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, 2009oro

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, 2009, the aggregate market value of the shares held by non-affiliates of the registrant's common stock was $133,789,331 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 10, 2010, the registrant had 14,365,941 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 19, 2010 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, 2009.



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TABLE OF CONTENTS



PAGEPART IItem 1.

Business

1Item 1A.

Risk Factors

15Item 1B.

Unresolved Staff Comments

18Item 2.

Properties

18Item 3.

Legal Proceedings

19Item 4.

Submission of Matters to a Vote of Security Holders

19PART IIItem 5.

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

20Item 6.

Selected Financial Data

22Item 7.

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

24Item 7A.

Quantitative and Qualitative Disclosures About Market Risk

52Item 8.

Financial Statements and Supplementary Data

53Item 9.

Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

100Item 9A.

Controls and Procedures

100Item 9B.

Other Information

100PART IIIItem 10.

Directors, Executive Officers and Corporate Governance

101Item 11.

Executive Compensation

101Item 12.

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

101Item 13.

Certain Relationships and Related Transactions, and Director Independence

102Item 14.

Principal Accountant Fees and Services

102PART IVItem 15.

Exhibits and Financial Statement Schedules

103SIGNATURES

107


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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 and other facilities-based communications services in Northern California, primarily the greater Sacramento region and 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, 2009, our operating subsidiaries included SureWest Broadband, SureWest TeleVideo, SureWest Internet, SureWest Custom Data Services, SureWest Kansas, Inc. (formerly
Everest Broadband, Inc. ("Everest") 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.

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 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

2009

2008

2007Broadband


67%


59%


39%Telecom


33%


41%


61%Total operating revenues


100%


100%


100%


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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 contributes the majority of our total operating revenues. We anticipate Broadband revenues will continue to increase and 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") 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, 2009, 2008 and 2007.

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 Revenues2009

2008

2007Broadband residential data service

$
45,061

$
39,966

$
27,075Broadband residential video service

$
47,522

$
38,520

$
14,721Broadband residential voice service

$
25,897

$
20,619

$
8,197Broadband business service

$
39,554

$
33,077

$
17,304Telecom residential service

$
24,504

$
32,464

$
39,810Telecom business service

$
35,457

$
38,066

$
37,233Telecom access service

$
19,727

$
23,732

$
27,752


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, 2009, we had 893 employees. None of our employees are represented by a union. We believe our employee relations are positive.

Broadband



The Broadband segment includes SureWest Broadband, SureWest TeleVideo, SureWest Internet, SureWest Custom Data Services, SureWest Kansas and the
SureWest CLEC.

The
Broadband segment utilizes fiber-to-the-premise and fiber-to-the-node networks in portions of its service 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 in the greater Sacramento, California and Kansas City areas. As of December 31, 2009, the Broadband segment had 102,600 and 229,200 residential subscribers and
Revenue-generating units ("RGUs"), respectively.

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 and consolidated results of operations. SureWest Kansas is

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a
competitive provider of high-speed data, video and voice services in the greater 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 plan to engage in future network expansion, including the City of Rocklin.

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 from its affiliate, SureWest Telephone, and also from other carriers. With SureWest TeleVideo, it developed an advanced method of delivering
video services to subscribers in the Sacramento area using IP, or IP-video capability.

The
Broadband segment utilizes a digital fiber network in many portions of its service areas, and we continually expand and diversify our network to be able to respond to business growth. The
Broadband segment uses its network for both business and residential services.



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, 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 area. A number of wireless providers 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. The operating units in this segment benefit within the region from the
name recognition and reputation of SureWest, and from the active participation of our executives and employees in civic and other groups.

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The Broadband segment has assumed the responsibility for all of our retail Digital Subscriber Line ("DSL") and high-speed Internet retail customer
base. The emergence of cable modems, wireless Internet access and other avenues to reach the Internet have allowed entry by many new firms, who provide significant competition.

In
most cases, we have entered the cable television service markets as the second (or subsequent) provider. 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 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 competitor an advantage in both access to and pricing of the program content needed to operate a cable television business. Comcast (in California) and Time Warner (in the Kansas
City area) each possess significantly greater size and scale than the Company.



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 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
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 Carrier's ("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

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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 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:

The
SureWest CLEC, SureWest TeleVideo, and SureWest Kansas 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 our subsidiaries. For example,
a mandatory resale requirement applied to AT&T in California or Kansas allows the SureWest CLEC and our Kansas City operations to gain access to special access services and 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 2009. A new FCC chairman was confirmed in 2009, and there are a number of new commissioners. As a result, its agenda is changing. 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
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; 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. 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 are generally exempt by law from direct FTC regulation, but 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.



Our
cable television subsidiaries each require 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

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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 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.

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"). 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
different 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 more traditional incumbents. 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. This law is also available under certain circumstances to incumbent cable operators with existing local franchises who compete against us as well.

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 affect 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.

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 not occur until late 2011.

Federal
law and regulation regulates 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 then unless it is again extended. The FCC
recently adopted an order banning exclusive contracts between affiliates where the programming is sent via terrestrial media, and 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 subject to appeal. 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. Review of the proposed transaction by the FCC and other bodies with jurisdiction has commenced, and no prediction can be made as to the ultimate outcome. If the
transaction is approved, conditions may apply.

The
contractual relationships between cable operators and most providers of content who are not television broadcast stations, however, 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, 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 have caused our subsidiaries to incur costs for public service
announcements, new equipment and network reconfiguration. The transition was completed during 2009, subject to certain transitional "continued viewability" rules to ensure that subscribers will
continue to have access to broadcast content. In addition, a number of television providers agreed upon non-binding standards for the deployment of mobile video services during 2009. These
changes 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.

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.

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 adopted an order, recently upheld on appeal, that
invalidated exclusivity provisions in agreements between multiple dwelling unit owners and cable providers, and requires that these owners grant access to competing cable providers (the FCC is still
considering proposals to prohibit related exclusive marketing agreements and bulk billing arrangements altogether). The FCC also has

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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.

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.



SureWest
Internet, SureWest Custom Data Services, the SureWest CLEC and our Kansas City operations provide 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 DSL service on an equal competitive footing, the FCC asserted jurisdiction over these services as "information services"
under Title I of the Communications 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. That proceeding is pending and the Commission is not expected to
act until later in 2010. Its ultimate outcome cannot be predicted.

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 is currently unclear
whether the FTC initiative 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.

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Telecom



The Telecom segment includes SureWest Telephone and SureWest Long Distance, which provide landline telecommunications services, wholesale DSL
service, 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 greater
Sacramento area. 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 2010.

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 29% decrease in voice RGUs and an 8% decline in business customers from December 31, 2008 to
December 31, 2009. As of December 31, 2009, SureWest Telephone served approximately 38,500 voice RGUs and approximately 8,500 business customers. We believe that the continued 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 units 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., Transcom
Enhanced Services, Inc. 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.

As
of December 31, 2009 and 2008, 55% and 53%, respectively, of the customers of SureWest Telephone chose SureWest Long Distance as their presubscribed long distance provider.

In
February 2007, we sold 100% of the stock of SureWest Directories, our directory publishing business, to GateHouse Media ("Gatehouse") for an aggregate cash purchase price of $110,123, resulting in
a gain of $59,339, net of tax. The net gain was recorded in our consolidated statements of
income as a discontinued operation. SureWest Directories was previously included in the Telecom segment. As part of the transaction, GateHouse became the publisher of the official directory of
SureWest Telephone.

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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 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.

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

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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 change in the makeup of the FCC during 2009 also
may influence the FCC's actions on these and other policy issues.

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.

In
2004, we entered into a settlement agreement (the "Settlement Agreement"), which was ultimately approved by the CPUC, to resolve an ongoing regulatory proceeding with various parties. The
Settlement Agreement resolved past sharing liabilities and suspended future sharing requirements in the intrastate jurisdiction. In accordance with the Settlement Agreement, SureWest Telephone
returned approximately $6,500 plus interest at the 90-day commercial paper rate for non-financial institutions, which was 0.97% as of December 31, 2008, and an imputed
rate of 3.15%, to its end users through a consumer dividend. The surcredit was recorded as a reduction of our contractual shareable earnings obligations over a period of approximately four years,
which began January 1, 2005 and terminated February 9, 2009. The conclusion of this surcredit satisfied our remaining requirements associated with the Settlement Agreement as all other
requirements were completed in preceding years. 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 December 2006, the CPUC authorized us to reduce our annual interim draw from the CHCF by $1,300 pursuant to
its proposal to offset a portion of the 2004 consumer dividend Settlement Agreement. In September 2007, the CPUC issued Decision 07-09-002 which provides for SureWest Telephone
to phase-down its remaining interim annual CHCF draw over a five-year period, to end on January 1, 2012. The phase-down of the interim draw began in January
2007, initially reducing the annual $11,500 interim draw by the aforementioned $1,300 consumer dividend 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 can 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 will be allowed full pricing flexibility for the basic residential rate.

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In
December 2007, the CPUC issued a final decision ("FD") in a proceeding investigating the continued need for an intrastate access element called the transport interconnection charge ("TIC"). In
September 2008, the CPUC issued a FD in its CHCF-B proceeding. When taken together with the December 2007 FD, it caps SureWest Telephone's intrastate access charges at current levels
through 2010 and eliminates the TIC 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 subsequent to the expiration on January 1, 2011 of the current residential price freeze, as discussed above.

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 long term policies and/or rules to maintain and promote universal service, intercarrier compensation, a national broadband plan
and network neutrality. 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.

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 Everest for a total purchase price of $181,459, including transaction
costs. Subsequent to the acquisition, the Kansas City operations

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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 greater
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.



In February 2007, we sold 100% of the stock of SureWest Directories, our directory publishing business, to GateHouse for an aggregate cash purchase
price of $110,123, resulting in a gain of $59,339, net of tax. The net gain was recorded in our consolidated statements of income as a discontinued operation. SureWest Directories was previously
included in the Telecom segment. As part of the transaction, GateHouse became the publisher of the official directory of SureWest Telephone.

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, 2010 were as follows:

Steven C. Oldham; age 59; 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 57; 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.

Bill M. DeMuth; age 60; Senior Vice President and Chief Technology Officer

Mr. DeMuth has served as Senior Vice President and Chief Technology Officer since May 2006. Prior to his appointment to Senior Vice President,
he served as Vice President and Chief Technology Officer since 2000.

L. Scott Sommers; age 52; 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.

Scott K. Barber; age 49; 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.

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Dan T. Bessey; age 44; 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 46, 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 49; Vice President, 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 54; 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 46; Vice President and General Manager of Operations, Kansas

Mr. Johnson has 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 50; 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 49; 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 amended, are available free of charge on our web site at www.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

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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 those described below (without limitation to), that
could adversely affect our business, financial condition, results of operations, cash flows and trading price of our common stock.



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17

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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 231,000 square feet for central office facilities, operations and warehouse space in Sacramento County. Our leased Sacramento County facilities are utilized by both of our
segments and are primarily located at an approximate 214,000 square foot facility in McClellan Park. Our lease in McClellan Park will expire on December 31, 2010 and we anticipate that the
amount of leased square footage will be reduced through workforce consolidations into our other facilities in California. 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.

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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.

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".

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

No matters were submitted to a vote of security holders during the fourth quarter of 2009.

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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 10, 2010, there were approximately 9,581 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, 2008

$
17.11

$
12.00June 30, 2008

$
19.08

$
8.43September 30, 2008

$
14.15

$
7.31December 31, 2008

$
17.97

$
10.35March 31, 2009

$
11.74

$
7.50June 30, 2009

$
11.05

$
6.22September 30, 2009

$
13.50

$
10.45December 31, 2009

$
12.55

$
8.23


We
paid cash dividends on our common stock of $0.25 per share during the first two quarters of 2008.

In
April 2008, our Board of Directors announced the decision to discontinue dividend payments for the foreseeable future in an effort to foster our growth strategy by reinvesting the approximate
$14,100 of annual dividend distributions back into the Company. The cash dividend of $0.25 per share, paid on June 16, 2008 to shareholders of record at the close of business on May 15,
2008, was the last dividend paid to shareholders for the foreseeable future. Any reinstatement of future dividend payments is at the discretion of our Board of Directors. See Part II,
Item 7"Management's Discussion and Analysis of Financial Condition and Results of OperationsLiquidity and Capital Resources" for a discussion regarding restrictions on
the payment of dividends. Additional information concerning dividends may be found in "Selected Financial Data" in Item 6 and in Item 8, which are incorporated herein by reference.

During
the year ended December 31, 2009, 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 2.5 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, 2009, we had remaining authorization from the Board of Directors to repurchase approximately
611 thousand 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 includes 18 telecommunications
companies) 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, 2004 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 31,2004

2005

2006

2007

2008

2009SureWest Communications

$
100

$
97

$
106

$
69

$
48

$
42Russell 2000

$
100

$
105

$
124

$
122

$
81

$
103Dow Jones US Telecommunications

$
100

$
96

$
131

$
145

$
97

$
106


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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.

2009

2008(1)

2007

2006

2005(Dollars in thousands, except per share amounts)Statements of Income Data:Total operating revenues

$
241,700

$
230,373

$
174,257

$
170,982

$
167,174Operating income


13,573


15,141


8,387


10,416


7,778Net income:Income from continuing operations


667


826


5,223


2,004


1,635Income from discontinued operations(2)(3)(4)


2,499


18,107


57,717


3,734


4,743Net income

$
3,166

$
18,933

$
62,940

$
5,738

$
6,378Per Share DataEarnings Per Share and Dividends:Basic earnings per share:Income per share from continuing operations(5)

$
0.05

$
0.06

$
0.36

$
0.14

$
0.11Income per share from discontinued operations(5)


0.18


1.28


3.99


0.25


0.33Net income per basic share

$
0.23

$
1.34

$
4.35

$
0.39

$
0.44Diluted earnings per share:Income per share from continuing operations(5)

$
0.05

$
0.06

$
0.36

$
0.14

$
0.11Income per share from discontinued operations(5)


0.18


1.28


3.98


0.25


0.33Net income per diluted share

$
0.23

$
1.34

$
4.34

$
0.39

$
0.44Cash dividends per share(6)

$


$
0.50

$
1.00

$
1.00

$
1.00Balance Sheet Data:Total assets

$
622,863

$
633,809

$
484,767

$
445,750

$
459,029Long-term obligations

$
207,409

$
226,045

$
118,189

$
123,722

$
89,168Shareholders' equity

$
269,183

$
261,345

$
271,003

$
225,776

$
231,751Other Data:Adjusted EBITDA(7)

$
77,898

$
69,239

$
57,295

$
64,324

$
57,966


(1)In
February 2008, we acquired 100% of the issued and outstanding stock of 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.(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 all years presented.


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(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 all years presented.(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)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; 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 items which do not relate to our
core operating performance. The presentation of Adjusted EBITDA is not a measure of financial performance under United States generally accepted accounting principles and should not be considered in
isolation or as a substitute for consolidated net income as a measure of performance and may not be comparable to similarly titled measures used by other companies.
The
following is a reconciliation of our income from continuing operations to Adjusted EBITDA:


2009

2008

2007

2006

2005Income from continuing operations

$
667

$
826

$
5,223

$
2,004

$
1,635Add (subtract):Income tax expense (benefit)


2,006


3,139


(367
)

1,383


569Other (income) expense, net


10,900


11,176


3,531


7,029


5,574Depreciation and amortization


59,724


55,027


43,636


48,410


42,433Impairment loss








5,454





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


2,591


(1,808
)

(1,159
)

4,279


6,266Non-cash stock compensation expense


2,010


879


977


1,219


1,489Adjusted EBITDA

$
77,898

$
69,239

$
57,295

$
64,324

$
57,966




23

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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, 2009 included elsewhere in this Annual Report on
Form 10-K.

Overview

We are one of the leading integrated communications providers and are the bandwidth leader in the markets we serve. We provide voice, video and data
services, either individually or as bundled services to residential and business customers in the greater Sacramento, California and greater Kansas City, Kansas and Missouri areas ("Kansas City
area"). We deploy our services by combining fiber-to-the-home ("FTTH") 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 greater Sacramento,
California area. We classify our operations in two reportable segments: Broadband and Telecommunications ("Telecom").

Our
Broadband segment earns revenues primarily through subscriptions to our video, high-speed Internet and digital phone services. As of December 31, 2009, approximately 24% of the
homes in the areas we serve subscribed to one of our video services. Our video services range from a limited basic service to our newest product offering Advanced Digital TV ("ADTV"), powered by
Microsoft® Mediaroom. Many of our services are delivered utilizing fiber-to-the-premise and
fiber-to-the-node networks, which allow us to offer a high quality experience with our digital TV Packages. ADTV was launched in the Sacramento region in January
2010. This enhanced video product includes a Whole Home digital video recorder ("DVR") (which allows subscribers to watch and record four programs at the same time and pause, replay and rewind "live"
television), instant channel changes and an intuitive, user-friendly guide. Our ADTV product provides access to over 330 channels in our California market. Our full digital cable service
in our Kansas City market provides access to over 250 channels and additional digital cable services, including a DVR. Our video product offerings include access to high-definition ("HD")
television ("HDTV"), which provides multiple channels in high definition, 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 and 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 and the VOD library).

