the asset class exposures
identified in the Pension Plan's strategic allocation. We update our long-term, strategic asset allocations every few years to ensure they are in line with our fund objectives. The target
allocation of the Pension Plan assets is approximately 33% U.S. large cap equities, 17% international equities, 7% U.S. small cap equities and 43% domestic fixed income. Domestic fixed income is in
the form of corporate and municipal bonds, U.S. Treasury and Government Agency securities and mortgage-backed securities. Currently, we believe that there are no significant concentrations of risk
associated with the Pension Plan assets.

Refer
to Note 3,Fair Value Measurements, for more detail regarding the three-tier value hierarchy, which prioritizes the inputs used
in the valuation methodologies in measuring fair value. The fair value measurements used to value our Pension Plan and Other Benefits Plan assets as of December 31, 2010 were generated by using
market transactions involving identical or comparable assets. There were no changes in the valuation techniques used during 2010.

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Table of Contents

SUREWEST COMMUNICATIONS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
YEARS ENDED DECEMBER 31, 2010, 2009 AND 2008

8.    PENSION PLAN AND OTHER POST-RETIREMENT BENEFITS (Continued)

The
fair values of our Pension Plan assets at December 31, 2010 and 2009, by asset category were as follows:

December 31, 2010Asset Category

Total

Level 1

Level 2

Level 3Short-term investment fund(1)

$
1,437

$
1,437

$


$
Equity securities:United States large-cap(2)


31,445


31,445





United States small-cap(4)


7,833





7,833


International value(5)


8,513





8,513


International growth funds(5)


7,987


7,987





Domestic fixed income:United States treasury and government agency securities


11,093


11,093





Corporate and municipal bonds


9,410





9,410


Mortgage/asset-backed securities


19,896





19,896


Total

$
97,614

$
51,962

$
45,652

$





December 31, 2009Asset Category

Total

Level 1

Level 2

Level 3Short-term investment fund(1)

$
2,449

$
2,449

$


$
Equity securities:United States large-cap(3)


32,467





32,467


United States small-cap(4)


7,160





7,160


International value(5)


7,967





7,967


International growth funds(5)


7,789


7,789





Domestic fixed income:United States treasury and government agency securities


6,669


6,669





Corporate commercial paper


1,302





1,302


Corporate and municipal bonds


10,523





10,523


Mortgage/asset-backed securities


18,284





18,284


Total

$
94,610

$
16,907

$
77,703

$



(1)This
category represents a sweep fund that is used for daily Plan operations.(2)This
category comprises low-cost equity index funds and investments in common stock of domestic corporations in a industry sectors
with a benchmark of the Russell 1000 Index.(3)This
category comprises low-cost equity index funds with a benchmark of the Russell 1000 Index.(4)This
category comprises low-cost equity index funds with a benchmark of the Russell 2000 Index.(5)These
categories compromise equity funds with a benchmark of the Morgan Stanley Capital International Europe, Asia, Australia, Far East Stock
index, net of withholding taxes to United States investors.


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Table of Contents

SUREWEST COMMUNICATIONS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
YEARS ENDED DECEMBER 31, 2010, 2009 AND 2008

8.    PENSION PLAN AND OTHER POST-RETIREMENT BENEFITS (Continued)

The fair values of our Other Benefits Plan assets at December 31, 2010 and 2009, by asset category were as follows:

December 31, 2010Asset Category

Total

Level 1

Level 2

Level 3Short-term investment fund(1)

$
57

$
57

$


$
Equity securities:United States large-cap(2)


1,238


1,238





United States small-cap(4)


308





308


International value(5)


335





335


International growth funds(5)


314


314





Domestic fixed income:United States treasury and government agency securities


437


437





Corporate and municipal bonds


370





370


Mortgage/asset-backed securities


783





783


Total

$
3,842

$
2,046

$
1,796

$





December 31, 2009Asset Category

Total

Level 1

Level 2

Level 3Short-term investment fund(1)

$
100

$
100

$


$
Equity securities:United States large-cap(3)


1,322





1,322


United States small-cap(4)


291





291


International value(5)


324





324


International growth funds(5)


317


317





Domestic fixed income:United States treasury and government agency securities


272


272





Corporate commercial paper


53





53


Corporate and municipal bonds


429





429


Mortgage/asset-backed securities


745





745


Total

$
3,853

$
689

$
3,164

$



(1)This
category represents a sweep fund that is used for daily Plan operations.(2)This
category comprises low-cost equity index funds and investments in common stock of domestic corporations in a industry sectors
with a benchmark of the Russell 1000 Index.(3)This
category comprises low-cost equity index funds with a benchmark of the Russell 1000 Index.(4)This
category comprises low-cost equity index funds with a benchmark of the Russell 2000 Index.(5)These
categories compromise equity funds with a benchmark of the Morgan Stanley Capital International Europe, Asia, Australia, Far East Stock
index, net of withholding taxes to United States investors.


