##### Table of Contents



UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549


FORM 10-K


|    |  |                                                                                             
|--- |  | --------------------------------------------------------------------------------------------
|[X] |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934    
|   
|    |  | For the fiscal year ended December 31, 2004                                                 
|   
|[ ] |  | TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934



SUREWEST COMMUNICATIONS







|                                                                   |  |                                         
|------------------------------------------------------------------ |  | ----------------------------------------
|California                                                         |  | 68-0365195                              
|                                                                   |  |                                         
|(State or Other Jurisdiction of
    Incorporation or Organization) |  | (I.R.S. Employer
    Identification No.)
|                                                                  
|200 Vernon Street, Roseville, California                           |  | 95678                                   
|                                                                   |  |                                         
|(Address of Principal Executive Offices)                           |  | (Zip Code)                              

(916) 772-2000








Common Stock  Without Par Value






X


o




X










1



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|              |  |                                                                                                                      |     |      |     |  |  | 
|------------- |  | -------------------------------------------------------------------------------------------------------------------- | --- | ---- | --- |  |  | 
|              |  |                                                                                                                      |     | PAGE |    
|PART I        |  |                                                                                                                      |     |     
|             
|Item 1.       |  | Business                                                                                                             |     |      | 3   | 
|Item 2.       |  | Properties                                                                                                           |     |      | 14  | 
|Item 3.       |  | Legal Proceedings                                                                                                    |     |      | 15  | 
|Item 4.       |  | Submission of Matters to a Vote of Security
    Holders                                                              |     |      | 18  | 
|             
|PART II       |  |                                                                                                                      |     |     
|             
|Item 5.       |  | Market for Registrants Common Equity,
    Related Stockholder Matters and Issuer Purchases of Equity
    Securities |     |      | 20  | 
|Item 6.       |  | Selected Financial Data                                                                                              |     |      | 21  | 
|Item 7.       |  | Managements Discussion and Analysis
    of Financial Condition and Results of Operations                            |     |      | 23  | 
|Item 7A.      |  | Quantitative and Qualitative Disclosures
    About Market Risk                                                       |     |      | 56  | 
|Item 8.       |  | Financial Statements and Supplementary
    Data                                                                      |     |      | 57  | 
|Item 9.       |  | Changes in and Disagreements With
    Accountants on Accounting and Financial Disclosure                             |     |      | 98  | 
|Item 9A.      |  | Controls and Procedures                                                                                              |     |      | 98  | 
|Item 9B.      |  | Other Information                                                                                                    |     |      | 102 | 
|             
|PART III      |  |                                                                                                                      |     |     
|             
|Item 10.      |  | Directors and Executive Officers of the
    Registrant                                                               |     |      | 103 | 
|Item 11.      |  | Executive Compensation                                                                                               |     |      | 103 | 
|Item 12.      |  | Security Ownership of Certain Beneficial
    Owners and Management and Related Stockholder Matters                   |     |      | 103 | 
|Item 13.      |  | Certain Relationships and Related
    Transactions                                                                   |     |      | 104 | 
|Item 14.      |  | Principal Accountant Fees and Services                                                                               |     |      | 104 | 
|             
|PART IV       |  |                                                                                                                      |     |     
|             
|Item 15.      |  | Exhibits and Financial Statement
    Schedules                                                                       |     |      | 105 | 
|SIGNATURES    |  |                                                                                                                      | 109 |     
|EXHIBIT 10.7 
|EXHIBIT 10.15
|EXHIBIT 10.16
|EXHIBIT 10.17
|EXHIBIT 10.18
|EXHIBIT 10.19
|EXHIBIT 10.20
|EXHIBIT 10.21
|EXHIBIT 21.1 
|EXHIBIT 23.1 
|EXHIBIT 31.1 
|EXHIBIT 31.2 
|EXHIBIT 32.1 
|EXHIBIT 32.2 



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PART I





Item 1. Business.


General Development of Business












|                         |  |                               |      |  |      |  |      |      |  |  |      | 
|------------------------ |  | ----------------------------- | ---- |  | ---- |  | ---- | ---- |  |  | ---- | 
|                         |  | % of Total Operating Revenues |     
|Reporting Segment        |  | 2004                          |      |  | 2003 |  |      | 2002 | 
|                         |  |                               |      |  |      |  |      |      | 
|Telecom                  |  |                               | 67%  |  |      |  | 71%  |      |  |  | 81%  | 
|Broadband                |  |                               | 18%  |  |      |  | 15%  |      |  |  | 7%   | 
|Wireless                 |  |                               | 15%  |  |      |  | 14%  |      |  |  | 12%  | 
|                         |  |                               |      |  |      |  |      |      | 
|Total operating revenues |  |                               | 100% |  |      |  | 100% |      |  |  | 100% | 
|                         |  |                               |      |  |      |  |      |      | 



|                       |  |                        |        |  |      |   |        |      |  |   |        | 
|---------------------- |  | ---------------------- | ------ |  | ---- | - | ------ | ---- |  | - | ------ | 
|                       |  | 2004                   |        |  | 2003 |   |        | 2002 | 
|                       |  |                        |        |  |      |   |        |      | 
|                       |  | (Amounts in thousands) |       
|Local service          |  | $                      | 69,560 |  |      | $ | 63,363 |      |  | $ | 66,283 | 
|Network access service |  | $                      | 46,161 |  |      | $ | 51,286 |      |  | $ | 58,426 | 
|Wireless service       |  | $                      | 31,261 |  |      | $ | 27,146 |      |  | $ | 23,225 | 



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|                                                           |  |                                   |      |  |      |  |      |      |  |  |      | 
|---------------------------------------------------------- |  | --------------------------------- | ---- |  | ---- |  | ---- | ---- |  |  | ---- | 
|                                                           |  | Rate Regulated Revenues as a % of |     
|                                                           |  | Total Operating Revenues          |     
|Revenues                                                   |  | 2004                              |      |  | 2003 |  |      | 2002 | 
|                                                           |  |                                   |      |  |      |  |      |      | 
|Revenues from services subject to comprehensive regulation |  |                                   | 55%  |  |      |  | 59%  |      |  |  | 67%  | 
|Other revenues                                             |  |                                   | 45%  |  |      |  | 41%  |      |  |  | 33%  | 
|                                                           |  |                                   |      |  |      |  |      |      | 
|Total operating revenues                                   |  |                                   | 100% |  |      |  | 100% |      |  |  | 100% | 
|                                                           |  |                                   |      |  |      |  |      |      | 





Telecom




| |        
| | -------
| | General









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| |            
| | -----------
| | Competition







5



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| |           
| | ----------
| | Regulation















6



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7



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Broadband




| |        
| | -------
| | General















8



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| |            
| | -----------
| | Competition









9



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| |           
| | ----------
| | Regulation







Wireless








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| |            
| | -----------
| | Competition





| |           
| | ----------
| | Regulation





Other Significant Events




| |                                  
| | ---------------------------------
| | Sale of Alarm Monitoring Division



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| |                                                                  
| | -----------------------------------------------------------------
| | Acquisition of the Assets of Western Integrated Networks,
    LLC



Factors That Could Affect Future Results






| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We expect to continue to face significant competition in all
    parts of our business and the level of competition is expected
    to intensify. The telecommunications industry is highly
    competitive. We face actual or potential competition from many
    existing and emerging companies, including other incumbent and
    competitive local telephone companies, long-distance carriers
    and resellers, wireless telephone companies, Internet service
    providers, satellite companies and cable television companies.
    We may not be able to successfully anticipate and respond to
    various competitive factors affecting the industry, including
    regulatory changes that may affect our competitors and us
    differently, new technologies and services that may be
    introduced, changes in consumer preferences, demographic trends
    and discount pricing strategies by competitors. As the incumbent
    carrier in Sacramento, SBC enjoys certain business advantages,
    including its size, financial resources, favorable regulatory
    position, brand recognition and connection to virtually all of
    our customers and potential customers there. As the largest
    cable operator in Sacramento and Placer County, Comcast enjoys
    certain business advantages, including its size, financial
    resources, ownership or superior access to programming and other
    content, brand recognition, and first-in-the-field advantages
    with a customer base that generates positive cash flow for its
    operations. We face intense competition in our markets for
    long-distance, Internet access and other ancillary services that
    are important to our business and to our growth strategy.
|
| | We must adapt to rapid technological change.
    Technological developments could increase our costs and cause a
    decline in demand for our services. In addition, technology
    changes can reduce the costs of entry for others and give
    competitors significant new advantages. If we do not replace or
    upgrade technology and equipment that becomes obsolete, we will
    be unable to compete effectively because we will not be able to
    meet the needs or expectations of our customers, and we may be
    placed at a cost disadvantage in offering other services.
    Additionally, replacing or upgrading our infrastructure in the
    future could result in significant capital expenditures.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|
| | We are subject to a complex and uncertain regulatory
    environment. Some parts of our business are extensively
    regulated, and the nature of regulation continues to undergo
    fundamental change and reinterpretation. Many businesses that
    compete with the Company are comparatively less regulated. Many
    significant regulatory decisions have had to be accommodated in
    recent years, and there are pending decisions on issues
    affecting the Company that are of great importance.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    

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| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our operations have undergone material changes, and our
    actual operating results can be expected to differ from the
    results indicated in our historical financial statements. As
    a result of our acquisition of assets from WIN in 2002, and the
    subsequent expansion of our cable television business, our mix
    of operating assets differs from those operations upon which our
    historical financial statements are based. Consequently, our
    historical financial statements may not be reliable as an
    indicator of future results.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|
| | Our success depends upon our ability to manage our growth and
    expansion. If our acquisitions and growth initiatives are not
    successful, we could suffer an adverse effect on our business
    and results of operations. Our growth strategy will continue
    to require us to invest significant capital in facilities and
    services that may not achieve the desired returns. Our future
    success depends, in part, upon our ability to manage our growth,
    including our ability to build network and related facilities to
    serve new customers, integrate our operations to take advantage
    of new capabilities and systems; attract and retain skilled
    personnel across the Company, effectively manage the demands of
    day to day operations in new areas while attempting to execute
    our business strategy, and realize the projected growth and
    revenue targets developed by Company management.                                                                                                                                                                                                                                                                                                                                             
|
| | We are reliant on support funds provided under federal and
    state laws. We receive revenues from various federal or
    state support funds: interstate common line support from the
    Universal Service Program, California High Cost Fund-B and
    Universal Lifeline Service Fund. These governmental programs are
    reviewed and amended from time to time, and are likely to change
    in the near future. As described in the Regulationsection above, the Company currently receives funding of
    $11.5 million annually from the CHCF, a program designed by
    the CPUC to establish a fair and equitable local rate structure
    and to reduce any disparity in the rates charged by certain
    telephone companies serving high-cost areas. The CHCF was due to
    expire on January 1, 2005. On September 28, 2004, the
    Governor of California signed SB1276 into law, which amended the
    existing legislation and extended the expiration date to
    January 1, 2009. The outcome and impact on the
    Companys operations resulting from future changes to these
    governmental programs cannot be determined at this time.                                                                                                                         
|
| | We could be harmed by the recent adverse developments
    affecting other communications companies. There have been
    numerous bankruptcies and other financial difficulties
    experienced by other carriers and suppliers in the
    telecommunications and Internet sectors. Similar situations with
    our suppliers, some of whom provide products and services for
    which there are few substitutes, could cause us to experience
    delays, service interruptions or additional expenses. Situations
    with carriers and other customers could affect our ability to
    collect for services that have been provided.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|
| | We often depend on third parties, over whom we have no
    control, to deliver our services. Because of the
    interconnected nature of the telecommunications industry, we
    depend heavily on other local telephone companies, long-distance
    carriers, and numerous other third parties to deliver our
    services. In addition, we are dependent on easements, franchises
    and licenses from various private parties such as established
    telephone companies and other utilities, railroads,
    long-distance companies, and from state highway authorities,
    local governments and transit authorities for access to aerial
    pole space, underground conduits and other rights-of-way in
    order to construct and operate our networks. The failure to
    maintain in effect the necessary third party arrangements on
    acceptable terms would have an adverse effect on our ability to
    conduct our business.                                                                                                                                                                                                                                                                                                                                            
|
| | We are subject to new corporate governance and internal
    control reporting requirements, and our failure to comply with
    existing and future requirements could adversely affect our
    business. Pursuant to Section 404 of the Sarbanes-Oxley
    Act of 2002 (Section 404) and related
    Securities and Exchange Commission rules, we have furnished a
    report of managements assessment of the effectiveness of
    our internal controls at December 31, 2004. In addition,
    our Independent Registered Public Accounting Firm audited and
    reported on, managements assessment. Management concluded
    that the Companys internal control over financial
    reporting was not effective at December 31, 2004. If our
    deficiencies are not adequately addressed, we could experience
    accounting errors that could result in misstatements of our
    financial position and results of operations, potential
    restatements of our financial statements or otherwise adversely
    affect our business, reputation and results of operations.
    Inferior internal controls could also cause investors to lose
    confidence in our reported financial information, which could
    have a negative effect on the trading price of our securities.

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| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If we are unable to effectively and efficiently implement the
    necessary initiatives to eliminate the material weakness
    identified in our internal controls and procedures, there could
    be an adverse affect on our operations or financial results.
    In connection with the Managements Report on Internal
    Control over Financial Reporting, management identified a
    material weakness in the Companys internal control over
    financial reporting relating to the accounting for property,
    plant and equipment, which resulted from control weaknesses that
    caused the following conditions: The Company was unable to
    completely reconcile its plant in service and plant under
    construction subsidiary ledgers to the corresponding general
    ledger balances for periods throughout 2004 and as of
    December 31, 2004. Management believes these unreconciled
    differences are attributable principally to deficiencies in the
    reliability of the Companys information system interfaces
    between the general ledger and the property, plant and equipment
    subsidiary ledgers. In addition, during 2004, several errors
    occurred in the Companys periodic depreciation and
    capitalized interest calculations that were more than
    inconsequential. Additionally, as of December 31, 2004, the
    Company did not have effective procedures with which to
    determine the cost bases of property, plant and equipment that
    had been retired. Moreover, certain manual internal controls
    pertaining to property, plant and equipment implemented by the
    Company during the third quarter of 2004 were not operating
    effectively as of December 31, 2004. These matters required
    the Company to record adjustments to both its annual and interim
    2004 consolidated financial statements. The significant accounts
    affected by this material weakness are property, plant and
    equipment and related accumulated depreciation included in the
    Companys consolidated balance sheets, and depreciation
    expense and interest expense included in the Companys
    consolidated statements of operations. Due to this material
    weakness, management believes that as of December 31, 2004,
    the Companys internal control over financial reporting was
    not effective based on the Committee of Sponsoring Organizations
    of the Treadway Commission criteria.
|
| | During the year ended December 31, 2004, we implemented
    various initiatives, and will be implementing additional
    initiatives in 2005 to improve our internal controls, and
    address the matters discussed in Managements Report on
    Internal Control over Financial Reporting. The implementation of
    the initiatives and the consideration of additional necessary
    improvements are among our highest priorities. The Board of
    Directors, under the direction of the Audit Committee, will
    continually assess the progress of the initiatives and the
    improvements, and take further actions as deemed necessary.
    Until the identified material weakness is eliminated, there is a
    risk of an adverse affect on our operations or financial results.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 

Available Information


www.surw.com /ir/







|        |            
|------- | -----------
|Item 2. | Properties.





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|        |                                          
|------- | -----------------------------------------
|Item 3. | Legal Proceedings. (Dollars in thousands)





| |                   
| | ------------------
| | Regulatory Matters











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| |                                 
| | --------------------------------
| | Corporate Treasury Investigation



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| |   |                                                                                                                                                                                                                                                                                                                                 
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | All of the unauthorized transactions occurred in 2003 and
    remained undetected until December 2003, consisting of thirteen
    distinct principal transfers to and from the company beginning
    in January 10, 2003, with additional transfers occurring in
    the months of March, April, July, August and December 2003;
|
| |  | The unauthorized transactions were actively concealed by the
    Companys former employee in the Companys books and
    records; and                                                                                                                                                                                          
|
| |  | Independent legal counsel did not uncover any other similar
    transactions nor any evidence that any other Company employee
    intentionally participated in the unauthorized transactions.                                                                                                                                  





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




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|                    |  |     |    |  |                       |                                                                                                                                     
|------------------- |  | --- | -- |  | --------------------- | ------------------------------------------------------------------------------------------------------------------------------------
|Name                |  | Age |    |  | Positions and Offices
|                    |  |     |    |  |                      
|Kirk C. Doyle       |  |     | 51 |  |                       | Chairman of the Board of Directors (since 2003)                                                                                     
|                   
|Brian H. Strom      |  |     | 62 |  |                       | President and Chief Executive Officer (since 1993)                                                                                  
|                   
|Philip A. Grybas    |  |     | 56 |  |                       | Senior Vice President and Chief Financial Officer (since 2004)                                                                      
|                   
|Fred A. Arcuri      |  |     | 52 |  |                       | Senior Vice President and Chief Operating Officer 
    SureWest Broadband (since 2001)                                             
|                   
|Robert M. Burger    |  |     | 48 |  |                       | Senior Vice President and Chief Operating Officer 
    SureWest Wireless (since 2000)                                              
|                   
|Jay B. Kinder       |  |     | 58 |  |                       | Senior Vice President and Chief Operating Officer 
    SureWest Telephone and SureWest Directories (since 2000)                    
|                   
|Scott K. Barber     |  |     | 44 |  |                       | Vice President, Network Operations  SureWest
    Telephone (since 2003)                                                            
|                   
|Bill M. DeMuth      |  |     | 55 |  |                       | Vice President and Chief Technology Officer (since 2000)                                                                            
|                   
|Peter C. Drozdoff   |  |     | 49 |  |                       | Vice President, Marketing (since 2002)                                                                                              
|                   
|Philip D. Germond   |  |     | 55 |  |                       | Vice President, Customer Operations  SureWest
    Telephone (since 2002) and Vice President SureWest Long Distance
    (since 1998)
|                   
|Barbara J. Nussbaum |  |     | 55 |  |                       | Vice President, Administration (since 2002)                                                                                         
|                   
|Darla J. Yetter     |  |     | 44 |  |                       | Corporate Secretary (since 2003)                                                                                                    
|                   
|Laurel R. Dismukes  |  |     | 57 |  |                       | Assistant Corporate Secretary (since 2003)                                                                                          
|                   
|Martin T. McCue     |  |     | 54 |  |                       | Assistant Corporate Secretary (since 2003)                                                                                          

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PART II







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



|                   |  |                        |          |  |     |  |          | 
|------------------ |  | ---------------------- | -------- |  | --- |  | -------- | 
|                   |  | NASDAQ National Market |         
|                   |  |                        |         
|                   |  | High                   |          |  | Low | 
|                   |  |                        |          |  |     | 
|March 31, 2003     |  |                        | $  38.98 |  |     |  | $  22.66 | 
|June 30, 2003      |  |                        | $  32.59 |  |     |  | $  26.43 | 
|September 30, 2003 |  |                        | $  39.99 |  |     |  | $  29.44 | 
|December 31, 2003  |  |                        | $  41.05 |  |     |  | $  37.20 | 
|March 31, 2004     |  |                        | $  40.00 |  |     |  | $  25.65 | 
|June 30, 2004      |  |                        | $  32.23 |  |     |  | $  25.25 | 
|September 30, 2004 |  |                        | $  31.28 |  |     |  | $  25.50 | 
|December 31, 2004  |  |                        | $  30.12 |  |     |  | $  27.30 | 







| |                                     
| | ------------------------------------
| | Equity Compensation Plan Information