Our
high-speed Internet service can provide Internet access at symmetrical speeds of up to 50 Mbps, depending on the level of service selected. As of December 31, 2009,
approximately 32% of the homes in the areas we serve subscribed to one of our high-speed Internet services. In March 2008, we launched our
Voice-over-Internet-Protocol ("VoIP") digital phone product in the Sacramento market. Our digital phone service is available in packages ranging from basic service to unlimited
local and domestic long distance calling plans. Nearly all of our digital phone service plans include an extensive array of calling features including caller identification and call waiting, Find
Me/Follow Me, sequential ringing and selective call acceptance and rejection. As of December 31, 2009, approximately 14% of the homes in our Sacramento

24

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Table of Contents

market
have subscribed to our VoIP phone service. We also offer traditional voice services in some of the areas we serve. The total voice penetration in the markets we serve was 23% as of
December 31, 2009.

Our
Telecom segment, which operates only in the Sacramento area, offers a broad selection of telecommunications services including traditional landline voice services, Digital Subscriber Line
("DSL"), long distance services and certain non-regulated services. Traditional landline services are offered from basic local service to bundled packages ranging from
unlimited local calling to unlimited local and domestic long distance calling plans. Our voice products include long distance services and value-added services such as voicemail, call waiting, caller
identification and many other calling feature options. Long distance services are offered by our subsidiary SureWest Long Distance, which is a reseller of long distance services.

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, consist of 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, as determined by 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
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 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 greater 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.

In
February 2007 we sold 100% of the stock of SureWest Directories, our directory publishing business, to GateHouse Media ("GateHouse"), 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. As part of the transaction, GateHouse became the publisher of the official directory of SureWest
Telephone.

25

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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, 2009, 2008 and 2007.

Financial Data

%Change2009

2008

2007

2009 vs.
2008

2008 vs.
2007Operating revenues(1)Broadband

$
161,222

$
135,341

$
68,652


19
%

97
%Telecom


80,478


95,032


105,605


(15
)

(10
)Operating revenues


241,700


230,373


174,257


5


32Income (loss) from operationsBroadband


(23,550
)

(27,261
)

(32,826
)

14


17Telecom


37,123


42,402


41,213


(12
)

3Income from operations


13,573


15,141


8,387


(10
)

81Income (loss) from continuing operationsBroadband


(20,782
)

(23,684
)

(22,318
)

12


(6
)Telecom


21,449


24,510


27,541


(12
)

(11
)Income from continuing operations


667


826


5,223


(19
)

*Adjusted EBITDA(2)Broadband


25,590


12,899


(4,596
)

98


381Telecom


52,308


56,340


61,891


(7
)

(9
)Adjusted EBITDA


77,898


69,239


57,295


13


21
  *Not
Meaningful(1)External
customers only.(2)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; 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 items which do not relate to our
core operating performance. The presentation of Adjusted EBITDA is not a measure of financial performance under United States generally accepted accounting principles and should not be considered in
isolation or as a substitute for consolidated net income (loss) as a measure of performance and may not be comparable to similarly titled measures used by other companies. The following table is a
reconciliation of our income (loss) from continuing operations to Adjusted EBITDA on a consolidated and segment basis for the years ended December 31, 2009, 2008 and 2007:


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


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Table of Contents



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 income


(738
)

(1,070
)

(1,808
)Non-cash stock compensation expense


407


472


879Adjusted EBITDA

$
12,899

$
56,340

$
69,239




2007

Broadband

Telecom

ConsolidatedIncome (loss) from continuing operations

$
(22,318
)
$
27,541

$
5,223Add (subtract):Income tax expense (benefit)


(16,504
)

16,137


(367
)Other (income) expense


5,996


(2,465
)

3,531Depreciation and amortization


22,764


20,872


43,636Impairment loss


5,454





5,454Non-cash pension and post-retirement income


(558
)

(601
)

(1,159
)Non-cash stock compensation expense


570


407


977Adjusted EBITDA

$
(4,596
)
$
61,891

$
57,295


Select Operating Metrics

%Change2009

2008

2007

2009 vs.
2008

2008 vs.
2007BroadbandTotal residential subscribers(1)


102,600


102,400


58,200


0
%

76
%Broadband residential Revenue-generating units(2)


229,200


221,000


96,700


4


129Data


98,500


97,400


56,000


1


74Video


59,100


60,100


20,700


(2
)

190Voice


71,600


63,500


20,000


13


218Total business customers(3)


7,100


6,500


4,200


9


55TelecomVoice Revenue-generating units(4)


38,500


54,000


69,200


(29
)

(22
)Total business customers(3)


8,500


9,200


9,800


(8
)

(6
)


(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 Revenue-generating units ("RGUs") for
digital video, voice and data, in addition to the number of subscribers. For example, a single customer who purchases digital 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.


27

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Consolidated Overview



Operating revenues in the Broadband segment increased $25,881 in 2009 compared to 2008. The Broadband segment results of operations in the current
year period compared to the same prior year period have been impacted by the effects of the Everest acquisition in February 2008, as described above.

Broadband
residential revenues increased $19,375 in 2009 as residential RGUs grew 4% as of December 31, 2009 compared to the prior year. Broadband residential operating revenues also increased
as a result of higher pricing for video and data services in 2009, as well as the demand for enhanced service offerings such as VOD, DVR and HDTV and for digital video, voice and data offered as a
bundled triple-play package.

The
introduction of our VoIP Digital Phone product in the Sacramento market during 2008, including in the Telecom segment service territory, provides us with a more competitive triple-play
offering, which has resulted in an elevated take rate and an increase in broadband residential triple-play RGUs, while mitigating nearly half of the access line losses in the Telecom
segment by migrating those customers to voice RGUs in the Broadband segment. Broadband voice RGUs in the Sacramento market increased 30% as of December 31, 2009 compared to the same prior year
period.

Broadband
business revenues increased $6,477, or 20%, in 2009 compared to 2008. Business customers increased 9% as of December 31, 2009 compared to the same period in 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 packages to businesses of all sizes as well as superior business
customer satisfaction levels contributed to the current year growth in business revenue and will continue to provide us with new opportunities in the commercial market.

We
will continue to invest in success-based capital to develop and enhance the broadband infrastructure and the services we offer, while focusing on the generation of new customers and increasing
residential penetration on existing marketable homes.

Operating
revenues in the Telecom segment decreased $14,554 in 2009 compared to 2008. Residential services were largely impacted by our customer's migration toward alternative communication services,
including those offered by our Broadband segment, which contributed to a 29% decline in the Telecom segment voice RGUs as of December 31, 2009 compared to the same period in 2008. In an effort
to mitigate future operating revenue and voice RGU declines, we offer various flat-rate and bundled service packages and provide a broadband VoIP service to customers residing within
SureWest Telephone's service area. The decrease in operating revenues was also impacted by the scheduled reduction in California High Cost Fund ("CHCF") subsidies of $2,040 during 2009 compared to
2008. See the Regulatory Matters section below for a further discussion regarding the regulatory subsidies we receive.

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, 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.



Consolidated operating expenses, excluding depreciation and amortization, increased $8,198 in 2009 compared to 2008. The Broadband segment accounted
for substantially all of the year-over-year increase in our consolidated operating expenses primarily as a result of the addition and growth of our Kansas City operations. The
increase in operating expenses in the current year period from the Broadband segment

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Table of Contents

was
offset in part by a decline in operating expenses in the Telecom segment resulting from the decline in Telecom operating revenues and voice RGUs.

Cost
of services and products expense increased $9,940 in 2009 compared to 2008 largely due to increases in programming and network costs related to providing video and data services as a result of an
increase in programming fees per subscriber and the growth in the Kansas City operations and network; however, these costs were reduced in part by savings in property maintenance costs through a
consolidation of office space and cost cutting initiatives.

Customer
operations and selling expense increased $837 in 2009 compared to 2008 due in part to an increase in labor costs as a result of the addition and growth in our Kansas City operations, as well
as an increase in costs associated with our defined benefit pension plan (the "Pension Plan"), as described below. The change was also impacted by a decrease in sales and advertising costs as a result
of a reduction in radio and television advertising in the current year. General and administrative expenses decreased $2,579 in 2009 compared to 2008 primarily as a result of (i) a decline in
consulting and advisory fees related to strategic initiatives and (ii) information technology costs related to production support projects in the prior year period.

Costs
associated with our Pension Plan increased consolidated operating expenses by $4,252 in 2009 compared to 2008. As a result of amendments, effective April 1, 2007, to freeze the Pension
Plan we recorded income of $1,777 during 2008 related to the Pension Plan. However, the significant decline in the equity markets during 2008 negatively affected the value of our Pension Plan assets
which resulted in expense of $2,475 related to the Pension Plan in 2009. See Note 8 for more information on the Pension Plan.

Our
consolidated depreciation and amortization expense increased $4,697 in 2009 compared to 2008. The increase in depreciation and amortization expense was primarily due to the addition and growth of
our Kansas City operations, continued network build-out and success-based capital
projects undertaken within the residential and business broadband service territories; however, was partially offset by certain Telecom assets becoming fully depreciated in the current year period.



Certain amounts in our 2008 and 2007 consolidated financial statements have been reclassified to conform to the presentation of our 2009 consolidated
financial statements.



Our Broadband segment contributes the majority of our consolidated operating revenues as Telecom revenues continue to decline as a result of
technology changes and competitive challenges within the communications industry. The sources of our revenues and cost structure are also impacted by changes in the legislative and regulatory
environment, which, in recent years, has provided us with growth opportunities within our Broadband segment. Our long-term strategy remains to grow our Broadband operations to counter the
industry-wide trend of declines in Telecom revenues.

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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 expenses:Cost of services and products*


91,212


77,539


13,673


18Customer operations and selling


26,121


23,612


2,509


11General 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


12


*Exclusive
of depreciation and amortization


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. We anticipate continued growth in residential broadband RGUs and average revenue per user resulting from our HD DVR, VoIP digital phone services and the launch in
January 2010 of our ADTV product powered by Microsoft® Mediaroom. ADTV will be deployed through our copper and fiber networks in the greater Sacramento area. 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.



We offer high speed Internet access at symmetrical speeds of up to 50 Mbps, depending on the level of service selected. The reliability and high
speeds of the data service in both the Sacramento and Kansas City markets enhance other services such as the SureWest Digital Phone, where customers manage phone services through the online SureWest
portal. Through the SureWest portal, customers can manage their SureWest 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.

30

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Table of Contents

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.



Our video services range from limited basic service to a full digital cable service. Our services are delivered utilizing FTTH and
fiber-to-the-node networks, which allow us to offer a high quality experience with digital TV Packages. Our full digital cable service provides access to over 330
and 250 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 cable subscribers can also subscribe to additional digital cable services, including a DVR and HDTV.

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.



In March 2008, we launched our new VoIP digital phone product in the Sacramento market. Our digital phone service is available in packages ranging
from basic service to unlimited local and domestic long distance calling plans. Nearly all of our digital phone service plans include a broad array of calling features including Caller ID and Call
Waiting, Find Me/Follow Me, sequential ringing and selective call acceptance and rejection. As of December 31, 2009, approximately 14% of the homes in our Sacramento market have subscribed to
our VoIP phone service. The VoIP digital phone product presents our customers with a more competitive triple-play offering with increased options and multiple packages. We also offer
traditional voice services in some of the areas we serve. The total voice penetration in the markets we serve was 23% as of December 31, 2009.

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. As anticipated, the launch of our VoIP Digital Phone product in the Sacramento market, including in the Telecom service territory, has resulted in elevated take rates and an increase in
Broadband residential triple-play 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 and digital TV.

Business
revenues increased $6,477 in 2009 compared to 2008 due primarily to a 9% 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, as described in the Consolidated Overview section above.

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Table of Contents

Cost of services and products (exclusive of depreciation and amortization) increased $13,673 in 2009 compared to 2008. The increase in costs in the current year period was
largely due to direct costs incurred to provide video services. Programming costs have been increasing over the last several years primarily due to an increase in costs on a per subscriber basis and
per program channel, particularly for sports and HD channels. In addition, local commercial television broadcast stations began charging retransmission fees, similar to fees charged by other program
providers. 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 $2,509 in 2009 compared to 2008. The increase in the current year period was mostly attributable to an increase in salaries and wages and advertising costs in the
Kansas City market. We have 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 the current year period.

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.

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*


25,620


27,604


(1,984
)

(7
)Customer operations and selling


10,200


12,152


(1,952
)

(16
)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
)


*Exclusive
of depreciation and amortization


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 offers several different phone services, 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

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$7,960
in 2009 compared to 2008 as we continue 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. We continue to mitigate additional voice operating revenue losses through our VoIP phone service now
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, 2009, nearly half of the decline in Telecom voice RGUs, see the Select Operating Metrics section above, have transferred to SureWest
Broadband's VoIP phone service. 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 on our advanced fiber network. 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 scalable IP communication systems.

SureWest
Telephone business revenues decreased by $2,609 in 2009 compared to 2008 largely due to the current economic impact on small to medium sized businesses and the continued strong competitive
pressures, as discussed above. 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 Average Revenue Per Unit ("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.

Access Revenues

Access revenues, which include switched access revenue, interstate common line ("CL") revenue and draws from the CHCF, decreased
$4,005 in 2009 compared to 2008. As anticipated, subsidies received during 2009 from the CHCF have 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 the National Exchange Carrier Association ("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 below 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 have 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

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costs
related to our Pension Plan of approximately $2,777, as described in the Consolidated Overview section above.

Cost
of services and products (exclusive of depreciation and amortization) decreased $1,984 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, in the current
year periods property maintenance costs declined through a consolidation of office space and cost cutting initiatives.

Customer
operations expense decreased $1,952 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 in the current year period 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 the current year
period and a portion of general purpose software becoming fully depreciated during the third quarter of 2008.

Regulatory Matters

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



Significant
portions of our telephone rates and charges are subject to regulation by the Federal Communications Commission ("FCC") and state commissions. Rates and charges are based on various tariffs
filed by the Company and others, including those filed by NECA for interstate 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.

Intrastate
service rates are subject to regulation by state commissions. With respect to toll calls initiated by interexchange carriers' customers, the interexchange carriers are assessed access
charges based on tariffs filed by the Company. Interstate access rates and resultant earnings are subject to regulation by the FCC. With respect to interstate services, SureWest Telephone has
detariffed its DSL services and files its own tariff with the FCC for switched and special access services. For interstate CL charges, SureWest Telephone concurs with tariffs filed by NECA. Pending
and future regulatory actions may have a material impact on our consolidated financial position and results of operations.



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.

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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.

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 the prior year monitoring
periods during the year ended December 31, 2007. These changes in estimates decreased our consolidated revenues and income from continuing operations by $368 and net income by $261 ($0.02 per
share). We did not record any significant changes in estimates related to prior year monitoring periods during 2009 or 2008.



In 2004, we entered into a settlement agreement (the "Settlement Agreement"), which was ultimately approved by the CPUC, to resolve an ongoing
regulatory proceeding with various parties. The Settlement Agreement resolved past sharing liabilities and suspended future sharing requirements in the intrastate jurisdiction. In accordance with the
Settlement Agreement, SureWest Telephone returned approximately $6,500, plus interest at the 90-day commercial paper rate for non-financial institutions and an imputed rate of
3.15%, to its end-users through a consumer dividend. The surcredit was recorded as a reduction of our contractual shareable earnings obligations over a period of approximately four years,
which began January 1, 2005. During the first quarter of 2009 and prior to the cessation of the surcredit on February 9, 2009, we returned approximately $165.

As
part of the Settlement Agreement, SureWest Telephone was required to implement an additional annual consumer dividend of $1,300 on January 1, 2007 to end-users receiving SureWest
Telephone services subject to sharing on or after that date. In December 2006, the CPUC authorized us to offset our annual $11,500 interim draw from the CHCF with the aforementioned $1,300 consumer
dividend Settlement Agreement. The CHCF was previously authorized by the CPUC to offset SureWest Telephone's intrastate regulated operating expenses on an interim basis. In September 2007, the CPUC
issued Decision 07-09-002 which provides for SureWest Telephone to phase-down our annual CHCF interim draw over a five-year period. In 2009, our interim
CHCF draw was $6,120 and is being incrementally reduced by $2,040 annually. We anticipate our 2010 interim CHCF draw will be $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 can only be raised up to $3.25 per year during 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 Incumbent Local Exchange Carriers ("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 will be allowed full pricing flexibility for the basic residential rate.

In
December 2007, the CPUC issued a final decision ("FD") in a proceeding investigating the continued need for an intrastate access element called the transport interconnection charge ("TIC"). In
September 2008, the CPUC issued a FD in its CHCF-B proceeding. When taken together with the December 2007 FD, it caps SureWest Telephone's intrastate access charges at current levels
through 2010 and eliminates the TIC effective January 1, 2011. SureWest Telephone will have an opportunity to recover all or part of

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our
lost TIC revenue elsewhere, including residential rate adjustments subsequent to the expiration on January 1, 2011 of the current residential price freeze, as discussed above.



There are a number of other regulatory proceedings occurring at the federal and state levels that may have a material impact on us. These regulatory
proceedings include, but are not limited to, consideration of changes to the jurisdictional separations process, the interstate universal service fund, intercarrier compensation access charge reform,
broadband deployment, the regulation of local exchange carriers and their competitors, including providers of IP-enabled services, the provision of video services and competition in the
market, a national broadband plan and network neutrality. The outcomes and impact on our operations due to these proceedings and related court matters cannot be determined at this time.

The
regulatory proceedings occurring at the state and federal levels described above may also authorize new competition in the provision of regulated services and change the rates and rate structure
for regulated services that we furnish, of which the effects cannot yet be determined.