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Table of Contents

SUREWEST COMMUNICATIONS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
YEARS ENDED DECEMBER 31, 2010, 2009 AND 2008

8.    PENSION PLAN AND OTHER POST-RETIREMENT BENEFITS (Continued)

Cash Flows



Our minimum funding requirement for 2011 related to the Pension Plan is expected to be approximately $5,800. However, due to a carryover balance of
approximately $2,000 and the timing of the quarterly installments we are not required to make a cash contribution until January 2012. We will continue to evaluate the future funding requirements of
the Plans and fund them as necessary.



As of December 31, 2010, benefit payments expected to be paid over the next ten years from the Plans are outlined in the following table:

Pension Plan & SERP

Other Benefits PlanExpected benefit payments:2011

$
7,780

$
1,0842012


8,043


9982013


8,316


9872014


8,646


9562015


8,856


7742016-2020


46,521


1,882


We
maintain a defined contribution retirement plan, the SureWest KSOP (the "KSOP"). We have retained a financial advisor and an investment management company to serve as the record keeper and fund
manager for certain funds of the KSOP. The KSOP allows its participants an opportunity to diversify their retirement holdings by offering a choice of twenty-two investment options, including the
Company's common stock. The KSOP has a retirement and savings feature. The retirement feature allows for qualified tax deferred contributions by employees under Section 401(k) of the Internal
Revenue Code. We match an employee's contributions dollar-for-dollar up to six percent of an employee's salary. Our matching contribution vests when the employee completes one
year of service. The KSOP provides for voting rights as to the participant's share of the Company's common stock held by the KSOP and for certain diversification rights of the participant's account
balances. Our earnings (loss) per share calculations include the issued and outstanding shares held by the KSOP.

The
following table summarizes matching KSOP contributions we expensed, the number of shares of the Company's common stock held by the KSOP and dividends received from the shares of the Company's
common stock held by the KSOP for the years ended December 31, 2010, 2009 and 2008:

2010

2009

2008Aggregate matching KSOP contributions expensed by the Company

$
2,871

$
3,015

$
3,138Number of the Company's shares held by the KSOP at December 31,


656,000


751,000


766,000Dividends received from the Company's shares held by the KSOP

$


$


$
364


97

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Table of Contents

SUREWEST COMMUNICATIONS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
YEARS ENDED DECEMBER 31, 2010, 2009 AND 2008

9.    COMMITMENTS AND CONTINGENCIES

We have certain other obligations for various contractual agreements that secure future rights to goods and services to be used in the normal course of operations. These include purchase commitments
for planned capital expenditures, agreements securing dedicated access and transport services, programming license agreements and support agreements. Additionally, SureWest Long Distance has procured
transport resale arrangements with several interexchange carriers. These resale arrangements are on a month-to-month basis with no long-term obligations.

We
lease certain facilities and equipment used in our operations under arrangements accounted for as operating leases. The facility leases generally require us to pay operating costs; including
property taxes, insurance and maintenance, and certain of them contain scheduled rent increases and renewal options. Leasehold improvements are amortized over their estimated useful lives or lease
period, whichever is shorter. We recognize rent expense on a straight-line basis over the term of each lease.

The
following table summarizes our minimum annual contractual obligations as of December 31, 2010 and the estimated timing and effect the obligations will have on our liquidity and cash flows
in future periods:

2011

2012

2013

2014

2015

Thereafter

TotalOperating lease agreements(1)

$
1,118


928


823


852


850


1,067

$
5,638Capital expenditures(2)


2,114

















2,114Service and support agreements(3)


804


527


18











1,349Programming content agreements(4)


477


360


26


2








865High-speed data connectivity(5)


300


125














425Total

$
4,813

$
1,940

$
867

$
854

$
850

$
1,067

$
10,391


(1)We
have entered into various non-cancelable operating leases for certain facilities and equipment with terms greater than one
year.(2)We
have binding commitments with numerous suppliers for future capital expenditures.(3)We
have entered into service and maintenance agreements to support various computer hardware and software applications and certain equipment.(4)Programming
content represents contracts with cable television networks and broadcast stations to provide programming services to our
subscribers. The amounts included in the above schedule represent estimated future payments for contracts with guaranteed minimum commitment levels and other factors, including the number of
subscribers receiving the programming.(5)High-speed
data connectivity represents contracts with guaranteed dedicated Internet access at designated bandwidth levels.