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Item 6. Selected Financial Data


|                                                                                                    |                                                                                                     |                                                  |         |        |        |   |         |      |        |   |         |        |        |      |         |        |        |   |         |         |        | 
|--------------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------- | ------------------------------------------------ | ------- | ------ | ------ | - | ------- | ---- | ------ | - | ------- | ------ | ------ | ---- | ------- | ------ | ------ | - | ------- | ------- | ------ | 
|                                                                                                    |                                                                                                     | 2004                                             |         |        | 2003   |   |         | 2002 |        |   | 2001    |        |        | 2000 |        
|                                                                                                    |                                                                                                     |                                                  |         |        |        |   |         |      |        |   |         |        |        |      |        
|                                                                                                    |                                                                                                     | (Amounts in thousands, except per share amounts) |        
|Total operating revenues                                                                            |                                                                                                     | $                                                | 211,763 |        |        | $ | 195,121 |      |        | $ | 185,849 |        |        | $    | 163,485 |        |        | $ | 143,194 |        
|Gain on sale of investment in cellular partnership (1)                                              |                                                                                                     | $                                                |        |        |        | $ |        |      |        | $ |        |        |        | $    |        |        |        | $ | 201,294 |        
|Net income (loss)                                                                                   |                                                                                                     | $                                                | (1,128  | )      |        | $ | 645     |      |        | $ | 11,249  |        |        | $    | 10,317  |        |        | $ | 125,793 |        
|Basic earnings (loss) per share (2)                                                                 |                                                                                                     | $                                                | (0.08   | )      |        | $ | 0.04    |      |        | $ | 0.76    |        |        | $    | 0.67    |        |        | $ | 8.06    |        
|Diluted earnings (loss) per share (2)                                                               |                                                                                                     | $                                                | (0.08   | )      |        | $ | 0.04    |      |        | $ | 0.76    |        |        | $    | 0.67    |        |        | $ | 8.05    |        
|Extraordinary loss, net of tax (3)                                                                  |                                                                                                     | $                                                |        |        |        | $ |        |      |        | $ |        |        |        | $    |        |        |        | $ | (10,932 | )      
|Cumulative effect of change in accounting principle, net of
    tax (4)                             |                                                                                                     | $                                                |        |        |        | $ |        |      |        | $ |        |        |        | $    |        |        |        | $ | (3,273  | )      
|Extraordinary loss, net of tax, per share (basic and diluted)                                       |                                                                                                     | $                                                |        |        |        | $ |        |      |        | $ |        |        |        | $    |        |        |        | $ | (0.70   | )      
|Cumulative effect of change in accounting principle, net of tax,
    per share, (basic and diluted) |                                                                                                     | $                                                |        |        |        | $ |        |      |        | $ |        |        |        | $    |        |        |        | $ | (0.21   | )      
|Pro forma amounts assuming the accounting change is applied
    retroactively:                      |                                                                                                     |                                                  |         |        |        |   |         |      |        |   |         |        |        |      |         |        |        |   |         |        
|                                                                                                    | Income (loss) before extraordinary loss and cumulative effect of
    change in accounting principle |                                                  | $       | (1,128 | )      |   | $       | 645  |        |   | $       | 11,249 |        |      | $       | 10,317 |        |   | $       | 139,998 |       
|                                                                                                    | Net income (loss)                                                                                   |                                                  | $       | (1,128 | )      |   | $       | 645  |        |   | $       | 11,249 |        |      | $       | 10,317 |        |   | $       | 129,066 |       
|                                                                                                    | Basic per share amounts:                                                                            |                                                  |         |        |        |   |         |      |        |   |         |        |        |      |         |        |        |   |         |         |       
|                                                                                                    | Income (loss) before extraordinary loss and cumulative effect of
    change in accounting principle |                                                  | $       | (0.08  | )      |   | $       | 0.04 |        |   | $       | 0.76   |        |      | $       | 0.67   |        |   | $       | 8.97    |       
|                                                                                                    | Net income (loss)                                                                                   |                                                  | $       | (0.08  | )      |   | $       | 0.04 |        |   | $       | 0.76   |        |      | $       | 0.67   |        |   | $       | 8.27    |       
|                                                                                                    | Diluted per share amounts:                                                                          |                                                  |         |        |        |   |         |      |        |   |         |        |        |      |         |        |        |   |         |         |       
|                                                                                                    | Income (loss) before extraordinary loss and cumulative effect of
    change in accounting principle |                                                  | $       | (0.08  | )      |   | $       | 0.04 |        |   | $       | 0.76   |        |      | $       | 0.67   |        |   | $       | 8.96    |       
|                                                                                                    | Net income (loss)                                                                                   |                                                  | $       | (0.08  | )      |   | $       | 0.04 |        |   | $       | 0.76   |        |      | $       | 0.67   |        |   | $       | 8.26    |       
|Cash dividends per share (5)                                                                        |                                                                                                     | $                                                | 1.00    |        |        | $ | 1.00    |      |        | $ | 1.00    |        |        | $    | 1.00    |        |        | $ | 1.00    |        
|Property, plant and equipment, at cost                                                              |                                                                                                     | $                                                | 715,718 |        |        | $ | 646,740 |      |        | $ | 576,579 |        |        | $    | 524,505 |        |        | $ | 469,389 |        
|Total assets                                                                                        |                                                                                                     | $                                                | 435,182 |        |        | $ | 435,209 |      |        | $ | 396,516 |        |        | $    | 412,343 |        |        | $ | 528,942 |        
|Long-term obligations                                                                               |                                                                                                     | $                                                | 95,345  |        |        | $ | 93,135  |      |        | $ | 52,252  |        |        | $    | 42,142  |        |        | $ | 44,285  |        
|Shares of common stock used to calculate:                                                           |                                                                                                     |                                                  |         |        |        |   |         |      |        |   |         |        |        |      |         |        |        |   |         |        
|                                                                                                    |                                                                                                     | Basic earnings (loss) per share (2)              |         |        | 14,531 |   |         |      | 14,522 |   |         |        | 14,728 |      |         |        | 15,326 |   |         |         | 15,610 | 
|                                                                                                    |                                                                                                     | Diluted earnings per (loss) share (2)            |         |        | 14,531 |   |         |      | 14,539 |   |         |        | 14,795 |      |         |        | 15,387 |   |         |         | 15,630 | 



|    |                                                                                                                                                                                                                                                                                                                            
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | On November 3, 2000, two of the Companys subsidiaries
    sold their collective 24% cellular partnership interest in
    Sacramento  Valley Limited Partnership to Verizon
    Wireless for approximately $236,150, resulting in a pre-tax gain
    of $201,294.                                                         
|   
|(2) | 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 and RSUs used in the computation of diluted earnings per

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|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    | share are based on the weighted average number of common shares
    and RSUs outstanding, along with other potentially dilutive
    securities outstanding in each period. Shares used in the
    computation of diluted loss per share are based on the weighted
    average number of common shares and RSUs outstanding and exclude
    potential dilutive common shares, as their effect is
    antidulitive.                                                                                                                                                                                                    
|   
|(3) | In December 2000, the Company recognized an extraordinary loss
    due to the discontinuation of accounting under
    SFAS No. 71, Accounting for the Effects of
    Certain Types of Regulation. Consequently, the Company
    recorded an extraordinary non-cash charge of $10,932, which is
    net of related tax benefits of $7,631, in 2000.                                                                                                                                                                                                                                                                 
|   
|(4) | The Company changed its method of accounting, retroactive to
    January 1, 2000, for up-front fees associated with
    telecommunications service activation in accordance with Staff
    Accounting Bulletin No. 101. The cumulative effect of
    the change in prior years resulted in a charge to 2000 net
    income of $3,273 (net of income taxes of $2,250).                                                                                                                                                                                                                                                
|   
|(5) | Cash dividends per share are based on the actual dividends per
    share, as declared by the Companys Board of Directors. On
    each date that the Company pays a cash dividend to the holders
    of the Companys common stock, the Company shall credit 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 shall be included in the
    additional RSUs.

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|        |                                                                                           
|------- | ------------------------------------------------------------------------------------------
|Item 7. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
    CONDITION AND RESULTS OF OPERATIONS.

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






Corporate Structure










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Treasury Investigation and Internal Control Matters










| |   |                                                                                                                                                                                                                                                                                                                                 
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | All of the unauthorized transactions occurred in 2003 and
    remained undetected until December 2003, consisting of thirteen
    distinct principal transfers to and from the Company beginning
    on January 10, 2003, with additional transfers occurring in
    the months of March, April, July, August and December 2003;
|
| |  | The unauthorized transactions were actively concealed by the
    Companys former employee in the Companys books and
    records; and                                                                                                                                                                                          
|
| |  | Independent legal counsel did not uncover any other similar
    transactions nor any evidence that any other Company employees
    intentionally participated in the unauthorized transactions.                                                                                                                                 





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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | An assessment to be conducted with respect to the Companys
    Corporate Finance Department, which encompasses the
    Companys accounting and finance personnel, including
    specifically relating to the number of personnel, and the
    collective mix and technical skills of such personnel, and the
    addition of new personnel if necessary. During the second
    quarter, the Companys Board of Directors approved the
    addition of six personnel in the Corporate Finance Department.
    The Company has hired three of the six additional personnel and
    has subsequently filled two of the three remaining positions.
    Further evaluation will be conducted by the Chief Financial
    Officer and, if deemed appropriate, with the assistance of a
    third party, in continuing consultation with the Board. The
    evaluation was completed in February 2005. See
    Item 9A  Controls and Procedures for
    further discussion;
|
| |  | An internal audit process, with tasks to be performed either by
    Company personnel or a third party, with reporting duties to the
    Chairman of the Companys Audit Committee (implemented in
    part by the Companys hiring of a Senior Internal Auditor
    in July 2004);                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|
| |  | A more significant effort devoted to internal controls training
    for all affected personnel, and an increased emphasis on the
    completion of internal controls documentation, including as
    required by Section 404 of the Sarbanes-Oxley Act of 2002
    (including the retention in May 2004 of third-parties to assist
    in performing internal control reviews of all of the
    Companys accounting systems, and to assist in expediting
    the completion of the internal controls documentation); and                                                                                                                                                                                                                                                                                                                                                                                                                                               
|
| |  | The preparation and implementation of a formal accounting
    policies and procedures manual or electronic database to serve
    as a reference tool for Company personnel and to establish
    uniformity and consistency throughout the Company. The
    accounting policies and procedures manual was completed in draft
    in October 2004, and completed in final form in February 2005.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          





| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The establishment of a Disclosure Committee comprised of
    Management personnel and senior representatives of the
    Companys Corporate Finance Department, which undertakes
    reviews prior to significant filings with the Securities and
    Exchange Commission (SEC);                                                                                                                                                                                                                                                                                                                                                                                                                   
|
| |  | The modification of written ethics and compliance materials
    provided to Company employees, and the formal adoption of a Code
    of Ethics and Business Conduct, and the related establishment of
    confidential procedures which permit Company employees to
    communicate anonymously in the event of suspected violations of
    laws or Company standards (together with mandatory classes
    beginning in 2004 for all Company employees to review the Code
    of Ethics and Business Conduct); and                                                                                                                                                                                   
|
| |  | The implementation in 2003 of new enterprise resource planning
    and accounting software, which likely assisted in identifying
    certain of the accounting deficiencies noted above relating to
    property, plant and equipment. (The Company in 2004 also
    improved modules in its new software and undertook in October
    2004 revised physical verification and other procedures to
    improve its accounting for property, plant and equipment).
    However, as of December 31, 2004, Management concluded that
    the material weakness relating to property, plant and equipment
    had not been remediated. See Item 9A 
    Controls and Procedures for further discussion.



25



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Results of Operations


Consolidated Overview




|                        |                               |                |   |          |      |  |          |         |   |  |      |         |   |      |  |      |    |  |  |     |   
|----------------------- | ----------------------------- | -------------- | - | -------- | ---- |  | -------- | ------- | - |  | ---- | ------- | - | ---- |  | ---- | -- |  |  | --- | --
|                        |                               | Financial Data |  
|                        |                               |                |   | % Change |     
|                        |                               |                |   |          |     
|                        |                               |                |   | 2004 vs. |      |  | 2003 vs. |        
|                        |                               | 2004           |   |          | 2003 |  |          | 2002    |   |  | 2003 |         |   | 2002 | 
|                        |                               |                |   |          |      |  |          |         |   |  |      |         |   |      | 
|Operating revenues(1)   |                               |                |   |          |      |  |          |         |   |  |      |         |   |      |  |      |    |  |  |    
|                        | Telecom                       |                | $ | 141,086  |      |  | $        | 138,924 |   |  | $    | 149,679 |   |      |  | 2    | %  |  |  | (7  | )%
|                        | Broadband                     |                |   | 39,416   |      |  |          | 29,051  |   |  |      | 12,945  |   |      |  | 36   |    |  |  | 124 |   
|                        | Wireless                      |                |   | 31,261   |      |  |          | 27,146  |   |  |      | 23,225  |   |      |  | 15   |    |  |  | 17  |   
|                        | Total operating revenues      |                |   | 211,763  |      |  |          | 195,121 |   |  |      | 185,849 |   |      |  | 9    |    |  |  | 5   |   
|Operating income (loss) |                               |                |   |          |      |  |          |         |   |  |      |         |   |      |  |      |    |  |  |    
|                        | Telecom                       |                |   | 49,937   |      |  |          | 47,598  |   |  |      | 51,839  |   |      |  | 5    |    |  |  | (8  | ) 
|                        | Broadband                     |                |   | (31,340  | )    |  |          | (16,312 | ) |  |      | (11,180 | ) |      |  | 92   |    |  |  | 46  |   
|                        | Wireless                      |                |   | (17,278  | )    |  |          | (23,539 | ) |  |      | (24,969 | ) |      |  | (27  | )  |  |  | (6  | ) 
|                        | Total operating income (loss) |                |   | 1,319    |      |  |          | 7,747   |   |  |      | 15,690  |   |      |  | (83  | )  |  |  | (51 | ) 
|Net income (loss)       |                               |                |   |          |      |  |          |         |   |  |      |         |   |      |  |      |    |  |  |    
|                        | Telecom                       |                |   | 28,322   |      |  |          | 26,565  |   |  |      | 33,634  |   |      |  | 7    |    |  |  | (21 | ) 
|                        | Broadband                     |                |   | (18,627  | )    |  |          | (10,983 | ) |  |      | (6,715  | ) |      |  | 70   |    |  |  | 64  |   
|                        | Wireless                      |                |   | (10,823  | )    |  |          | (14,937 | ) |  |      | (15,670 | ) |      |  | (28  | )  |  |  | (5  | ) 
|                        | Total net income (loss)       |                |   | (1,128   | )    |  |          | 645     |   |  |      | 11,249  |   |      |  | (275 | )% |  |  | (94 | )%



|    |                        
|--- | -----------------------
|(1) | External customers only

|          |                              |                            |  |          |      |  |          |         |  |  |      |         |  |      |  |    |    |  |  |    |   
|--------- | ---------------------------- | -------------------------- |  | -------- | ---- |  | -------- | ------- |  |  | ---- | ------- |  | ---- |  | -- | -- |  |  | -- | --
|          |                              | Selected Operating Metrics | 
|          |                              |                            |  | % Change |     
|          |                              |                            |  |          |     
|          |                              |                            |  | 2004 vs. |      |  | 2003 vs. |        
|          |                              | 2004                       |  |          | 2003 |  |          | 2002    |  |  | 2003 |         |  | 2002 | 
|          |                              |                            |  |          |      |  |          |         |  |  |      |         |  |      | 
|Telecom   |                              |                            |  |          |      |  |          |         |  |  |      |         |  |      |  |    |    |  |  |   
|          | ILEC access lines            |                            |  | 131,905  |      |  |          | 136,365 |  |  |      | 137,240 |  |      |  | (3 | )% |  |  | (1 | )%
|          | Long distance lines          |                            |  | 47,512   |      |  |          | 42,911  |  |  |      | 39,654  |  |      |  | 11 |    |  |  | 8  |   
|Broadband |                              |                            |  |          |      |  |          |         |  |  |      |         |  |      |  |    |    |  |  |   
|          | DSL subscribers (1)          |                            |  | 22,442   |      |  |          | 19,882  |  |  |      | 15,648  |  |      |  | 13 |    |  |  | 27 |   
|          | FTTP subscribers (2)         |                            |  | 15,689   |      |  |          | 11,101  |  |  |      | 5,646   |  |      |  | 41 |    |  |  | 97 |   
|          | Revenue-generating units (3) |                            |  | 36,336   |      |  |          | 25,486  |  |  |      | 13,271  |  |      |  | 43 |    |  |  | 92 |   
|Wireless  |                              |                            |  |          |      |  |          |         |  |  |      |         |  |      |  |    |    |  |  |   
|          | Subscribers                  |                            |  | 52,657   |      |  |          | 46,724  |  |  |      | 40,454  |  |      |  | 13 | %  |  |  | 15 | % 



|    |                                                                                                                                                                                                                                                                                                                                                                                                   
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | DSL subscribers are customers who receive data services within
    SureWest Telephones service area.                                                                                                                                                                                                                                                                                             
|(2) | FTTP subscribers are customers who receive digital video, voice
    and/or data services from broadband residential services.                                                                                                                                                                                                                                                                     
|(3) | The Broadband segment can deliver multiple services to a
    customer. Accordingly, the Company maintains statistical data
    regarding Revenue-generating units for digital video, voice and
    data, in addition to the number of customers. For example, a
    single customer who purchases digital video, voice and data
    services would be reflected as three Revenue-generating units.

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Regulatory Matters Telecom Segment Results
of Operations












28



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| |                                 
| | --------------------------------
| | Adjustments and Reclassification







| |                    
| | -------------------
| | Revenue Recognition



29



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2004 versus 2003


Segment Results of Operations


Telecom





|                                                 |  |      |         |  |      |   |         |         |  |   |         |   |  |  |     |  
|------------------------------------------------ |  | ---- | ------- |  | ---- | - | ------- | ------- |  | - | ------- | - |  |  | --- | -
|                                                 |  | 2004 |         |  | 2003 |   |         | $Change |  |   | %Change |  
|                                                 |  |      |         |  |      |   |         |         |  |   |         |  
|Local service                                    |  | $    | 69,560  |  |      | $ | 63,363  |         |  | $ | 6,197   |   |  |  | 10  | %
|Network access service                           |  |      | 46,161  |  |      |   | 51,286  |         |  |   | (5,125  | ) |  |  | (10 | )
|Directory advertising                            |  |      | 16,283  |  |      |   | 15,087  |         |  |   | 1,196   |   |  |  | 8   |  
|Long distance service                            |  |      | 5,184   |  |      |   | 5,098   |         |  |   | 86      |   |  |  | 2   |  
|Other                                            |  |      | 3,898   |  |      |   | 4,090   |         |  |   | (192    | ) |  |  | (5  | )
|Total operating revenues from external customers |  |      | 141,086 |  |      |   | 138,924 |         |  |   | 2,162   |   |  |  | 2   |  
|Intersegment revenues                            |  |      | 25,814  |  |      |   | 23,576  |         |  |   | 2,238   |   |  |  | 9   |  
|Operating expenses *                             |  |      | 91,736  |  |      |   | 83,645  |         |  |   | 8,091   |   |  |  | 10  |  
|Depreciation and amortization                    |  |      | 25,227  |  |      |   | 31,257  |         |  |   | (6,030  | ) |  |  | (19 | )
|Operating income                                 |  |      | 49,937  |  |      |   | 47,598  |         |  |   | 2,339   |   |  |  | 5   |  
|Net income                                       |  | $    | 28,322  |  |      | $ | 26,565  |         |  | $ | 1,757   |   |  |  | 7   | %

|  |                                           
|- | ------------------------------------------
|* | Exclusive of depreciation and amortization



| |                   
| | ------------------
| | Operating Revenues



Regulatory Matters


30



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Regulatory Matters


Revenue Recognition in Financial
Statements




| |                   
| | ------------------
| | Operating Expenses

Consolidated Overview










31



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| |                   
| | ------------------
| | Regulatory Matters





| |   |                                                                                                                                    
| | - | -----------------------------------------------------------------------------------------------------------------------------------
| |  | business and residential subscribers, for basic exchange
    services;                                                             
| |  | surcharges, mandated by the California Public Utilities
    Commission (CPUC);                                                   
| |  | long distance carriers, for network access service;                                                                                
| |  | competitive access providers and subscribers, for network access
    services:                                                     
| |  | interstate pool settlements, from the National Exchange Carrier
    Association (NECA);                                          
| |  | support payments from the Universal Service Fund; and                                                                              
| |  | support payments from the California High Cost Fund
    (CHCF), recovering costs of services including
    extended area service.











32



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33



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34



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Broadband


|                                                 |  |      |         |   |      |   |         |         |  |   |         |  |  |  |     |  
|------------------------------------------------ |  | ---- | ------- | - | ---- | - | ------- | ------- |  | - | ------- |  |  |  | --- | -
|                                                 |  | 2004 |         |   | 2003 |   |         | $Change |  |   | %Change | 
|                                                 |  |      |         |   |      |   |         |         |  |   |         | 
|Internet service                                 |  | $    | 16,679  |   |      | $ | 15,984  |         |  | $ | 695     |  |  |  | 4   | %
|Residential Broadband service                    |  |      | 17,077  |   |      |   | 9,370   |         |  |   | 7,707   |  |  |  | 82  |  
|Business Broadband service                       |  |      | 5,660   |   |      |   | 3,697   |         |  |   | 1,963   |  |  |  | 53  |  
|Total operating revenues from external customers |  |      | 39,416  |   |      |   | 29,051  |         |  |   | 10,365  |  |  |  | 36  |  
|Intersegment revenues                            |  |      | 1,784   |   |      |   | 1,683   |         |  |   | 101     |  |  |  | 6   |  
|Operating expenses *                             |  |      | 61,143  |   |      |   | 42,538  |         |  |   | 18,605  |  |  |  | 44  |  
|Depreciation and amortization                    |  |      | 11,397  |   |      |   | 4,508   |         |  |   | 6,889   |  |  |  | 153 |  
|Operating loss                                   |  |      | (31,340 | ) |      |   | (16,312 | )       |  |   | 15,028  |  |  |  | 92  |  
|Net loss                                         |  | $    | (18,627 | ) |      | $ | (10,983 | )       |  | $ | 7,644   |  |  |  | 70  | %

|  |                                           
|- | ------------------------------------------
|* | Exclusive of depreciation and amortization



| |                   
| | ------------------
| | Operating Revenues





| |                   
| | ------------------
| | Operating Expenses

Consolidated
Overview






| |                         
| | ------------------------
| | Nonmonetary Transactions



35



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Wireless


|                                          |  |      |         |   |      |   |         |         |  |   |         |   |  |  |     |   
|----------------------------------------- |  | ---- | ------- | - | ---- | - | ------- | ------- |  | - | ------- | - |  |  | --- | --
|                                          |  | 2004 |         |   | 2003 |   |         | $Change |  |   | %Change |  
|                                          |  |      |         |   |      |   |         |         |  |   |         |  
|Wireless revenues from external customers |  | $    | 31,261  |   |      | $ | 27,146  |         |  | $ | 4,115   |   |  |  | 15  | % 
|Intersegment revenues                     |  |      | 1,699   |   |      |   | 744     |         |  |   | 955     |   |  |  | 128 |   
|Operating expenses *                      |  |      | 38,266  |   |      |   | 34,724  |         |  |   | 3,542   |   |  |  | 10  |   
|Depreciation and amortization             |  |      | 11,972  |   |      |   | 16,705  |         |  |   | (4,733  | ) |  |  | (28 | ) 
|Operating loss                            |  |      | (17,278 | ) |      |   | (23,539 | )       |  |   | (6,261  | ) |  |  | (27 | ) 
|Net loss                                  |  | $    | (10,823 | ) |      | $ | (14,937 | )       |  | $ | (4,114  | ) |  |  | (28 | )%

|  |                                           
|- | ------------------------------------------
|* | Exclusive of depreciation and amortization



| |                   
| | ------------------
| | Operating Revenues





| |                   
| | ------------------
| | Operating Expenses

Consolidated Overview






| |                         
| | ------------------------
| | Local Number Portability



36



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Non-Operating Items




| |                                 
| | --------------------------------
| | Interest Income and Expense, Net





| |                            
| | ---------------------------
| | Other Income (Expense), Net





| |             
| | ------------
| | Income Taxes





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2003 versus 2002


Segment Results of Operations


Telecom


|                                                 |  |      |         |  |      |   |         |         |  |   |         |   |  |  |     |   
|------------------------------------------------ |  | ---- | ------- |  | ---- | - | ------- | ------- |  | - | ------- | - |  |  | --- | --
|                                                 |  | 2003 |         |  | 2002 |   |         | $Change |  |   | %Change |  
|                                                 |  |      |         |  |      |   |         |         |  |   |         |  
|Local service                                    |  | $    | 63,363  |  |      | $ | 66,283  |         |  | $ | (2,920  | ) |  |  | (4  | )%
|Network access service                           |  |      | 51,286  |  |      |   | 58,426  |         |  |   | (7,140  | ) |  |  | (12 | ) 
|Directory advertising                            |  |      | 15,087  |  |      |   | 14,824  |         |  |   | 263     |   |  |  | 2   |   
|Long distance service                            |  |      | 5,098   |  |      |   | 5,368   |         |  |   | (270    | ) |  |  | (5  | ) 
|Other                                            |  |      | 4,090   |  |      |   | 4,778   |         |  |   | (688    | ) |  |  | (14 | ) 
|Total operating revenues from external customers |  |      | 138,924 |  |      |   | 149,679 |         |  |   | (10,755 | ) |  |  | (7  | ) 
|Intersegment revenues                            |  |      | 23,576  |  |      |   | 16,826  |         |  |   | 6,750   |   |  |  | 40  |   
|Operating expenses *                             |  |      | 83,645  |  |      |   | 86,417  |         |  |   | (2,772  | ) |  |  | (3  | ) 
|Depreciation and amortization                    |  |      | 31,257  |  |      |   | 28,249  |         |  |   | 3,008   |   |  |  | 11  |   
|Operating income                                 |  |      | 47,598  |  |      |   | 51,839  |         |  |   | (4,241  | ) |  |  | (8  | ) 
|Net income                                       |  | $    | 26,565  |  |      | $ | 33,634  |         |  | $ | (7,069  | ) |  |  | (21 | )%

|  |                                           
|- | ------------------------------------------
|* | Exclusive of depreciation and amortization



| |                   
| | ------------------
| | Operating Revenues









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| |                   
| | ------------------
| | Operating Expenses













| |                           
| | --------------------------
| | Significant Business Event