Non-Operating Items



Consolidated investment income decreased $555 in 2009 compared to 2008. During the prior year period, 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 extinguishment of debt of $607 recorded during the quarter ended March 31, 2008, as described in the Liquidity and Capital Resources section below and
(iii) offset by a decrease in capitalized interest of approximately $340. 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 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 2009 and
2008, respectively. The decrease in the effective tax rate in the current year compared to the prior year 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
have 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 have state net
operating loss carryforwards of approximately $11,726 which will begin to expire in 2016 if not used. We also have 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

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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.

2008 versus 2007

Segment Results of Operations

Broadband

2008

2007

$Change

%ChangeResidential revenues:Data

$
39,966

$
27,075

$
12,891


48
%Video


38,520


14,721


23,799


162Voice


20,619


8,197


12,422


152Total residential revenues


99,105


49,993


49,112


98Business


33,077


17,304


15,773


91Access


1,453


295


1,158


393Other


1,706


1,060


646


61Total operating revenues from external customers


135,341


68,652


66,689


97Intersegment revenues


539


607


(68
)

(11
)Operating expensesCost of services and products*


77,539


43,981


33,558


76Customer operations and selling


23,612


15,617


7,995


51General and administrative


21,499


14,269


7,230


51Total operating expenses


122,650


73,867


48,783


66Depreciation and amortization


40,491


22,764


17,727


78Impairment loss





5,454


(5,454
)

(100
)Loss from operations


(27,261
)

(32,826
)

5,565


17Loss from continuing operations


(23,684
)

(22,318
)

(1,366
)

(6
)


*Exclusive
of depreciation and amortization


Broadband Segment Operating Revenues

Operating revenues from external customers in the Broadband segment increased $66,689 in 2008 compared to 2007. Our Kansas City operations, as
described above, contributed $57,908 of operating revenues in 2008.

Residential Revenues

Broadband residential revenues increased $49,112 in 2008 compared to 2007, of which $43,624 was attributable to the Kansas City operations. Broadband
residential subscribers and RGUs increased 76% and 129%, respectively, as of December 31, 2008 compared to 2007.



Our residential data revenues increased $12,891 in 2008 compared to 2007 as a result of subscriber growth and the addition of our Kansas City
operations. Data RGUs in the Sacramento market increased 74% as of December 31, 2008 compared to 2007.



Residential video revenues increased $23,799 in 2008 compared to 2007. In 2008 the Broadband segment (including our Kansas City operations)
experienced growth in Video RGUs and residential subscribers of 190% and 76%, respectively. Revenues also increased as a result of higher pricing on our video services effective January 2008 and
demand for enhanced video offerings such as VOD, DVR and HDTV.

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Residential voice revenues increased $12,422 in 2008 compared to 2007. The increase was due in part to a 218% growth in voice RGUs as of
December 31, 2008 compared to 2007 and the addition of our Kansas City operations in 2008. The launch of our VoIP Digital Phone product in the Sacramento market in March 2008, including the
Telecom service territory, resulted in elevated take rates and an increase in Broadband residential triple-play RGUs. Our digital phone service was available to approximately 7% of the
homes we passed in the Sacramento market as of December 31, 2008. As of December 31, 2008, approximately 5% of the homes in the areas we served subscribed to our new digital phone
service.

Business Revenues

Business revenues increased $15,773 in 2008 compared to 2007 due primarily to a 55% increase in business customers as of December 31, 2008
compared to 2007. Although our business broadband services expanded in Sacramento during 2008, a significant portion of the business revenue growth was due to the addition of our Kansas City
operations.

Broadband Segment Operating Expenses

Total operating expenses in the Broadband segment increased $48,783 in 2008 compared to 2007.

Cost
of services and products (exclusive of depreciation and amortization) increased $33,558 in 2008 compared to 2007. The increase in costs in 2008 was primarily due to Kansas City operations,
contributing $29,148 in additional expenses. The increase was also attributable to (i) an increase in programming, transport and access costs related to the growth in Broadband subscribers,
residential broadband RGUs and business customers and (ii) an increase in maintenance costs corresponding to the increased subscriber count, as well as the expanded network footprint.

Customer
operations expense increased $7,995 in 2008 compared to 2007. Substantially all of the increase in 2008 was attributable to our Kansas City operations resulting, in part, from increased radio
and television advertising in the Kansas City market. We experienced a modest increase in the Sacramento market in sales and advertising costs to promote subscriber growth, as well as new and existing
product offerings.

General
and administrative expense increased $7,230 in 2008 compared to 2007 primarily due to increases in (i) information technology costs related to system maintenance and development,
including integration of Kansas City operations and increased production support projects and (ii) consulting and advisory fees. Our Kansas City operations accounted for $5,096 of the increase
in general and administrative expenses.

In
2007, as a result of the decision to focus our efforts on fiber based triple play service offerings, we determined that we would no longer devote significant resources to our residential and
business wireless service offerings that utilized LMDS technology. As a result, during 2007, we incurred a pre-tax $5,454 non-cash impairment charge on our LMDS licenses and
related network assets.

Depreciation
and amortization increased $17,727 in 2008 compared to 2007 due to the continued expansion of the broadband network and success based capital projects. Our Kansas City operations
increased depreciation and amortization expense by $14,167 in 2008.

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Telecom

2008

2007

$Change

%ChangeResidential

$
32,464

$
39,810

$
(7,346
)

(18
)%Business


38,066


37,233


833


2Access


23,732


27,752


(4,020
)

(14
)Other


770


810


(40
)

(5
)Total operating revenues from external customers


95,032


105,605


(10,573
)

(10
)Intersegment revenues


18,455


18,530


(75
)

(0
)Operating expenses:Cost of services and products*


27,604


28,624


(1,020
)

(4
)Customer operations and selling


12,152


13,661


(1,509
)

(11
)General and administrative


16,793


19,765


(2,972
)

(15
)Total operating expenses


56,549


62,050


(5,501
)

(9
)Depreciation and amortization


14,536


20,872


(6,336
)

(30
)Income from operations


42,402


41,213


1,189


3Income from continuing operations


24,510


27,541


(3,031
)

(11
)


*Exclusive
of depreciation and amortization


Telecom Segment Operating Revenues

Operating revenues from external customers in the Telecom segment decreased $10,573 in 2008 compared to 2007.

Residential Revenues

SureWest Telephone residential revenues decreased $7,346 due to competition from wireless, wireline competitors and cable providers (including
SureWest Broadband). Residential subscribers and voice RGUs declined approximately 22% as of December 31, 2008 compared to 2007. As of December 31, 2008, approximately 4,700, or 31%, of
the decline in 2008 Telecom voice RGUs transferred to SureWest Broadband's VoIP phone service. See the 2009 vs. 2008 Broadband segment residential revenue section above for a more detailed discussion
regarding VoIP and other services offered by SureWest Broadband.

Business Revenues

Business revenues increased $833 in 2008 compared to 2007, despite the strong competitive pressures discussed above. While the business customer base
declined 6% as of December 31, 2008, compared to 2007, ARPU grew 5% during the same time period due to continued strong demand for data services and the increasing requirement for businesses to
network multiple locations in order to share data have mostly alleviated the business revenue losses which could have resulted from the decline in the customer base. 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 for long distance backhaul support and interconnect services
provided to Verizon during the transition of the wireless business to Verizon, which concluded during the third quarter of 2008.

Access Revenues

Access revenues, which include switched access revenue, interstate CL revenue and draws from the CHCF, decreased $4,020 in 2008 compared to 2007. As
anticipated, subsidies received from the CHCF decreased by approximately $2,212. Switched access revenues also declined by approximately $2,238 due to declines in minutes of use associated with the
reduction of residential voice services previously discussed. These decreases were partially offset during 2008 by an increase in interstate CL settlements received from

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NECA
of approximately $430 as a result of a shift in revenue recovery from end users to the NECA pool. 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 $5,501 in 2008 compared to 2007. The decrease was due in part to a decline in costs
related to the Pension Plan of approximately $468.

Cost
of services and products (exclusive of depreciation and amortization) decreased $1,020 in 2008 compared to 2007. This decrease was due primarily to the decline in local and long distance expenses
as a result of the decrease in (i) residential and business services and (ii) long distance minutes of use.

Customer
operations expense decreased $1,509 in 2008 compared to 2007. The decrease was primarily due to a decline in labor costs and related operating expenses resulting from reductions in headcount
during 2008. The customer operations expense decrease was partially offset by an increase in advertising costs as a result of brand advertising.

General
and administrative expense decreased $2,972 in 2008 compared to 2007. The decrease was primarily due to the incurrence of costs in 2007 related to (i) information technology projects,
including costs associated with various system developments and automation projects and related maintenance contracts and (ii) legal and advisory fees for certain regulatory matters.

Depreciation
and amortization decreased $6,336 in 2008 compared to 2007. This decrease was due primarily to a majority of the circuit and digital switch equipment fully depreciating during the second
half of 2007 and a significant portion of general purpose software fully depreciating early in the third quarter of 2008.

Non-Operating Items



Consolidated investment income decreased $2,435 during 2008 compared to 2007. This decrease was primarily due to the use of cash and
short-term investments to fund the acquisition of Everest. Consolidated interest expense increased $5,624 during 2008 compared to 2007 due primary to increased principal balances, as well
as a loss on extinguishment of debt of $607 recorded during 2008. These increases were partially offset by the receipt of a patronage dividend of $400. We earn patronage dividends from CoBank based on
our share of the net income earned by CoBank. We record the receipt of patronage dividends against interest expense.

Other,
net included a gain of $1,383 during the year ended December 31, 2008 from the offer ("Right") offered by UBS Financial Services, Inc., a subsidiary of UBS AG ("UBS"), offset in
its entirety by a $1,575 loss recorded on the auction rate security ("ARS") due to a reclassification of the security from available-for-sale to trading.



Income taxes increased $3,506 during 2008 compared to 2007, due primarily to an increase in deferred state income tax related to apportionment factor
changes in 2008 resulting from our Kansas City operations and the 2007 reduction in the income tax liability related to previously unrecognized income tax benefits. The effective federal and state
income tax rates for continuing operations were 79.2% and (7.6%) for the years ended 2008 and 2007, respectively. The increase in the effective tax rate in the current year compared to the prior year
was due primarily to an increase in deferred state income tax related to apportionment factor changes and the 2007 reduction in the income tax liability related to previously unrecognized income tax
benefits.

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As
a result of our purchase of the Kansas City operations in 2008, we acquired federal net operating loss carryforwards of approximately $13,166, of which $1,450 (subject to additional limitations),
$3,249 and $8,467 will expire in 2026, 2027 and 2028, respectively, if not used. An additional federal net operating loss carryforward of approximately $982 was generated in 2008 and will expire in
2028, if not used. We acquired state net operating loss carryforwards of approximately $13,038, of which $1,403, $3,168 and $8,467 will expire in 2016, 2017 and 2018, respectively, if not used. We
also have approximately $1,716 and $745 of state income tax hiring credit carryforwards as of December 31, 2008 and 2007, 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 $631 and $185 during 2008 and 2007, respectively.

Liquidity and Capital Resources

Overview

We generate significant cash flows from operating activities. The proceeds from monetizing our non strategic investments have also provided us with a
significant source of cash flow. 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 2009 was for capital expenditures, 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 may fund the authorized share repurchase plan.

The
following table summarizes our cash flows:

Years Ended December 31,2009

2008

2007Cash Flows Provided By (Used In)Operating Activities:Continuing operations

$
71,842

$
50,778

$
50,830Discontinued operations


(562
)

(1,605
)

(43,929
)Investing Activities:Continuing operations


(46,587
)

(183,292
)

36,441Discontinued operations





(176
)

(492
)Financing Activities:Continuing operations


(20,044
)

106,021


(18,107
)Increase (Decrease) In Cash and Cash Equivalents

$
4,649

$
(28,274
)
$
24,743


Cash Flows Provided By Operating Activities

Net cash provided by continuing operating activities was $71,842 during 2009. Significant adjustments to net income to arrive at cash provided by
operating activities primarily include (i) non-cash charges of $68,990 consisting of (a) depreciation and amortization of $59,724 due to capital investments principally in
the Broadband segment, (b) deferred income taxes of $7,161 and (c) stock compensation expense of $2,105 and (ii) a decrease in trade and miscellaneous accounts receivable of
$1,681 as a result of a decrease in receivables from regulatory agencies and an increase in the allowance for doubtful accounts. The increase in cash provided by continuing operations was also due to
income tax refunds of $5,860 received in 2009 as compared to income taxes paid of $3,627 in 2008.

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Cash Flows Used In Investing Activities.

Net cash used in continuing investing activities during 2009 and 2008 was $46,587 and $183,292, respectively. Net cash used during the prior year
period was primarily attributed to the acquisition of Everest for $179,749, net of cash acquired.



Capital expenditures continue to be our primary recurring investing activity and were $58,330, $86,489 and $53,332 in 2009, 2008 and 2007,
respectively. We invest a significant portion of our capital spending in our Broadband segment as a result of business growth, the introduction of new products and services and the expansion of the
network. The increase in capital expenditures in 2008, compared to 2009 and 2007, was due to the additional expenditures to expand
and enhance the network within the Sacramento and Kansas City areas as well as to optimize tax savings through bonus depreciation benefits.



In February 2009, we sold our Tower Assets, owned by our subsidiary West Coast PCS, to Global Tower Partners. The sale was completed for an aggregate
cash purchase price of $9,222. Proceeds from the sale of the Tower Assets were used to repay a portion of outstanding long-term debt.

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 will be available during the second quarter of 2010. See Note 4 for more
information on the escrow. Proceeds from the sale of the Wireless business were, in part, used to repay a portion of the Credit Agreement described below.

Cash Flows Provided By Financing Activities

Net cash provided by financing activities consists primarily of our proceeds from short and long-term borrowings offset by cash payments
for dividends and planned repurchases of our common stock.



In February 2008, we entered into a Second Amended and Restated Credit Agreement ("February 2008 Agreement") with CoBank to restate and replace a May
2007 credit agreement. The February 2008 Agreement terms, among other things (i) revised the amount available under the Term Loan A facility from $40,000 to $120,000, (ii) established a
1-year $60,000 Term Loan B facility and (iii) modified certain financial covenants. No significant changes were made to the existing $60,000 Revolving Loan facility. The credit
facilities were used in part to acquire Everest and were available for general corporate purposes. The Term Loan A facility and the Revolving Loan facility are due and payable on May 1, 2012.

The
Term Loan A facility, prior to the February 2008 Agreement, which had $40,000 outstanding, was extinguished in February 2008 resulting in a loss on extinguishment of debt of $607, which was
recorded as a component of interest expense in the first quarter of 2008. $40,000 of the February 2008 Agreement borrowings bore interest at a fixed rate. The remaining $80,000 of the February 2008
Agreement borrowings bore interest based, at our election, on the London Interbank Offered Rate ("LIBOR") or the bank's Prime Rate, in either case, plus an applicable margin. The Term Loan B facility
was due and payable on February 12, 2009 and included automatic increases to the applicable interest margins. On May 14, 2008, we repaid $30,000 of the Term Loan B and $16,000 of the
Revolving facility with proceeds from the sale of the operating assets of our Wireless business, SureWest Wireless.

In
September 2008, we entered into a Third Amended and Restated Credit Agreement ("Credit Agreement") with CoBank to restate and replace the February 2008 Agreement. The Credit Agreement

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terms,
among other things (i) reflected the repayment of $30,000 of the Term Loan B facility under the February 2008 Agreement to reduce the principal balance from $60,000 to $30,000,
(ii) modified interest margins, (iii) extended the maturity date of the Term Loan B facility to May 1, 2012, (iv) separated the total revolving commitments of $60,000 into
a Revolving Loan facility of $57,500 and a Swingline Loan facility of $2,500 and (v) required permanent reductions of the Revolving Loan facility of $7,500 at December 31, 2009 and 2010.

As
of December 31, 2009, $14,545 and $48,000 were outstanding on the Series A and Series B Senior Notes, respectively. As of December 31, 2009, $120,000, $30,000, $10,500
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,
2009.

On
January 29, 2010, we entered into a letter agreement with CoBank amending certain terms of the Credit Agreement, including (i) an increase in the total Revolving Loan facility of
$7,500, (ii) CoBank's share of the Revolving Loan facility be permanently reduced by $5,000 (rather than $7,500) on December 31, 2010 and (iii) the total Revolving Loan facility
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 and our available balance, which is less our
outstanding balance of $10,500, was approximately $49,500.



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 capital 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, 2009, 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, 2009Leverage ratio

Not more than 3.75

2.95Interest coverage ratio

Not less than 3.00

6.69Consolidated net worth

Not less than $160,000

$265,224Debt to capitalization

Not more than 0.55

0.46


At
December 31, 2009 and 2008, retained earnings of $109,183 and $101,345, respectively, were available for the payments described above.



Our Board of Directors has authorized the repurchase of up to 2.5 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. Starting in the first quarter of 2000 through December 31, 2009,
approximately 1.9 million shares of common stock had been repurchased. As of December 31, 2009, we had remaining authorization from the Board of Directors to repurchase approximately
611 thousand additional outstanding shares. We repurchased approximately 108 thousand shares and 553 thousand shares during 2009 and 2008, respectively. We did not repurchase any
shares during 2007. 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, 2009, 2008 or 2007.