The
table below summarizes payments we made for operating leases, long distances transport, and high-speed data connectivity services for the years ended December 31, 2010, 2009 and
2008:

2010

2009

2008Operating lease agreements

$
3,369

$
3,561

$
3,614Long distance transport services


1,716


2,112


2,201High-speed data connectivity


853


1,546


783$
5,938

$
7,219

$
6,598


98

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Table of Contents

SUREWEST COMMUNICATIONS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
YEARS ENDED DECEMBER 31, 2010, 2009 AND 2008

9.    COMMITMENTS AND CONTINGENCIES (Continued)

Litigation, Regulatory Proceedings and Other Contingencies

We are subject to certain legal and regulatory proceedings, Internal Revenue Service examinations and other income tax exposures, and other claims
arising in the ordinary course of our business. In the opinion of management, the ultimate outcome of these matters will not materially affect our consolidated financial position, results of
operations or cash flows.

10.    SHARE-BASED COMPENSATION



Our Board of Directors may grant share-based awards from our shareholder approved Equity Incentive Plan, the 2000 Equity Incentive Plan (the "Stock
Plan"), to certain employees, outside directors and consultants. The Stock Plan permits issuance of awards in the form of RSAs, RSUs, performance shares, stock options and stock appreciation rights.
Under the Stock Plan, approximately 2.1 million shares of our common stock were authorized for issuance, including those outstanding as of December 31, 2010.



We measure the fair value of the RSAs and RSUs based upon the market price of the underlying common stock as of the date of the grant. RSAs and RSUs
are amortized over their respective vesting periods, generally from immediate vest to a four-year vesting period using the straight-line method. We have estimated expected
forfeitures based on historical experience and are recognizing compensation expense only for those RSAs and RSUs expected to vest.

The
following table summarizes the grants that occurred under the Stock Plan during the years 2010, 2009 and 2008:

Years Ended December 31,2010

Grant Date
Fair Value

2009

Grant Date
Fair Value

2008

Grant Date
Fair ValueRSAs Granted


217,575

$
9.95


166,506

$
11.56


143,340

$
12.34-15.59RSUs Granted


92,709

$
9.95


72,443

$
11.56


66,810

$
8.43-12.34RSU Dividends




$



8,470

$
9.79


802

$
8.88Total


310,284





247,419





210,952


RSU
Dividends consist of dividends that were previously granted to the holders of RSUs, which have fully vested and were released during the years presented in accordance with the underlying award
agreement. Stock-based compensation expense for both RSAs and RSUs of $2,845 (which included the costs to accelerate certain RSAs in accordance with the workforce reduction initiative as described
below), $2,010 and $879 was recorded during the years ended December 31, 2010, 2009 and 2008, respectively. Income tax benefits related to stock-based compensation of approximately $1,147, $813
and $356 were recorded for the years ended December 31, 2010, 2009 and 2008, respectively.

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Table of Contents

SUREWEST COMMUNICATIONS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
YEARS ENDED DECEMBER 31, 2010, 2009 AND 2008

10.    SHARE-BASED COMPENSATION (Continued)

During
the year ended December 31, 2010, the following summarizes the restricted common stock activity:

Nonvested Shares

Shares

Weighted Average Grant Date Fair ValueNonvested-January 1, 2010


349,916

$
12.90Granted


310,284

$
9.95Vested


(259,044
)
$
12.05Forfeited


(4,813
)
$
11.03Nonvested-December 31, 2010


396,343

$
11.17


As
of December 31, 2010, total unrecognized compensation costs related to nonvested restricted stock was $4,336 and will be recognized over a weighted-average period of approximately
2.31 years. The total fair value of RSAs and RSUs vested during the years ended December 31, 2010, 2009 and 2008 was $3,123, $2,305 and $1,222, respectively.



In 2003, we ceased granting stock options and have since granted RSAs and RSUs as part of our equity compensation plan. We issue new shares of common
stock upon exercise of stock options. The exercise price per share of the Company's common stock to be purchased under any incentive stock option shall not be less than 100% of the fair market value
of a share of the Company's common stock on the date of the grant, and the exercise price under a non-qualified stock option shall not be less than 85% of the fair market value of the
Company's common stock at the date of the grant. The term of any stock option shall not exceed ten years. There were no stock options granted or exercised during the year ended December 31,
2010. The aggregate intrinsic value is calculated as the difference between the exercise price of the stock options and the quoted price of our common stock. There were no options that were
in-the-money as of December 31, 2010.