Broadband


|                                                 |  |      |         |   |      |   |         |         |  |   |         |  |  |  |     |  
|------------------------------------------------ |  | ---- | ------- | - | ---- | - | ------- | ------- |  | - | ------- |  |  |  | --- | -
|                                                 |  | 2003 |         |   | 2002 |   |         | $Change |  |   | %Change | 
|                                                 |  |      |         |   |      |   |         |         |  |   |         | 
|Internet service                                 |  | $    | 15,984  |   |      | $ | 7,578   |         |  | $ | 8,406   |  |  |  | 111 | %
|Residential Broadband service                    |  |      | 9,370   |   |      |   | 2,946   |         |  |   | 6,424   |  |  |  | 218 |  
|Business Broadband service                       |  |      | 3,697   |   |      |   | 2,421   |         |  |   | 1,276   |  |  |  | 53  |  
|Total operating revenues from external customers |  |      | 29,051  |   |      |   | 12,945  |         |  |   | 16,106  |  |  |  | 124 |  
|Intersegment revenues                            |  |      | 1,683   |   |      |   | 1,189   |         |  |   | 494     |  |  |  | 42  |  
|Operating expenses *                             |  |      | 42,538  |   |      |   | 23,342  |         |  |   | 19,196  |  |  |  | 82  |  
|Depreciation and amortization                    |  |      | 4,508   |   |      |   | 1,972   |         |  |   | 2,536   |  |  |  | 129 |  
|Operating loss                                   |  |      | (16,312 | ) |      |   | (11,180 | )       |  |   | 5,132   |  |  |  | 46  |  
|Net loss                                         |  | $    | (10,983 | ) |      | $ | (6,715  | )       |  | $ | 4,268   |  |  |  | 64  | %

|  |                                           
|- | ------------------------------------------
|* | Exclusive of depreciation and amortization

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| |                   
| | ------------------
| | Operating Revenues





| |                   
| | ------------------
| | Operating Expenses





| |                        
| | -----------------------
| | Nonmonetary Transaction





| |               
| | --------------
| | Asset Purchase



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|                                                        |                           |   |        |        | 
|------------------------------------------------------- | ------------------------- | - | ------ | ------ | 
|Accounts receivable, net                                |                           | $ | 615    |       
|Equipment held for sale                                 |                           |   | 2,573  |       
|Other current assets                                    |                           |   | 931    |       
|Property, plant and equipment                           |                           |   | 12,327 |       
|Intangible asset relating to favorable operating leases |                           |   | 893    |       
|                                                        |                           |   |       
|                                                        | Total assets acquired     |   |        | 17,339 | 
|Current liabilities assumed under executory contracts   |                           |   | 3,483  |       
|Liabilities assumed under capital lease obligations     |                           |   | 1,064  |       
|Other liabilities                                       |                           |   | 170    |       
|                                                        |                           |   |       
|                                                        | Total liabilities assumed |   |        | 4,717  | 
|                                                        |                           |   |       
|                                                        | Net assets acquired       |   | $      | 12,622 | 
|                                                        |                           |   |       



Wireless


|                                          |  |      |         |   |      |   |         |         |  |   |         |   |  |  |    |   
|----------------------------------------- |  | ---- | ------- | - | ---- | - | ------- | ------- |  | - | ------- | - |  |  | -- | --
|                                          |  | 2003 |         |   | 2002 |   |         | $Change |  |   | %Change |  
|                                          |  |      |         |   |      |   |         |         |  |   |         |  
|Wireless revenues from external customers |  | $    | 27,146  |   |      | $ | 23,225  |         |  | $ | 3,921   |   |  |  | 17 | % 
|Intersegment revenues                     |  |      | 744     |   |      |   | 507     |         |  |   | 237     |   |  |  | 47 |   
|Operating expenses *                      |  |      | 34,724  |   |      |   | 33,796  |         |  |   | 928     |   |  |  | 3  |   
|Depreciation and amortization             |  |      | 16,705  |   |      |   | 14,905  |         |  |   | 1,800   |   |  |  | 12 |   
|Operating loss                            |  |      | (23,539 | ) |      |   | (24,969 | )       |  |   | (1,430  | ) |  |  | (6 | ) 
|Net loss                                  |  | $    | (14,937 | ) |      | $ | (15,670 | )       |  | $ | (733    | ) |  |  | (5 | )%





| |                   
| | ------------------
| | Operating Revenues





| |                   
| | ------------------
| | Operating Expenses



41



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| |                         
| | ------------------------
| | Local Number Portability



Non-Operating Items




| |                                 
| | --------------------------------
| | Interest Income and Expense, Net





| |                            
| | ---------------------------
| | Other Income (Expense), Net





| |             
| | ------------
| | Income Taxes





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Liquidity and Capital Resources












43



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|                                           |  |      |        |  |           |   |       |           |  |   |            |  |  |       |        |  |  |   |        | 
|------------------------------------------ |  | ---- | ------ |  | --------- | - | ----- | --------- |  | - | ---------- |  |  | ----- | ------ |  |  | - | ------ | 
|                                           |  | 2005 |        |  | 2006-2007 |   |       | 2008-2009 |  |   | Thereafter |  |  | Total |       
|                                           |  |      |        |  |           |   |       |           |  |   |            |  |  |       |       
|Long-term debt                             |  | $    | 3,779  |  |           | $ | 7,273 |           |  | $ | 19,273     |  |  | $     | 62,545 |  |  | $ | 92,870 | 
|Short-term borrowings                      |  |      | 10,000 |  |           |   |      |           |  |   |           |  |  |       |       |  |  |   | 10,000 | 
|Capital leases                             |  |      | 212    |  |           |   | 39    |           |  |   | 13         |  |  |       |       |  |  |   | 264    | 
|Contractual shareable earnings obligations |  |      | 3,092  |  |           |   | 4,883 |           |  |   | 1,791      |  |  |       |       |  |  |   | 9,766  | 
|Operating leases                           |  |      | 4,957  |  |           |   | 9,130 |           |  |   | 8,769      |  |  |       | 17,736 |  |  |   | 40,592 | 
|Unconditional purchase obligations         |  |      | 1,700  |  |           |   | 275   |           |  |   |           |  |  |       |       |  |  |   | 1,975  | 



Related Party Transactions








Critical Accounting Policies and Estimates






|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | As discussed more fully in Note 1, in accordance with
    SFAS No. 142, Goodwill and Other Intangible Assets,goodwill and wireless spectrum licenses are reviewed for
    impairment annually, or more frequently if an event occurs or
    circumstances change that would reduce the fair value below its
    carrying value. The impairment test for goodwill requires the
    Company to estimate the fair value at the reporting unit level.
    To determine

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| |                                                                                                                                                                                                  
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | the fair value in 2004, the Company obtained an independent
    valuation of the Companys goodwill using a discounted cash
    flow model. Assumptions used in this model include the following:



| |   |                                                                                                                                                                                                                                                                                               
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | cash flow assumptions regarding investment in network
    facilities, distribution channels and customer base (the
    assumptions underlying these inputs are based upon a combination
    of historical results and trends, new industry developments and
    the Companys business plans);
| |  | an 11% weighted average cost of capital based on industry
    weighted averaged cost of capital; and                                                                                                                                                                                          
| |  | no terminal growth rate.                                                                                                                                                                                                                                                                      



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The use of different estimates or assumptions within the
    discounted cash flow model when determining fair value of the
    Companys goodwill could result in a different fair value.
    For example, the Company used a discount rate of 11% and no
    terminal growth rate in its assessment of fair value in 2004. If
    the discount rate were to increase two percent, the fair value
    of the goodwill would decrease by $49,400, but would not result
    in an impairment of goodwill.                                                                       
|
| | The Companys wireless spectrum licenses include Personal
    Communications Services (PCS) and Local Multipoint
    Distribution Service (LMDS) licenses. In assessing
    the recoverability of the Companys PCS licenses, the
    Company obtained an independent valuation in 2004, which
    reviewed transactions involving sales of comparable wireless
    spectrum licenses in the aftermarket, using characteristics of
    the license and the related market, including geographic
    location, market size, megahertz frequency and population
    density.
|
| | In assessing the recoverability of the Companys LMDS
    licenses, the Company obtained an independent valuation, as
    comparable license sales data was not available. The independent
    valuation estimates fair value of the Companys LMDS
    licenses using a discounted cash flow model. Assumptions used in
    this model include the following:                                                                                                                                                                                                                



| |   |                                                                                                                                                                                                                                                                                               
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | cash flow assumptions regarding investment in network
    facilities, distribution channels and customer base (the
    assumptions underlying these inputs are based upon a combination
    of historical results and trends, new industry developments and
    the Companys business plans);
| |  | a 20% weighted average cost of capital based on industry
    weighted averaged cost of capital adjusted to reflect the
    inherent risks associated with the introduction of a new service
    offering; and                                                                                 
| |  | a 3% terminal value growth rate.                                                                                                                                                                                                                                                              



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The use of different estimates or assumptions within the
    discounted cash flow model when determining fair value of the
    Companys LMDS licenses could result in different values
    for these licenses. For example, the Company used a discount
    rate of 20% and a terminal growth rate of 3% in its assessment
    of fair value in 2004. If the discount rate were to increase one
    percent, the fair value of the LMDS licenses would decrease by
    $600, which would result in an impairment charge of
    approximately $140 based on the carrying value of the LMDS
    licenses as of December 31, 2004. In addition, the
    Companys LMDS licenses may be impaired in the near future
    if the estimates and assumptions used in the 2004 LMDS license
    discounted cash flow model are not met.
|
| | If the estimated fair value is less than the carrying value,
    then the carrying value is written down to the fair value. As a
    result of the Companys annual test for the current year,
    no impairment of either goodwill or PCS or LMDS licenses was
    indicated.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | As discussed more fully in Note 1, total revenues from
    telephone services are affected by rates authorized by various
    regulatory agencies. The FCC monitors SureWest Telephones
    interstate earnings through the use of annual cost separation
    studies prepared by SureWest Telephone. The FCC establishes
    rules that carriers must follow in the preparation of the annual
    studies. Based on these rules, the Company is required to
    prospectively set its annual 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. The Company must also make estimates of the
    jurisdictional separation of this data to assign current
    financial

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| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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.
    Additionally, certain FCC rules regarding interstate shareable
    earnings obligations have not yet been clarified as to whether
    the Companys rate filings are deemed lawful and,
    therefore, protected from over-earnings liability. Further, the
    Companys separation studies include estimates and
    assumptions regarding issues before the FCC involving
    intercarrier interconnection, Internet traffic, and traffic
    utilizing Internet Protocol. The Company also participates in
    the NECA pool for certain interstate revenues. In addition to
    the estimates noted above, the Companys earned
    rate-of-return from its participation in the NECA pool can also
    be impacted by the earnings and data of other carriers who
    participate in the pool.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | In accordance with the NRF, SureWest Telephone is subject to
    ongoing monitoring and reporting requirements by the CPUC, and
    it was initially required to share earnings with customers based
    on its earned annual rate-of-return. The Company utilizes
    models, which rely on estimates regarding the jurisdictional
    separation of financial data and operational data into the
    intrastate and interstate jurisdictions as discussed previously
    for the purposes of calculating its earned annual
    rate-of-return. However, as discussed more fully in Note 1,
    SureWest Telephone has entered into a settlement agreement,
    which was approved by the CPUC in November 2004, to cease
    intrastate sharing requirements beginning January 1, 2005
    through at least December 31, 2010. The settlement
    agreement also resolves existing sharing obligations and related
    earnings issues for the monitoring periods 2000-2004.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|
| | In addition, the Company must make estimates and assumptions
    regarding various issues before the FCC and CPUC involving
    intercarrier interconnection, Internet traffic, traffic
    utilizing Internet Protocol, methods used to allocate costs for
    services provided by SureWest Communications and SureWest
    Telephone to its affiliates and the treatment of certain plant
    and tax costs, including internal-use software costs.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|
| | As a result of these estimates and assumptions, it is reasonably
    possible that managements estimates of SureWest
    Telephones interstate shareable earnings obligations could
    change in the near term, and the amounts involved could be
    material. For example, the CPUC approved a settlement agreement
    on November 19, 2004 that resolved the Companys
    intrastate shareable earnings for the years 2000 through 2004.
    In accordance with this settlement agreement, the Company
    recorded $2,948 in local revenues due to a change in accounting
    estimate in the fourth quarter of 2004 (for a more detailed
    discussion regarding the settlement agreement, see Regulation
    and Contractual and Estimated Shareable Earnings Obligationswithin Note 1 to the Companys consolidated
    financial statements). This increase in revenue resulted in a
    decrease of the Companys net loss by $2,046
    ($0.14 per share). In addition, in 2002 the Company made
    changes in its estimates for interstate shareable earnings
    obligations for approximately $5,800, principally due to the
    D.C. Circuit Court of Appeals decision issued in May 2002, which
    determined that a tariff filed properly under Section 204
    streamlined procedures and allowed to go into effect
    without suspension is deemed lawful. Therefore, the carrier is
    not subsequently obligated to pay refunds for earnings higher
    than the permitted rate of return as prescribed by the FCC for
    that monitoring period.



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | As discussed more fully in Note 2, the Company recognizes
    revenue when (i) persuasive evidence of an arrangement
    between the Company and the customer exists, (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) collectibility of the
    sales price is reasonably assured.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|
| |  | As discussed more fully in Note 1, the Company maintains
    allowances for doubtful accounts for estimated losses resulting
    from the potential inability of its customers to make required
    payments. In evaluating the collectibility of its accounts
    receivable, the Company assesses a number of factors including a
    specific customers or carriers ability to meet its
    financial obligations to the Company, the length of time the
    receivable has been past due and historical and future
    expectations of conditions that may impact the Companys
    ability to collect its accounts receivable. If circumstances
    change or economic conditions worsen such that the
    Companys past collection experience is no longer relevant,
    the Companys estimate of the recoverability of its
    accounts receivable could be further reduced from the levels
    reflected in the Companys consolidated balance sheet. If
    uncollectibility of the Companys billed revenue changes by
    1%, the Company would expect an increase in uncollectible
    expense of approximately $2,200. As of December 31, 2004,
    the

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|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  | Company had three customers that accounted for 4% of
    consolidated accounts receivable in the aggregate. 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, on the Companys 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, the
    Company maintains accounts receivable allowances and recognizes
    certain customer refund liabilities, through charges to
    revenues, based on the Companys best estimates of the
    resolution of these contingencies, which are based on historical
    experience.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| 
| | As discussed more fully in Note 1, the Company states its
    inventories held for sale at lower of cost or market. In
    assessing the ultimate recoverability of inventories, the
    Company is required to make estimates regarding future customer
    demand and technological advances of equipment.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| 
| | As discussed more fully in Note 1, property, plant and
    equipment are recorded at cost. Retirements and other reductions
    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. Property, plant
    and equipment is depreciated or amortized using the
    straight-line method over their estimated economic lives. The
    economic lives are estimated at the time the assets are acquired
    and are based on historical experience with similar assets, as
    well as anticipated technological or other changes. If
    technological changes were to occur more rapidly than
    anticipated or differently than anticipated, the economic lives
    assigned to these assets may need to be shortened, resulting in
    the recognition of increased depreciation and amortization
    expense in future periods. Likewise, if the anticipated
    technological or other changes occur more slowly than
    anticipated, the life of the asset group could be extended based
    on the life assigned to new assets added to the group. This
    could result in a reduction of depreciation and amortization
    expense in future periods. The Company reviews the estimated
    useful lives of its property, plant and equipment once every
    three years, or when events or circumstances indicate that the
    carrying amount may not be recoverable over the remaining lives
    of the assets. In assessing the recoverability of the
    Companys property, plant and equipment, the Company must
    make assumptions regarding estimated future cash flows and other
    factors to determine the fair value of the respective assets.
| 
| | As discussed in Note 1, the Company accounts for asset
    retirement obligations in accordance with
    SFAS No. 143, Accounting for Asset Retirement
    Obligations, which requires the Company to recognize a
    retirement obligation (future cost of removal) when a legal
    obligation exists to remove plant at some point in the future.
    The Company believes it may have potential retirement
    obligations relating to its wireless cell sites. Based on terms
    outlined in its tower leases, the Company is obligated to return
    the land or facilities to their original condition at the end of
    the cell site lease term, should the lease be terminated. The
    Company has used a probability-weighted cash flow approach in
    estimating its potential retirement obligation. The Company
    calculates the net present value of the retirement obligation
    assuming an inflation rate of 3%, a discount rate of 7% and a
    market risk premium of 4%. The Company has also assumed the
    settlement date is 25 years from the date the asset is
    placed into service. The Company has also used a
    probability-weighted assessment to address the uncertainty
    regarding the timing of future cash flows to settle the
    potential liability. The Company believes that utilizing
    probabilities less than 100% is appropriate because the Company
    believes the likelihood of incurring material asset retirement
    expenditures is remote. The Company monitors the estimates and
    assumptions used in determining its potential asset retirement
    obligations for its cell sites. However, the Company believes it
    is remote that any future adjustment to its asset retirement
    liability for obligations existing as of December 31, 2004
    will be material to the Companys consolidated financial
    statements.                                                                                                                                                                  
| 
| | As discussed more fully in Notes 1 and 7, the Company
    accounts 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. The Company does not have a
    valuation allowance on its deferred tax asset as of
    December 31, 2004 or 2003 because it believes                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           

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| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | it is more likely than not that such deferred tax asset will be
    realized. Should the Company determine that it would not be able
    to realize all or part of its deferred tax asset in the future,
    an adjustment to the deferred tax asset would be charged to
    income in the period in which the determination was made.
    However, the Company believes it will generate sufficient
    taxable income from future operations and reversal of deferred
    tax liabilities to realize the deferred tax asset of $34,412 as
    of December 31, 2004.



|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | As discussed more fully in Note 8, the Company has pension
    and post-retirement benefit costs and obligations. The
    Companys pension and post-retirement benefit obligations
    are actuarially determined based on estimates of discount rates,
    long-term rates of return on plan assets and increases in future
    compensation levels. Changes in these estimates and other
    factors could significantly impact the Companys pension
    and post-retirement benefit costs and obligations. Assumed
    health care cost trend rates have a significant effect on the
    amounts reported for the health care plans. A
    one-percentage-point change in assumed health care cost trend
    rates would have the following effects:

|                                                                         |  |                |     |  |                |   |      |  
|------------------------------------------------------------------------ |  | -------------- | --- |  | -------------- | - | ---- | -
|                                                                         |  | 1-Percentage-  |     |  | 1-Percentage-  |  
|                                                                         |  | Point Increase |     |  | Point Decrease |  
|                                                                         |  |                |     |  |                |  
|Effect on total 2004 service and interest cost                           |  | $              | 72  |  |                | $ | (61  | )
|                                                                        
|Effect on post-retirement benefit obligation as of
    December 31, 2004 |  | $              | 526 |  |                | $ | (499 | )



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The discount rate is determined based on the current yields on
    high quality corporate fixed-income investments with maturities
    corresponding to the expected duration of the benefit
    obligations. As of December 31, 2004, the Company used a
    discount rate of 5.75%, which represents a reduction of
    50 basis points from the discount rate of 6.25% as of
    December 31, 2003. This change in the discount rate did not
    have a material impact on the Companys 2004 and 2003
    consolidated results of operations.                                                                                                                                                                    
|
| | In 2004, the Company used an expected long-term rate of return
    of 8.50%. For 2005, the Company does not believe the expected
    long-term rate will change significantly. The expected long-term
    rate of return on plan assets is determined based on the current
    and projected investment portfolio mix and estimated long-term
    investment returns for each asset class. The projected portfolio
    mix of the plan assets is developed in consideration of the
    expected duration of related plan obligations and private equity
    positions. The expected return on plan assets is determined by
    applying the expected long-term rate of return to the
    market-value of plan assets.
|
| | The future compensation levels are based on recent experience as
    well as future expectations. As of December 31, 2003, the
    Company reduced the future compensation level by 100 basis
    points to 5.00% and it remains at that level for 2004. This
    change in the future compensation level did not have a material
    impact on the Companys 2004 and 2003 consolidated results
    of operations.                                                                                                                                                                                                                                                                                                  



|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | As discussed more fully in Notes 1 and 9, the Company
    is a party to a variety of litigation, regulatory proceedings
    and other contingencies that arise in the ordinary course of
    business. The Company is required to assess the likelihood of
    any adverse judgments or outcomes to these matters, as well as
    potential ranges of probable losses for certain of these
    matters. The determination of the liabilities required, if any,
    for loss contingencies is made after careful analysis of each
    individual issue. In the opinion of management, the ultimate
    outcome of these matters will not materially affect the
    Companys consolidated financial position and results of
    operations.                                                     
| 
| | The Company currently sponsors two Equity Incentive Plans (the
    Plans) for certain employees, outside directors and
    consultants of the Company, which were approved by the
    Companys shareholders. The Plans permit issuance by the
    Company of awards in the form of restricted shares, stock units,
    performance shares, stock options and stock appreciation rights.
    Prior to 2003, the Company accounted for those plans under the
    recognition and measurement provisions of Accounting Principles
    Board Opinion (APB) No. 25, Accounting for
    Stock Issued to Employees, and Related Interpretations. No
    stock based compensation expense for stock options was reflected
    in net income for the year ended December 31, 2002, as all
    stock

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| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | options granted under those plans had an exercise price equal to
    the fair value of the underlying common stock on the date of
    grant. Effective January 1, 2003, the Company adopted the
    preferable fair value recognition provisions of Statement of
    Financial Accounting Standards (SFAS) No. 123,
    Accounting for Stock-Based Compensation Transition and
    Disclosure. Under the prospective transition method selected
    by the Company, as described in SFAS No. 148,
    Accounting for Stock-Based Compensation-Transition and
    Disclosure, compensation expense was recognized in 2003 for
    all employee awards granted, modified or settled after
    January 1, 2003. This change in accounting for stock-based
    compensation resulted in increased compensation expense of $29
    and $47, which increased net loss and decreased net income by
    $20 (no effect on loss per share) and $18 (no effect on earnings
    per share) for the years ended December 31, 2004 and 2003,
    respectively.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Company voluntarily made the choice to change to the
    preferable method of accounting for employee stock options in
    accordance with SFAS No. 123. The Company concluded
    that stock options are a form of employee compensation expense
    and, therefore, it is appropriate that these expenses be
    recorded in the results of operations to more clearly reflect
    economic reality.                                                                                                                                                                                                                                                                        
|
| | The Black-Scholes-Merton option pricing model includes
    assumptions regarding dividend yields, expected volatility,
    expected lives and risk-free interest rates. These assumptions
    reflect managements best estimates, but these items
    involve inherent uncertainties based on market conditions
    generally outside of the control of the Company. As a result, if
    other assumptions had been used in the current period,
    stock-based compensation expense could have been materially
    different. If management uses different assumptions in future
    periods, stock-based compensation expense could be materially
    impacted in future years.