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In April 2008, our Board of Directors announced the decision to discontinue dividend payments for the foreseeable future in an effort to foster our growth strategy by
reinvesting the approximate $14,100 of annual dividend distributions back into the Company. The cash dividend of $0.25 per share, paid on June 16, 2008 to shareholders of record at the close of
business on May 15, 2008, was the last dividend paid to shareholders for the foreseeable future. Any reinstatement of future dividend payments is at the discretion of our Board of Directors.

Sufficiency of Cash Resources

We had cash, cash equivalents and short-term investments at December 31, 2009 of $11,795. As discussed in the
Long-term debt section above, we have additional long-term borrowing capacity of approximately $60,000 available to us through our Revolving Loan facility; of which, $10,500
was outstanding as of December 31, 2009. 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 2010 is expected to be for (i) budgeted capital expenditures of $55,000 to $60,000, (ii) scheduled payments of long-term debt of $15,636
and (iii) anticipated interest payments of $11,000. 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 2010 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 2010 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.

Contractual Obligations

As of December 31, 2009, our contractual obligations were as follows:

2010

2011

2012

2013

Thereafter

TotalLong-term debt

$
15,636

$
15,636

$
176,137

$
15,636

$


$
223,045Interest on long-term debt(1)


11,016


10,224


4,136


513





25,889Operating leases


2,525


711


501


388


1,894


6,019Unconditional purchase obligations:Unrecorded(2)


5,715


790


411


26


26


6,968Recorded(3)


15,697














15,697Liabilities for unrecognized tax benefits including interest and penalties(4)





127


2





74


203


(1)Interest
on long-term debt includes amounts due on fixed and variable rate debt. As of December 31, 2009, $120,500 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, 2009. The weighted
average rate was approximately 4.36%.(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, 2009 and expected to be settled in cash.(4)The
settlement period for unrecognized tax benefits and potential interest and penalties of $74 cannot be reasonably determined; however, the
liabilities are not expected to become due within the next twelve months.


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As required, we contribute to the 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. We stopped accruing benefits for active participants
effective April 1, 2007 and we anticipate that future funding requirements will decrease significantly as a result of the freeze of the Plans. However, the significant decline in the equity
markets precipitated by the recent credit crisis and financial system instability has negatively affected the value of our Pension Plan assets. Our minimum funding requirement for 2010 related to the
Pension Plan is approximately $2,700; however, due to a carryover credit balance of approximately $4,400, no cash contribution will be required. 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.



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 U.S. generally accepted accounting principles ("GAAP"). For example, tax laws in effect for 2009
regarding accelerated or "bonus" depreciation for tax reporting resulted in less cash payments than the GAAP tax expense on continuing and discontinued operations. 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 earning for financial reporting purposes has 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 $2,040 annually, over a 5-year period ending on January 1, 2012.

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,

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because
future events and the related effects can not 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.

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 reduce the fair value below its carrying value. 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. We have allocated our goodwill to the Telephone reporting unit and the Kansas City operations
reporting unit. The Telecom segment includes the Telephone reporting unit. The Broadband segment includes the Kansas City operations reporting unit.

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 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. Such assumptions are subject to change as a result of changing economic and competitive conditions. We use a weighted average of the various
models to estimate the fair value of the Kansas City operating reporting unit. Assumptions used in the DCF model include the following:



The
carrying value of the goodwill allocated to the Kansas City operations reporting unit was $43,643 as of December 31, 2009. When determining the fair value, the use of different estimates or
assumptions within the DCF model or other market based approaches could result in a different fair value. For example, in our DCF model we used a discount rate of 14% and a terminal growth rate of 4%
in our assessment of fair value in 2009. At November 30, 2009 the fair value of the Kansas City operating unit was $231,000 and the associated carrying value was $201,000. If the discount rate
in our DCF model were to increase 2%, the fair value of $231,000 would decrease by approximately $28,000, 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. 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 a potential impairment of goodwill recorded at the Kansas City operations reporting unit.

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



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The
carrying value of the goodwill allocated to the Telephone reporting unit was $2,171 as of December 31, 2009. When determining the fair value, the use of different estimates or assumptions
within the DCF model could result in a different fair value. For example, we used a discount rate of 14% and a terminal growth rate of -4% in our assessment of fair value in 2009. At
November 30, 2009, the fair value of the telephone reporting unit was $102,000 and the associated carrying value was $(39,065). If the discount rate were to increase 2%, the fair value would
decrease by approximately $10,000, 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 its 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, 2009, we had three customers that accounted for approximately 8.5% 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, our results of operations, cash flows and financial 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.

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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. On January 1, 2007, we adopted ASC Topic 740,Income Taxes("ASC 740") (formerly
FASB Interpretation No. 48,Accounting for Uncertainty in Income Taxes), which changed our methodology for estimating our potential liability for
income tax positions for which uncertainty exists regardless of whether taxing authorities will challenge its interpretation of the income tax laws. 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 and Other Post-Retirement Costs and Obligations

As discussed more fully in Note 8, we have costs and obligations for our Pension Plan and Other Benefits Plan, which are actuarially
determined based on estimates of discount rates and long-term rates of return on plan assets. Changes in these estimates and other factors could significantly impact our Pension Plan and
other post-retirement benefit costs and obligations.

For
2009 the discount rates used for our Pension Plan and other post-retirement benefit obligations were 6.0% and 4.8%, respectively. The discount rates were determined based on current
yields on high quality corporate fixed-income investments with maturities corresponding to the expected duration of the benefit obligations. The rate used for the other post-retirement
benefit obligation reflects heavier weighting for retired participants of shorter durations. A one percentage-point increase or decrease in the discount rate used to determine net periodic benefit
cost related to the Pension Plan would have the following effects:

1-Percentage-
Point Increase

1-Percentage-
Point Decrease$
(907
)
$
1,042


Recently Issued Accounting Pronouncements

In January 2010, the FASB issued Accounting Standards Update ("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 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. The amendments to ASC 820 made by ASU 2010-06 are effective for interim and annual reporting periods beginning after
December 15, 2009, 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

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fiscal
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 disclosures 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.
Early adoption is permitted, provided that the guidance is retroactively applied to the beginning of the year of adoption. We are currently evaluating the impact this update will have on our
consolidated financial statements.

Recently Adopted Accounting Pronouncements

In September 2009, the FASB issued ASU No. 2009-05,Fair Value Measurements and Disclosures (Topic
820)Measuring Liabilities at Fair Value("ASU 2009-05"). ASU 2009-05 amends ASC 820 to provide guidance concerning the measurement of
liabilities at fair value. Our adoption of this guidance did not have a material impact on our consolidated financial position and results of operations.

In
December 2008, the FASB issued guidance to require disclosure of additional information about assets held in a defined benefit pension or other post-retirement plan (formerly Staff Position ("FSP")
FAS No. 132(R)-1,Employers' Disclosures about Post-retirement Benefit Plan Assets) currently included in ASC Topic 715, Compensation Retirement Benefits. Specifically, this guidance requires an employer to disclose (i) investment policies and strategies including
target allocation percentages, (ii) major categories of plan assets, (iii) inputs and valuation techniques used to measure the fair value of plan assets and (iv) significant
concentration of risk within plan assets. Our adoption of this guidance did not have a material impact on our consolidated financial position and results of operations. See Note 8 for the
additional disclosures required by this guidance.

In
June 2009, the FASB issued an accounting standard, currently included in ASC Topic 105,Generally Accepted Accounting Principles("ASC 105"), which
established only two levels of GAAP, authoritative and nonauthoritative (formerly SFAS No. 168,The FASB Accounting Standards CodificationTM and the
Hierarchy of Generally Accepted Accounting Principlesa replacement of FASB Statement No. 162). The FASB ASC became the only source of authoritative
nongovernmental GAAP, except for rules and interpretive releases of the Securities and Exchange Commission ("SEC"), which are sources of authoritative GAAP for SEC registrants. All other
nongrandfathered, non-SEC accounting literature not included in the ASC will become nonauthoritative. ASC 105 was not intended to change or alter existing GAAP; consequently our adoption
of ASC 105 did not have a material impact on our consolidated financial position and results of operations.

In
May 2009, the FASB issued guidance, currently included in ASC Topic 855,Subsequent Events, which established general standards of accounting for and
disclosure of events that occur after the balance sheet date but before financial statements are issued or available to be issued (formerly SFAS No. 165,Subsequent
Events). This guidance requires disclosure of the date through which subsequent events have been evaluated, as well as whether that is the date the financial statements were
issued or the date the financial statements were available to be issued. Our adoption of this guidance did not have a material impact on our consolidated financial position and results of operations.

In
April 2009, the FASB issued three accounting standards that were intended to provide additional application guidance and enhance disclosures about fair value measurements and impairments of
securities. The provisions included in these standards were intended to (i) clarify the objective and method

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of
fair value measurement even when there has been a significant decrease in market activity for the asset being measured (formerly FSP FAS No. 157-4, Determining Fair Value When the Volume and Level of Activity for the
Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not
Orderly), currently included in ASC 820, (ii) establish a new model for measuring other-than-temporary impairments for debt securities, including
establishing criteria for when to recognize a write-down through earnings versus other comprehensive income (formerly FSP FAS No. 115-2 and FSP FAS
No. 124-2,Recognition of Other-Than-Temporary Impairment), currently included in ASC Topic 320, Investments-Debt and Equity Securitiesand
(iii) require fair value disclosures in interim periods for all financial instruments
within the scope of ASC Topic 825,Financial Instruments(formerly FAS No. 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial
Instruments). Our adoption of the provisions of these standards, on April 1, 2009, did not have
a material impact on our consolidated financial position and results of operations.

In
November 2008, the Emerging Issues Task Force ("EITF") reached a consensus (formerly EITF No. 08-7,Accounting for Defensive Intangible
Assets)which requires the acquirer of a defensive intangible asset to account for a defensive intangible asset as a separate unit of accounting and assign a useful life for a
defensive intangible asset according to the entity's consumption of the expected benefits related to that asset, currently included in ASC 350. Our adoption of this provision, on January 1,
2009 did not have a material impact on our consolidated financial position and results of operations.

In
June 2008, the FASB issued guidance which addresses whether instruments granted in share-based payment transactions are participating securities prior to vesting and, therefore, need to be included
in the earnings allocation in computing earnings per share under the two-class method as described in ASC Topic 260,Earnings Per Share(formerly FSP EITF 03-6-1,Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating
Securities). Under this guidance, unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents (whether
paid or unpaid) are participating securities and shall be included in the computation of earnings per share pursuant to the two-class method. Our adoption of the requirements of this
guidance, on January 1, 2009, did not have a material impact on our consolidated financial position and results of operations.

In
April 2008, the FASB issued guidance which amends the factors that should be considered in developing renewal or extension assumptions used for purposes of determining the useful life of a
recognized intangible asset under ASC 350 (formerly FSP No. FAS 142-3,Determination of the Useful Life of Intangible Assets). This
guidance was intended to improve the consistency between the useful life of a recognized intangible asset under ASC 350 and the period of expected cash flows used to measure the fair value of the
asset under ASC Topic 805,Business Combinations("ASC 805"), and other U.S. GAAP. Our adoption of this guidance, on January 1, 2009, did
not have a material impact on our consolidated financial position and results of operations.

In
February 2008, the FASB issued guidance which amended ASC 820 to delay the effective date until January 1, 2009 for nonfinancial assets and nonfinancial liabilities, except for items that
are recognized or disclosed at fair value in the financial statements on a recurring basis, at least annually (formerly FSP No. FAS 157-2,Effective Date of
FASB Statement No. 157).ASC 820, as amended, was effective for financial statements issued for fiscal years beginning after November 15, 2008 and for interim
periods within those fiscal years. Our adoption of the provisions of this pronouncement, on January 1, 2009, did not have a material impact on our consolidated financial position and results of
operations.

In
December 2007, the FASB issued an accounting standard which establishes principles and requirements for how the acquirer recognizes and measures, in its financial statements, the identifiable
assets acquired, the liabilities assumed and any noncontrolling interest in the acquiree in a business combination, currently included in ASC 805 (formerly SFAS No. 141(R), Business Combinations).
This standard also establishes principles around how goodwill acquired in a business combination or gain from a bargain purchase
should be recognized and measured, as well as provides guidelines on the disclosure requirements on the nature

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and
financial impact of the business combination. In addition, this standard requires acquisition-related transaction and restructuring costs to be expensed rather than treated as part of the cost of
the acquisition. In April 2009, the FASB issued an amendment to this standard by establishing a model to account for certain pre-acquisition contingencies (formerly FSP
FAS 141(R)-1,Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies). Under
the amendment, an acquirer is required to recognize at fair value an asset acquired or a liability assumed in a business combination that arises from a contingency if the acquisition-date
fair value of that asset or liability can be determined during the measurement period. If the acquisition-date fair value cannot be determined, then the acquirer should follow the
recognition criteria requirements of ASC Topic 450,Contingencies. Our adoption of the standard and amendment, on January 1, 2009, did not have a
material impact on our consolidated financial position and results of operations.

Regulatory and Legal Matters

Significant portions of SureWest Telephone's rates and charges are subject to regulation by the FCC and the CPUC. Rates and charges are based on
various tariffs 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 CPUC and FCC. Pending before the FCC and CPUC 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, network neutrality 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 credit risk and interest rate fluctuations in our
investment portfolio and debt obligations.



As of December 31, 2009, we held one $3,700 par value auction rate security ("ARS") with an estimated fair value of $3,054, which was measured
using a discounted cash flow ("DCF") model and Level 3 inputs. This ARS was collateralized by student loans that are guaranteed primarily by a monoline insurance company and partially by the
Federal Family Education Loan Program ("FFELP"). We also held an offer ("Right") from UBS Financial Services, Inc., a subsidiary of UBS AG ("UBS"), entitling us to sell at par value our ARS
originally purchased from UBS at anytime during a two-year period from June 30, 2010 through July 2, 2012. Although we expected to sell our ARS under the Right, if the Right
was not exercised before July 2, 2012, it would expire and UBS would have no further rights or obligation to buy our ARS. If UBS had insufficient funding to buy back the ARS and the auction
process continued to fail, then we may have
incurred further losses on the carrying value of the ARS. Using a DCF model, the Right had an estimated fair value of $621 as of December 31, 2009.

The
significant estimates that were used as inputs in our DCF models were the credit quality of the issuer, the credit quality of the monoline insurance company, the percentage and the types of
guarantees (such as the monoline insurance company and FFELP), interest rates, expected holding periods, expected future cash flows, an illiquidity discount factor and UBS's financial ability to
repurchase the ARS beginning June 30, 2010. We compared the ARS and Right, when possible, to other observable and relevant market data. Changes in the assumptions of the models are based on
dynamic market conditions which could have a significant impact on the valuation of this security and may have resulted in impairment charges for one or both of these securities in the future.

However,
on January 6, 2010, UBS exercised their rights under the Right to purchase our ARS at par for $3,700. As a result, during the first quarter of 2010, we will record a gain of $646 on
the ARS in the condensed consolidated statements of income. That gain will be largely offset by recording a loss of $621 on the Right, due to the cancellation of our put option under the Right.



We enter into debt obligations to fund acquisitions, operations and planned capital expenditures. At December 31, 2009, we had
long-term debt outstanding of $223,045. Of this amount, $102,545, or 46%, bears interest at fixed rates with a weighted average rate of 5.86%. Additionally, we had $120,500 of outstanding
borrowings on our credit facility bearing interest at London Interbank Offered Rate based rates with a weighted average rate of 4.36%. 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, 2009 was $221,477. We currently have no outstanding short-term
debt obligations as of December 31, 2009.

52

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Table of Contents

Item 8.    Financial Statements and Supplementary Data.



PageManagement's Report on Internal Control Over Financial Reporting

54Reports of Independent Registered Public Accounting
Firm

55Consolidated Statements of Income for each of the three years in the period ended
December 31, 2009

57Consolidated Balance Sheets as of December 31, 2009 and 2008

58Consolidated Statements of Shareholders' Equity for each of the three years in
the period ended December 31, 2009

59Consolidated Statements of Cash Flows for each of the three years in the period ended
December 31, 2009

60Notes to Consolidated Financial Statements

61


53

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Table of Contents

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, 2009.

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 26, 2010, on the effectiveness of our internal control over financial reporting.

February 26,
2010

/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


54

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Table of Contents

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, 2009, 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, 2009, 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, 2009 and 2008, and the related consolidated statements of income, shareholders' equity and cash flows for each of the three years in the period ended December 31, 2009 of
SureWest Communications and our report dated February 26, 2010 expressed an unqualified opinion thereon.

/s/
Ernst & Young LLP

Sacramento,
California
February 26, 2010

55

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Table of Contents

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, 2009 and 2008, and the related consolidated statements of income, shareholders' equity
and cash flows for each of the three years in the period ended December 31, 2009. These financial statements are the responsibility of the Company's management. Our responsibility is to express
an opinion on 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, 2009 and
2008, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2009, 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, 2009, 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 26, 2010 expressed an unqualified opinion thereon.