The
following table summarizes stock option activity for the year ended December 31, 2010, along with options exercisable at the end of the year:

Options

Shares

Weighted
Average
Exercise
Price

Weighted
Average
Remaining
Contractual
LifeOutstanding-January 1, 2010


318,389

$
40.45Expired


(222,007
)Outstanding-December 31, 2010


96,382

$
41.85


1.00Vested and exercisable at December 31, 2010


96,382

$
41.85


1.00


11.    STOCK REPURCHASE

In September 2010, our Board of Directors authorized the repurchase of up to an additional 1 million shares of our common stock, supplementing the previously authorized share repurchase
program. The share repurchase program was originally approved in February 2000, and expanded in June 2002 and

100

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Table of Contents

SUREWEST COMMUNICATIONS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
YEARS ENDED DECEMBER 31, 2010, 2009 AND 2008

11.    STOCK REPURCHASE (Continued)

November
2006. This additional authorization increases the total number of shares available for repurchase under the program to 3.5 million. Shares are purchased from time to time in the open
market or through privately negotiated transactions, subject to overall financial and market conditions. As of December 31, 2010, under the share repurchase program approximately
2.3 million shares of common stock have been repurchased and approximately 1.2 million additional outstanding shares remain authorized for repurchase by the Board of Directors.

We
repurchased approximately 430 thousand shares, 108 thousand shares and 553 thousand shares during 2010, 2009 and 2008, respectively. The purchase of common shares did not have
a substantive effect on the average number of common shares outstanding or the calculation of basic and diluted earnings per share for the years ended December 31, 2010, 2009 or 2008.

12.    BUSINESS SEGMENTS

We have two reportable business segments: Broadband and Telecom. We have aggregated certain of our operating segments within the Broadband and Telecom segments because we believe that such operating
segments share similar economic characteristics. We measure and evaluate the performance of our segments based on income (loss) from operations. Corporate Operations are allocated to the appropriate
segment, except for cash; investments; certain property, plant, and equipment; and miscellaneous other assets, which are not allocated to the segments. However, the interest income associated with
cash and investments held by Corporate Operations is included in the results of the operations of our segments.

The
Broadband segment utilizes fiber-to-the-home and fiber-to-the-node networks to offer many of its bundled residential and
commercial services that include Internet Protocol-based digital and high-definition television, high-speed Internet, Voice over Internet Protocol ("VoIP") and local and long
distance telephone in the Sacramento region and Kansas City area. The Broadband segment continues to expand its use of optical fiber in its networks.

The
Telecom segment, which operates only in the Sacramento region, offers a broad selection of telecommunications services including traditional circuit-switched voice services, domestic and
international long distance services and a number of lightly-regulated or non-regulated services. Customers in the Telecom segment can select individual services or bundled packages that
may include unlimited local calling or unlimited local and domestic long distance calling plans. Our voice products also include value-added services such as voicemail, call waiting, caller
identification and many other calling feature options. Most long distance services are offered by our subsidiary SureWest Long Distance, which is a reseller of long distance services.

The
Telecom segment also provides wholesale access services through the use of its network to the Broadband segment, which enables the Broadband segment to offer high-speed Internet, VoIP
and video services to those customers within SureWest Telephone's service area. These wholesale services are included as intersegment revenues and expenses in each of the respective segments and
eliminated in the consolidated statements of income.

These
segments are strategic business units that offer different products and services. The accounting policies of these segments are the same as those described in Note 1. We account for
intersegment revenues and expenses at prevailing market rates.

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Table of Contents

SUREWEST COMMUNICATIONS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
YEARS ENDED DECEMBER 31, 2010, 2009 AND 2008

12.    BUSINESS SEGMENTS (Continued)

Our
business segment information is as follows:

2010

Broadband

Telecom

Corporate
Operations

Discontinued
Operations

Intercompany
Eliminations

ConsolidatedOperating revenues from external customers

$
174,546

$
68,953

$


$


$


$
243,499Intersegment revenues


564


20,637








(21,201
)

Operating expenses*


140,282


47,399








(21,201
)

166,480Depreciation and amortization


49,621


12,204











61,825Income (loss) from operations


(14,793
)

29,987











15,194Investment income


21


56











77Interest expense, net of capitalized interest


(8,089
)

(257
)










(8,346
)Income tax expense (benefit)


(9,893
)