Recent Accounting Pronouncements


Share-Based Payment Accounting for Stock-Based
Compensation Accounting
for Stock Issued to Employees, Statement of Cash Flows








| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1. | A modified prospective method in which compensation
    cost is recognized beginning with the effective date
    (a) based on the requirements of SFAS No. 123(R)
    for all share-based payments granted after the effective date
    and (b) based on the requirements of SFAS No. 123
    for all awards granted to employees prior to the effective date
    of SFAS No. 123(R) that remain unvested on the
    effective date.
|
| | 2. | A modified retrospective method, which includes the
    requirements of the modified prospective method described above,
    but also permits entities to restate their financial statements
    based on the amounts previously recognized under
    SFAS No. 123 for purposes of pro forma disclosures
    either for (a) all prior periods presented or
    (b) prior interim periods of the year of adoption.                   



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Accounting for Certain Financial Instruments with
Characteristics of Both Liabilities and Equity


Consolidation of Variable
Interest Entities, Consolidated
Financial Statements


Accounting for Costs Associated with an Exit or Disposal
Activity Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (Including Certain
Costs Incurred in a Restructuring)


Accounting for Stock-Based
Compensation  Transition and Disclosure Accounting for Stock-Based Compensation


Accounting for Asset Retirement
Obligations.


Accounting for Revenue
Arrangements with Multiple Deliverables.


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Guarantors Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of
Others.


Factors That Could Affect Future Results








| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We expect to continue to face significant competition in all
    parts of our business and the level of competition is expected
    to intensify. The telecommunications industry is highly
    competitive. We face actual or potential competition from many
    existing and emerging companies, including other incumbent and
    competitive local telephone companies, long-distance carriers
    and resellers, wireless telephone companies, Internet service
    providers, satellite companies and cable television companies.
    We may not be able to successfully anticipate and respond to
    various competitive factors affecting the industry, including
    regulatory changes that may affect our competitors and us
    differently, new technologies and services that may be
    introduced, changes in consumer preferences, demographic trends
    and discount pricing strategies by competitors. As the incumbent
    carrier in Sacramento, SBC Communications enjoys certain
    business advantages, including its size, financial resources,
    favorable regulatory position, brand recognition and connection
    to virtually all of our customers and potential customers there.
    As the largest cable operator in Sacramento and Placer County,
    Comcast enjoys certain business advantages, including its size,
    financial resources, ownership or superior access to programming
    and other content, brand recognition, and first-in-the-field
    advantages with a customer base that generates positive cash
    flow for its operations. We face intense competition in our
    markets for long-distance, Internet access and other ancillary
    services that are important to our business and to our growth
    strategy.
|
| | We must adapt to rapid technological change.
    Technological developments could increase our costs and cause a
    decline in demand for our services. In addition, technology
    changes can reduce the costs of entry for others and give
    competitors significant new advantages. If we do not replace or
    upgrade technology and equipment that becomes obsolete, we will
    be unable to compete effectively because we will not be able to
    meet the needs or expectations of our customers, and we may be
    placed at a cost disadvantage in offering our services.
    Additionally, replacing or upgrading our infrastructure in the
    future could result in significant capital expenditures.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|
| | We are subject to a complex and uncertain regulatory
    environment. Some parts of our business are extensively
    regulated, and the nature of regulation continues to undergo
    fundamental change and reinterpretation. Many businesses that
    compete with the Company are comparatively less regulated. Many
    significant regulatory decisions have had to be accommodated in
    recent years, and there are pending decisions on issues
    affecting the Company that are of great importance.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       

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| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our operations have undergone material changes, and our
    actual operating results can be expected to differ from the
    results indicated in our historical financial statements. As
    a result of our acquisition of assets from WIN in 2002, and the
    subsequent expansion of our cable television business, our mix
    of operating assets differs from those operations upon which our
    historical financial statements are based. Consequently, our
    historical financial statements may not be reliable as an
    indicator of future results.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|
| | Our success depends upon our ability to manage our growth and
    expansion. If our acquisitions and growth initiatives are not
    successful, we could suffer an adverse effect on our business
    and results of operations. Our growth strategy will continue
    to require us to invest significant capital in facilities and
    services that may not achieve the desired returns. Our future
    success depends, in part, upon our ability to manage our growth,
    including our ability to build network and related facilities to
    serve new customers, integrate our operations to take advantage
    of new capabilities and systems; attract and retain skilled
    personnel across the Company, effectively manage the demands of
    day to day operations in new areas while attempting to execute
    our business strategy, and realize the projected growth and
    revenue targets developed by Company management.                                                                                                                                                                                                                                                                                                                                             
|
| | We are reliant on support funds provided under federal and
    state laws. We receive revenues from various federal or
    state support funds: interstate common line support from the
    Universal Service Program, CHCF-B and Universal Lifeline Service
    Fund. These governmental programs are reviewed and amended from
    time to time, and are likely to change in the near future. As
    described in the Regulationsection above, the Company
    currently receives funding of $11,500 annually from the CHCF, a
    program designed by the CPUC to establish a fair and equitable
    local rate structure and to reduce any disparity in the rates
    charged by certain telephone companies serving high-cost areas.
    The CHCF was due to expire on January 1, 2005. On
    September 28, 2004, the Governor of California signed
    SB1276 into law, which amended the existing legislation and
    extended the expiration date to January 1, 2009. The
    outcome and impact on the Companys operations resulting
    from future changes to these governmental programs cannot be
    determined at this time.                                                                                                                                                
|
| | We could be harmed by the recent adverse developments
    affecting other communications companies. There have been
    numerous bankruptcies and other financial difficulties
    experienced by other carriers and suppliers in the
    telecommunications and Internet sectors. Similar situations with
    our suppliers, some of whom provide products and services for
    which there are few substitutes, could cause us to experience
    delays, service interruptions or additional expenses. Situations
    with carrier and other customers could affect our ability to
    collect services that have been provided.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|
| | We depend on third parties, over whom we have no control, to
    deliver our services. Because of the interconnected nature
    of the telecommunications industry, we depend heavily on other
    local telephone companies, long-distance carriers, and numerous
    other third parties to deliver our services. In addition, we are
    dependent on easements, franchises and licenses from various
    private parties such as established telephone companies and
    other utilities, railroads, long-distance companies, and from
    state highway authorities, local governments and transit
    authorities for access to aerial pole space, underground
    conduits and other rights-of-way in order to construct and
    operate our networks. The failure to maintain in effect the
    necessary third party arrangements on acceptable terms would
    have an adverse effect on our ability to conduct our business.                                                                                                                                                                                                                                                                                                                                                      
|
| | We are subject to new corporate governance and internal
    control reporting requirements, and our failure to comply with
    existing and future requirements could adversely affect our
    business. Pursuant to Section 404 of the Sarbanes-Oxley
    Act of 2002 (Section 404) and related
    Securities and Exchange Commission rules, we have furnished a
    report of managements assessment of the effectiveness of
    our internal controls at December 31, 2004. In addition,
    our Independent Registered Public Accounting Firm audited and
    reported on, managements assessment. Management concluded
    that the Companys internal control over financial
    reporting was not effective at December 31, 2004. If our
    deficiencies are not adequately addressed, we could experience
    accounting errors that could result in misstatements of our
    financial position and results of operations, potential
    restatements of our financial statements or otherwise adversely
    affect our business, reputation and results of operations.
    Inferior internal controls could also cause investors to lose
    confidence in our reported financial information, which could
    have a negative effect on the trading price of our securities.

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| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If we are unable to effectively and efficiently implement the
    necessary initiatives to eliminate the material weakness
    identified in our internal controls and procedures, there could
    be an adverse affect on our operations or financial results.
    In connection with the Managements Report on Internal
    Control over Financial Reporting, management identified a
    material weakness in the Companys internal control over
    financial reporting relating to the accounting for property,
    plant and equipment, which resulted from a control weakness that
    caused the following conditions: The Company was unable to
    completely reconcile its plant in service and plant under
    construction subsidiary ledgers to the corresponding general
    ledger balances for periods throughout 2004 and as of
    December 31, 2004. Management believes these unreconciled
    differences are attributable principally to deficiencies in the
    reliability of the Companys information system interfaces
    between the general ledger and the property, plant and equipment
    subsidiary ledgers. In addition, during 2004, several errors
    occurred in the Companys periodic depreciation and
    capitalized interest calculations that were more than
    inconsequential. Additionally, as of December 31, 2004, the
    Company did not have effective procedures with which to
    determine the cost bases of property, plant and equipment that
    had been retired. Moreover, certain manual internal controls
    pertaining to property, plant and equipment implemented by the
    Company during the third quarter of 2004 were not operating
    effectively as of December 31, 2004. These matters required
    the Company to record adjustments to both its annual and interim
    2004 consolidated financial statements. The significant accounts
    affected by this material weakness are property, plant and
    equipment and related accumulated depreciation included in the
    Companys consolidated balance sheets, and depreciation
    expense and interest expense included in the Companys
    consolidated statements of operations. Due to this material
    weakness, management believes that as of December 31, 2004,
    the Companys internal control over financial reporting was
    not effective based on the Committee of Sponsoring Organizations
    of the Treadway Commission criteria.
|
| | During the year ended December 31, 2004, we implemented
    various initiatives, and will be implementing additional
    initiatives in 2005 to improve our internal controls, and
    address the matters discussed in Managements Report on
    Internal Control over Financial Reporting. The implementation of
    the initiatives and the consideration of additional necessary
    improvements are among our highest priorities. The Board of
    Directors, under the direction of the Audit Committee, will
    continually assess the progress of the initiatives and the
    improvements, and take further actions as deemed necessary.
    Until the identified material weakness is eliminated, there is a
    risk of an adverse affect on our operations or financial results.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 

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Regulatory and Legal Matters










| |   |                                                                                                                                                                                                                                                         
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Additional rules governing the opening of markets to competition;                                                                                                                                                                                       
|
| |  | The goals and definition of universal telephone service in a
    changing environment, including examination of subsidy support
    mechanisms for subscribers of different carriers (including
    incumbent carriers) and in various geographic areas;
|
| |  | Rules that will provide non-discriminatory access by competing
    service providers to the network capabilities of local exchange
    carriers; and                                                                                                    
|
| |  | The regulated rates and earnings of SureWest Telephone.                                                                                                                                                                                                 







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







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|        |                                             
|------- | --------------------------------------------
|Item 8. | Financial Statements and Supplementary Data.

|                                                                                                                      |  |      |    | 
|--------------------------------------------------------------------------------------------------------------------- |  | ---- | -- | 
|                                                                                                                      |  | Page |   
|Report of Ernst and Young LLP, Independent Registered Public
    Accounting Firm                                      |  |      | 58 | 
|                                                                                                                     
|Consolidated Balance Sheets as of December 31, 2004 and 2003                                                          |  |      | 59 | 
|                                                                                                                     
|Consolidated Statements of Operations for each of the three
    years in the period ended December 31, 2004           |  |      | 61 | 
|                                                                                                                     
|Consolidated Statements of Shareholders Equity for each of
    the three years in the period ended December 31, 2004 |  |      | 62 | 
|                                                                                                                     
|Consolidated Statements of Cash Flows for each of the three
    years in the period ended December 31, 2004           |  |      | 63 | 
|                                                                                                                     
|Notes to Consolidated Financial Statements                                                                            |  |      | 65 | 

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Report of Ernst & Young LLP, Independent Registered
Public Accounting Firm












Accounting for Stock-Based
Compensation, Accounting for Stock-Based
Compensation  Transition and Disclosure. Accounting
for Revenue Arrangements with Multiple Deliverables.






| |                          
| | -------------------------
| | /s/ Ernst & Young
    LLP





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SUREWEST COMMUNICATIONS


CONSOLIDATED BALANCE SHEETS




|                                   |                                                                                                            |              |         |        |      |   |         |        | 
|---------------------------------- | ---------------------------------------------------------------------------------------------------------- | ------------ | ------- | ------ | ---- | - | ------- | ------ | 
|                                   |                                                                                                            | December 31, |        
|                                   |                                                                                                            | 2004         |         |        | 2003 |  
|ASSETS                             |                                                                                                            |              |         |        |      |  
|Current assets:                    |                                                                                                            |              |         |        |      |   |         |       
|                                   | Cash and cash equivalents                                                                                  |              | $       | 18,119 |      |   | $       | 39,008 | 
|                                   | Short-term investments                                                                                     |              |         |       |      |   |         | 2,699  | 
|                                   | Accounts receivable (less allowances of $3,850 and $2,665 at
    December 31, 2004 and 2003, respectively) |              |         | 20,155 |      |   |         | 18,846 | 
|                                   | Deferred income tax asset                                                                                  |              |         |       |      |   |         | 209    | 
|                                   | Inventories                                                                                                |              |         | 5,578  |      |   |         | 5,537  | 
|                                   | Deferred directory costs                                                                                   |              |         | 5,599  |      |   |         | 5,320  | 
|                                   | Prepaid expenses                                                                                           |              |         | 2,359  |      |   |         | 2,544  | 
|                                   | Prepaid pension benefits                                                                                   |              |         |       |      |   |         | 896    | 
|                                   |                                                                                                            |              |         |        |      |  
|Total current assets               |                                                                                                            |              | 51,810  |        |      |   | 75,059  |       
|Property, plant and equipment, net |                                                                                                            |              | 365,613 |        |      |   | 342,967 |       
|Intangible and other assets:       |                                                                                                            |              |         |        |      |   |         |       
|                                   | Wireless spectrum licenses, net                                                                            |              |         | 13,566 |      |   |         | 13,566 | 
|                                   | Goodwill                                                                                                   |              |         | 2,171  |      |   |         | 2,171  | 
|                                   | Intangible asset relating to pension plans                                                                 |              |         | 802    |      |   |         | 125    | 
|                                   | Intangible asset relating to favorable operating leases, net                                               |              |         | 506    |      |   |         | 649    | 
|                                   | Deferred charges and other assets                                                                          |              |         | 714    |      |   |         | 672    | 
|                                   |                                                                                                            |              |         |        |      |  
|                                   |                                                                                                            |              | 17,759  |        |      |   | 17,183  |       
|                                   |                                                                                                            |              |         |        |      |  
|                                   |                                                                                                            | $            | 435,182 |        |      | $ | 435,209 |       
|                                   |                                                                                                            |              |         |        |      |  



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SUREWEST COMMUNICATIONS


CONSOLIDATED BALANCE SHEETS (CONTINUED)




|                                                                                                                     |                                                                                                                                                                 |              |         |         |      |   |         |         |  
|-------------------------------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------ | ------- | ------- | ---- | - | ------- | ------- | -
|                                                                                                                     |                                                                                                                                                                 | December 31, |        
|                                                                                                                     |                                                                                                                                                                 | 2004         |         |         | 2003 |  
|LIABILITIES AND SHAREHOLDERS EQUITY                                                                                 |                                                                                                                                                                 |              |         |         |      |  
|Current liabilities:                                                                                                 |                                                                                                                                                                 |              |         |         |      |   |         |        
|                                                                                                                     | Short-term borrowings                                                                                                                                           |              | $       | 10,000  |      |   | $       |        |  
|                                                                                                                     | Current portion of long-term debt                                                                                                                               |              |         | 3,779   |      |   |         | 3,779   |  
|                                                                                                                     | Current portion of capital lease obligations                                                                                                                    |              |         | 212     |      |   |         | 347     |  
|                                                                                                                     | Accounts payable                                                                                                                                                |              |         | 2,886   |      |   |         | 2,206   |  
|                                                                                                                     | Current portion of contractual shareable earnings obligations
    (less unamortized discount of $52 as of December 31, 2004)                                    |              |         | 3,040   |      |   |         |        |  
|                                                                                                                     | Estimated shareable earnings obligations                                                                                                                        |              |         | 396     |      |   |         | 13,389  |  
|                                                                                                                     | Advance billings and deferred revenues                                                                                                                          |              |         | 9,883   |      |   |         | 9,882   |  
|                                                                                                                     | Accrued income taxes                                                                                                                                            |              |         | 1,549   |      |   |         | 1,908   |  
|                                                                                                                     | Accrued pension benefits                                                                                                                                        |              |         | 3,216   |      |   |         |        |  
|                                                                                                                     | Accrued compensation                                                                                                                                            |              |         | 5,830   |      |   |         | 4,860   |  
|                                                                                                                     | Other accrued liabilities                                                                                                                                       |              |         | 22,038  |      |   |         | 14,727  |  
|                                                                                                                     |                                                                                                                                                                 |              |         |         |      |  
|Total current liabilities                                                                                            |                                                                                                                                                                 |              | 62,829  |         |      |   | 51,098  |        
|Long-term debt                                                                                                       |                                                                                                                                                                 |              | 89,091  |         |      |   | 92,870  |        
|Long-term capital lease obligations                                                                                  |                                                                                                                                                                 |              | 52      |         |      |   | 265     |        
|Long-term contractual shareable earnings obligations (less
    unamortized discount of $472 as of December 31, 2004) |                                                                                                                                                                 |              | 6,202   |         |      |   |        |        
|Deferred income taxes                                                                                                |                                                                                                                                                                 |              | 24,134  |         |      |   | 25,946  |        
|Other liabilities and deferred revenues                                                                              |                                                                                                                                                                 |              | 11,537  |         |      |   | 7,502   |        
|Commitments and contingencies                                                                                        |                                                                                                                                                                 |              |         |         |      |   |         |        
|Shareholders equity:                                                                                                |                                                                                                                                                                 |              |         |         |      |   |         |        
|                                                                                                                     | Common stock, without par value; 100,000 shares authorized,
    14,591 and 14,578 shares issued and outstanding at
    December 31, 2004 and 2003, respectively |              |         | 161,824 |      |   |         | 160,911 |  
|                                                                                                                     | Deferred stock-based compensation                                                                                                                               |              |         | (949    | )    |   |         | (1,419  | )
|                                                                                                                     | Accumulated other comprehensive loss                                                                                                                            |              |         | (2,126  | )    |   |         | (261    | )
|                                                                                                                     | Retained earnings                                                                                                                                               |              |         | 82,588  |      |   |         | 98,297  |  
|                                                                                                                     |                                                                                                                                                                 |              |         |         |      |  
|Total shareholders equity                                                                                           |                                                                                                                                                                 |              | 241,337 |         |      |   | 257,528 |        
|                                                                                                                     |                                                                                                                                                                 |              |         |         |      |  
|                                                                                                                     |                                                                                                                                                                 | $            | 435,182 |         |      | $ | 435,209 |        
|                                                                                                                     |                                                                                                                                                                 |              |         |         |      |  