/s/
Ernst & Young LLP

Sacramento,
California
February 26, 2010

56

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Table of Contents

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

Years Ended December 31,2009

2008

2007Operating revenues:Broadband

$
161,222

$
135,341

$
68,652Telecom


80,478


95,032


105,605Total operating revenues


241,700


230,373


174,257Operating expenses:Cost of services and products (exclusive of depreciation and amortization)


99,624


89,684


57,106Customer operations and selling


33,770


32,933


26,464General and administrative


35,009


37,588


33,210Depreciation and amortization


59,724


55,027


43,636Impairment loss on LMDS and related assets








5,454Total operating expenses


228,127


215,232


165,870Income from operations


13,573


15,141


8,387Other income (expense):Investment income


121


676


3,111Interest expense


(11,318
)

(12,126
)

(6,502
)Other, net


297


274


(140
)Total other income (expense), net


(10,900
)

(11,176
)

(3,531
)Income from continuing operations before income taxes


2,673


3,965


4,856Income tax expense (benefit)


2,006


3,139


(367
)Income from continuing operations


667


826


5,223Discontinued operations, net of tax:Income (loss) from discontinued operations


(69
)

103


(2,439
)Gain on sale of discontinued operations


2,568


18,004


60,156Total discontinued operations


2,499


18,107


57,717Net income

$
3,166

$
18,933

$
62,940Basic earnings per common share:Income from continuing operations

$
0.05

$
0.06

$
0.36Discontinued operations, net of tax


0.18


1.28


3.99Net income per basic common share

$
0.23

$
1.34

$
4.35Diluted earnings per common share:Income from continuing operations

$
0.05

$
0.06

$
0.36Discontinued operations, net of tax


0.18


1.28


3.98Net income per diluted common share

$
0.23

$
1.34

$
4.34Dividends per share

$


$
0.50

$
1.00Shares of common stock used to calculate earnings per share:Basic


13,996


14,096


14,450Diluted


13,996


14,099


14,492


See
accompanying notes.

57

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Table of Contents

SUREWEST COMMUNICATIONS  CONSOLIDATED BALANCE SHEETS(amounts in thousands)

December 31,2009

2008ASSETSCurrent assets:Cash and cash equivalents

$
7,489

$
2,840Short-term investments


4,306


610Accounts receivable (less allowances of $3,532 and $2,716 at
December 31, 2009 and 2008, respectively)


19,734


21,415Income tax receivable


2,221


6,391Inventories


5,263


6,527Prepaid expenses


3,704


4,539Deferred income taxes


3,373


2,989Other current assets


1,760


1,752Assets held for sale


6,009


7,388Assets of discontinued operations





5,002Total current assets


53,859


59,453Property, plant and equipment, net


517,230


515,843Intangible and other assets:Long-term investments





3,508Customer relationships, net


3,847


5,062Goodwill


45,814


45,814Deferred charges and other assets


2,113


4,12951,774


58,513$
622,863

$
633,809LIABILITIES AND SHAREHOLDERS' EQUITYCurrent liabilities:Current portion of long-term debt and capital lease obligations

$
15,636

$
15,643Accounts payable


2,547


2,798Other accrued liabilities


18,315


19,050Advance billings and deferred revenues


8,580


8,960Accrued compensation and pension benefits


9,172


11,292Liabilities of discontinued operations





453Total current liabilities


54,250


58,196Long-term debt


207,409


226,045Deferred income taxes


54,856


46,358Accrued pension and other post-retirement benefits


32,451


36,046Other liabilities and deferred revenues


4,714


5,819Commitments and contingenciesShareholders' equity:Common stock, without par value; 100,000 shares authorized, 14,148 and 14,082 shares issued and outstanding at December 31, 2009 and
December 31, 2008, respectively


146,844


146,558Accumulated other comprehensive loss


(15,280
)

(19,248
)Retained earnings


137,619


134,035Total shareholders' equity


269,183


261,345$
622,863

$
633,809


See
accompanying notes.

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Table of Contents

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, 2006


14,465

$
157,926

$
565

$
67,285

$
225,776Issuance and amortization of restricted common stock, net of forfeitures and stock surrenders


49


849





(2
)

847Other comprehensive (loss)








(4,095
)




(4,095
)Cash dividends











(14,465
)

(14,465
)Restricted Stock Units dividends





95





(95
)

Net Income











62,940


62,940Balance 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

$
269,183


See
accompanying notes.

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

Years Ended December 31,2009

2008

2007Cash flows from operating activities:Net income

$
3,166

$
18,933

$
62,940Less income from discontinued operations, net of tax


(2,499
)

(18,107
)

(57,717
)Income from continuing operations


667


826


5,223Adjustments to reconcile income from continuing operations to net cash provided by operating activities:Depreciation and amortization


59,724


55,027


43,636Impairment loss on LMDS and related assets








5,454Loss (gain) on put option


762


(1,383
)

(Gain) loss on auction rate security


(929
)

1,575


Provision for deferred income taxes


7,161


4,708


(2,313
)Provision for doubtful accounts


2,944


2,772


803Stock-based compensation


2,105


963


847Other, net


(258
)

(557
)

304Net changes in:Receivables


(1,263
)

239


(1,589
)Refundable and accrued income taxes, net


843


(4,057
)

(2,131
)Inventories, prepaid expenses and other current assets


1,566


395


(1,106
)Accounts payable


(251
)

(2,101
)

19Accrued liabilities, other liabilities and deferred credits


(1,229
)

(7,629
)

1,683Net cash provided by continuing operations


71,842


50,778


50,830Net cash used in discontinued operations


(562
)

(1,605
)

(43,929
)Net cash provided by operating activities


71,280


49,173


6,901Cash flows from investing activities:Business acquisition, net of cash acquired





(179,749
)

Proceeds from sale of discontinued operations


10,947


66,296


110,123Proceeds from sale of property and equipment


830





Capital expenditures for property, plant and equipment


(58,330
)

(86,489
)

(53,332
)Purchases of available-for-sale securities


(34
)




(123,550
)Proceeds from sale of available-for-sale securities





16,650


103,200Net cash provided by (used in) continuing operations


(46,587
)

(183,292
)

36,441Net cash used in discontinued operations





(176
)

(492
)Net cash provided by (used in) investing activities


(46,587
)

(183,468
)

35,949Cash flows from financing activities:Proceeds from issuance of long-term debt


10,500


109,500


Proceeds from short-term borrowings





60,000


Repayment of short-term borrowings





(30,000
)

Dividends paid





(7,124
)

(14,465
)Principal payments of long-term debt and capital lease obligations


(29,143
)

(19,643
)

(3,642
)Repurchases and surrenders of common stock


(1,401
)

(6,712
)

Net cash provided by (used in) financing activities


(20,044
)

106,021


(18,107
)Increase (decrease) in cash and cash equivalents


4,649


(28,274
)

24,743Cash and cash equivalents at beginning of year


2,840


31,114


6,371Cash and cash equivalents at end of year

$
7,489

$
2,840

$
31,114


See accompanying notes.

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Table of Contents

SUREWEST COMMUNICATIONS  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  YEARS ENDED DECEMBER 31, 2009, 2008 AND 2007

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, and the greater Kansas City, Kansas and Missouri areas ("Kansas City area"). Our operating subsidiaries are SureWest Broadband, SureWest
TeleVideo, SureWest Internet, SureWest Custom Data Services, SureWest Kansas, Inc. (formerly Everest Broadband, Inc. ("Everest") with its various direct and indirect subsidiaries,
"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 sold 100% of the issued and outstanding stock of our wholly-owned subsidiary SureWest Directories in February 2007. Further, in October of 2008 we entered into a definitive purchase agreement to
sell our communication tower assets and completed the transaction on February 27, 2009. Accordingly, the financial results of SureWest Wireless, SureWest Directories 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 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 eliminated in the consolidated statements of income.

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Table of Contents

SUREWEST COMMUNICATIONS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
YEARS ENDED DECEMBER 31, 2009, 2008 AND 2007

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 an investment in an auction rate security ("ARS") 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 debt instruments such as investment grade fixed income corporate
obligations. We consider all highly liquid investments with an original maturity from date of purchase of 90 days or less to be cash equivalents. 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, 2009 and 2008, respectively:

2009

2008Cash

$
2,143

$
2,545Cash equivalents


5,346


295$
7,489

$
2,840


Investments

Our available-for-sale investments have historically consisted of equity securities and tax exempt auction rate securities,
which have an auction reset feature. Auction rate securities are generally long-term debt instruments that provide liquidity through a Dutch auction process that resets the applicable
interest rate at pre-determined calendar intervals, generally every seven to thirty-five days. However, as a result of liquidity issues in the global credit and capital
markets, the auctions for our ARS failed beginning in February 2008 when sell orders exceeded buy orders. The ARS was reclassified from short-term investments to long-term
investments during the first quarter of 2008.

The
fair value of the corporate equity securities (common stock) are determined by quoted market prices. We designated all investments, except for our ARS, as
available-for-sale and are therefore reported at fair value, with unrealized gains and losses recorded in accumulated other comprehensive income. During the fourth quarter of
2008, we transferred our ARS from available-for-sale to trading securities. Investments that we designate as trading assets are reported at fair value, with gains or losses
resulting from changes in fair value recognized in earnings.

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. As a result of our ARS being transferred from available-for-sale to trading securities, we recorded a $1,575
other-than-temporary impairment charge to the statement of income during the year ended December 31, 2008. As of December 31, 2008, we recorded $1,383 as the fair
value of an offer ("Right" or "put option") asset and classified it as a long-term investment on the consolidated balance sheet, with a corresponding credit to other income (expense),

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SUREWEST COMMUNICATIONS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
YEARS ENDED DECEMBER 31, 2009, 2008 AND 2007

1.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

other,
net, in the consolidated statement of income for the year ended December 31, 2008. The recording of the gain (fair value) of the Right during the year ended December 31, 2008
largely offset the loss on the ARS during that same period. See Note 3 for further detailed discussion.

During
the year ended December 31, 2009, both the ARS and Right were classified as current assets in short-term investments on our consolidated balance sheet as a result of our
Right, as more fully described in Note 3.

The
following is a summary of our short-term investments as of December 31, 2009 and 2008:

2009

2008Investment in common stock

$
631

$
610Auction rate securities


3,054


Put option (Right)


621


$
4,306

$
610


The
unrealized gains, net of tax, on investments in common stock were recorded as a component of other comprehensive income at such dates. Fair values for cash equivalents and short-term
investments were determined by quoted market prices.

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, 2009, 2008 and 2007, we
wrote-off certain accounts receivable balances related to continuing operations aggregating $3,171, $3,072 and $1,774, respectively. During the years ended December 31, 2009, 2008
and 2007, we recovered $451, $529 and $684, respectively, of accounts receivable balances previously written-off against such allowance.

Inventories

Inventories consist of network materials and supplies, which are stated at weighted average cost. We provide inventory write-downs on excess and
obsolete inventories determined primarily by future customer demand and technological advances of equipment.

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SUREWEST COMMUNICATIONS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
YEARS ENDED DECEMBER 31, 2009, 2008 AND 2007

1.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

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 $24,492, $7,106 and $6,498 in 2009, 2008 and 2007, 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, 2009 and 2008:

2009

2008

Estimated
Useful
LivesLand

$
2,824

$
2,829Buildings


76,363


75,788

35 yearsCentral office equipment


312,338


290,984

3-12 yearsOutside plant equipment


481,099


466,658

5-40 yearsInternal-use software


58,714


58,281

5 yearsOther


56,974


57,905

3-25 yearsTotal plant in service


988,312


952,445Less accumulated depreciation and amortization


481,639


448,579Plant in service


506,673


503,866Plant under construction


10,557


11,977Property plant and equipment, net

$
517,230

$
515,843


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 $52,843,
$46,478 and $37,014 and amortization expense was $6,881, $8,549 and $6,622 in 2009, 2008 and 2007, respectively. Average annual composite depreciation and amortization rates were 6.1%, 6.2% and 6.1%
in 2009, 2008 and 2007, respectively.

As
a result of our analysis related to ASC Topic 350,Intangibles-Goodwill and Other ("ASC 350") (formerly SFAS No. 142, Goodwill and Other Intangible Assets), 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

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SUREWEST COMMUNICATIONS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
YEARS ENDED DECEMBER 31, 2009, 2008 AND 2007

1.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Long-Lived Assets) as of November 30, 2009. 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.

In
connection with our 2007 annual assessment of our Local Multipoint Distribution System ("LMDS") licenses and the services provided by LMDS line of sight technology, we concluded that we would halt
further development of these services. However, customers using these services would continue to receive such services. The decision to no longer pursue this component of the data services was due to
our strategic change in the focus on the provision of landline based networks to provide voice, video and data services to residential customers and voice and high capacity bandwidth to business
customers in the markets in which we serve. Therefore, we used a combination of approaches to develop an Orderly Liquidation Value ("OLV") for the LMDS assets. The sales comparison approach, which
obtains current market information for similar assets, was used for computer hardware and tower signal hardware. The cost approach, which applied the indirect cost method to determine the replacement
cost new, was used for the remaining assets. Indirect costs were excluded from the reported fair value estimates in order to estimate the OLV of the residential fixed wireless data service assets. As
a result, we shortened the remaining useful life of the assets to 5 years and recorded a pre-tax $913 non-cash impairment charge on our Broadband segment, relating to
the residential fixed wireless data service assets. This charge was included in the consolidated statement of income for the year ended December 31, 2007.

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
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. 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 two 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

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SUREWEST COMMUNICATIONS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
YEARS ENDED DECEMBER 31, 2009, 2008 AND 2007

1.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

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.

Through
our 2007 annual assessment, our LMDS licenses were evaluated for impairment by comparing the carrying value to the estimated fair value. The fair value of our LMDS licenses, which were held by
the Broadband segment, was obtained using a DCF model. The assumptions used in the estimate of fair value were based on a combination of historical results and trends, new industry developments and
our current operating plans. Such assumptions were subject to change as a result of changing economic and competitive conditions. If the carrying value was in excess of the estimated fair value, then
an impairment loss is recognized equal to that excess. During 2007, we determined that our LMDS licenses were impaired and recorded a non-cash charge to operations of $4,541 on our
Broadband segment. The impairment was due to our change in strategic direction to focus on the provision of landline based networks to provide voice, video and data services to residential customers
and voice and high capacity bandwidth to business customers in the markets in which we serve. As a result of the completed and pending transitions of the aforementioned strategic initiatives, we
critically analyzed all of our various non-core service offerings. As a result, in December 2007, we determined that we would no longer pursue service offerings that utilize the LMDS
licenses as extensively. In addition to the non-cash impairment charge relating to the LMDS licenses, we used a combination of approaches to estimate the OLV and compared them to the
carrying value of the assets used to provide residential fixed wireless data service (see further discussion in the Property, Plant and Equipment section of this same footnote).

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
recorded goodwill for the Telecom and Broadband segments was $2,171 and $43,643, respectively, as of December 31, 2009 and 2008.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
YEARS ENDED DECEMBER 31, 2009, 2008 AND 2007

1.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

The
gross carrying amount, accumulated amortization and net carrying value of our acquisition-related intangible assets (customer relationships) were $6,240, $2,393 and $3,847, respectively, as of
December 31, 2009, Customer relationships are definite-life assets and have a weighted average useful life from the date of purchase of 5 years. At December 31, 2009,
the expected amortization expense for customer relationships was $1,215 annually from 2010 through 2012 and $202 in 2013, for a total of $3,847.

Stock-based Compensation

We account for stock-based compensation in accordance with ASC Topic 718,Compensation-Stock
Compensation(formerly SFAS No. 123(R),Share-Based Payment). Under the fair value recognition provisions of this
statement, share-based compensation cost is recognized as expense over the applicable vesting period of the stock award (generally four years) using the straight-line method.

Advertising Costs

Advertising costs are expensed as incurred. Advertising expense was $6,548, $7,411 and $4,780 in 2009, 2008 and 2007, respectively.

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.

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 restricted common
stock units ("RSUs") outstanding, excluding unvested restricted common shares ("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.

Cash
dividends per share are 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 the Company's common stock, we
credited 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, divided by the Company's stock price on the dividend payment date. Based on a decision of our Board of Directors to discontinue dividend payments for the
foreseeable future, we have not paid a cash dividend since June 2008.

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SUREWEST COMMUNICATIONS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
YEARS ENDED DECEMBER 31, 2009, 2008 AND 2007

1.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

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

Years Ended December 31,2009

2008

2007Weighted average common shares


13,996


14,096


14,450Potentially dilutive common equivalent shares:Unvested RSAs and RSUs





3


42Weighted average common shares and RSUs outstanding and potentially dilutive common equivalent shares


13,996


14,099


14,492


For
the year ended December 31, 2009, 309 unvested RSAs and unvested RSUs, in the aggregate, were excluded from the computation of diluted earnings per share. The per share value of the
unvested RSAs and RSUs, including the amount of compensation cost not yet recognized, was greater than the average market price of the shares which would have resulted in an anti-dilutive
effect to diluted earnings per share.