13,247











3,354Income (loss) from continuing operations

$
(12,873
)
$
16,228

$


$


$


$
3,355Total assets

$
1,004,739

$
1,308,367

$
997,012

$


$
(2,706,937
)
$
603,181Capital expenditures

$
43,944

$
7,286

$
1,330

$


$


$
52,560


*Exclusive
of depreciation and amortization


2009

Broadband

Telecom

Corporate
Operations

Discontinued
Operations

Intercompany
Eliminations

ConsolidatedOperating revenues from external customers

$
161,222

$
80,478

$


$


$


$
241,700Intersegment revenues


438


19,897








(20,335
)

Operating expenses*


137,851


50,887








(20,335
)

168,403Depreciation and amortization


47,359


12,365











59,724Income (loss) from operations


(23,550
)

37,123











13,573Investment income


28


93











121Interest expense, net of capitalized interest


(10,856
)

(462
)










(11,318
)Income tax expense (benefit)


(13,453
)

15,459











2,006Income (loss) from continuing operations

$
(20,782
)
$
21,449

$


$


$


$
667Total assets

$
914,026

$
1,186,441

$
827,566

$


$
(2,305,170
)
$
622,863Capital expenditures

$
47,975

$
9,355

$
1,000

$


$


$
58,330


*Exclusive
of depreciation and amortization


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Table of Contents

SUREWEST COMMUNICATIONS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
YEARS ENDED DECEMBER 31, 2010, 2009 AND 2008

12.    BUSINESS SEGMENTS (Continued)

2008

Broadband

Telecom

Corporate
Operations

Discontinued
Operations

Intercompany
Eliminations

ConsolidatedOperating revenues from external customers

$
135,341

$
95,032

$


$


$


$
230,373Intersegment revenues


539


18,455








(18,994
)

Operating expenses*


122,650


56,549








(18,994
)

160,205Depreciation and amortization


40,491


14,536











55,027Income (loss) from operations


(27,261
)

42,402











15,141Investment income


95


581











676Interest expense, net of capitalized interest


(11,798
)

(328
)










(12,126
)Income tax expense (benefit)


(15,157
)

18,296











3,139Income (loss) from continuing operations

$
(23,684
)
$
24,510

$


$


$


$
826Total assets

$
858,899

$
1,087,032

$
682,712

$
5,002

$
(1,999,836
)
$
633,809Capital expenditures

$
66,737

$
18,519

$
1,233

$


$


$
86,489


*Exclusive
of depreciation and amortization


13.    QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

2010

March 31

June 30

September 30

December 31Operating revenues

$
60,188

$
60,548

$
61,117

$
61,646Income from operations

$
3,142

$
2,037

$
5,017

$
4,998Net income (loss)

$
527

$
(527
)
$
1,404

$
1,951Net income (loss) per basic and diluted common share

$
0.04

$
(0.04
)
$
0.10

$
0.14




2009

March 31

June 30

September 30

December 31Operating revenues

$
60,942

$
60,930

$
59,529

$
60,299Income from operations

$
3,320

$
4,615

$
2,616

$
3,022Income (loss) from continuing operations

$
79

$
899

$
(211
)
$
(100
)Loss from discontinued operations


(69
)







Gain on discontinued operations


2,508


60





Net income (loss)

$
2,518

$
959

$
(211
)
$
(100
)Basic and diluted earnings (loss) per share:Income (loss) from continuing operations

$
0.01

$
0.06

$
(0.02
)
$
Discontinued operations, net of tax


0.17


0.01





Net income (loss) per basic and diluted common share

$
0.18

$
0.07

$
(0.02
)
$



103

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Table of Contents

SUREWEST COMMUNICATIONS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
YEARS ENDED DECEMBER 31, 2010, 2009 AND 2008

13.    QUARTERLY FINANCIAL INFORMATION (UNAUDITED) (Continued)

As
described in Note 1, we incurred estimated severance costs of $1,640 as a result of the workforce reduction initiative implemented during the quarter ended June 30, 2010. During the
quarter ended September 30, 2010, severance costs decreased $212 as a result of a reduction in estimated stock compensation expense.

In
February 2009, we sold our Tower Assets for an aggregate cash purchase price of $9,222, resulting in a gain of $2,525, net of tax. The operating results of our Tower Assets are included in loss
from discontinued operations for the quarter ended March 31, 2009.

As
a result of periodic cost separation studies required by the FCC, SureWest Telephone changed its estimates for certain NECA CL accounts receivable balances related to current and prior year
monitoring periods. These changes in accounting estimates decreased consolidated revenues and net income by $583 and $335 ($0.02 per share) and $361 and $210 ($0.02 per share) during the third and
fourth quarters of 2009, respectively. We did not record any significant changes in accounting estimates related to current or prior year monitoring periods during 2010 or the first or second quarters
of 2009.