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SUREWEST COMMUNICATIONS


CONSOLIDATED STATEMENTS OF OPERATIONS




|                                            |                                                                                |                            |                                   |         |      |         |        |        |   |         |        |        |   |         |        | 
|------------------------------------------- | ------------------------------------------------------------------------------ | -------------------------- | --------------------------------- | ------- | ---- | ------- | ------ | ------ | - | ------- | ------ | ------ | - | ------- | ------ | 
|                                            |                                                                                | Years Ended December 31,   |                                  
|                                            |                                                                                | 2004                       |                                   |         | 2003 |         |        | 2002   |  
|                                            |                                                                                |                            |                                   |         |      |         |        |        |  
|Operating revenues:                         |                                                                                |                            |                                   |         |      |         |        |        |   |         |        |       
|                                            | Local service                                                                  |                            | $                                 | 69,560  |      |         | $      | 63,363 |   |         | $      | 66,283 |  
|                                            | Network access service                                                         |                            |                                   | 46,161  |      |         |        | 51,286 |   |         |        | 58,426 |  
|                                            | Directory advertising                                                          |                            |                                   | 16,283  |      |         |        | 15,087 |   |         |        | 14,824 |  
|                                            | Long distance service                                                          |                            |                                   | 5,184   |      |         |        | 5,098  |   |         |        | 5,368  |  
|                                            | Wireless service                                                               |                            |                                   | 31,261  |      |         |        | 27,146 |   |         |        | 23,225 |  
|                                            | Internet service                                                               |                            |                                   | 16,679  |      |         |        | 15,984 |   |         |        | 7,578  |  
|                                            | Residential broadband service                                                  |                            |                                   | 17,077  |      |         |        | 9,370  |   |         |        | 2,946  |  
|                                            | Business broadband service                                                     |                            |                                   | 5,660   |      |         |        | 3,697  |   |         |        | 2,421  |  
|                                            | Other                                                                          |                            |                                   | 3,898   |      |         |        | 4,090  |   |         |        | 4,778  |  
|                                            |                                                                                |                            |                                   |         |      |         |        |        |  
|                                            |                                                                                |                            | Total operating revenues          |         |      | 211,763 |        |        |   | 195,121 |        |        |   | 185,849 |       
|Operating expenses:                         |                                                                                |                            |                                   |         |      |         |        |        |   |         |        |       
|                                            | Cost of services and products (exclusive of depreciation and
    amortization) |                            |                                   | 80,853  |      |         |        | 66,890 |   |         |        | 61,220 |  
|                                            | Customer operations and selling                                                |                            |                                   | 37,175  |      |         |        | 34,094 |   |         |        | 34,165 |  
|                                            | General and administrative                                                     |                            |                                   | 43,820  |      |         |        | 33,920 |   |         |        | 29,648 |  
|                                            | Depreciation and amortization                                                  |                            |                                   | 48,596  |      |         |        | 52,470 |   |         |        | 45,126 |  
|                                            |                                                                                |                            |                                   |         |      |         |        |        |  
|                                            |                                                                                |                            | Total operating expenses          |         |      | 210,444 |        |        |   | 187,374 |        |        |   | 170,159 |       
|Income from operations                      |                                                                                |                            | 1,319                             |         |      |         | 7,747  |        |   |         | 15,690 |       
|Other income (expense):                     |                                                                                |                            |                                   |         |      |         |        |        |   |         |        |       
|                                            | Interest income                                                                |                            |                                   | 201     |      |         |        | 306    |   |         |        | 739    |  
|                                            | Interest expense                                                               |                            |                                   | (4,505  | )    |         |        | (4,247 | ) |         |        | (1,876 | )
|                                            | Gain on sale of alarm monitoring assets                                        |                            |                                   |        |      |         |        |       |   |         |        | 4,435  |  
|                                            | Corporate treasury loss recovery (loss)                                        |                            |                                   | 1,803   |      |         |        | (1,828 | ) |         |        |       |  
|                                            | Other, net                                                                     |                            |                                   | (443    | )    |         |        | (311   | ) |         |        | (313   | )
|                                            |                                                                                |                            |                                   |         |      |         |        |        |  
|                                            |                                                                                |                            | Total other income (expense), net |         |      | (2,944  | )      |        |   | (6,080  | )      |        |   | 2,985   |       
|                                            |                                                                                |                            |                                   |         |      |         |        |        |  
|Income (loss) before income taxes           |                                                                                |                            | (1,625                            | )       |      |         | 1,667  |        |   |         | 18,675 |       
|Income taxes                                |                                                                                |                            | (497                              | )       |      |         | 1,022  |        |   |         | 7,426  |       
|                                            |                                                                                |                            |                                   |         |      |         |        |        |  
|Net income (loss)                           |                                                                                | $                          | (1,128                            | )       |      | $       | 645    |        |   | $       | 11,249 |       
|                                            |                                                                                |                            |                                   |         |      |         |        |        |  
|Basic and diluted earnings (loss) per share |                                                                                | $                          | (0.08                             | )       |      | $       | 0.04   |        |   | $       | 0.76   |       
|                                            |                                                                                |                            |                                   |         |      |         |        |        |  
|Dividends per share                         |                                                                                | $                          | 1.00                              |         |      | $       | 1.00   |        |   | $       | 1.00   |       
|                                            |                                                                                |                            |                                   |         |      |         |        |        |  
|Shares of common stock used to calculate    |                                                                                |                            |                                   |         |      |         |        |        |   |         |        |       
|                                            |                                                                                | Earnings (loss) per share: |                                   |         |      |         |        |        |   |         |        |        |   |        
|                                            |                                                                                |                            |                                   | Basic   |      |         | 14,531 |        |   |         | 14,522 |        |   |         | 14,728 | 
|                                            |                                                                                |                            |                                   |         |      |         |        |        |  
|                                            |                                                                                |                            |                                   | Diluted |      |         | 14,531 |        |   |         | 14,539 |        |   |         | 14,795 | 
|                                            |                                                                                |                            |                                   |         |      |         |        |        |  



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SUREWEST COMMUNICATIONS


CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY




|                             |                                                                                            |              |        |      |          |   |             |              |   |               |        |        |          |          |        |        |       |   |         |         |   |   |         |         |  
|---------------------------- | ------------------------------------------------------------------------------------------ | ------------ | ------ | ---- | -------- | - | ----------- | ------------ | - | ------------- | ------ | ------ | -------- | -------- | ------ | ------ | ----- | - | ------- | ------- | - | - | ------- | ------- | -
|                             |                                                                                            | Common Stock |        |      |          |   |             |              |   |               |       
|                             |                                                                                            |              |        |      | Deferred |   |             | Other        |   |               |        |        |         
|                             |                                                                                            | Number       |        |      |          |   | Stock-Based |              |   | Comprehensive |        |        | Retained |          |        |       
|                             |                                                                                            | of Shares    |        |      | Amount   |   |             | Compensation |   |               | Loss   |        |          | Earnings |        |        | Total |  
|                             |                                                                                            |              |        |      |          |   |             |              |   |               |        |        |          |          |        |        |       |  
|Balance at December 31, 2001 |                                                                                            |              | 15,110 |      |          | $ | 172,083     |              |   | $             | (303   | )      |          | $        |       |        |       | $ | 130,013 |         |   | $ | 301,793 |        
|                             | Issuance of common stock upon exercise of options                                          |              |        | 23   |          |   |             | 896          |   |               |        |       |          |          |        |       |       |   |         |        |   |   |         | 896     |  
|                             | Issuance of restricted common stock                                                        |              |        | 2    |          |   |             | 46           |   |               |        |       |          |          |        |       |       |   |         |        |   |   |         | 46      |  
|                             | Repurchase of common stock                                                                 |              |        | (606 | )        |   |             | (15,149      | ) |               |        |       |          |          |        |       |       |   |         | (14,318 | ) |   |         | (29,467 | )
|                             | Amortization of deferred stock-based compensation                                          |              |        |     |          |   |             |             |   |               |        | 187    |          |          |        |       |       |   |         |        |   |   |         | 187     |  
|                             | Tax benefits from stock plans                                                              |              |        |     |          |   |             | 691          |   |               |        |       |          |          |        |       |       |   |         |        |   |   |         | 691     |  
|                             | Minimum pension and post-retirement benefit obligation
    adjustment, net of income taxes |              |        |     |          |   |             |             |   |               |        |       |          |          |        | (1,637 | )     |   |         |        |   |   |         | (1,637  | )
|                             | Cash dividends                                                                             |              |        |     |          |   |             |             |   |               |        |       |          |          |        |       |       |   |         | (14,753 | ) |   |         | (14,753 | )
|                             | Net income                                                                                 |              |        |     |          |   |             |             |   |               |        |       |          |          |        |       |       |   |         | 11,249  |   |   |         | 11,249  |  
|                             |                                                                                            |              |        |      |          |   |             |              |   |               |        |        |          |          |        |        |       |  
|Balance at December 31, 2002 |                                                                                            |              | 14,529 |      |          |   | 158,567     |              |   |               | (116   | )      |          |          | (1,637 | )      |       |   | 112,191 |         |   |   | 269,005 |        
|                             | Issuance of common stock upon exercise of options                                          |              |        | 5    |          |   |             | 164          |   |               |        |       |          |          |        |       |       |   |         |        |   |   |         | 164     |  
|                             | Issuance of stock options to employees                                                     |              |        |     |          |   |             | 47           |   |               |        |       |          |          |        |       |       |   |         |        |   |   |         | 47      |  
|                             | Issuance of restricted common stock                                                        |              |        | 44   |          |   |             | 1,594        |   |               |        | (1,594 | )        |          |        |       |       |   |         |        |   |   |         |        |  
|                             | Amortization of deferred stock-based compensation                                          |              |        |     |          |   |             |             |   |               |        | 291    |          |          |        |       |       |   |         |        |   |   |         | 291     |  
|                             | Tax benefits from stock plans                                                              |              |        |     |          |   |             | 539          |   |               |        |       |          |          |        |       |       |   |         |        |   |   |         | 539     |  
|                             | Minimum pension and post-retirement benefit obligation
    adjustment, net of income taxes |              |        |     |          |   |             |             |   |               |        |       |          |          |        | 1,376  |       |   |         |        |   |   |         | 1,376   |  
|                             | Cash dividends                                                                             |              |        |     |          |   |             |             |   |               |        |       |          |          |        |       |       |   |         | (14,539 | ) |   |         | (14,539 | )
|                             | Net income                                                                                 |              |        |     |          |   |             |             |   |               |        |       |          |          |        |       |       |   |         | 645     |   |   |         | 645     |  
|                             |                                                                                            |              |        |      |          |   |             |              |   |               |        |        |          |          |        |        |       |  
|Balance at December 31, 2003 |                                                                                            |              | 14,578 |      |          |   | 160,911     |              |   |               | (1,419 | )      |          |          | (261   | )      |       |   | 98,297  |         |   |   | 257,528 |        
|                             | Issuance of common stock upon exercise of options                                          |              |        |     |          |   |             | 10           |   |               |        |       |          |          |        |       |       |   |         |        |   |   |         | 10      |  
|                             | Recognition of stock options issued to employees                                           |              |        |     |          |   |             | 29           |   |               |        |       |          |          |        |       |       |   |         |        |   |   |         | 29      |  
|                             | Issuance of restricted common stock, net of cancellations                                  |              |        | 13   |          |   |             | 315          |   |               |        | (319   | )        |          |        |       |       |   |         |        |   |   |         | (4      | )
|                             | Issuance of restricted common stock units                                                  |              |        |     |          |   |             | 150          |   |               |        | (150   | )        |          |        |       |       |   |         |        |   |   |         |        |  
|                             | Amortization of deferred stock-based compensation                                          |              |        |     |          |   |             |             |   |               |        | 939    |          |          |        |       |       |   |         |        |   |   |         | 939     |  
|                             | Tax benefits from stock plans                                                              |              |        |     |          |   |             | 409          |   |               |        |       |          |          |        |       |       |   |         |        |   |   |         | 409     |  
|                             | Minimum pension and post-retirement benefit obligation
    adjustment, net of income taxes |              |        |     |          |   |             |             |   |               |        |       |          |          |        | (1,865 | )     |   |         |        |   |   |         | (1,865  | )
|                             | Cash dividends                                                                             |              |        |     |          |   |             |             |   |               |        |       |          |          |        |       |       |   |         | (14,581 | ) |   |         | (14,581 | )
|                             | Net loss                                                                                   |              |        |     |          |   |             |             |   |               |        |       |          |          |        |       |       |   |         | (1,128  | ) |   |         | (1,128  | )
|                             |                                                                                            |              |        |      |          |   |             |              |   |               |        |        |          |          |        |        |       |  
|Balance at December 31, 2004 |                                                                                            |              | 14,591 |      |          | $ | 161,824     |              |   | $             | (949   | )      |          | $        | (2,126 | )      |       | $ | 82,588  |         |   | $ | 241,337 |        
|                             |                                                                                            |              |        |      |          |   |             |              |   |               |        |        |          |          |        |        |       |  



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SUREWEST COMMUNICATIONS


CONSOLIDATED STATEMENTS OF CASH FLOWS






|                                          |                                                                                              |                                         |                                                             |         |        |        |         |         |        |        |         |         |        |         |  
|----------------------------------------- | -------------------------------------------------------------------------------------------- | --------------------------------------- | ----------------------------------------------------------- | ------- | ------ | ------ | ------- | ------- | ------ | ------ | ------- | ------- | ------ | ------- | -
|                                          |                                                                                              | Years Ended December 31,                |                                                            
|                                          |                                                                                              | 2004                                    |                                                             |         | 2003   |        |         | 2002    |       
|                                          |                                                                                              |                                         |                                                             |         |        |        |         |         |       
|Cash flows from operating activities:     |                                                                                              |                                         |                                                             |         |        |        |         |         |        |        |         |        
|                                          | Net income (loss)                                                                            |                                         | $                                                           | (1,128  | )      |        | $       | 645     |        |        | $       | 11,249  |       
|                                          | Adjustments to reconcile net income (loss) to net cash provided
    by operating activities: |                                         |                                                             |         |        |        |         |         |        |        |         |         |       
|                                          |                                                                                              | Depreciation and amortization           |                                                             |         | 48,596 |        |         |         | 52,470 |        |         |         | 45,126 |        
|                                          |                                                                                              | Provision for deferred income taxes     |                                                             |         | (372   | )      |         |         | (1,309 | )      |         |         | 17,128 |        
|                                          |                                                                                              | Gain on sale of alarm monitoring assets |                                                             |         |       |        |         |         |       |        |         |         | (4,435 | )      
|                                          |                                                                                              | Provision for doubtful accounts         |                                                             |         | 3,441  |        |         |         | 3,381  |        |         |         | 3,811  |        
|                                          |                                                                                              | Stock-based compensation                |                                                             |         | 968    |        |         |         | 338    |        |         |         | 202    |        
|                                          |                                                                                              | Other, net                              |                                                             |         |       |        |         |         | 307    |        |         |         | (4     | )      
|                                          |                                                                                              | Net changes in:                         |                                                             |         |        |        |         |         |        |        |         |         |        |        
|                                          |                                                                                              |                                         | Receivables                                                 |         |        | (4,750 | )       |         |        | (2,480 | )       |         |        | (3,624  | )
|                                          |                                                                                              |                                         | Refundable and accrued income taxes, net                    |         |        | (359   | )       |         |        | 8,852  |         |         |        | (3,558  | )
|                                          |                                                                                              |                                         | Inventories, prepaid expenses and other current assets      |         |        | (379   | )       |         |        | (1,926 | )       |         |        | (155    | )
|                                          |                                                                                              |                                         | Accounts payable                                            |         |        | 680    |         |         |        | 1,601  |         |         |        | (2,777  | )
|                                          |                                                                                              |                                         | Accrued liabilities, other liabilities and deferred credits |         |        | 9,373  |         |         |        | 11,229 |         |         |        | (16,161 | )
|                                          |                                                                                              |                                         |                                                             |         |        |        |         |         |       
|Net cash provided by operating activities |                                                                                              |                                         | 56,070                                                      |         |        |        | 73,108  |         |        |        | 46,802  |        
|Cash flows from investing activities:     |                                                                                              |                                         |                                                             |         |        |        |         |         |        |        |         |        
|                                          | Purchase of substantially all of the assets from Western
    Integrated Networks, LLC        |                                         |                                                             |        |        |        |         | (62     | )      |        |         | (12,529 | )     
|                                          | Proceeds from the sale of alarm monitoring assets                                            |                                         |                                                             |        |        |        |         |        |        |        |         | 4,495   |       
|                                          | Capital expenditures for property, plant and equipment                                       |                                         |                                                             | (70,833 | )      |        |         | (76,105 | )      |        |         | (44,352 | )     
|                                          | Purchases of held-to-maturity investments                                                    |                                         |                                                             | (4,275  | )      |        |         | (25,351 | )      |        |         |        |       
|                                          | Maturities of held-to-maturity investments                                                   |                                         |                                                             | 6,974   |        |        |         | 20,652  |        |        |         | 1,723   |       
|                                          | Sale of held-to-maturity investment prior to maturity                                        |                                         |                                                             |        |        |        |         | 2,000   |        |        |         |        |       
|                                          | Other, net                                                                                   |                                         |                                                             | (123    | )      |        |         | 33      |        |        |         | 192     |       
|                                          |                                                                                              |                                         |                                                             |         |        |        |         |         |       
|Net cash used in investing activities     |                                                                                              |                                         | (68,257                                                     | )       |        |        | (78,833 | )       |        |        | (50,471 | )      



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SUREWEST COMMUNICATIONS


CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)






|                                                    |                                                                        |                          |         |         |      |   |        |         |   |   |         |         |  
|--------------------------------------------------- | ---------------------------------------------------------------------- | ------------------------ | ------- | ------- | ---- | - | ------ | ------- | - | - | ------- | ------- | -
|                                                    |                                                                        | Years Ended December 31, |        
|                                                    |                                                                        | 2004                     |         |         | 2003 |   |        | 2002    |  
|                                                    |                                                                        |                          |         |         |      |   |        |         |  
|Cash flows from financing activities:               |                                                                        |                          |         |         |      |   |        |         |   |   |         |        
|                                                    | Increase (decrease) in short-term borrowings                           |                          | $       | 10,000  |      |   | $      | (15,000 | ) |   | $       | 15,000  |  
|                                                    | Principal payments of long-term debt and capital lease
    obligations |                          |         | (4,127  | )    |   |        | (5,921  | ) |   |         | (2,142  | )
|                                                    | Proceeds from issuance of long-term debt                               |                          |         |        |      |   |        | 60,000  |   |   |         |        |  
|                                                    | Payment of debt issuance costs                                         |                          |         |        |      |   |        | (356    | ) |   |         |        |  
|                                                    | Dividends paid                                                         |                          |         | (14,581 | )    |   |        | (14,539 | ) |   |         | (14,753 | )
|                                                    | Proceeds from exercise of stock options                                |                          |         | 10      |      |   |        | 164     |   |   |         | 896     |  
|                                                    | Repurchase of common stock                                             |                          |         |        |      |   |        |        |   |   |         | (29,467 | )
|                                                    | Other, net                                                             |                          |         | (4      | )    |   |        |        |   |   |         |        |  
|                                                    |                                                                        |                          |         |         |      |   |        |         |  
|Net cash provided by (used in) financing activities |                                                                        |                          | (8,702  | )       |      |   | 24,348 |         |   |   | (30,466 | )      
|                                                    |                                                                        |                          |         |         |      |   |        |         |  
|Increase (decrease) in cash and cash equivalents    |                                                                        |                          | (20,889 | )       |      |   | 18,623 |         |   |   | (34,135 | )      
|Cash and cash equivalents at beginning of year      |                                                                        |                          | 39,008  |         |      |   | 20,385 |         |   |   | 54,520  |        
|                                                    |                                                                        |                          |         |         |      |   |        |         |  
|Cash and cash equivalents at end of year            |                                                                        | $                        | 18,119  |         |      | $ | 39,008 |         |   | $ | 20,385  |        
|                                                    |                                                                        |                          |         |         |      |   |        |         |  



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SUREWEST COMMUNICATIONS


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002




1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES


Business, Basis of Accounting and Liquidity








Principles of Consolidation




Adjustments and Reclassifications




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SUREWEST COMMUNICATIONS


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002




|   |                                                       
|-- | ------------------------------------------------------
|1. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)



Regulation and Contractual and Estimated Shareable Earnings
Obligations














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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002




|   |                                                       
|-- | ------------------------------------------------------
|1. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)











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SUREWEST COMMUNICATIONS


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002




|   |                                                       
|-- | ------------------------------------------------------
|1. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)















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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002




|   |                                                       
|-- | ------------------------------------------------------
|1. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Cash Equivalents and Short-term Investments








|                                           |  |      |    |  |      |   |        | 
|------------------------------------------ |  | ---- | -- |  | ---- | - | ------ | 
|                                           |  | 2004 |    |  | 2003 |  
|                                           |  |      |    |  |      |  
|Money market mutual funds                  |  | $    | 49 |  |      | $ | 15,726 | 
|United States government agency securities |  |      |   |  |      |   | 999    | 
|Auction rate securities                    |  |      |   |  |      |   | 1,700  | 
|                                           |  |      |    |  |      |  
|                                           |  | $    | 49 |  |      | $ | 18,425 | 
|                                           |  |      |    |  |      |  

Fair Values of Financial Instruments








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SUREWEST COMMUNICATIONS


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002




|   |                                                       
|-- | ------------------------------------------------------
|1. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)



Allowance for Doubtful Accounts




Inventories




Property, Plant and Equipment




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SUREWEST COMMUNICATIONS


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002




|   |                                                       
|-- | ------------------------------------------------------
|1. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)



|                                  |  |      |         |  |      |           |         |              |  |  |              | 
|--------------------------------- |  | ---- | ------- |  | ---- | --------- | ------- | ------------ |  |  | ------------ | 
|                                  |  |      |         |  |      | Estimated |        
|                                  |  | 2004 |         |  | 2003 |           |         | Useful Lives | 
|                                  |  |      |         |  |      |           |         |              | 
|Land                              |  | $    | 4,198   |  |      | $         | 4,198   |              |  |  |              | 
|Buildings                         |  |      | 81,922  |  |      |           | 79,286  |              |  |  | 35 years     | 
|Central office equipment          |  |      | 181,412 |  |      |           | 156,374 |              |  |  | 3 - 21 years | 
|Outside plant equipment           |  |      | 319,145 |  |      |           | 281,903 |              |  |  | 5 - 40 years | 
|Internal-use software             |  |      | 50,787  |  |      |           | 46,137  |              |  |  | 5 years      | 
|Other                             |  |      | 63,977  |  |      |           | 63,735  |              |  |  | 3 - 21 years | 
|                                  |  |      |         |  |      |           |         |              | 
|Total plant in service            |  |      | 701,441 |  |      |           | 631,633 |              |  |  |              | 
|Less accumulated depreciation     |  |      | 350,105 |  |      |           | 303,773 |              |  |  |              | 
|                                  |  |      |         |  |      |           |         |              | 
|Plant in service, net             |  |      | 351,336 |  |      |           | 327,860 |              |  |  |              | 
|Plant under construction          |  |      | 14,277  |  |      |           | 15,107  |              |  |  |              | 
|                                  |  |      |         |  |      |           |         |              | 
|Property plant and equipment, net |  | $    | 365,613 |  |      | $         | 342,967 |              |  |  |              | 
|                                  |  |      |         |  |      |           |         |              | 









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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002




|   |                                                       
|-- | ------------------------------------------------------
|1. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Asset Retirement Obligations


Accounting for Asset
Retirement Obligations


Intangible Assets


Goodwill and
Other Intangible Assets






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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002




|   |                                                       
|-- | ------------------------------------------------------
|1. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)





Nonmonetary Transactions






Stock-based Compensation


Accounting for Stock Issued to Employees Accounting for Stock-Based Compensation Accounting for
Stock-Based Compensation  Transition and
Disclosure