Statements of Cash Flows Information

During 2009, 2008 and 2007, we made payments for interest and income taxes as follows:

2009

2008

2007Interest, net of amounts capitalized ($393, $727 and $576 in 2009, 2008 and 2007, respectively)

$
12,309

$
11,752

$
6,576Income taxes (received) paid, net

$
(5,860
)
$
3,627

$
48,679


The
decrease in income taxes paid in 2009 was due to income tax refunds received in 2009 as compared to income taxes paid in 2008. The decrease in income taxes paid in 2008 compared to 2007 was due to
additional estimated income tax payments paid in 2007, primarily as a result of the gain on the sale of SureWest Directories during 2007, as discussed in Note 4 below.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
YEARS ENDED DECEMBER 31, 2009, 2008 AND 2007

1.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Other Comprehensive Income

Significant components of our other comprehensive income are as follows:

Years Ended December 31,2009

2008

2007Net income

$
3,166

$
18,933

$
62,940Minimum pension and post-retirement benefit (liability) net of income taxes of $2,691, $10,579 and $2,860 in 2009, 2008 and 2007,
respectively


3,960


(15,602
)

(4,158
)Unrealized (loss) gain on available-for-sale investments, net of income taxes of $4, $77 and $43 in 2009, 2008 and 2007, respectively


(8
)

(116
)

63Reclassification adjustment for losses included in net income, net of income taxes of $11 in 2009


16





Comprehensive income

$
7,134

$
3,215

$
58,845


As
of December 31, 2009 and 2008, accumulated other comprehensive loss, net of tax, consisted of the following:

2009

2008Minimum pension and post-retirement liability, net of tax

$
(15,299
)
$
(19,259
)Unrealized gain on available-for-sale investments, net of tax


19


11$
(15,280
)
$
(19,248
)


Recently Issued Accounting Pronouncements

In January 2010, the FASB issued Accounting Standards Update ("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 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. The amendments to ASC 820 made by ASU 2010-06 are effective for interim and annual reporting periods beginning after
December 15, 2009, 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. We are currently evaluating the impact
this update will have on our consolidated financial statements.

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SUREWEST COMMUNICATIONS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
YEARS ENDED DECEMBER 31, 2009, 2008 AND 2007

1.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

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 disclosures 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.
Early adoption is permitted, provided that the guidance is retroactively applied to the beginning of the year of adoption. We are currently evaluating the impact this update will have on our
consolidated financial statements.

Recently Adopted Accounting Pronouncements

In September 2009, the FASB issued ASU No. 2009-05,Fair Value Measurements and Disclosures (Topic
820)Measuring Liabilities at Fair Value("ASU 2009-05"). ASU 2009-05 amends ASC 820 to provide guidance concerning the measurement of
liabilities at fair value. Our adoption of this guidance did not have a material impact on our consolidated financial position and results of operations.

In
December 2008, the FASB issued guidance to require disclosure of additional information about assets held in a defined benefit pension plan or other post-retirement plan (formerly Staff Position
("FSP") FAS No. 132(R)-1,Employers' Disclosures about Post-retirement Benefit Plan Assets) currently included in ASC Topic 715, Compensation Retirement
Benefits("ASC 715"). Specifically, this guidance requires an employer to disclose (i) investment policies and strategies
including target allocation percentages, (ii) major categories of plan assets, (iii) inputs and valuation techniques used to measure the fair value of plan assets and
(iv) significant concentration of risk within plan assets. Our adoption of this guidance did not have a material impact on our consolidated financial position and results of operations. See
Note 8 for the additional disclosures required by this guidance.

In
June 2009, the FASB issued an accounting standard, currently included in ASC Topic 105,Generally Accepted Accounting Principles("ASC 105"), which
established only two levels of GAAP, authoritative and nonauthoritative (formerly SFAS No. 168,The FASB Accounting Standards CodificationTM and the
Hierarchy of Generally Accepted Accounting Principlesa replacement of FASB Statement No. 162). The FASB ASC became the only source of authoritative
nongovernmental generally accepted
accounting principles ("GAAP"), except for rules and interpretive releases of the SEC, which are sources of authoritative GAAP for SEC registrants. All other nongrandfathered, non-SEC
accounting literature not included in the ASC will become nonauthoritative. ASC 105 was not intended to change or alter existing GAAP; consequently our adoption of ASC 105 did not have a material
impact on our consolidated financial position and results of operations.

In
May 2009, the FASB issued guidance, currently included in ASC Topic 855,Subsequent Events, which established general standards of accounting for and
disclosure of events that occur after the balance sheet date but before financial statements are issued or available to be issued (formerly SFAS No. 165,Subsequent
Events). This guidance requires disclosure of the date through which subsequent events have been evaluated, as well as whether that is the date the financial statements were
issued or the date the

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
YEARS ENDED DECEMBER 31, 2009, 2008 AND 2007

1.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

financial
statements were available to be issued. Our adoption of this guidance did not have a material impact on our consolidated financial position and results of operations.

In
April 2009, the FASB issued three accounting standards that were intended to provide additional application guidance and enhance disclosures about fair value measurements and impairments of
securities. The provisions included in these standards were intended to (i) clarify the objective and method of fair value measurement even when there has been a significant decrease in market
activity for the asset being measured (formerly FSP FAS No. 157-4,Determining Fair Value When the Volume and Level of Activity for the Asset or Liability
Have Significantly Decreased and Identifying Transactions That Are Not Orderly), currently included in ASC 820, (ii) establish a new model for measuring
other-than-temporary impairments for debt securities, including establishing criteria for when to recognize a write-down through earnings versus other comprehensive
income (formerly FSP FAS No. 115-2 and FSP FAS No. 124-2,Recognition of Other-Than-Temporary
Impairment), currently included in ASC Topic 320,InvestmentsDebt and Equity Securitiesand (iii) require
fair value disclosures in interim periods for all financial instruments within the scope of ASC Topic 825,Financial Instruments(formerly FAS
No. 107-1 and APB 28-1,Interim Disclosures about Fair Value of Financial Instruments). Our adoption of the
provisions of these standards, on April 1, 2009, did not have a material impact on our consolidated financial position and results of operations.

In
November 2008, the Emerging Issues Task Force ("EITF") reached a consensus (formerly EITF No. 08-7,Accounting for Defensive Intangible
Assets)which requires the acquirer of a defensive intangible asset to account for a defensive intangible asset as a separate unit of accounting and assign a useful life for a
defensive intangible asset according to the entity's consumption of the expected benefits related to that asset, currently included in ASC 350. Our adoption of this provision, on January 1,
2009 did not have a material impact on our consolidated financial position and results of operations.

In
June 2008, the FASB issued guidance which addresses whether instruments granted in share-based payment transactions are participating securities prior to vesting and, therefore, need to be included
in the earnings allocation in computing earnings per share under the two-class method as described in ASC Topic 260,Earnings Per Share(formerly FSP EITF 03-6-1,Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating
Securities). Under this guidance, unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents (whether paid or
unpaid) are participating securities and shall be included in the computation of earnings per share pursuant to the two-class method. Our adoption of the requirements of this guidance, on
January 1, 2009, did not have a material impact on our consolidated financial position and results of operations.

In
April 2008, the FASB issued guidance which amends the factors that should be considered in developing renewal or extension assumptions used for purposes of determining the useful life of a
recognized intangible asset under ASC 350 (formerly FSP No. FAS 142-3,Determination of the Useful Life of Intangible Assets). This
guidance was intended to improve the consistency between the useful life of a recognized intangible asset under ASC 350 and the period of expected cash flows used to measure the fair value of the
asset under ASC Topic 805,Business Combinations("ASC 805"), and other U.S. GAAP. Our adoption of this guidance, on January 1, 2009, did
not have a material impact on our consolidated financial position and results of operations.

In
February 2008, the FASB issued guidance which amended ASC 820 to delay the effective date until January 1, 2009 for nonfinancial assets and nonfinancial liabilities, except for items that
are recognized or

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SUREWEST COMMUNICATIONS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
YEARS ENDED DECEMBER 31, 2009, 2008 AND 2007

1.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

disclosed
at fair value in the financial statements on a recurring basis, at least annually (formerly FSP No. FAS 157-2,Effective Date of FASB Statement
No. 157).ASC 820, as amended, was effective for financial statements issued for fiscal years beginning after November 15, 2008 and for interim periods within
those fiscal years. Our adoption of the provisions of this pronouncement, on January 1, 2009, did not have a material impact on our consolidated financial position and results of operations.

In
December 2007, the FASB issued an accounting standard which establishes principles and requirements for how the acquirer recognizes and measures, in its financial statements, the identifiable
assets acquired, the liabilities assumed and any noncontrolling interest in the acquiree in a business combination, currently included in ASC 805,Business
Combinations(formerly SFAS No. 141(R),Business Combinations). This standard also establishes principles around how
goodwill acquired in a business combination or gain from a bargain purchase should be recognized and measured, as well as provides guidelines on the disclosure requirements on the nature and financial
impact of the business combination. In addition, this standard requires acquisition-related transaction and restructuring costs to be expensed rather than treated as part of the cost of the
acquisition. In April 2009, the FASB issued an amendment to this standard by establishing a model to account for certain pre-acquisition contingencies (formerly FSP
FAS 141(R)-1,Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies).
Under the amendment, an acquirer is required to recognize at fair value an asset acquired or a liability assumed in a business combination that arises from a contingency if the
acquisition-date fair value of that asset or liability can be determined during the measurement period. If the acquisition-date fair value cannot be determined, then the
acquirer should follow the recognition criteria requirements of ASC Topic 450,Contingencies. Our adoption of the standard and amendment, on
January 1, 2009, did not have a material impact on our consolidated financial position and results of operations.

Reclassifications

Certain amounts in our 2008 and 2007 consolidated financial statements have been reclassified to conform to the presentation of our 2009 consolidated
financial statements.

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.

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SUREWEST COMMUNICATIONS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
YEARS ENDED DECEMBER 31, 2009, 2008 AND 2007

2.    REVENUE RECOGNITION (Continued)

We
collect and remit Federal Universal Service contributions on a gross basis, which resulted in recorded revenue of $3,692, $3,048 and $2,984 for the years ended December 31, 2009, 2008 and
2007, 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, 2009

As of December 31, 2008Adjusted
Cost

Gross
Unrealized
Gains

Gross
Unrealized
Losses

Estimated
Fair
Market
Value

Adjusted
Cost

Gross
Unrealized
Gains

Gross
Unrealized
Losses

Estimated
Fair
Market
ValueEquity securities

$
654

$


$
(23
)
$
631

$
648

$


$
(38
)
$
610


As
of December 31, 2009, the decline in the fair value of our short-term available-for-sale investments had been in a continuous loss position for more than
twelve months and as of December 31, 2008 the value of these investments had been in a continuous loss position for less than twelve months. We concluded that the gross unrealized losses of our
equity securities were temporary, as the extent of the decline, both in dollars and percentages of cost were not considered significant and we have the ability and intent to hold the investments until
at least substantially all of the costs of the investment is recovered. The unrealized losses, net of tax, on our short-term available-for-sale investments were
recorded as a component of other comprehensive income at such dates. We determined the fair value of our short-term equity security investments by quoted market prices.



In accordance with ASC 820 (formerly SFAS No. 157,Fair Value Measurements), we measure our
cash equivalents (money market funds) and short-term investments (equity securities, auction rate security and put option) 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.


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
YEARS ENDED DECEMBER 31, 2009, 2008 AND 2007

3.    FAIR VALUE MEASUREMENTS (Continued)

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, 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


Fair
values for cash equivalents and equity securities in short-term investments were determined by quoted market prices. Fair values for the ARS and put option were determined based on
DCF models, as described below.

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):

2009

2008Put Option

Auction Rate
Securities

Put Option

Auction Rate
SecuritiesBeginning balance at January 1st

$
1,383

$
2,125

$


$
Transfers in and/or out of Level 3











3,700Issuance of put option








1,383


Total gains or (losses) included in earnings


(762
)

929





(1,575
)Ending balance at December 31st

$
621

$
3,054

$
1,383

$
2,125


As
of December 31, 2009, we held one $3,700 par value ARS with an estimated fair value of $3,054, which was measured using Level 3 inputs. This ARS is collateralized by student loans
that are
guaranteed primarily by a monoline insurance company and partially by the Federal Family Education Loan Program ("FFELP").

In
November 2008, we accepted a Right from UBS Financial Services, Inc., a subsidiary of UBS AG ("UBS"), entitling us to sell at par value our ARS originally purchased from UBS at anytime
during a two-year period from June 30, 2010 through July 2, 2012. If the Right is not exercised before July 2, 2012, it will expire and UBS will have no further rights
or obligation to buy our ARS. If UBS has insufficient funding to buy back the ARS and the auction process continues to fail, then we may incur further losses on the carrying value of the ARS. The
enforceability of the Right results in a put option and is recognized as a separate freestanding asset and is accounted for separately from the ARS investment. We elected to measure the Right at fair
value under ASC Topic 825,Financial Instruments(formerly SFAS No.159,The Fair Value Option for Financial Assets and Financial
LiabilitiesIncluding an Amendment of FASB Statement No. 115), which permits an entity to elect the fair value option for recognized financial assets, in
order to match the changes in the fair value of the ARS.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
YEARS ENDED DECEMBER 31, 2009, 2008 AND 2007

3.    FAIR VALUE MEASUREMENTS (Continued)

We
prepared DCF models to estimate the fair value of the ARS and the Right as of December 31, 2009. The significant Level 3 assumptions that were used as inputs in one or both of our DCF
models were the credit quality of the issuer, the credit quality of the monoline insurance company, the percentage and the types of guarantees (such as the monoline insurance company and FFELP),
interest rates, expected holding periods, expected future cash flows, an illiquidity discount factor and UBS's financial ability to repurchase the ARS beginning June 30, 2010. We compared the
ARS and Right, when possible, to other observable and relevant market data. Changes in the assumptions of the models are based on dynamic market conditions which could have a significant impact on the
valuation of these securities and may result in impairment charges for one or both of these securities in the future.

Based
on our review of our DCF models, the inputs to the models and the assessment of fair values as of December 31, 2009, we determined there was a gain of $929 and a loss of $762 in the fair
values of the ARS and Right, respectively, during the year ended December 31, 2009. Accordingly, the changes in fair values have been recorded to other income (expense), other, net, in the
consolidated statements of income in 2009.

As
of December 31, 2008, the ARS and Right were classified as long-term assets on our consolidated balance sheet. We did not expect to need access to these funds in the
short-term; however, in the event we needed to access these funds, they were not expected to be accessible until one of the following occurs: a successful auction, the issuer redeems the
issue, a buyer was found outside of the auction process or the underlying securities mature. In addition, the underlying maturities of the securities are greater than 20 years. 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 and 2008.

Prior
to accepting the Right, we recorded our ARS as an available-for-sale investment, and therefore, recorded resulting unrealized gains or losses, net of tax, in accumulated
other comprehensive income. In connection with the acceptance of the Right in November 2008, we transferred our ARS, subject to the Right, from available-for-sale to trading in
accordance with ASC Topic 320,InvestmentDebt and Equity Securities(formerly SFAS No. 115,Accounting for
Certain Investments in Debt and Equity Securities). The transfer to trading securities reflected management's intent to exercise the Right during the period June 30,
2010 to July 2, 2012. Upon transfer of the ARS to trading securities, we recognized a loss of $1,575, included in other income (expense), other, net, for the amount of the unrealized loss not
previously recognized in earnings. As of December 31, 2008, we recorded $1,383 as the fair value of the Right asset and classified it as a long-term investment on the consolidated
balance sheet, with a corresponding credit to other income (expense), other, net, in the consolidated statement of income for the year ended December 31, 2008. The recording of the gain (fair
value) of the Right during the year ended December 31, 2008 largely offset the loss on the ARS during that same period.

On
January 6, 2010, UBS exercised their rights under the Right to purchase our ARS at par of $3,700. As a result, during the first quarter of 2010, we will record a gain of $646 on the ARS in
the consolidated statements of income. That gain will be largely offset by recording a loss of $621 on the Right, due to the cancellation of our put option under the Right.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
YEARS ENDED DECEMBER 31, 2009, 2008 AND 2007

3.    FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)



We had no short-term borrowings as of December 31, 2009 and 2008. 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, 2009

As of December 31, 2008Carrying Value

Fair Value

Carrying Value

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

$
223,045

$
221,323

$
241,688

$
238,471


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 greater 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 805. 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.

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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
YEARS ENDED DECEMBER 31, 2009, 2008 AND 2007

4.    ACQUISITION & DIVESTITURES (Continued)

of
5 years. During the years ended December 31, 2009 and 2008, we recorded amortization expense of approximately $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 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.

Years Ended December 31,2008

2007Operating revenues

$
237,930

$
233,671Income from operations


16,787


16,396Income from continuing operations


1,180


3,332Net income


19,287


61,049Basic earnings per common share:Income from continuing operations

$
0.08

$
0.23Net income

$
1.37

$
4.22Diluted earnings per common share:Income from continuing operations

$
0.08

$
0.23Net income

$
1.37

$
4.21


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. Under the agreement, 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.

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 will be available during the
second quarter of 2010,

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
YEARS ENDED DECEMBER 31, 2009, 2008 AND 2007

4.    ACQUISITION & DIVESTITURES (Continued)

less
the amount of any pending claims, in each case, to be held as security for certain losses, if any, incurred by Verizon in the event of (i) any breach of the representations and warranties
set forth in the agreement, (ii) any breach or nonperformance of covenants set forth in the agreement and (iii) certain other specified events. The actual gain on sale could vary based
on future claims, if any, made against the amounts held in escrow.

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

2008

2007Operating revenues

$


$
10,055

$
31,638Operating expenses including depreciation and amortization





9,962


37,099Income (loss) from operations





93


(5,461
)Other income (expense)





(7
)

108Income tax expense (benefit)





66


(2,260
)Income (loss) from discontinued operations

$


$
20

$
(3,093
)Gain on sale of discontinued operations, net of taxes of $30 and $13,088 in 2009 and 2008, respectively

$
43

$
18,821

$



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 and $5,667 for the years ended December 31, 2008 and 2007, respectively.