104

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Table of Contents

Item 9.    Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.

Not applicable.

Item 9A.    Controls and Procedures.

Evaluation of disclosure controls and procedures

In accordance with Rule 13a-15(b) of the Securities Exchange Act of 1934, as amended ("Exchange Act"), as of the end of the period
covered by this Annual Report on Form 10-K, we carried out an evaluation, under the supervision and with the participation of our management, including our chief executive officer
and our chief financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based upon, and as of the date of this evaluation, the chief executive
officer and chief financial officer have concluded that our disclosure controls and procedures were effective as of the end of the period covered by this Annual Report on Form 10-K,
to ensure that information required to be disclosed by the Company in reports we file or submit under the Exchange Act is authorized, recorded, processed, summarized and reported within the time
periods specified in the Securities and Exchange Commission rules and forms, and to ensure that information required to be disclosed by the Company in the reports we file or submit under the Exchange
Act is accumulated and communicated to our management, including our president and chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding disclosure.

In
the second quarter of 2010, we reduced our workforce by approximately 60 positions, including open and unfilled positions. The affected positions were comprised of a range of levels across the
Company, including Bill M. DeMuth, Senior Vice President and Chief Technology Officer, who left the Company on June 30, 2010 pursuant to a Severance Agreement. The responsibilities of the
affected employees were assumed by remaining employees and management, as deemed necessary. Based on our control testing and management's assessment of our internal control environment, the changes to
our employee base and management team did not adversely impact our internal controls or control environment.

Management's Report on Internal Control over Financial Reporting

The report of management required under Item 9A is contained in Item 8 of Part II of this Annual Report on
Form 10-K under the heading "Management's Report on Internal Control over Financial Reporting."

Attestation Report of Independent Registered Public Accounting Firm

The attestation report required under Item 9A is contained in Item 8 of Part II of this Annual Report on
Form 10-K under the heading "Report of Independent Registered Public Accounting Firm."

Change in internal control over financial reporting

Beginning in the second quarter of 2010, we commenced certain strategic projects to move our cash management services from our existing financial
institutions to two new financial institutions. The movement of these services was substantially completed in 2010, with the remaining likely to be completed in the first quarter of 2011. As part of
these projects, management continues to evaluate our internal controls over financial reporting and will do so until after the completion of all of the cash management changes. Except for the items
discussed above, there has been no change in our internal control over financial reporting during the quarter ended December 31, 2010.

Limitations on the effectiveness of controls

Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Our internal control system was
designed to provide reasonable assurance to our management, Board of Directors and Audit Committee regarding the reliability of financial reporting and the preparation of published financial
statements in accordance with generally accepted accounting principles.

Item 9B.    Other Information.

Not
applicable.

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Table of Contents

PART III

Item 10.    Directors, Executive Officers and Corporate Governance.

For information regarding SureWest Communications' (the "Company" or "our") executive officers, see "Executive Officers of the Registrant" in
Part I, Item 1 of this Annual Report on Form 10-K. Other information required by this item is incorporated herein by reference from the proxy statement for the annual
meeting of our shareholders to be filed pursuant to Regulation 14A within 120 days after our fiscal year-end of December 31, 2010.

Item 11.    Executive Compensation.

Incorporated herein by reference from the proxy statement for the annual meeting of our shareholders to be filed pursuant to Regulation 14A
within 120 days after our fiscal year-end of December 31, 2010.

Item 12.    Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

Equity Compensation Plan Information

Our Board of Directors may grant share-based awards from our shareholder approved Equity Incentive Plan; the 2000 Equity Incentive Plan (the "Stock
Plan") to certain employees, outside directors and consultants.

The
Stock Plan, as originally approved by our shareholders, contemplated the issuance of up to 800,000 shares of the Company's common stock. Thereafter, our shareholders approved an increase to
950,000 shares and the incorporation of an evergreen provision pursuant to which the number of shares of the Company stock, which shall be made available under the 2000 Plan, shall be 950,000 shares
plus an annual increase to be added on the first business day of each calendar year and thereafter beginning with January 2, 2003, equal to one percent of the outstanding shares as of
December 31 of the immediately preceding calendar year.

The
following table provides information about equity awards under the Stock Plan:

Plan category

Number of securities
to be issued upon
exercise of
outstanding options,
warrants and rights

Weighted-average
exercise price of
outstanding options,
warrants and rights

Number of securities
remaining available for
future issuance under equity
compensation plans
(excluding securities
reflected in column (a))(a)

(b)

(c)Equity compensation plans approved by security holders


96,382

$
41.85


938,254Equity compensation plans not approved by security holders








Total


96,382

$
41.85


938,254


Additional
information required by Item 12 is incorporated herein by reference from the proxy statement for the annual meeting of our shareholders to be filed pursuant to Regulation 14A
within 120 days after our fiscal year-end of December 31, 2010.