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002




|   |                                                       
|-- | ------------------------------------------------------
|1. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)



|                        |  |      |         |  |      |  |         | 
|----------------------- |  | ---- | ------- |  | ---- |  | ------- | 
|                        |  | 2003 |         |  | 2002 | 
|                        |  |      |         |  |      | 
|Risk-free Interest Rate |  |      | 1.79%   |  |      |  | 2.54%   | 
|Expected Dividend Yield |  |      | 2.50%   |  |      |  | 2.13%   | 
|Expected Volatility     |  |      | 42.48%  |  |      |  | 39.95%  | 
|Expected Lives          |  |      | 4 years |  |      |  | 4 years | 





|                                                                                                                                            |                       |                          |        |       |      |   |      |      |  |   |        |      | 
|------------------------------------------------------------------------------------------------------------------------------------------- | --------------------- | ------------------------ | ------ | ----- | ---- | - | ---- | ---- |  | - | ------ | ---- | 
|                                                                                                                                            |                       | Years Ended December 31, |       
|                                                                                                                                            |                       |                          |       
|                                                                                                                                            |                       | 2004                     |        |       | 2003 |   |      | 2002 | 
|                                                                                                                                            |                       |                          |        |       |      |   |      |      | 
|Net income (loss), as reported                                                                                                              |                       | $                        | (1,128 | )     |      | $ | 645  |      |  | $ | 11,249 |     
|Add: Stock-based employee compensation expense included in
    reported net income (loss), net of related tax effects                       |                       |                          | 672    |       |      |   | 131  |      |  |   | 122    |     
|Deduct: Stock-based employee compensation expense determined
    using the fair value method for all awards, net of related tax
    effects |                       |                          | (912   | )     |      |   | (809 | )    |  |   | (1,677 | )   
|                                                                                                                                            |                       |                          |        |       |      |   |      |      | 
|Pro forma net income (loss)                                                                                                                 |                       | $                        | (1,368 | )     |      | $ | (33  | )    |  | $ | 9,694  |     
|                                                                                                                                            |                       |                          |        |       |      |   |      |      | 
|Earnings (loss) per share:                                                                                                                  |                       |                          |        |       |      |   |      |      |  |   |        |     
|                                                                                                                                            | Basic  as reported   |                          | $      | (0.08 | )    |   | $    | 0.04 |  |   | $      | 0.76 | 
|                                                                                                                                            | Basic  pro forma     |                          | $      | (0.09 | )    |   | $    | 0.00 |  |   | $      | 0.66 | 
|                                                                                                                                           
|                                                                                                                                            | Diluted  as reported |                          | $      | (0.08 | )    |   | $    | 0.04 |  |   | $      | 0.76 | 
|                                                                                                                                            | Diluted  pro forma   |                          | $      | (0.09 | )    |   | $    | 0.00 |  |   | $      | 0.66 | 



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002




|   |                                                       
|-- | ------------------------------------------------------
|1. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Advertising Costs






Income Taxes




Per Share Amounts






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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002




|   |                                                       
|-- | ------------------------------------------------------
|1. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)



|         |                                                                                                                                                             |                          |  |        |      |  |  |        |  |  |  |        | 
|-------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------ |  | ------ | ---- |  |  | ------ |  |  |  | ------ | 
|         |                                                                                                                                                             | Years Ended December 31, | 
|         |                                                                                                                                                             | 2004                     |  |        | 2003 |  |  | 2002   | 
|         |                                                                                                                                                             |                          |  |        |      |  |  |        | 
|Basic:   |                                                                                                                                                             |                          |  |        |      |  |  |        |  |  |  |       
|         | Weighted average number of shares of common stock and restricted
    common stock units outstanding                                                         |                          |  | 14,571 |      |  |  | 14,539 |  |  |  | 14,737 | 
|         | Less weighted average number of unvested shares of restricted
    common stock and unvested restricted common stock units
    outstanding                   |                          |  | 40     |      |  |  | 17     |  |  |  | 9      | 
|         |                                                                                                                                                             |                          |  |        |      |  |  |        | 
|         | Weighted average number of common shares and restricted common
    stock units used in computing basic per share amounts                                    |                          |  | 14,531 |      |  |  | 14,522 |  |  |  | 14,728 | 
|         |                                                                                                                                                             |                          |  |        |      |  |  |        | 
|Diluted: |                                                                                                                                                             |                          |  |        |      |  |  |        |  |  |  |       
|         | Weighted average number of shares of common stock and restricted
    common stock units outstanding                                                         |                          |  | 14,571 |      |  |  | 14,539 |  |  |  | 14,737 | 
|         | Less weighted average number of unvested shares of restricted
    common stock and unvested restricted common stock units
    outstanding, if anti-dulitive |                          |  | 40     |      |  |  |       |  |  |  |       | 
|         | Plus weighted average number of shares of common stock from the
    assumed exercise of dilutive stock options                                              |                          |  |       |      |  |  |       |  |  |  | 58     | 
|         |                                                                                                                                                             |                          |  |        |      |  |  |        | 
|         | Weighted average number of common shares and restricted common
    stock units used in computing diluted per share amounts                                  |                          |  | 14,531 |      |  |  | 14,539 |  |  |  | 14,795 | 
|         |                                                                                                                                                             |                          |  |        |      |  |  |        | 

Statements of Cash Flows Information




|                                                                                           |  |      |       |  |      |   |       |      |  |   |       | 
|------------------------------------------------------------------------------------------ |  | ---- | ----- |  | ---- | - | ----- | ---- |  | - | ----- | 
|                                                                                           |  | 2004 |       |  | 2003 |   |       | 2002 | 
|                                                                                           |  |      |       |  |      |   |       |      | 
|Interest, net of amounts capitalized ($827 in 2004, $1,095 in
    2003 and $1,074 in 2002) |  | $    | 4,453 |  |      | $ | 3,758 |      |  | $ | 2,485 | 
|Income taxes                                                                               |  | $    | 404   |  |      | $ |      |      |  | $ | 2,812 | 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002




|   |                                                       
|-- | ------------------------------------------------------
|1. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Other Comprehensive Income (loss)




|                                                                                                                                              |  |                          |        |   |      |   |       |      |  |   |        |  
|--------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------ | ------ | - | ---- | - | ----- | ---- |  | - | ------ | -
|                                                                                                                                              |  | Years Ended December 31, |       
|                                                                                                                                              |  | 2004                     |        |   | 2003 |   |       | 2002 | 
|                                                                                                                                              |  |                          |        |   |      |   |       |      | 
|Net income (loss)                                                                                                                             |  | $                        | (1,128 | ) |      | $ | 645   |      |  | $ | 11,249 |  
|Minimum pension and post-retirement benefit liability
    adjustment, net of income taxes of $822, $934 and $1,138 in
    2004, 2003 and 2002 |  |                          | (1,865 | ) |      |   | 1,376 |      |  |   | (1,637 | )
|                                                                                                                                              |  |                          |        |   |      |   |       |      | 
|Other comprehensive income (loss)                                                                                                             |  | $                        | (2,993 | ) |      | $ | 2,021 |      |  | $ | 9,612  |  
|                                                                                                                                              |  |                          |        |   |      |   |       |      | 



Recent Accounting Pronouncements


Share-Based Payment Statement
of Cash Flows.








| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1. | A modified prospective method in which compensation
    cost is recognized beginning with the effective date
    (a) based on the requirements of SFAS No. 123(R)
    for all share-based payments granted after the effective date
    and (b) based on the requirements of SFAS No. 123
    for all awards granted to employees prior to the effective date
    of SFAS No. 123(R) that remain unvested on the
    effective date.
|
| | 2. | A modified retrospective method, which includes the
    requirements of the modified prospective method, described
    above, but also permits entities to restate their financial
    statements based on the amounts previously recognized under
    SFAS No. 123 for purposes of pro forma disclosures
    either for (a) all prior periods presented or
    (b) prior interim periods of the year of adoption.                  



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002




|   |                                                       
|-- | ------------------------------------------------------
|1. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Accounting for Certain Financial Instruments with
Characteristics of Both Liabilities and Equity.


Consolidation of Variable
Interest Entities Consolidated
Financial Statements.


Accounting for Costs Associated with an Exit or Disposal
Activity. Liability Recognition
for Certain Employee Termination Benefits and Other Costs to
Exit an Activity (Including Certain Costs Incurred in a
Restructuring)


Accounting for Stock-Based
Compensation  Transition and Disclosure. Accounting for Stock-Based Compensation


Accounting for Asset Retirement Obligations.


Accounting for Revenue
Arrangements with Multiple Deliverables.


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002




|   |                                                       
|-- | ------------------------------------------------------
|1. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)



Guarantors Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of
Others.




|   |                    
|-- | -------------------
|2. | REVENUE RECOGNITION







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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002




|   |                                
|-- | -------------------------------
|2. | REVENUE RECOGNITION (CONTINUED)

Revenue
Recognition in Financial Statements.




|   |                                 
|-- | --------------------------------
|3. | CORPORATE TREASURY INVESTIGATION





|   |               
|-- | --------------
|4. | ASSET PURCHASE





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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002




|   |                           
|-- | --------------------------
|4. | ASSET PURCHASE (CONTINUED)



|                                                        |                           |   |        |        | 
|------------------------------------------------------- | ------------------------- | - | ------ | ------ | 
|Accounts receivable, net                                |                           | $ | 615    |       
|Equipment held for sale                                 |                           |   | 2,573  |       
|Other current assets                                    |                           |   | 931    |       
|Property, plant and equipment                           |                           |   | 12,327 |       
|Intangible asset relating to favorable operating leases |                           |   | 893    |       
|                                                        |                           |   |       
|                                                        | Total assets acquired     |   |        | 17,339 | 
|Current liabilities assumed under executory contracts   |                           |   | 3,483  |       
|Liabilities assumed under capital lease obligations     |                           |   | 1,064  |       
|Other liabilities                                       |                           |   | 170    |       
|                                                        |                           |   |       
|                                                        | Total liabilities assumed |   |        | 4,717  | 
|                                                        |                           |   |       
|                                                        | Net assets acquired       |   | $      | 12,622 | 
|                                                        |                           |   |       











|   |                                  
|-- | ---------------------------------
|5. | SALE OF ALARM MONITORING DIVISION



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002




|   |                                              
|-- | ---------------------------------------------
|5. | SALE OF ALARM MONITORING DIVISION (CONTINUED)





|   |                    
|-- | -------------------
|6. | CREDIT ARRANGEMENTS



|                                                                                                                                                                                                                                                  |  |      |        |  |      |   |        | 
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | ------ |  | ---- | - | ------ | 
|                                                                                                                                                                                                                                                  |  | 2004 |        |  | 2003 |  
|                                                                                                                                                                                                                                                  |  |      |        |  |      |  
|Unsecured Series A Senior Notes, with interest payable
    semiannually at a fixed rate of 6.3%; principal payments are due
    in equal annual installments of approximately $3,636, commencing
    in December 2003 and ending in December 2013 |  | $    | 32,727 |  |      | $ | 36,363 | 
|Unsecured Series B Senior Notes, with interest payable
    semiannually at a fixed rate of 4.74%; principal payments are
    due in equal annual installments of approximately $12,000,
    commencing in March 2009 and ending in March 2013     |  |      | 60,000 |  |      |   | 60,000 | 
|Note payable, with interest payable quarterly at a fixed rate of
    8.00%; principal payments are due in equal quarterly
    installments of approximately $36, through November 2005                                                            |  |      | 143    |  |      |   | 286    | 
|                                                                                                                                                                                                                                                  |  |      |        |  |      |  
|Total long-term debt                                                                                                                                                                                                                              |  |      | 92,870 |  |      |   | 96,649 | 
|Less current portion                                                                                                                                                                                                                              |  |      | 3,779  |  |      |   | 3,779  | 
|                                                                                                                                                                                                                                                  |  |      |        |  |      |  
|Total long-term debt, net of current portion                                                                                                                                                                                                      |  | $    | 89,091 |  |      | $ | 92,870 | 
|                                                                                                                                                                                                                                                  |  |      |        |  |      |  







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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002




|   |             
|-- | ------------
|7. | INCOME TAXES



|                                   |         |      |      |      |      |   |        |        |   |   |        |        |  
|---------------------------------- | ------- | ---- | ---- | ---- | ---- | - | ------ | ------ | - | - | ------ | ------ | -
|                                   |         | 2004 |      |      | 2003 |   |        | 2002   |  
|                                   |         |      |      |      |      |   |        |        |  
|Current expense (benefit):         |         |      |      |      |      |   |        |        |   |   |        |       
|                                   | Federal |      | $    | (71  | )    |   | $      | 782    |   |   | $      | (9,095 | )
|                                   | State   |      |      | (54  | )    |   |        | 1,549  |   |   |        | (607   | )
|                                   |         |      |      |      |      |   |        |        |  
|Total current expense (benefit)    |         |      | (125 | )    |      |   | 2,331  |        |   |   | (9,702 | )     
|                                  
|Deferred expense (benefit):        |         |      |      |      |      |   |        |        |   |   |        |       
|                                   | Federal |      |      | (299 | )    |   |        | 75     |   |   |        | 15,010 |  
|                                   | State   |      |      | (73  | )    |   |        | (1,384 | ) |   |        | 2,118  |  
|                                   |         |      |      |      |      |   |        |        |  
|Total deferred expense (benefit)   |         |      | (372 | )    |      |   | (1,309 | )      |   |   | 17,128 |       
|                                   |         |      |      |      |      |   |        |        |  
|Total income tax expense (benefit) |         | $    | (497 | )    |      | $ | 1,022  |        |   | $ | 7,426  |       
|                                   |         |      |      |      |      |   |        |        |  



| |                                                                                                                                                                  
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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:

|                                     |                                     |      |      |     |      |   |       |      |  |   |       |     |  
|------------------------------------ | ----------------------------------- | ---- | ---- | --- | ---- | - | ----- | ---- |  | - | ----- | --- | -
|                                     |                                     | 2004 |      |     | 2003 |   |       | 2002 | 
|                                     |                                     |      |      |     |      |   |       |      | 
|Computed at statutory rates          |                                     | $    | (569 | )   |      | $ | 583   |      |  | $ | 6,536 |    
|Increase (decrease):                 |                                     |      |      |     |      |   |       |      |  |   |       |    
|                                     | State taxes, net of federal benefit |      |      | (82 | )    |   |       | 108  |  |   |       | 982 |  
|                                     | Other, net                          |      |      | 154 |      |   |       | 331  |  |   |       | (92 | )
|                                     |                                     |      |      |     |      |   |       |      | 
|Income tax expense (benefit)         |                                     | $    | (497 | )   |      | $ | 1,022 |      |  | $ | 7,426 |    
|                                     |                                     |      |      |     |      |   |       |      | 
|Effective federal and state tax rate |                                     |      | 30.6 | %   |      |   | 61.3  | %    |  |   | 39.8  | %  
|                                     |                                     |      |      |     |      |   |       |      | 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002




|   |                         
|-- | ------------------------
|7. | INCOME TAXES (CONTINUED)



|                                                                                                 |  |                       |        |  |             |   |        |        |  |   |             |  |  |   |        | 
|------------------------------------------------------------------------------------------------ |  | --------------------- | ------ |  | ----------- | - | ------ | ------ |  | - | ----------- |  |  | - | ------ | 
|                                                                                                 |  | Deferred Income Taxes |       
|                                                                                                 |  |                       |       
|                                                                                                 |  | 2004                  |        |  | 2003        |  
|                                                                                                 |  |                       |        |  |             |  
|                                                                                                 |  | Assets                |        |  | Liabilities |   |        | Assets |  |   | Liabilities | 
|                                                                                                 |  |                       |        |  |             |   |        |        |  |   |             | 
|Property, plant and equipment-primarily due to timing of
    recognition of depreciation expense |  | $                     |       |  |             | $ | 57,004 |        |  | $ |            |  |  | $ | 44,751 | 
|                                                                                                
|Differences in the timing of recognition of revenues                                             |  |                       | 8,468  |  |             |   |       |        |  |   | 9,838       |  |  |   |       | 
|                                                                                                
|State franchise taxes                                                                            |  |                       | 3      |  |             |   |       |        |  |   | 209         |  |  |   |       | 
|                                                                                                
|Net operating losses                                                                             |  |                       | 19,221 |  |             |   |       |        |  |   | 6,814       |  |  |   |       | 
|                                                                                                
|Other, net                                                                                       |  |                       | 6,720  |  |             |   | 1,542  |        |  |   | 3,712       |  |  |   | 1,559  | 
|                                                                                                 |  |                       |        |  |             |   |        |        |  |   |             | 
|                                                                                                
|Total                                                                                            |  |                       | 34,412 |  |             |   | 58,546 |        |  |   | 20,573      |  |  |   | 46,310 | 
|                                                                                                
|Less current portion                                                                             |  |                       |       |  |             |   |       |        |  |   | 209         |  |  |   |       | 
|                                                                                                 |  |                       |        |  |             |   |        |        |  |   |             | 
|                                                                                                
|Total deferred income taxes                                                                      |  | $                     | 34,412 |  |             | $ | 58,546 |        |  | $ | 20,364      |  |  | $ | 46,310 | 
|                                                                                                 |  |                       |        |  |             |   |        |        |  |   |             | 
|                                                                                                
|Net long-term deferred income tax liability                                                      |  |                       |        |  |             | $ | 24,134 |        |  |   |             |  |  | $ | 25,946 | 
|                                                                                                 |  |                       |        |  |             |   |        |        |  |   |             | 





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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002




|   |                                           
|-- | ------------------------------------------
|8. | PENSION AND OTHER POST-RETIREMENT BENEFITS













|                                        |                                  |                     |         |        |                |   |         |        |   |   |       |       |   |   |       |      |  
|--------------------------------------- | -------------------------------- | ------------------- | ------- | ------ | -------------- | - | ------- | ------ | - | - | ----- | ----- | - | - | ----- | ---- | -
|                                        |                                  | Pension Plan & SERP |         |        | Other Benefits |  
|                                        |                                  |                     |         |        |                |  
|                                        |                                  | 2004                |         |        | 2003           |   |         | 2004   |   |   | 2003  |      
|                                        |                                  |                     |         |        |                |   |         |        |   |   |       |      
|Change in benefit obligation:           |                                  |                     |         |        |                |   |         |        |   |   |       |       |   |   |       |     
|Benefit obligation at beginning of year |                                  | $                   | 110,353 |        |                | $ | 98,853  |        |   | $ | 5,036 |       |   | $ | 4,554 |     
|                                        | Service cost                     |                     |         | 5,360  |                |   |         | 4,557  |   |   |       | 469   |   |   |       | 353  |  
|                                        | Interest cost                    |                     |         | 7,095  |                |   |         | 6,841  |   |   |       | 351   |   |   |       | 326  |  
|                                        | Plan participants contributions |                     |         |       |                |   |         |       |   |   |       | 240   |   |   |       | 228  |  
|                                        | Plan amendments                  |                     |         |       |                |   |         |       |   |   |       |      |   |   |       | 175  |  
|                                        | Actuarial losses (gain)          |                     |         | 8,022  |                |   |         | 4,521  |   |   |       | 659   |   |   |       | (180 | )
|                                        | Special termination benefits     |                     |         | 632    |                |   |         |       |   |   |       | 3,136 |   |   |       |     |  
|                                        | Benefits paid                    |                     |         | (4,600 | )              |   |         | (4,419 | ) |   |       | (344  | ) |   |       | (420 | )
|                                        |                                  |                     |         |        |                |   |         |        |   |   |       |      
|Benefit obligation at end of year       |                                  | $                   | 126,862 |        |                | $ | 110,353 |        |   | $ | 9,547 |       |   | $ | 5,036 |     
|                                        |                                  |                     |         |        |                |   |         |        |   |   |       |      

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002




8. PENSION AND OTHER POST-RETIREMENT BENEFITS (CONTINUED)


|                                               |  |                     |         |   |                |   |        |      |  |   |       |   |  |   |       |  
|---------------------------------------------- |  | ------------------- | ------- | - | -------------- | - | ------ | ---- |  | - | ----- | - |  | - | ----- | -
|                                               |  | Pension Plan & SERP |         |   | Other Benefits |  
|                                               |  |                     |         |   |                |  
|                                               |  | 2004                |         |   | 2003           |   |        | 2004 |  |   | 2003  |  
|                                               |  |                     |         |   |                |   |        |      |  |   |       |  
|Change in plan assets:                         |  |                     |         |   |                |   |        |      |  |   |       |   |  |   |       |  
|Fair value of plan assets at beginning of year |  | $                   | 93,949  |   |                | $ | 73,806 |      |  | $ | 1,890 |   |  | $ | 1,347 |  
|Actual return on plan assets                   |  |                     | 10,859  |   |                |   | 15,453 |      |  |   | 217   |   |  |   | 289   |  
|Company contribution                           |  |                     | 5,130   |   |                |   | 9,109  |      |  |   | 76    |   |  |   | 446   |  
|Participants contributions                    |  |                     |        |   |                |   |       |      |  |   | 240   |   |  |   | 228   |  
|Benefits paid                                  |  |                     | (4,600  | ) |                |   | (4,419 | )    |  |   | (321  | ) |  |   | (420  | )
|                                               |  |                     |         |   |                |   |        |      |  |   |       |  
|Fair value of plan assets at end of year       |  | $                   | 105,338 |   |                | $ | 93,949 |      |  | $ | 2,102 |   |  | $ | 1,890 |  
|                                               |  |                     |         |   |                |   |        |      |  |   |       |  

|                                       |  |                     |         |   |                |   |         |      |  |   |        |   |  |   |        |  
|-------------------------------------- |  | ------------------- | ------- | - | -------------- | - | ------- | ---- |  | - | ------ | - |  | - | ------ | -
|                                       |  | Pension Plan & SERP |         |   | Other Benefits |  
|                                       |  |                     |         |   |                |  
|                                       |  | 2004                |         |   | 2003           |   |         | 2004 |  |   | 2003   |  
|                                       |  |                     |         |   |                |   |         |      |  |   |        |  
|Funded status:                         |  |                     |         |   |                |   |         |      |  |   |        |   |  |   |        |  
|Unfunded status of plan at end of year |  | $                   | (21,524 | ) |                | $ | (16,404 | )    |  | $ | (7,445 | ) |  | $ | (3,146 | )
|Unrecognized actuarial loss (gain)     |  |                     | 21,501  |   |                |   | 16,784  |      |  |   | 386    |   |  |   | (142   | )
|Unrecognized prior service cost        |  |                     | 497     |   |                |   | 575     |      |  |   | 408    |   |  |   | 408    |  
|Unrecognized net transition obligation |  |                     | 305     |   |                |   | 573     |      |  |   |       |   |  |   |       |  
|                                       |  |                     |         |   |                |   |         |      |  |   |        |  
|Prepaid (accrued) benefits             |  | $                   | 779     |   |                | $ | 1,528   |      |  | $ | (6,651 | ) |  | $ | (2,880 | )
|                                       |  |                     |         |   |                |   |         |      |  |   |        |  



|                                     |  |                     |        |   |                |   |        |      |  |   |        |   |  |   |        |  
|------------------------------------ |  | ------------------- | ------ | - | -------------- | - | ------ | ---- |  | - | ------ | - |  | - | ------ | -
|                                     |  | Pension Plan & SERP |        |   | Other Benefits |  
|                                     |  |                     |        |   |                |  
|                                     |  | 2004                |        |   | 2003           |   |        | 2004 |  |   | 2003   |  
|                                     |  |                     |        |   |                |   |        |      |  |   |        |  
|Prepaid benefit cost                 |  | $                   | 2,447  |   |                | $ | 3,009  |      |  | $ |       |   |  | $ |       |  
|Accrued benefit cost                 |  |                     | (1,668 | ) |                |   | (1,481 | )    |  |   | (6,651 | ) |  |   | (2,880 | )
|Additional minimum liability         |  |                     | (3,931 | ) |                |   | (568   | )    |  |   |       |   |  |   |       |  
|Intangible assets                    |  |                     | 802    |   |                |   | 126    |      |  |   |       |   |  |   |       |  
|Accumulated other comprehensive loss |  |                     | 3,129  |   |                |   | 442    |      |  |   |       |   |  |   |       |  
|                                     |  |                     |        |   |                |   |        |      |  |   |        |  
|Prepaid (accrued) benefits           |  | $                   | 779    |   |                | $ | 1,528  |      |  | $ | (6,651 | ) |  | $ | (2,880 | )
|                                     |  |                     |        |   |                |   |        |      |  |   |        |  



|                               |  |      |         |  |      |   |         | 
|------------------------------ |  | ---- | ------- |  | ---- | - | ------- | 
|                               |  | 2004 |         |  | 2003 |  
|                               |  |      |         |  |      |  
|Projected benefit obligation   |  | $    | 126,862 |  |      | $ | 110,353 | 
|Accumulated benefit obligation |  | $    | 108,490 |  |      | $ | 91,375  | 
|Fair value of plan assets      |  | $    | 105,338 |  |      | $ | 93,949  | 