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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
YEARS ENDED DECEMBER 31, 2009, 2008 AND 2007

4.    ACQUISITION & DIVESTITURES (Continued)

At
December 31, 2008, the major components of tower assets and liabilities to be sold were as follows:

December 31, 2008Prepaid expenses

$
98Property, plant and equipment, net


4,904Total assets

$
5,002Other liabilities and deferred revenues

$
453Total liabilities

$
453


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

Years Ended December 31,2009

2008

2007Operating revenues

$
249

$
1,616

$
922Operating expenses including depreciation and amortization


365


1,476


1,504Income (loss) from operations


(116
)

140


(582
)Income tax expense (benefit)


(47
)

57


(237
)Income (loss) from discontinued operations

$
(69
)
$
83

$
(345
)Gain 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 ("GateHouse"), 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. As part of the transaction, GateHouse became the publisher
of the official directory
of SureWest Telephone. During the quarter ended September 30, 2008, the gain on sale was reduced by $817 related to disputed claims owed to us under a transitional service agreement for billing
services performed after the sale date. The results of SureWest Directories are reported as a discontinued operation in the consolidated financial statements for all periods presented.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
YEARS ENDED DECEMBER 31, 2009, 2008 AND 2007

4.    ACQUISITION & DIVESTITURES (Continued)

The
following table summarizes the financial information for SureWest Directories' operations for the years ended December 31, 2008 and 2007:

Years Ended December 31,2008

2007Directory advertising revenues

$


$
2,939Income before income taxes





1,682Income tax expense





683Income from discontinued operations





999Gain (loss) on sale of discontinued operations, net of taxes of $(548) and $41,130 in 2008 and 2007, respectively

$
(817
)
$
60,156


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, consist of 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. The following is the carrying value of the assets held for sale as of
December 31, 2009 and 2008:

2009

2008Undeveloped land

$
1,556

$
1,556Office building


4,453


5,832$
6,009

$
7,388


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.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
YEARS ENDED DECEMBER 31, 2009, 2008 AND 2007

5.    CREDIT AGREEMENTS

Long-term debt outstanding as of December 31, 2009 and 2008 consisted of the following:

2009

2008Unsecured Series A Senior Notes, with interest payable semiannually at a fixed rate of 6.30%; principal payments are due in equal annual
installments of approximately $3,636, through December 2013

$
14,545

$
18,181Unsecured Series B Senior Notes, with interest payable semiannually at a fixed rate of 4.74%; principal payments are due in equal
annual installments of $12,000, commencing March 2009 through March 2013


48,000


60,000Unsecured Term Loan A credit facility, $40,000 at a fixed rate of 7.04%; the remaining $80,000 bears interest at LIBOR plus an applicable
margin (4.56% and 5.44% as of December 31, 2009 and 2008, respectively); all interest is paid quarterly; principal is due and payable on May 1, 2012


120,000


120,000Unsecured Term Loan B credit facility, with interest payable quarterly at LIBOR plus an applicable margin (3.66% and 4.47% as of
December 31, 2009 and 2008, respectively); principal is due and payable on May 1, 2012


30,000


30,000Unsecured Revolving Loan credit facility, with interest payable quarterly at LIBOR plus an applicable margin (4.81% and 3.00% as of
December 31, 2009 and 2008, respectively); principal is due and payable on May 1, 2012


10,500


13,500Total long-term debt


223,045


241,681Less current portion


15,636


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

$
207,409

$
226,045


At
December 31, 2009, the aggregate maturities of long-term debt were (i) $15,636 annually in 2010 and 2011, (ii) $176,137 in 2012 and (iii) $15,636 in 2013,
for a total of $223,045. We had no short-term borrowings as of December 31, 2009 and 2008.

In
February 2008, we entered into a Second Amended and Restated Credit Agreement ("February 2008 Agreement") with CoBank, ACB ("CoBank") to restate and replace a May 2007 credit agreement. The
February 2008 Agreement terms, among other things (i) revised the amount available under the Term Loan A facility from $40,000 to $120,000, (ii) established a 1-year $60,000
Term Loan B facility and (iii) modified certain financial covenants. No significant changes were made to the existing $60,000 Revolving Loan facility. The credit facilities were used in part to
acquire Everest and were available for general corporate purposes. The Term Loan A facility and the Revolving Loan facility are due and payable on May 1, 2012.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
YEARS ENDED DECEMBER 31, 2009, 2008 AND 2007

5.    CREDIT AGREEMENTS (Continued)

The
Term Loan A facility, prior to the February 2008 Agreement, which had $40,000 outstanding, was extinguished in February 2008 resulting in a loss on extinguishment of debt of $607, which was
recorded as a component of interest expense in the first quarter of 2008. $40,000 of the February 2008 Agreement borrowings bore interest at a fixed rate. The remaining $80,000 of the February 2008
Agreement borrowings bore interest based, at our election, on the London Interbank Offered Rate ("LIBOR") or the bank's Prime Rate, in either case, plus an applicable margin. The Term Loan B facility
was due and payable on February 12, 2009 and included automatic increases to the applicable interest margins. On May 14, 2008, we repaid $30,000 of the Term Loan B and $16,000 of the
Revolving facility with proceeds from the sale of the operating assets of our Wireless business, SureWest Wireless.

In
September 2008, we entered into a Third Amended and Restated Credit Agreement ("Credit Agreement") with CoBank to restate and replace the February 2008 Agreement. The Credit Agreement terms, among
other things (i) reflected the repayment of $30,000 of the Term Loan B facility under the February 2008 Agreement to reduce the principal balance from $60,000 to $30,000, (ii) modified
interest margins, (iii) extended the maturity date of the Term Loan B facility to May 1, 2012, (iv) separated the total revolving commitments of $60,000 into a Revolving Loan
facility of $57,500 and a Swingline Loan facility of $2,500 and (v) required permanent reductions of the Revolving Loan facility of $7,500 at December 31, 2009 and 2010.

On
January 29, 2010, we entered into a letter agreement with CoBank amending certain terms of the Credit Agreement, including (i) an increase in the total Revolving Loan facility of
$7,500, (ii) CoBank's share of the Revolving Loan facility be permanently reduced by $5,000 (rather than $7,500) on December 31, 2010 and (iii) the total Revolving Loan facility
be $57,500. As a result of this letter agreement, our combined revolving commitment balance on our Revolving Loan and Swingline Loan facilities is $60,000 and our available balance, which was less our
outstanding balance of $10,500, was approximately $49,500.

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 capital
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, 2009, 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, 2009Leverage ratio

Not more than 3.75

2.95Interest coverage ratio

Not less than 3.00

6.69Consolidated net worth

Not less than $160,000

$265,224Debt to capitalization

Not more than 0.55

0.46


At
December 31, 2009 and 2008, retained earnings of $109,183 and $101,345, respectively, were available for the payments described above.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
YEARS ENDED DECEMBER 31, 2009, 2008 AND 2007

6.    REGULATORY MATTERS

Certain of our rates are subject to regulation by the Federal Communications Commission ("FCC") and the state commissions. Intrastate service rates are subject to regulation by state commissions. With
respect to toll calls initiated by interexchange carriers' customers, the interexchange carriers are assessed access charges based on tariffs filed by the Company. Interstate access rates and
resultant earnings are subject to regulation by the FCC. With respect to interstate services, SureWest Telephone has detariffed its Digital Subscriber Line ("DSL") services and files
its own tariff with the FCC for switched and special access services. For interstate common line ("CL") charges, SureWest Telephone concurs with tariffs filed by the National Exchange
Carrier Association ("NECA"). Pending and future regulatory actions may have a material impact on our consolidated financial position and results of operations.



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.

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 the prior year monitoring
periods during the year ended December 31, 2007. These changes in estimates decreased our consolidated revenues and income from continuing operations by $368 and net income by $261 ($0.02 per
share). We did not record any significant changes in estimates related to prior year monitoring periods during 2009 or 2008.



In 2004, we entered into a settlement agreement (the "Settlement Agreement"), which was ultimately approved by the CPUC, to resolve an ongoing
regulatory proceeding with various parties. The Settlement Agreement resolved past sharing liabilities and suspended future sharing requirements in the intrastate jurisdiction. In accordance with the
Settlement Agreement, SureWest Telephone returned approximately $6,500, plus interest at the 90-day commercial paper rate for non-financial institutions and an imputed rate of
3.15%, to its end-users through a consumer dividend. The surcredit was recorded as a reduction of our contractual shareable earnings obligations over a period of approximately four years,
which began January 1, 2005. During the first quarter of 2009 and prior to the cessation of the surcredit on February 9, 2009, we returned approximately $165. For the year ended
December 31, 2008, we returned approximately $1,633 to end users through the consumer dividends.

We
also paid a one-time consumer dividend of $2,600 to consumers to settle the monitoring period's 2000 to 2004 payable over approximately two years, which began January 1, 2005 and
was completed in March 2007.

As
part of the Settlement Agreement, SureWest Telephone was required to implement an additional annual consumer dividend of $1,300 on January 1, 2007 to end-users receiving SureWest
Telephone services subject to sharing on or after that date. In December 2006, the CPUC authorized us to offset our annual $11,500 interim draw from the California High Cost Fund ("CHCF") with the
aforementioned $1,300 consumer dividend Settlement Agreement. The CHCF was previously authorized by the CPUC to

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
YEARS ENDED DECEMBER 31, 2009, 2008 AND 2007

6.    REGULATORY MATTERS (Continued)

offset
SureWest Telephone's intrastate regulated operating expenses on an interim basis. In September 2007, the CPUC issued Decision 07-09-002 which provides for SureWest
Telephone to phase-down our annual CHCF interim draw over a five-year period, to end on January 1, 2012. In 2009, our interim CHCF draw was $6,120 and is being
incrementally reduced by $2,040 annually.

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 can only be raised up to $3.25 per year during 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 Incumbent Local Exchange Carriers ("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 will be allowed full pricing flexibility for the basic
residential rate.

7.    INCOME TAXES

On January 1, 2007, we adopted 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.

The
following table provides a reconciliation of the beginning and ending amount of our liability for unrecognized tax benefits:

2009

2008

2007Balance at January 1,

$
257

$
305

$
1,511Additions based on prior year tax positions


7


76


Reductions based on prior year tax positions


(61
)

(124
)

(316
)Reductions for lapse of statue of limitations








(890
)Balance at December 31,

$
203

$
257

$
305


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 2009, 2008 and 2007. As of December 31, 2009 and 2008, we had approximately $75 and $81 of accrued interest and approximately $28 and $40 of penalties in the amount disclosed
above for unrecognized tax benefits, respectively.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
YEARS ENDED DECEMBER 31, 2009, 2008 AND 2007

7.    INCOME TAXES (Continued)

The
total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate was $129 and $123 at December 31, 2009 and 2008, respectively. We do not anticipate any
release of the liability for unrecognized tax benefits within the next 12 months.

As
of December 31, 2009, the following tax years and related taxing jurisdictions were open:

Tax Year

Taxing Jurisdiction2002 - 2009

Federal2004 - 2009

California2006 - 2009

Kansas and Missouri


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

2009

2008

2007Current expense (benefit):Federal

$
(5,359
)
$
(1,588
)
$
1,253State


204


19


693Total current expense (benefit)


(5,155
)

(1,569
)

1,946Deferred expense (benefit):Federal


6,492


2,760


(1,789
)State


669


1,948


(524
)Total deferred expense (benefit)


7,161


4,708


(2,313
)Total income tax expense (benefit)

$
2,006

$
3,139

$
(367
)


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:

2009

2008

2007Computed at statutory rates

$
936

$
1,388

$
1,700Increase (decrease):State taxes, net of federal benefit


209


415


110State taxes attributable to change to multi-state apportionment


325


863


Tax exempt interest


(14
)

(160
)

(401
)Statute closures and other recoveries








(1,662
)Interest and penalties





549


KSOP dividends





(127
)

(208
)Deferred compensation


482


123


Other, net


68


88


94Income tax expense (benefit)

$
2,006

$
3,139

$
(367
)Effective federal and state tax rate


75.0
%

79.2
%

(7.6
)%


85

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SUREWEST COMMUNICATIONS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
YEARS ENDED DECEMBER 31, 2009, 2008 AND 2007

7.    INCOME TAXES (Continued)

The
significant components of our deferred income tax assets and liabilities were as follows at December 31, 2009 and 2008:

Deferred Income Taxes2009

2008Assets

Liabilities

Assets

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

$


$
74,277

$


$
66,987Differences in the timing of recognition of revenues


3,183


488


3,339


952Net operating losses


5,999





5,061


Post-retirement and post-employment benefits


12,872





14,213


Accrued compensation


1,367





1,187


Other, net


1,701


648


2,708


823Total deferred income taxes


25,122


75,413


26,508


68,762Valuation allowance


(1,192
)




(1,115
)

Total deferred income taxes, net of valuation allowance

$
23,930

$
75,413

$
25,393

$
68,762Net deferred income tax liability




$
51,483




$
43,369


We
have federal net operating loss carryforwards of approximately $16,869 ($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 $11,726 which will begin to expire in 2016, if not used. We also have 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.

8.    PENSION PLAN AND OTHER POST-RETIREMENT BENEFITS

We maintain a noncontributory defined benefit pension plan (the "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 Supplemental Executive Retirement Plan ("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 certain post-retirement benefits other than pensions ("Other Benefits Plan") to certain eligible employees of our California location, including life insurance
benefits and a stated reimbursement for Medicare supplemental insurance.

In
recent years, we substantially modified our employee compensation structure in order to attract and retain the right mix of talent necessary to successfully support our operations. For that reason,
we amended

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SUREWEST COMMUNICATIONS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
YEARS ENDED DECEMBER 31, 2009, 2008 AND 2007

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

our
Pension Plan, SERP and Other Benefits Plan (collectively the "Plans"). The amendments to the Plans, effective April 1, 2007, froze the Plans 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.

We
account for our Pension Plan in accordance with ASC 715 (formerly SFAS No. 158,Employers' Accounting for Defined Benefit Pension and Other Post-retirement Plans, an
Amendment of FASB Statements No. 87, 88, 106 and 132(R)). ASC 715 requires an employer to recognize the overfunded or underfunded status of a defined benefit
post-retirement plan as an asset or liability in its statement of financial position, to recognize changes in that funded status in the year in which the changes occur through comprehensive income and
to measure the funded status of a plan as of the date of its year-end statement of financial position.

We
adopted the provisions the FASB guidance issued in December 2008 to require disclosure of additional information about assets held in a defined benefit pension or other post-retirement plan
(formerly FSP FAS No. 132(R)-1,Employers' Disclosures about Post-retirement Benefit Plan Assets) currently included in ASC 715.
Specifically, this guidance requires an employer to disclose (i) investment policies and strategies including target allocation percentages, (ii) major categories of plan assets,
(iii) inputs and valuation techniques used to measure the fair value of plan assets and (iv) significant concentration of risk within plan assets. The additional disclosure requirements
were effective for fiscal years ending after December 15, 2009.

The
following tables set forth the change in benefit obligation, change in plan assets and funded status of the Plans as of December 31, 2009 and 2008:

Pension Plan and SERP

Other Benefits Plan2009

2008

2009

2008Change in benefit obligationBenefit obligation at beginning of the year

$
118,636

$
124,391

$
8,481

$
9,512Service cost








90


107Interest cost on projected benefit obligation


7,234


7,153


442


438Plan participant's contributions








412


399Actuarial loss (gain)


5,073


(5,626
)

(808
)

(1,100
)Benefits paid


(7,526
)

(7,282
)

(905
)

(875
)Benefit obligation at end of the year

$
123,417

$
118,636

$
7,712

$
8,481




Pension Plan and SERP

Other Benefits Plan2009

2008

2009

2008Change in plan assetsFair value of plan assets at beginning of year

$
87,126

$
116,553

$
3,731

$
5,124Actual return on plan assets


14,787


(22,367
)

602


(939
)Employer contribution


223


222


13


22Plan participant's contributions








412


399Benefits paid


(7,526
)

(7,282
)

(905
)

(875
)Fair value of plan assets at end of year

$
94,610

$
87,126

$
3,853

$
3,731Funded status at year end

$
(28,807
)
$
(31,510
)
$
(3,859
)
$
(4,750
)


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SUREWEST COMMUNICATIONS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
YEARS ENDED DECEMBER 31, 2009, 2008 AND 2007

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

Amounts recognized in the consolidated balance sheets at December 31, 2009 and 2008 consist of:

Pension Plan and SERP

Other Benefits Plan2009

2008

2009

2008Current liabilities

$
216

$
216

$


$
Noncurrent liabilities

$
28,591

$
31,294

$
3,859

$
4,750


Amounts
recognized in accumulated other comprehensive income for the years ended December 31, 2009 and 2008 consist of:

Pension Plan and SERP

Other Benefits Plan2009

2008

2009

2008Net actuarial loss (gain)

$
28,242

$
33,864

$
(1,997
)
$
(877
)Prior service cost


2


4


(544
)

(637
)$
28,244

$
33,868

$
(2,541
)
$
(1,514
)


Net
periodic pension (income) cost recognized in the consolidated statements of income for the years ended December 31, 2009, 2008 and 2007 under the Plans included the following components:

Pension Plan and SERP

Other Benefits Plan2009

2008

2007

2009

2008

2007Service cost-benefits earned during the year

$


$


$
878

$
90

$
107

$
127Interest cost on projected benefit obligation


7,234


7,153


7,219


441


438


476Expected return on plan assets


(6,685
)

(9,065
)

(9,290
)

(245
)

(360
)

(384
)Amortization of:Prior service cost


2


2


2


(92
)

(92
)

(92
)Net actuarial gain (loss)


2,593


23


21


(45
)

(107
)

(62
)Net pension and other benefits (income) cost during the year

$
3,144

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

$
(14
)
$
65


The
following table summarizes other changes in plan assets and benefit obligations recognized in other comprehensive income, before tax effects, during 2009 and 2008:

Pension Plan and SERP

Other Benefits Plan2009

2008

2009

2008Actuarial loss (gain), net

$
(3,029
)
$
25,807

$
(1,164
)
$
199Recognized actuarial (loss) gain


(2,593
)

(23
)

45


107Recognized prior service (cost) credit


(2
)

(2
)

92


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

$
(5,624
)
$
25,782

$
(1,027
)
$
398


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, 2009, 2008 AND 2007

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

next
fiscal year are $2,216, $2 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 $124, $92 and $0, respectively .