Item 13.    Certain Relationships and Related Transactions, and Director Independence.

Incorporated herein by reference from the proxy statement for the annual meeting of our shareholders to be filed pursuant to Regulation 14A
within 120 days after our fiscal year-end of December 31, 2010.

Item 14.    Principal Accountant Fees and Services.

Incorporated herein by reference from the proxy statement for the annual meeting of our shareholders to be filed pursuant to Regulation 14A
within 120 days after our fiscal year-end of December 31, 2010.

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Table of Contents

PART IV

Item 15.    Exhibits and Financial Statement Schedules.

(a)

1.

All Financial StatementsThe following financial statements are filed as part of this report under Item 8"Financial Statements and Supplementary Data":Reports of Independent Registered Public Accounting FirmConsolidated Statements of Income for each of the three years in the period ended December 31, 2010Consolidated Balance Sheets as of December 31, 2010 and 2009Consolidated Statements of Shareholders' Equity for each of the three years in the period ended December 31, 2010Consolidated Statements of Cash Flows for each of the three years in the period ended December 31, 2010Notes to Consolidated Financial Statements (including: Quarterly Financial Information (Unaudited))Management's Report on Internal Control over Financial Reporting is contained as part of this report under Item 9A"Controls and Procedures"2.

Financial Statement SchedulesFinancial statement schedules have been omitted because they are not required, not applicable or the information is otherwise included in the notes to the consolidated financial statements.3.

ExhibitsThe exhibits listed on the accompanying Index to Exhibits are filed or furnished as part of this report.


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Table of Contents

SUREWEST COMMUNICATIONS  INDEX TO EXHIBITS  (Item 15 (a) 3)

Exhibit No.

Description

Method of Filing3.1

Articles of Incorporation of Registrant, together with Certificate of Amendment of Articles of Incorporation dated January 25, 1996 and Certificate of Amendment of Articles of Incorporation dated June 21, 1996
(Filed as Exhibit 3(a) to Form 10-Q Quarterly Report for the quarter ended September 30, 1996)

Incorporated by
reference3.2

Certificate of Amendment of Articles of Incorporation dated May 18, 2001 (Filed as Exhibit 3(b) to Form 10-Q Quarterly Report for the quarter ended June 30, 2001)

Incorporated by
reference3.3

Amended and Restated Bylaws of the Registrant, effective September 30, 2009 (Filed as Exhibit 3.1 to Form 8-K filed October 6, 2009)

Incorporated by
reference4.1

Amended and Restated Rights Agreement, inclusive of Amendment 1 (Filed as Exhibit 4.1 to Form 8-A/A filed March 12, 2008 and as Exhibit 9.01 to Form 8-K filed May 1, 2008)

Incorporated by
reference10.1

Second Amended and Restated Credit Agreement dated as of February 13, 2008 among SureWest Communications and CoBank, ACB (Filed as Exhibit 10.1 to Form 8-K filed February 15, 2008)

Incorporated by
reference10.2

Third Amended and Restated Credit Agreement dated as of September 19, 2008 among SureWest Communications and CoBank, ACB (Filed as Exhibit 10.1 to Form 8-K filed September 24, 2008)

Incorporated by
reference10.3

Letter Agreement dated as of January 29, 2010 amending the Third Amended and Restated Credit Agreement dated as of September 19, 2008 among SureWest Communications and CoBank, ACB (Filed as Exhibit 10.1
to Form 8-K filed February 1, 2010)

Incorporated by
reference10.4

Membership Interest Purchase Agreement among West Coast PCS Structures, LLC, PCS Structures Towers, LLC, West Coast PCS LLC and GTP Towers I, LLC dated October 10, 2008 (Filed as
Exhibit 2.1 to Form 8-K filed October 14, 2008)

Incorporated by
reference10.5

Asset Purchase Agreement among SureWest Wireless, West Coast PCS LLC, SureWest Communications and Cellco Partnership d/b/a Verizon Wireless dated January 18, 2008 (Filed as Exhibit 2.1 to Form 8-K
filed January 22, 2008)

Incorporated by
reference10.6

Purchase and Sale Agreement among Everest Broadband, Inc., the Equity Holders of Everest Broadband, Inc., and SureWest Communications dated December 6, 2007 (Filed as Exhibit 2.1 to Form 8-K
filed December 7, 2007)

Incorporated by
reference


108

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Table of Contents

Exhibit No.