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SUREWEST COMMUNICATIONS


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002




8. PENSION AND OTHER POST-RETIREMENT BENEFITS (CONTINUED)




|                                               |  |                     |        |   |                |   |        |      |  |   |        |   |  |      |       |   |      |   |      |   |  |   |      |  
|---------------------------------------------- |  | ------------------- | ------ | - | -------------- | - | ------ | ---- |  | - | ------ | - |  | ---- | ----- | - | ---- | - | ---- | - |  | - | ---- | -
|                                               |  | Pension Plan & SERP |        |   | Other Benefits |  
|                                               |  |                     |        |   |                |  
|                                               |  | 2004                |        |   | 2003           |   |        | 2002 |  |   | 2004   |   |  | 2003 |       |   | 2002 |  
|                                               |  |                     |        |   |                |   |        |      |  |   |        |   |  |      |       |   |      |  
|Service cost-benefits earned during the period |  | $                   | 5,360  |   |                | $ | 4,557  |      |  | $ | 4,552  |   |  | $    | 469   |   |      | $ | 353  |   |  | $ | 320  |  
|Interest cost on projected benefit obligation  |  |                     | 7,095  |   |                |   | 6,841  |      |  |   | 6,866  |   |  |      | 351   |   |      |   | 326  |   |  |   | 297  |  
|Expected return on plan assets                 |  |                     | (8,033 | ) |                |   | (6,305 | )    |  |   | (6,368 | ) |  |      | (151  | ) |      |   | (108 | ) |  |   | (117 | )
|Amortization of prior service cost             |  |                     | 78     |   |                |   | 92     |      |  |   | 92     |   |  |      | 43    |   |      |   | 26   |   |  |   | 26   |  
|Recognized net actuarial loss                  |  |                     | 480    |   |                |   | 798    |      |  |   | 151    |   |  |      |      |   |      |   |     |   |  |   | (6   | )
|Amortization of transition obligation          |  |                     | 267    |   |                |   | 267    |      |  |   | 267    |   |  |      |      |   |      |   |     |   |  |   |     |  
|Effect of special termination benefits         |  |                     | 632    |   |                |   |       |      |  |   |       |   |  |      | 3,136 |   |      |   |     |   |  |   |     |  
|                                               |  |                     |        |   |                |   |        |      |  |   |        |   |  |      |       |   |      |  
|Net pension cost                               |  | $                   | 5,879  |   |                | $ | 6,250  |      |  | $ | 5,560  |   |  | $    | 3,848 |   |      | $ | 597  |   |  | $ | 520  |  
|                                               |  |                     |        |   |                |   |        |      |  |   |        |   |  |      |       |   |      |  



|                              |  |                     |       |  |                |  |       |      |  |  |       |  |  |  |       | 
|----------------------------- |  | ------------------- | ----- |  | -------------- |  | ----- | ---- |  |  | ----- |  |  |  | ----- | 
|                              |  | Pension Plan & SERP |       |  | Other Benefits | 
|                              |  |                     |       |  |                | 
|                              |  | 2004                |       |  | 2003           |  |       | 2004 |  |  | 2003  | 
|                              |  |                     |       |  |                |  |       |      |  |  |       | 
|Discount rate                 |  |                     | 5.75% |  |                |  | 6.25% |      |  |  | 5.75% |  |  |  | 6.25% | 
|Rate of compensation increase |  |                     | 5.00% |  |                |  | 5.00% |      |  |  | 5.00% |  |  |  | 5.00% | 



|                                         |  |                     |       |  |                |  |       |      |  |  |       |  |  |      |       |  |      |  |       |  |  |  |       | 
|---------------------------------------- |  | ------------------- | ----- |  | -------------- |  | ----- | ---- |  |  | ----- |  |  | ---- | ----- |  | ---- |  | ----- |  |  |  | ----- | 
|                                         |  | Pension Plan & SERP |       |  | Other Benefits | 
|                                         |  |                     |       |  |                | 
|                                         |  | 2004                |       |  | 2003           |  |       | 2002 |  |  | 2004  |  |  | 2003 |       |  | 2002 | 
|                                         |  |                     |       |  |                |  |       |      |  |  |       |  |  |      |       |  |      | 
|Discount rate                            |  |                     | 6.25% |  |                |  | 6.75% |      |  |  | 7.00% |  |  |      | 6.25% |  |      |  | 6.75% |  |  |  | 7.00% | 
|Expected long-term return on plan assets |  |                     | 8.50% |  |                |  | 8.50% |      |  |  | 8.50% |  |  |      | 8.50% |  |      |  | 8.50% |  |  |  | 8.50% | 
|Rate of compensation increase            |  |                     | 5.00% |  |                |  | 5.00% |      |  |  | 6.00% |  |  |      | 5.00% |  |      |  | 5.00% |  |  |  | 6.00% | 





|                                                                                 |  |      |       |  |      |  |       | 
|-------------------------------------------------------------------------------- |  | ---- | ----- |  | ---- |  | ----- | 
|                                                                                 |  | 2004 |       |  | 2003 | 
|                                                                                 |  |      |       |  |      | 
|Health care cost trend assumed for the next year                                 |  |      | 9.00% |  |      |  | 9.00% | 
|Rate to which the cost trend is assumed to decline (the ultimate
    trend rate) |  |      | 6.00% |  |      |  | 6.00% | 
|Year that the rate reaches the ultimate trend rate                               |  |      | 2007  |  |      |  | 2007  | 

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SUREWEST COMMUNICATIONS


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002


8. PENSION AND OTHER POST-RETIREMENT BENEFITS (CONTINUED)




|                                                                     |  |                |     |  |                |   |       | 
|-------------------------------------------------------------------- |  | -------------- | --- |  | -------------- | - | ----- | 
|                                                                     |  | 1-Percentage-  |     |  | 1-Percentage-  |  
|                                                                     |  | Point Increase |     |  | Point Decrease |  
|                                                                     |  |                |     |  |                |  
|Effect on total 2004 service and interest costs                      |  | $              | 72  |  |                | $ | (61)  | 
|Effect on Other Benefits plan obligation as of December 31,
    2004 |  | $              | 526 |  |                | $ | (499) | 



|                                               |  |            |       |  |                        |  |       |      |  |  |       | 
|---------------------------------------------- |  | ---------- | ----- |  | ---------------------- |  | ----- | ---- |  |  | ----- | 
|                                               |  | Target     |       |  | Percentage of Plan     | 
|                                               |  | Allocation |       |  | Assets at December 31, | 
|                                               |  |            |       |  |                        | 
|Asset Category                                 |  | 2005       |       |  | 2004                   |  |       | 2003 | 
|                                               |  |            |       |  |                        |  |       |      | 
|Domestic equity securities                     |  |            | 39.0% |  |                        |  | 39.7% |      |  |  | 39.6% | 
|United States government and agency securities |  |            | 40.0% |  |                        |  | 38.9% |      |  |  | 38.6% | 
|International equity securities                |  |            | 20.0% |  |                        |  | 20.2% |      |  |  | 20.9% | 
|Cash equivalents                               |  |            | 1.0%  |  |                        |  | 1.2%  |      |  |  | 0.9%  | 
|                                               |  |            |       |  |                        |  |       |      | 
|Total                                          |  |            | 100%  |  |                        |  | 100%  |      |  |  | 100%  | 
|                                               |  |            |       |  |                        |  |       |      | 







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SUREWEST COMMUNICATIONS


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002


8. PENSION AND OTHER POST-RETIREMENT BENEFITS (CONTINUED)




| |                                  
| | ---------------------------------
| | Estimated Future Benefit Payments



|                           |             |                |   |        |                |  |   |       | 
|-------------------------- | ----------- | -------------- | - | ------ | -------------- |  | - | ----- | 
|                           |             | Pension Plan & |   |        |               
|                           |             | SERP           |   |        | Other Benefits | 
|                           |             |                |   |        |                | 
|Expected benefit payments: |             |                |   |        |                |  |   |      
|                           | 2005        |                | $ | 5,437  |                |  | $ | 201   | 
|                           | 2006        |                |   | 6,254  |                |  |   | 239   | 
|                           | 2007        |                |   | 6,434  |                |  |   | 278   | 
|                           | 2008        |                |   | 6,643  |                |  |   | 318   | 
|                           | 2009        |                |   | 6,875  |                |  |   | 358   | 
|                           | 2010 - 2014 |                |   | 39,372 |                |  |   | 2,514 | 







9. COMMITMENTS AND CONTINGENCIES


Capital and Operating Leases




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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002


9. COMMITMENTS AND CONTINGENCIES (CONTINUED)








|                                            |  |           |        |  |         |   |     | 
|------------------------------------------- |  | --------- | ------ |  | ------- | - | --- | 
|                                            |  | Operating |        |  | Capital |  
|                                            |  | Leases    |        |  | Leases  |  
|                                            |  |           |        |  |         |  
|2005                                        |  | $         | 4,957  |  |         | $ | 230 | 
|2006                                        |  |           | 4,592  |  |         |   | 36  | 
|2007                                        |  |           | 4,538  |  |         |   | 7   | 
|2008                                        |  |           | 4,520  |  |         |   | 7   | 
|2009                                        |  |           | 4,249  |  |         |   | 7   | 
|Thereafter                                  |  |           | 17,736 |  |         |   |    | 
|                                            |  |           |        |  |         |  
|                                            |  | $         | 40,592 |  |         |   | 287 | 
|                                            |  |           |        |  |         |  
|Less: amount representing interest          |  |           |        |  |         |   | 23  | 
|                                            |  |           |        |  |         |  
|Present value of net minimum lease payments |  |           |        |  |         |   | 264 | 
|Less: current portion                       |  |           |        |  |         |   | 212 | 
|                                            |  |           |        |  |         |  
|                                            |  |           |        |  |         | $ | 52  | 
|                                            |  |           |        |  |         |  

Other Commitments






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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002




9. COMMITMENTS AND CONTINGENCIES (CONTINUED)




Litigation, Regulatory Proceedings and Other Contingencies






|    |                       
|--- | ----------------------
|10. | EQUITY INCENTIVE PLANS





|                           |  |         |          |          |       |   |       |         |          |  |         |   |  |          |       |  |       |  |         |   |  |   |       | 
|-------------------------- |  | ------- | -------- | -------- | ----- | - | ----- | ------- | -------- |  | ------- | - |  | -------- | ----- |  | ----- |  | ------- | - |  | - | ----- | 
|                           |  | 2004    |          |          | 2003  |   |       | 2002    |         
|                           |  |         |          |          |       |   |       |         |         
|                           |  |         |          | Weighted |       |   |       |         | Weighted |  |         |   |  | Weighted |      
|                           |  |         |          | Average  |       |   |       |         | Average  |  |         |   |  | Average  |      
|                           |  | Options |          |          | Price |   |       | Options |          |  | Price   |   |  | Options  |       |  | Price | 
|                           |  |         |          |          |       |   |       |         |          |  |         |   |  |          |       |  |       | 
|Outstanding-January 1,     |  |         | 824,474  |          |       | $ | 40.72 |         |          |  | 865,122 |   |  | $        | 40.87 |  |       |  | 739,887 |   |  | $ | 41.28 | 
|Granted                    |  |         |         |          |       |   |      |         |          |  | 12,750  |   |  |          | 30.26 |  |       |  | 180,250 |   |  |   | 38.83 | 
|Exercised                  |  |         | (334     | )        |       |   | 30.07 |         |          |  | (5,344  | ) |  |          | 30.77 |  |       |  | (22,805 | ) |  |   | 39.28 | 
|Cancelled                  |  |         | (116,415 | )        |       |   | 40.81 |         |          |  | (48,054 | ) |  |          | 41.74 |  |       |  | (32,210 | ) |  |   | 39.91 | 
|                           |  |         |          |          |       |   |       |         |          |  |         |   |  |          |       |  |       | 
|Outstanding-December 31,   |  |         | 707,725  |          |       | $ | 40.71 |         |          |  | 824,474 |   |  | $        | 40.72 |  |       |  | 865,122 |   |  | $ | 40.87 | 
|                           |  |         |          |          |       |   |       |         |          |  |         |   |  |          |       |  |       | 
|Exercisable at end of year |  |         | 641,444  |          |       |   |       |         |          |  | 448,471 |   |  |          |       |  |       |  | 262,091 |   |  |   |       | 
|                           |  |         |          |          |       |   |       |         |          |  |         |   |  |          |       |  |       | 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002






|    |                                   
|--- | ----------------------------------
|10. | EQUITY INCENTIVE PLANS (CONTINUED)



|                         |  |                     |         |           |                     |  |          |          |  |   |           |          |  |          |         |  |  |   |       | 
|------------------------ |  | ------------------- | ------- | --------- | ------------------- |  | -------- | -------- |  | - | --------- | -------- |  | -------- | ------- |  |  | - | ----- | 
|                         |  | Options Outstanding |         |           | Options Exercisable | 
|                         |  |                     |         |           |                     | 
|                         |  |                     |         | Weighted  |                     |  |          |          | 
|                         |  |                     |         | Average   |                     |  | Weighted |          |  |   |           | Weighted | 
|                         |  |                     |         | Remaining |                     |  | Average  |          |  |   |           | Average  | 
|                         |  | Number of           |         |           | Contractual         |  |          | Exercise |  |   | Number of |          |  | Exercise |        
|Range of Exercise Prices |  | Shares              |         |           | Life                |  |          | Price    |  |   | Shares    |          |  | Price    |        
|                         | 
|$26.51 - $39.00          |  |                     | 171,179 |           |                     |  | 7.21     |          |  | $ | 36.68     |          |  |          | 131,844 |  |  | $ | 37.14 | 
|$39.25 - $39.25          |  |                     | 265,096 |           |                     |  | 5.53     |          |  | $ | 39.25     |          |  |          | 258,699 |  |  | $ | 39.25 | 
|$39.50 - $50.50          |  |                     | 262,950 |           |                     |  | 6.49     |          |  | $ | 44.32     |          |  |          | 244,901 |  |  | $ | 44.48 | 
|$53.37 - $55.74          |  |                     | 8,500   |           |                     |  | 7.31     |          |  | $ | 55.46     |          |  |          | 6,000   |  |  | $ | 55.35 | 
|                         |  |                     |         |           |                     |  |          |          |  |   |           |          |  |          |        
|                         |  |                     | 707,725 |           |                     |  | 6.31     |          |  | $ | 40.71     |          |  |          | 641,444 |  |  | $ | 40.96 | 
|                         |  |                     |         |           |                     |  |          |          |  |   |           |          |  |          |        





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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002




|    |                 
|--- | ----------------
|11. | STOCK REPURCHASE





|    |                                                        
|--- | -------------------------------------------------------
|12. | SHAREHOLDER RIGHTS PLAN AND CHANGE IN CONTROL AGREEMENT







|    |                  
|--- | -----------------
|13. | BUSINESS SEGMENTS







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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002






|    |                              
|--- | -----------------------------
|13. | BUSINESS SEGMENTS (CONTINUED)

Disclosure About Segments of an Enterprise and Related
Information,






|                                              |  |         |         |   |           |   |         |           |  |   |              |   |  |              |         |  |              |   |          |   |  |   |         |  
|--------------------------------------------- |  | ------- | ------- | - | --------- | - | ------- | --------- |  | - | ------------ | - |  | ------------ | ------- |  | ------------ | - | -------- | - |  | - | ------- | -
|                                              |  |         |         |   |           |   |         | Corporate |  |   | Intercompany |   |  |             
|2004                                          |  | Telecom |         |   | Broadband |   |         | Wireless  |  |   | Operations   |   |  | Eliminations |         |  | Consolidated |  
|                                              |  |         |         |   |           |   |         |           |  |   |              |   |  |              |         |  |              |  
|Operating revenues from external customers    |  | $       | 141,086 |   |           | $ | 39,416  |           |  | $ | 31,261       |   |  | $            |        |  |              | $ |         |   |  | $ | 211,763 |  
|Intersegment revenues                         |  |         | 25,814  |   |           |   | 1,784   |           |  |   | 1,699        |   |  |              |        |  |              |   | (29,297  | ) |  |   |        |  
|Operating expenses *                          |  |         | 91,736  |   |           |   | 61,143  |           |  |   | 38,266       |   |  |              |        |  |              |   | (29,297  | ) |  |   | 161,848 |  
|Depreciation and amortization                 |  |         | 25,227  |   |           |   | 11,397  |           |  |   | 11,972       |   |  |              |        |  |              |   |         |   |  |   | 48,596  |  
|Income (loss) from operations                 |  |         | 49,937  |   |           |   | (31,340 | )         |  |   | (17,278      | ) |  |              |        |  |              |   |         |   |  |   | 1,319   |  
|Interest income                               |  |         | 193     |   |           |   | 8       |           |  |   |             |   |  |              |        |  |              |   |         |   |  |   | 201     |  
|Interest expense, net of capitalized interest |  |         | (488    | ) |           |   | (2,247  | )         |  |   | (1,770       | ) |  |              |        |  |              |   |         |   |  |   | (4,505  | )
|Corporate treasury loss recovery              |  |         | 1,246   |   |           |   | 342     |           |  |   | 215          |   |  |              |        |  |              |   |         |   |  |   | 1,803   |  
|Income tax expense (benefit)                  |  |         | 22,347  |   |           |   | (14,558 | )         |  |   | (8,286       | ) |  |              |        |  |              |   |         |   |  |   | (497    | )
|Net income (loss)                             |  | $       | 28,322  |   |           | $ | (18,627 | )         |  | $ | (10,823      | ) |  | $            |        |  |              | $ |         |   |  | $ | (1,128  | )
|Total assets                                  |  | $       | 617,205 |   |           | $ | 199,174 |           |  | $ | 134,733      |   |  | $            | 178,904 |  |              | $ | (694,834 | ) |  | $ | 435,182 |  
|Capital expenditures                          |  | $       | 9,678   |   |           | $ | 50,330  |           |  | $ | 5,605        |   |  | $            | 5,220   |  |              | $ |         |   |  | $ | 70,833  |  