The
weighted-average assumptions used to determine projected benefit obligations as of December 31, 2009 and 2008 were as follows:

Pension Plan and SERP

Other Benefits Plan2009

2008

2009

2008Discount rate


6.00%


6.25%


4.80%


6.00%


The
weighted-average assumptions used to determine net periodic benefit cost for the years ended December 31, 2009, 2008 and 2007 were as follows:

Pension Plan and SERP

Other Benefits Plan2009

2008

2007

2009

2008

2007Discount rate


6.25%


6.00%


6.00%


6.00%


5.50%


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


Age Graded


NA


NA


Age Graded


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, 2009 and 2008 were as follows:

2009

2008Health care cost trend assumed for the next year


9.00%


10.00%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


2013


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

$
7

$
(7
)Effect on post-retirement benefit obligation as of January 1, 2009

$
45

$
(50
)


Plan Assets

Our investment strategy is designed to provide a stable environment to secure participant retirement benefits and minimize the reliance on
contributions as a source of benefit security. The objectives are

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
YEARS ENDED DECEMBER 31, 2009, 2008 AND 2007

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

based
on a long-term (5 to 15 year) investment horizon, so that interim fluctuations should be viewed with appropriate perspective. The assets of the fund are to be invested to
achieve the greatest reward for the 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 plan's strategic allocation. The target allocation of funds is approximately 33% large cap equities, 17%
international equities, 7% small cap equities and 43% domestic fixed income. Domestic fixed income is in the form of corporate and municipal bonds, corporate commercial paper, 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 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, 2009 were generated by using
market transactions involving identical or comparable assets. There were no changes in the valuation techniques used during 2009.

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

Asset Category

Total

Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)

Significant
Observable
Inputs
(Level 2)

Significant
Unobservable
Inputs
(Level 3)Short-term investment fund(1)

$
2,449

$
2,449

$


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


32,467





32,467


United States small-cap(3)


7,160





7,160


International value(4)


7,967





7,967


International growth funds(4)


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 with a benchmark of the Russell 1000 Index.(3)This
category comprises low-cost equity index funds with a benchmark of the Russell 2000 Index.(4)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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SUREWEST COMMUNICATIONS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
YEARS ENDED DECEMBER 31, 2009, 2008 AND 2007

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

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

Asset Category

Total

Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)

Significant
Observable
Inputs
(Level 2)

Significant
Unobservable
Inputs
(Level 3)Short-term investment fund(1)

$
100

$
100

$


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


1,322





1,322


United States small-cap(3)


291





291


International value(4)


324





324


International growth funds(4)


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 with a benchmark of the Russell 1000 Index.(3)This
category comprises low-cost equity index funds with a benchmark of the Russell 2000 Index.(4)These
categories compromise equity funds with a benchmark of the Morgan Stanley Capital International urope, Asia, Australia, Far East Stock
index, net of withholding taxes to United States investors.


Cash Flows



Our minimum funding requirement for 2010 related to the Pension Plan is approximately $2,700; however, due to a carryover credit balance of
approximately $4,400, no cash contribution will be required. We will continue to evaluate the future funding requirements of the Plans and fund them as deemed necessary.

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SUREWEST COMMUNICATIONS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
YEARS ENDED DECEMBER 31, 2009, 2008 AND 2007

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



As of December 31, 2009, 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:2010

$
7,698

$
1,0672011


7,870


9772012


8,135


1,0172013


8,390


1,0102014


8,682


9792015-2019


46,061


2,386


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-one 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, 2009, 2008 and 2007:

2009

2008

2007Aggregate matching KSOP contributions expensed by the Company

$
3,015

$
3,138

$
2,341Number of the Company's shares held by the KSOP at December 31,


751,000


766,000


694,000Dividends received from the Company's shares held by the KSOP

$


$
364

$
675


9.    COMMITMENTS AND CONTINGENCIES

Operating Leases

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. Total rent expense for all
operating leases was $3,561, $3,614 and $2,639 in 2009, 2008 and 2007, respectively.

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SUREWEST COMMUNICATIONS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
YEARS ENDED DECEMBER 31, 2009, 2008 AND 2007

9.    COMMITMENTS AND CONTINGENCIES (Continued)

As
of December 31, 2009, we had various non-cancelable operating leases with terms greater than one year. Future minimum lease payments under non-cancelable operating
leases at December 31, 2009 were as follows:

Years Ended December 31,

Amount2010

$
2,5252011


7112012


5012013


3882014


411Thereafter


1,483$
6,019


Other Commitments

As of December 31, 2009, binding commitments for future capital expenditures were approximately $4,600 in the aggregate.

SureWest
Long Distance provides long distance services under resale arrangements with three interexchange carriers, Level 3 Communications, LLC, Transcom Enhanced Services, Inc.
and Sprint Communications Company L.P. As of December 31, 2009, the resale agreements were all maintained on a month-to-month basis. For the years ended
December 31, 2009, 2008 and 2007, we paid $2,112, $2,201 and $2,691, respectively, under these long distance resale arrangements.

SureWest
Broadband provides Internet access services and has procured dedicated access and transport agreements with various communication providers. Our minimum usage requirement related to these
agreements for the next three years is $1,705, of which approximately $660 represents a minimum payment in 2010. For the years ended December 31, 2009, 2008 and 2007, we paid $1,546, $783 and
$536, respectively, under these agreements.

SureWest
Broadband has entered into agreements for various computer hardware, software and equipment maintenance agreements with various service providers. The minimum future payments related to these
contracts for the next five years are $663.

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.    EQUITY INCENTIVE PLANS



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 of our employees, outside directors and

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
YEARS ENDED DECEMBER 31, 2009, 2008 AND 2007

10.    EQUITY INCENTIVE PLANS (Continued)

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 million
shares of our common stock were authorized for issuance, including those outstanding as of December 31, 2009. The shares authorized for grant are subject to upward adjustment based upon our
issued and outstanding shares of authorized, but unissued, common stock.



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 five-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 2009, 2008 and 2007:

Years Ended December 31,2009

Grant Date
Fair Value

2008

Grant Date
Fair Value

2007

Grant Date
Fair ValueRSAs Granted


166,506

$
11.56


143,340

$
12.34-15.59


55,806

$
18.36-23.97RSUs Granted


72,443

$
11.56


66,810

$
8.43-12.34


27,844

$
17.51-26.21RSU Dividends


8,470

$
9.79


802

$
8.88




$
Total


247,419





210,952





83,650


RSU
Dividends consist of dividends that were previously granted to the holders of RSUs, which have fully vested and were released during the years ended December 31, 2009, 2008 and 2007 in
accordance with the underlying award agreement. Stock-based compensation expense for both RSAs and RSUs of $2,010, $879 and $977 was recorded during the years ended December 31, 2009, 2008 and
2007, respectively. Income tax benefits related to stock-based compensation of approximately $813, $356 and $398 were recorded for the years ended December 31, 2009, 2008 and 2007,
respectively.

During
the year ended December 31, 2009, the following summarizes the restricted common stock activity:

Nonvested Shares

Shares

Weighted Average
Grant Date Fair ValueNonvested-January 1, 2009


269,038

$
14.98Granted


247,419

$
11.50Vested


(163,478
)
$
14.10Forfeited


(3,063
)
$
18.36Nonvested-December 31, 2009


349,916

$
12.90


As
of December 31, 2009, total unrecognized compensation costs related to nonvested restricted stock was $4,415 and will be recognized over a weighted-average period of approximately
2.69 years. The total fair value of RSAs and RSUs vested during the years ended December 31, 2009, 2008 and 2007 was $2,305, $1,222 and $1,694, respectively.

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SUREWEST COMMUNICATIONS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
YEARS ENDED DECEMBER 31, 2009, 2008 AND 2007

10.    EQUITY INCENTIVE PLANS (Continued)



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, 2009. 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, 2009.

The
following table summarizes stock option activity for the year ended December 31, 2009, along with options exercisable at the end of the year:

Options

Shares

Weighted
Average
Exercise
Price

Weighted
Average
Remaining
Contractual
LifeOutstanding-January 1, 2009


335,839

$
40.37Expired


(17,450
)Outstanding-December 31, 2009


318,389

$
40.45


1.25Vested and exercisable at December 31, 2009


318,389

$
40.45


1.25


11.    STOCK REPURCHASE

Our Board of Directors has authorized the repurchase of up to 2.5 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. Starting in the first quarter of 2000 through December 31, 2009, approximately 1.9 million shares of common stock had
been repurchased. As of December 31, 2009, we had remaining authorization from the Board of Directors to repurchase approximately 611 thousand additional outstanding shares. We
repurchased approximately 108 thousand shares and 553 thousand shares during 2009 and 2008, respectively. We did not repurchase any shares during 2007. 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, 2009, 2008 or 2007.

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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
YEARS ENDED DECEMBER 31, 2009, 2008 AND 2007

12.    BUSINESS SEGMENTS (Continued)

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-premise and fiber-to-the-node networks to offer many of our bundled residential and
commercial services that include Internet Protocol-based digital and high-definition television, high-speed internet, Voice over Internet Protocol and local and long distance
telephone in the greater Sacramento region and Kansas City area.

The
Telecom segment offers landline telecommunications services, DSL service, long distance services and certain non-regulated services operating only in the greater Sacramento area.
SureWest Telephone, which is the principal operating subsidiary of the Telecom segment, provides local services, toll telephone services, network access services (including wholesale access services
to the Broadband segment) and certain non-regulated services. SureWest Long Distance is a reseller of long distance services.

As
discussed in Note 4, in May 2008 we sold the operating assets of our Wireless business, SureWest Wireless, which was previously reported as a separate reportable segment. The Wireless
business sold has been presented as a discontinued operation for all periods presented.

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. Our business segment information is as follows:

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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SUREWEST COMMUNICATIONS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
YEARS ENDED DECEMBER 31, 2009, 2008 AND 2007

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


2007

Broadband

Telecom

Corporate
Operations

Discontinued
Operations

Intercompany
Eliminations

ConsolidatedOperating revenues from external customers

$
68,652

$
105,605

$


$


$


$
174,257Intersegment revenues


607


18,530








(19,137
)

Operating expenses*


73,867


62,050








(19,137
)

116,780Depreciation and amortization


22,764


20,872











43,636Impairment loss on LMDS related assets


5,454














5,454Income (loss) from operations


(32,826
)

41,213











8,387Investment income


121


2,990











3,111Interest expense, net of capitalized interest


(6,060
)

(442
)










(6,502
)Income tax expense (benefit)


(16,504
)

16,137











(367
)Income (loss) from continuing operations

$
(22,318
)
$
27,541

$


$


$


$
5,223Total assets

$
503,572

$
899,469

$
833,972

$
46,862

$
(1,799,108
)
$
484,767Capital expenditures

$
36,051

$
13,279

$
4,002

$


$


$
53,332


*Exclusive
of depreciation and amortization


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Table of Contents

SUREWEST COMMUNICATIONS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
YEARS ENDED DECEMBER 31, 2009, 2008 AND 2007

13.    QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

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 common share

$
0.18

$
0.07

$
(0.02
)
$





2008

March 31

June 30

September 30

December 31Operating revenues

$
51,313

$
59,852

$
60,270

$
58,938Income from operations


2,691


5,874


4,017


2,559Income (loss) from continuing operations


22


1,729


622


(1,547
)Income (loss) from discontinued operations


261


179


(108
)

(229
)Gain (loss) on discontinued operations





18,977


(615
)

(358
)Net income (loss)

$
283

$
20,885

$
(101
)
$
(2,134
)Basic and diluted earnings (loss) per share:Income (loss) from continuing operations

$


$
0.12

$
0.04

$
(0.11
)Discontinued operations, net of tax


0.02


1.35


(0.05
)

(0.04
)Net income (loss) per basic common share

$
0.02

$
1.47

$
(0.01
)
$
(0.15
)


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 income
from discontinued operations for all years presented.

During
the fourth quarter of 2008, we completed our assessment of our state income tax apportionment factors related to the acquisition of Everest. As a result, additional deferred state income tax
expense of $863 was recognized due to changes in our state apportionment. Also during the fourth quarter of 2008, we recorded a write-off of long-lived assets of $534 and
incurred severance costs of $487 relating to various position eliminations which occurred during the fourth quarter of 2008.

In
the second quarter of 2008, we sold the operating assets of our Wireless business, SureWest Wireless, for an aggregate cash purchase price of $69,746, resulting in an initial gain as of
June 30, 2008 of $18,977, net of tax. During the third and fourth quarters of 2008, the gain on sale increased (decreased) $202 and $(358), net of tax, respectively, as a result of changes in
estimated transaction costs and the post closing working capital calculation.

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 date of
February 13, 2008, the

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SUREWEST COMMUNICATIONS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
YEARS ENDED DECEMBER 31, 2009, 2008 AND 2007

13.    QUARTERLY FINANCIAL INFORMATION (UNAUDITED) (Continued)

operating
results for the Kansas City operations have been included in our consolidated financial statements.

A
loss on the extinguishment of debt of $607 was incurred in the first quarter of 2008 as a result of entering into the amended Credit Agreement, as described in Note 5.

As
a result of periodic cost separation studies, SureWest Telephone changed its estimates for a portion of its interstate shareable earnings obligations and certain NECA CL accounts receivable
balances related to current and prior year monitoring periods during the years ended December 31, 2009 and 2008. 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. These changes in
accounting estimates increased (decreased) our consolidated revenues and net income by $(254) and $(160) ($0.01 per share) and $279 and $179 ($0.01 per share), during the third and
fourth quarters of 2008, respectively. We did not record any significant changes in accounting estimates during the first or second quarters of 2009 or 2008 related to current or prior year monitoring
periods.

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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.

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

There has been no change in our internal control over financial reporting during the quarter ended December 31, 2009.

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, 2009.

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, 2009.

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

Equity Compensation Plan Information

Our Board of Director's may grant share-based awards from our shareholder approved Equity Incentive Plan; the 2000 Equity Incentive Plan (the "Stock
Plan") to certain of our 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


318,389

$
40.45


880,233Equity compensation plans not approved by security holders








Total


318,389

$
40.45


880,233


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Table of Contents

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, 2009.

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, 2009.

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, 2009.

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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, 2009Consolidated Balance Sheets as of December 31, 2009 and 2008Consolidated Statements of Shareholders' Equity for each of the three years in the period ended December 31, 2009Consolidated Statements of Cash Flows for each of the three years in the period ended December 31, 2009Notes 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

Bylaws of Registrant (Filed as Exhibit 3(b) to Form 10-K Annual Report of the Registrant for the year ended December 31, 2000)

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


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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 as Exhibit 10.6 to Form 10-K Annual Report of Registrant for the year ended December 31, 2006)

Incorporated by
reference10.9

Form of Stock Award Agreement under the SureWest Communications 2000 Equity Incentive Plan (Filed as Exhibit 10.9 to Form 10-K Annual Report of the Registrant for the year ended December 31,
2008)

Incorporated by
reference10.10

Form of Stock Unit Award Agreement under the SureWest Communications 2000 Equity Incentive Plan For Key Officers (Filed as Exhibit 10.10 to Form 10-K Annual Report of the Registrant for the year ended
December 31, 2008)

Incorporated by
reference10.11

Form of Stock Unit Award Agreement under the SureWest Communications 2000 Equity Incentive Plan For Non-Employee Directors (Filed as Exhibit 10.11 to Form 10-K Annual Report of the Registrant for the year
ended December 31, 2008)

Incorporated by
reference10.12

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

Incorporated by
reference10.13

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
reference10.14

Change in Control Agreement dated January 31, 2008 between Registrant and Steven C. Oldham (Filed as Exhibit 10.11 to Form 10-K Annual Report of the Registrant for the year ended December 31,
2007)

Incorporated by
reference10.15

Change in Control Agreement dated January 31, 2008 between Registrant and Officers (Filed as Exhibit 10.12 to Form 10-K Annual Report of the Registrant for the year ended December 31,
2007)

Incorporated by
reference10.16

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
reference21

List of Subsidiaries

Filed herewith23

Consent of Independent Registered Public Accounting Firm

Filed herewith


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Table of Contents

Exhibit
No.

Description

Method of Filing31.1

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


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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 26, 2010By:

/s/ DAN T. BESSEY Dan T. Bessey,
Vice President
and Chief Financial OfficerDate: February 26, 2010


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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 26, 2010


108

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