Description

Method of Filing10.7

Share Purchase Agreement among SureWest Communications, SureWest Directories and Gatehouse Media, Inc., dated as of January 28, 2007. Pursuant to Item 601(b)(2) of Regulation S-K, the Registrant agrees
to furnish, supplementally, a copy of any exhibit or schedule omitted from the Share Purchase Agreement to the Commission upon request (Filed as Exhibit 10.1 to Form 8-K filed January 29, 2007)

Incorporated by
reference10.8

2000 Equity Incentive Plan, as amended

Filed Herewith10.9

Form of Stock Award Agreement (Time Based) under the SureWest Communications 2000 Equity Incentive Plan

Filed Herewith10.10

Form of Stock Award Agreement (Performance Based) under the SureWest Communications 2000 Equity Incentive Plan

Filed Herewith10.11

Form of Stock Unit Award Agreement (Time Based) under the SureWest Communications 2000 Equity Incentive Plan For Non-Employee Directors

Filed Herewith10.12

Form of Stock Unit Award Agreement (Time Based) under the SureWest Communications 2000 Equity Incentive Plan for Key Officers

Filed Herewith10.13

Form of Stock Unit Award Agreement (Performance Based) under the SureWest Communications 2000 Equity Incentive Plan for Key Officers

Filed Herewith10.14

SureWest KSOP (Filed as Exhibit 4.1 to Registration Statement on Form S-8 [No. 333-87222])

Incorporated by
reference10.15

Letter agreement dated December 15, 2005 between Registrant and Steven C. Oldham (Filed as Exhibit 99.5 to Form 8-K filed December 16, 2005)

Incorporated by
reference10.16

Change in Control Severance Plan and Summary Plan Description, effective date February 7, 2011

Filed Herewith10.17

Change in Control Agreement dated February 8, 2011 between Registrant and Steven C. Oldham (Filed as Exhibit 10.1 to Form 8-K filed February 14, 2011)

Incorporated by
reference10.18

Change in Control Agreement dated February 8, 2011 between Registrant and Officers (Filed as Exhibit 10.2 to Form 8-K filed February 14, 2011)

Incorporated by
reference10.19

Severance Agreement dated March 25, 2008 between SureWest Communications and Philip A. Grybas (Filed as Exhibit 10.6 to Form 10-Q Quarterly Report for the quarter ended March 31, 2008)

Incorporated by
reference10.20

Severance Agreement dated June 22, 2010 between SureWest Communications and Bill DeMuth (Filed as Exhibit 10.1 to Form 10-Q Quarterly Report for the quarter ended June 30, 2010)

Incorporated by
reference


109

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Table of Contents

Exhibit No.

Description

Method of Filing10.21

Form of Indemnification Agreement for directors, officers and key employees of SureWest Communications, effective March 24, 2010 (Filed as Exhibit 10.1 to Form 8-K filed March 26, 2010)

Incorporated by
reference21

List of Subsidiaries

Filed herewith23

Consent of Independent Registered Public Accounting Firm

Filed herewith31.1

Certification of Steven C. Oldham, President and Chief Executive Officer, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

Filed herewith31.2

Certification of Dan T. Bessey, Vice President and Chief Financial Officer, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

Filed herewith32.1

Certification of Steven C. Oldham, President and Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

Filed herewith32.2

Certification of Dan T. Bessey, Vice President and Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

Filed herewith


110

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Table of Contents

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.

SUREWEST COMMUNICATIONS
(Registrant)By:

/s/ STEVEN C. OLDHAM Steven C. Oldham,
President and Chief Executive OfficerDate: February 25, 2011By:

/s/ DAN T. BESSEY Dan T. Bessey,
Vice President
and Chief Financial OfficerDate: February 25, 2011


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Table of Contents

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.

/s/ KIRK C. DOYLE Kirk C. Doyle,
Chairman of the Board/s/ STEVEN C. OLDHAM Steven C. Oldham,
President and Chief Executive
Officer, Director/s/ DAN T. BESSEY Dan T. Bessey,
Vice President
and Chief Financial Officer/s/ GUY R. GIBSON Guy R. Gibson,
Director/s/ ROBERT D. KITTREDGE Robert D. Kittredge,
Director/s/ JOHN R. ROBERTS III John R. Roberts III,
Director/s/ TIMOTHY D. TARON Timothy D. Taron,
Director/s/ ROGER J. VALINE Roger J. Valine,
DirectorDate: February 25, 2011


112

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