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SUREWEST COMMUNICATIONS


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002




|    |                              
|--- | -----------------------------
|13. | BUSINESS SEGMENTS (CONTINUED)

|                                              |  |         |         |   |           |   |         |           |  |   |              |   |  |              |        |  |              |   |          |   |  |   |         |  
|--------------------------------------------- |  | ------- | ------- | - | --------- | - | ------- | --------- |  | - | ------------ | - |  | ------------ | ------ |  | ------------ | - | -------- | - |  | - | ------- | -
|                                              |  |         |         |   |           |   |         | Corporate |  |   | Intercompany |   |  |             
|2003                                          |  | Telecom |         |   | Broadband |   |         | Wireless  |  |   | Operations   |   |  | Eliminations |        |  | Consolidated |  
|                                              |  |         |         |   |           |   |         |           |  |   |              |   |  |              |        |  |              |  
|Operating revenues from external customers    |  | $       | 138,924 |   |           | $ | 29,051  |           |  | $ | 27,146       |   |  | $            |       |  |              | $ |         |   |  | $ | 195,121 |  
|Intersegment revenues                         |  |         | 23,576  |   |           |   | 1,683   |           |  |   | 744          |   |  |              |       |  |              |   | (26,003  | ) |  |   |        |  
|Operating expenses *                          |  |         | 83,645  |   |           |   | 42,538  |           |  |   | 34,724       |   |  |              |       |  |              |   | (26,003  | ) |  |   | 134,904 |  
|Depreciation and amortization                 |  |         | 31,257  |   |           |   | 4,508   |           |  |   | 16,705       |   |  |              |       |  |              |   |         |   |  |   | 52,470  |  
|Income (loss) from operations                 |  |         | 47,598  |   |           |   | (16,312 | )         |  |   | (23,539      | ) |  |              |       |  |              |   |         |   |  |   | 7,747   |  
|Interest income                               |  |         | 322     |   |           |   | 2       |           |  |   | (18          | ) |  |              |       |  |              |   |         |   |  |   | 306     |  
|Interest expense, net of capitalized interest |  |         | (452    | ) |           |   | (1,890  | )         |  |   | (1,905       | ) |  |              |       |  |              |   |         |   |  |   | (4,247  | )
|Corporate treasury loss                       |  |         | (1,263  | ) |           |   | (347    | )         |  |   | (218         | ) |  |              |       |  |              |   |         |   |  |   | (1,828  | )
|Income tax expense (benefit)                  |  |         | 19,327  |   |           |   | (7,551  | )         |  |   | (10,754      | ) |  |              |       |  |              |   |         |   |  |   | 1,022   |  
|Net income (loss)                             |  | $       | 26,565  |   |           | $ | (10,983 | )         |  | $ | (14,937      | ) |  | $            |       |  |              | $ |         |   |  | $ | 645     |  
|Total assets                                  |  | $       | 569,574 |   |           | $ | 104,522 |           |  | $ | 80,217       |   |  | $            | 53,025 |  |              | $ | (372,129 | ) |  | $ | 435,209 |  
|Capital expenditures                          |  | $       | 15,675  |   |           | $ | 47,626  |           |  | $ | 5,224        |   |  | $            | 7,580  |  |              | $ |         |   |  | $ | 76,105  |  

|                                              |  |         |         |   |           |   |         |           |  |   |              |   |  |              |        |  |              |   |          |   |  |   |         |  
|--------------------------------------------- |  | ------- | ------- | - | --------- | - | ------- | --------- |  | - | ------------ | - |  | ------------ | ------ |  | ------------ | - | -------- | - |  | - | ------- | -
|                                              |  |         |         |   |           |   |         | Corporate |  |   | Intercompany |   |  |             
|2002                                          |  | Telecom |         |   | Broadband |   |         | Wireless  |  |   | Operations   |   |  | Eliminations |        |  | Consolidated |  
|                                              |  |         |         |   |           |   |         |           |  |   |              |   |  |              |        |  |              |  
|Operating revenues from external customers    |  | $       | 149,679 |   |           | $ | 12,945  |           |  | $ | 23,225       |   |  | $            |       |  |              | $ |         |   |  | $ | 185,849 |  
|Intersegment revenues                         |  |         | 16,826  |   |           |   | 1,189   |           |  |   | 507          |   |  |              |       |  |              |   | (18,522  | ) |  |   |        |  
|Operating expenses*                           |  |         | 86,417  |   |           |   | 23,342  |           |  |   | 33,796       |   |  |              |       |  |              |   | (18,522  | ) |  |   | 125,033 |  
|Depreciation and amortization                 |  |         | 28,249  |   |           |   | 1,972   |           |  |   | 14,905       |   |  |              |       |  |              |   |         |   |  |   | 45,126  |  
|Income (loss) from operations                 |  |         | 51,839  |   |           |   | (11,180 | )         |  |   | (24,969      | ) |  |              |       |  |              |   |         |   |  |   | 15,690  |  
|Interest income                               |  |         | 738     |   |           |   |        |           |  |   | 1            |   |  |              |       |  |              |   |         |   |  |   | 739     |  
|Interest expense, net of capitalized interest |  |         | (366    | ) |           |   | (85     | )         |  |   | (1,425       | ) |  |              |       |  |              |   |         |   |  |   | (1,876  | )
|Income tax expense (benefit)                  |  |         | 22,762  |   |           |   | (4,585  | )         |  |   | (10,751      | ) |  |              |       |  |              |   |         |   |  |   | 7,426   |  
|Net income (loss)                             |  | $       | 33,634  |   |           | $ | (6,715  | )         |  | $ | (15,670      | ) |  |              |       |  |              | $ |         |   |  | $ | 11,249  |  
|Total assets                                  |  | $       | 524,913 |   |           | $ | 64,654  |           |  | $ | 132,483      |   |  | $            | 15,085 |  |              | $ | (340,619 | ) |  | $ | 396,516 |  
|Capital expenditures                          |  | $       | 16,460  |   |           | $ | 10,125  |           |  | $ | 10,650       |   |  | $            | 7,117  |  |              | $ |         |   |  | $ | 44,352  |  



|  |                                           
|- | ------------------------------------------
|* | Exclusive of depreciation and amortization



|    |                           
|--- | --------------------------
|14. | RELATED PARTY TRANSACTIONS





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SUREWEST COMMUNICATIONS


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002






|    |                                       
|--- | --------------------------------------
|14. | RELATED PARTY TRANSACTIONS (CONTINUED)





|    |                                            
|--- | -------------------------------------------
|15. | QUARTERLY FINANCIAL INFORMATION (UNAUDITED)



|                                  |  |          |        |  |         |   |        |              |  |   |             |   |  |   |        |  
|--------------------------------- |  | -------- | ------ |  | ------- | - | ------ | ------------ |  | - | ----------- | - |  | - | ------ | -
|2004                              |  | March 31 |        |  | June 30 |   |        | September 30 |  |   | December 31 |  
|                                  |  |          |        |  |         |   |        |              |  |   |             |  
|Operating revenues                |  | $        | 51,588 |  |         | $ | 52,115 |              |  | $ | 53,239      |   |  | $ | 54,821 |  
|Income (loss) from operations     |  |          | 1,758  |  |         |   | 3,771  |              |  |   | (1,517      | ) |  |   | (2,693 | )
|Net income (loss)                 |  | $        | 381    |  |         | $ | 1,561  |              |  | $ | (1,602      | ) |  | $ | (1,468 | )
|Basic earnings (loss) per share   |  | $        | 0.03   |  |         | $ | 0.11   |              |  | $ | (0.11       | ) |  | $ | (0.11  | )
|Diluted earnings (loss) per share |  | $        | 0.03   |  |         | $ | 0.11   |              |  | $ | (0.11       | ) |  | $ | (0.11  | )

|                                  |  |          |        |  |         |   |        |              |  |   |             |  |  |   |        |  
|--------------------------------- |  | -------- | ------ |  | ------- | - | ------ | ------------ |  | - | ----------- |  |  | - | ------ | -
|2003                              |  | March 31 |        |  | June 30 |   |        | September 30 |  |   | December 31 | 
|                                  |  |          |        |  |         |   |        |              |  |   |             | 
|Operating revenues                |  | $        | 47,375 |  |         | $ | 50,252 |              |  | $ | 48,855      |  |  | $ | 48,639 |  
|Income (loss) from operations     |  |          | 1,905  |  |         |   | 5,567  |              |  |   | 3,677       |  |  |   | (3,402 | )
|Net income (loss)                 |  | $        | 675    |  |         | $ | 2,713  |              |  | $ | 1,502       |  |  | $ | (4,245 | )
|Basic earnings (loss) per share   |  | $        | 0.05   |  |         | $ | 0.19   |              |  | $ | 0.10        |  |  | $ | (0.30  | )
|Diluted earnings (loss) per share |  | $        | 0.05   |  |         | $ | 0.19   |              |  | $ | 0.10        |  |  | $ | (0.30  | )

Regulation and Contractual and
Estimated


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SUREWEST COMMUNICATIONS


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002






|    |                                                        
|--- | -------------------------------------------------------
|15. | QUARTERLY FINANCIAL INFORMATION (UNAUDITED) (CONTINUED)

Shareable Earnings Obligations








|                    |                    |  |   |     | 
|------------------- | ------------------ |  | - | --- | 
|Three months ended: |                    |  |   |    
|                    | March 31, 2004     |  | $ | 56  | 
|                    | June 30, 2004      |  | $ | 40  | 
|                    | September 30, 2004 |  | $ | 26  | 
|                    | December 31, 2004  |  | $ | 8   | 
|                    | March 31, 2003     |  | $ | 128 | 
|                    | June 30, 2003      |  | $ | 114 | 
|                    | September 30, 2003 |  | $ | 96  | 
|                    | December 31, 2003  |  | $ | 75  | 





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







Item 9A. Controls and Procedures.


Controls and Procedures




Managements Report on Internal Control over Financial
Reporting










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Remediation Steps Related to Material Weakness






| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The Company was unable to completely reconcile its plant in
    service and plant under construction subsidiary ledgers to the
    corresponding general ledger balances for periods throughout
    2004 and as of December 31, 2004. At December 31,
    2004, the unreconciled difference was less than 1% of the
    Companys consolidated net property, plant and equipment
    balance. Management believes these unreconciled differences are
    attributable principally to deficiencies in the reliability of
    the Companys information system interfaces between the
    general ledger and the property, plant and equipment subsidiary
    ledgers. Manual controls, put in place in the third quarter of
    2004 as noted in the Companys Form 10-Q for the
    quarter ended September 30, 2004, were not adequate to
    resolve to a reasonable level the various data errors.
|
| |  | Depreciation and capitalized interest calculations by the
    Companys enterprise resource planning system have been
    inconsistent and have required various manual adjustments to
    properly record depreciation expense and related interest costs
    in the proper period.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|
| |  | Monthly reviews of plant under construction balances for
    propriety and correct classification, a manual control
    implemented in the third quarter of 2004, were not performed at
    the appropriate level or at the appropriate time to provide
    reasonable assurance that costs are properly reflected in the
    property, plant and equipment sub-modules.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|
| |  | As of December 31, 2004, the Company did not have effective
    procedures with which to determine the cost bases of property,
    plant and equipment that had been retired.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        





| |   |                                                                                                                                                                                                                           
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Enhancements to the Companys enterprise resource planning
    and accounting software, for which implementation commenced in
    the second quarter of 2004, is ongoing.                                                 
|
| |  | The performance of additional detailed reviews, on a monthly
    basis, of all open construction projects by the appropriate
    project manager to validate the results generated by the
    Companys systems.          
|
| |  | The review of systematic routines, which generate and transfer
    data between modules within the enterprise resource planning
    system, as necessary to determine if the routines are generating
    accurate reports.
|
| |  | Timely detailed reviews by management will occur to provide
    reasonable assurance that manual controls are operating
    effectively.                                                                                  

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Other Internal Control Matters






| |                       
| | ----------------------
| | Information Technology



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The Company has identified certain deficiencies related to its
    Information Technology general and application controls. In
    response to these deficiencies, during the third quarter of
    2004, the Company engaged an outside consulting firm to design
    and implement changes to the controls in an effort to remediate
    the identified deficiencies. Although the Company has made
    progress in its remediation efforts, these efforts were not
    completed by December 31, 2004. The Company believes that
    it is reasonably likely that this control deficiency will be
    remediated and tested in 2005.



| |                                              
| | ---------------------------------------------
| | Accounting Personnel, Policies and Procedures



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | In the third quarter of 2004, the Company expected that the
    assessment of the Corporate Finance Department by management,
    including the new Senior Vice President and Chief Financial
    Officer who joined the Company on October 4, 2004, and the
    implementation of a training program and the hiring of new
    personnel as necessary, to assure the proper mix of technical
    skills and the relevant personnel, would be completed by
    December 31, 2004. This review and the Chief Financial
    Officers report to the Audit Committee were completed in
    February 2005.
|
| |  | On September 30, 2004, the Company issued in draft its
    Accounting Policies and Procedure Manual. The manual and certain
    additional sections were completed subsequent to
    December 31, 2004.                                                                                                                                                                                                                                                                                                                                                                                               
|
| |  | During managements assessment of internal controls, it was
    noted that the quality of evidence was not consistent across the
    Companys controls. Management put into place various
    remediation steps during the third and fourth quarters of 2004,
    which it believed would improve the overall quality of the
    control documentation. During managements testing of
    internal controls in 2005, we will determine if such remediation
    was effective in improving the Companys overall quality of
    control documentation.                                               

Change in Internal Control over Financial Reporting




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Report of Ernst & Young LLP, Independent Registered
Public Accounting Firm, on Internal Control over Financial
Reporting
















101



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| |                      
| | ---------------------
| | /s/ Ernst & Young LLP








Item 9B. Other Information




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PART III







|         |                                                    
|-------- | ---------------------------------------------------
|Item 10. | Directors and Executive Officers of the Registrant.



Code of Ethics


http://www.surw.com/ir/corpgov/Code of Ethics Business Conduct.php




| |                              
| | -----------------------------
| | SureWest Communications      
| | P.O. Box 969                 
| | Roseville, California 95678  
| | Attention: Investor Relations






|         |                        
|-------- | -----------------------
|Item 11. | Executive Compensation.






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


Equity Compensation Plan Information




103



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|                                                           |  |                      |         |  |                     |                         |                       |                         |  |  |         | 
|---------------------------------------------------------- |  | -------------------- | ------- |  | ------------------- | ----------------------- | --------------------- | ----------------------- |  |  | ------- | 
|                                                           |  |                      |         |  |                     | Number of securities    |                      
|                                                           |  |                      |         |  |                     | remaining available for |                      
|                                                           |  | Number of securities |         |  |                     |                         | future issuance under |                        
|                                                           |  | to be issued upon    |         |  | Weighted-average    |                         |                       | equity compensation     | 
|                                                           |  | exercise of          |         |  | exercise price of   |                         |                       | plans (excluding        | 
|                                                           |  | outstanding options, |         |  | outstanding options |                         |                       | securities reflected in | 
|Plan category                                              |  | warrants and rights  |         |  | warrants and rights |                         |                       | column (a)              | 
|                                                           |  |                      |         |  |                     |                         |                       |                         | 
|                                                           |  | (a)                  |         |  | (b)                 |                         |                       | (c)                     | 
|Equity compensation plans approved by security holders     |  |                      | 707,725 |  |                     | $                       | 40.71                 |                         |  |  | 604,365 | 
|Equity compensation plans not approved by security holders |  |                      |        |  |                     |                         |                      |                         |  |  |        | 
|                                                           |  |                      |         |  |                     |                         |                       |                         | 
|Total                                                      |  |                      | 707,725 |  |                     | $                       | 40.71                 |                         |  |  | 604,365 | 
|                                                           |  |                      |         |  |                     |                         |                       |                         | 



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | The 1999 Plan permits only the issuance of Restricted Shares. As
    of December 31, 2004, the Company had made Restricted Share
    grants in respect of 34,268 shares of the Companys
    common stock, and 166,107 shares of the Companys
    common stock remain available under the 1999 Plan.                                                                                                                                                                                                                                                                                                                                                                                                               
|   
|(2) | The 2000 Plan, as originally approved by the Companys
    shareholders, contemplated the issuance of up to
    800,000 shares of the Companys common stock.
    Thereafter, the Companys 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.








|         |                                                
|-------- | -----------------------------------------------
|Item 13. | Certain Relationships and Related Transactions.








|         |                                       
|-------- | --------------------------------------
|Item 14. | Principal Accountant Fees and Services



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##### Table of Contents



PART IV







|         |                                            
|-------- | -------------------------------------------
|Item 15. | Exhibits and Financial Statement Schedules.



|                        |                              
|----------------------- | -----------------------------
|(a)            1 and 2. | Financial Statement Schedules





|   |         
|-- | --------
|3. | Exhibits



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SUREWEST COMMUNICATIONS


INDEX TO EXHIBITS




|        |    |    |             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |           |                          
|------- | -- | -- | ----------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | --------- | -------------------------
|Exhibit |    |    |             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           | Method   
|No.     |    |    | Description |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           | of Filing
|        |    |    |             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |          
|        | 3  | .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 reference
|       
|        | 3  | .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 reference
|       
|        | 3  | .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 reference
|       
|        | 4  | .1 |             | Shareholder Rights Plan (Filed as Exhibit 2.1 to
    Form 8-A Registration Statement under the Securities Act of
    1934)                                                                                                                                                                                                                                                                                                                                                                                                                                |           | Incorporated by reference
|       
|        | 10 | .1 |             | Note Purchase Agreement for Series A Senior Notes in
    the aggregate amount of $40,000,000 dated December 9, 1998
    (Filed as Exhibit 10(b) to Form 10-K Annual Report of
    Registrant for the year ended December 31, 1998)                                                                                                                                                                                                                                                                                                                        |           | Incorporated by reference
|       
|        | 10 | .2 |             | Supplement to Note Purchase Agreement for Series B
    Senior Notes in the aggregate amount of $60,000,000 dated
    March 13, 2003 (Filed as Exhibit 99.1 to the
    Form 8-K filed March 13, 2003)                                                                                                                                                                                                                                                                                                                                                      |           | Incorporated by reference
|       
|        | 10 | .3 |             | Business Loan Agreement of Registrant with Bank of America,
    dated March 15, 2000, as amended by Amendment No. 1
    dated as of April 10, 2000 (Filed as Exhibit 10(f) to
    Form 10-Q Quarterly Report of Registrant for the quarter
    ended March 31, 2000), as amended by Amendment No. 2
    dated as of September 15, 2000, Amendment No. 3 dated
    as of July 17, 2001, and Amendment No. 4 dated as of
    June 26, 2000 (Filed as Exhibit 10(l) to
    Form 10-Q Quarterly Report of Registrant for the Quarter
    ended June 30, 2002) |           | Incorporated by reference
|       
|        | 10 | .4 |             | Amendment No. 5 to Business Loan Agreement dated
    February 26, 2003 (Filed as Exhibit 10(e) to
    Form 10-K Annual Report of Registrant for the year ended
    December 31, 2002)                                                                                                                                                                                                                                                                                                                                                                     |           | Incorporated by reference
|       
|        | 10 | .5 |             | Amendment No. 6 to Business Loan Agreement dated as of
    January 13, 2004 (Filed as exhibit 10.6 to Form 10-K/A
    Annual Report of Registrant for the year ended December 31,
    2003)                                                                                                                                                                                                                                                                                                                                                               |           | Incorporated by reference
|       
|        | 10 | .6 |             | Amendment No. 7 to Business Loan Agreement dated as of
    March 25, 2004 (Filed as Exhibit 10.7 to
    Form 10-K/A Annual Report of Registrant for the year ended
    December 31, 2003)                                                                                                                                                                                                                                                                                                                                                                 |           | Incorporated by reference
|       
|        | 10 | .7 |             | Amendment No. 8 to Business Loan Agreement dated as of
    December 31, 2004                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |           | Filed herewith           

106



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|        |    |     |             |                                                                                                                                                                                                    |           |                          
|------- | -- | --- | ----------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | --------- | -------------------------
|Exhibit |    |     |             |                                                                                                                                                                                                    | Method   
|No.     |    |     | Description |                                                                                                                                                                                                    | of Filing
|        |    |     |             |                                                                                                                                                                                                    |          
|       
|        | 10 | .8  |             | 1999 Restricted Stock Bonus Plan (Filed as Exhibit 10(d) to
    Form 10-K Annual Report of Registrant for the year ended
    December 31, 1998)                                                    |           | Incorporated by reference
|       
|        | 10 | .9  |             | 2000 Equity Incentive Plan, as amended (filed as
    Exhibit 10.9 to Form 10-K/A Annual Report of
    Registrant for year ended December 31, 2003)                                                 |           | Incorporated by reference
|       
|        | 10 | .10 |             | SureWest KSOP (filed as Exhibit 4.1 to Registration
    Statement on Form S-8 [No. 333-87222])                                                                                                     |           | Incorporated by reference
|       
|        | 10 | .11 |             | Letter agreement dated January 16, 2001 between Registrant
    and Brian H. Strom (Filed as Exhibit 10(g) to
    Form 10-K Annual Report of Registrant for the year ended
    December 31, 2000)   |           | Incorporated by reference
|       
|        | 10 | .12 |             | Letter agreement dated January 16, 2001 between Registrant
    and Jay B. Kinder (Filed as Exhibit 10(i) to
    Form 10-K Annual Report of Registrant for the year ended
    December 31, 2000)    |           | Incorporated by reference
|       
|        | 10 | .13 |             | Letter agreement dated January 16, 2001 between Registrant
    and Bill M. DeMuth (Filed as Exhibit 10.14 to
    Form 10-K/A Annual Report of Registrant for the year ended
    December 31, 2003) |           | Incorporated by reference
|       
|        | 10 | .14 |             | Letter agreement dated January 16, 2001 between Registrant
    and Fred A. Arcuri (Filed as Exhibit 10.15 to
    Form 10-K/A Annual Report of Registrant for the year ended
    December 31, 2003) |           | Incorporated by reference
|       
|        | 10 | .15 |             | Restricted Stock Unit Award, dated December 21, 2004,
    between Registrant and Roger J. Valine                                                                                                   |           | Filed herewith           
|       
|        | 10 | .16 |             | Form of Restricted Stock Unit Award, dated December 21,
    2004, between Registrant and each of Guy R. Gibson, Steven C.
    Oldham, John R. Roberts III and Timothy D. Taron                     |           | Filed herewith           
|       
|        | 10 | .17 |             | Form of Restricted Stock Unit Award, dated February 23,
    2005, between Registrant and Brian H. Strom                                                                                            |           | Filed herewith           
|       
|        | 10 | .18 |             | Form of Restricted Stock Unit Award, dated February 23,
    2005, between Registrant and each of Fred A. Arcuri, Bill M.
    DeMuth and Jay B. Kinder                                              |           | Filed herewith           
|       
|        | 10 | .19 |             | Form of Restricted Stock Unit Award for Registrants 2000
    Equity Incentive Plan                                                                                                                |           | Filed herewith           
|       
|        | 10 | .20 |             | Form of Stock Option Agreement for Registrants 2000 Equity
    Incentive Plan                                                                                                                     |           | Filed herewith           
|       
|        | 10 | .21 |             | Form of Restricted Stock Agreement for Registrants 2000
    Equity Incentive Plan                                                                                                                 |           | Filed herewith           
|       
|        | 21 | .1  |             | List of Subsidiaries                                                                                                                                                                               |           | Filed herewith           

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##### Table of Contents



|        |    |    |             |                                                                                                                                                                                                            |           |               
|------- | -- | -- | ----------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | --------- | --------------
|Exhibit |    |    |             |                                                                                                                                                                                                            | Method   
|No.     |    |    | Description |                                                                                                                                                                                                            | of Filing
|        |    |    |             |                                                                                                                                                                                                            |          
|        | 23 | .1 |             | Consent of Ernst & Young LLP, Independent Registered
    Public Accounting Firm                                                                                                                            |           | Filed herewith
|       
|        | 31 | .1 |             | Certification of Brian H. Strom, President and Chief Executive
    Officer, as adopted pursuant to Section 302 of the
    Sarbanes-Oxley Act of 2002                                                       |           | Filed herewith
|       
|        | 31 | .2 |             | Certification of Philip A. Grybas, Senior Vice President and
    Chief Financial Officer, as adopted pursuant to Section 302
    of the Sarbanes-Oxley Act of 2002                                         |           | Filed herewith
|       
|        | 32 | .1 |             | Certification of Brian H. Strom, 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 herewith
|       
|        | 32 | .2 |             | Certification of Philip A. Grybas, Senior 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

108



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##### Table of Contents






SIGNATURES




SUREWEST COMMUNICATIONS




|                     |  |     |  |                                                                                                    
|-------------------- |  | --- |  | ---------------------------------------------------------------------------------------------------
|Date: March 10, 2005 |  | By: |  | /s/ Brian H. Strom
Brian H. Strom,
    President and Chief
    Executive Officer                   
|                    
|Date: March 10, 2005 |  | By: |  | /s/ Philip A. GrybasPhilip
    A. Grybas,
    Senior Vice President
    and Chief Financial Officer

109



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##### Table of Contents



SIGNATURES






| |                            
| | ---------------------------
| | /s/ Kirk C. Doyle          
| |                            
| | Kirk C. Doyle,             
| | Chairman of the Board      
|
| | /s/ Brian H. Strom         
| |                            
| | Brian H. Strom,            
| | President and Chief        
| | Executive Officer; Director
|
| | /s/ Philip A. Grybas       
| |                            
| | Philip A. Grybas,          
| | Senior Vice President      
| | and Chief Financial Officer
|
| | /s/ Guy R. Gibson          
| |                            
| | Guy R. Gibson,             
| | Director                   
|
| | /s/ Steven C. Oldham       
| |                            
| | Steven C. Oldham,          
| | 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,           
| | Director                   



110