**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**WASHINGTON,D.C. 20549**

** **

**FORM 10-Q**

** **
| **x**                                                       | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF  1934**  |
|-------------------------------------------------------------|-----------------------------------------------------------------------------------------------------|
| ** **                                                  |
| **For the  quarterly period ended September 30, 2009** |
| ** **                                                  |
| **or**                                                      |
| ** **                                                  |
| **o**                                                       | **TRANSITION  REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF  1934** |

** **

**CommissionFile Number 000-29660**

** **

****

**SureWestCommunications**

(Exact name ofregistrant as specified in its charter)

 

| **California**                     | ** ** | **68-0365195**       |
|------------------------------------|------------|----------------------|
| (State or other  jurisdiction      |       | (IRS Employer        |
| of incorporation  or organization) |       | Identification  No.) |

 

| **8150  Industrial Avenue, Building A, Roseville, California** | ** ** | **95678**  |
|----------------------------------------------------------------|------------|------------|
| (Address of  principal executive offices)                      |       | (Zip Code) |

 

**(916)786-6141**

(Registrant’stelephone number, including area code)

 

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

 

Indicate by check markwhether the registrant has submitted electronically and posted on its corporateWeb site, if any, every Interactive Data File required to be submitted andposted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter)during the preceding 12 months (or for such shorter period that the registrantwas required to submit and post such files). Yes o  No o

 

Indicate by check mark whetherthe registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer, or a smaller reporting company.  See the definitions of “large acceleratedfiler,” “accelerated filer” and “smaller reporting company” in Rule 12b-2of the Exchange Act. (Check one):

 

| Large  accelerated filer o                |   | Accelerated  filer x         |
|------------------------------------------------|--------|-----------------------------------|
|                                           |   |                              |
| Non-accelerated  filer o                  |   | Smaller  reporting company o |
| (Do not check  if a smaller reporting company) |   |                              |

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act).  Yes o  No x

 

On October 23, 2009,the registrant had 14,168,990 shares of Common Stock outstanding.

 

 

 

----

 

**TABLE OF CONTENTS**

 
| ** **                               | ** **                                                                                  | **Page** |
|------------------------------------------|---------------------------------------------------------------------------------------------|----------|
| **PART I - FINANCIAL  INFORMATION** |                                                                                        |
| Item 1.                                  | Financial  Statements                                                                       | 1        |
| Item 2.                                  | Management’s  Discussion and Analysis of Financial Condition and Results of Operations | 18       |
| Item 3.                                  | Quantitative and  Qualitative Disclosures About Market Risk                                 | 34       |
| Item 4.                                  | Controls and  Procedures                                                                    | 34       |
|                                     |                                                                                        |     |
| **PART II - OTHER  INFORMATION**    |                                                                                        |
| Item 1.                                  | Legal  Proceedings                                                                          | 35       |
| Item 6.                                  | Exhibits                                                                                    | 35       |
| SIGNATURES                               | 36                                                                                          |

 

----

 

**PART 1— FINANCIAL INFORMATION**

 

**ITEM 1.  FINANCIALSTATEMENTS.**

 

**SUREWEST COMMUNICATIONS**

**CONDENSED CONSOLIDATED STATEMENTS OFOPERATIONS**

*(Unaudited; Amounts in thousands,except per share amounts)*

* *
| ** **                                                                  | ** ** | **Quarter Ended September 30,** | ** ** | **Nine Months Ended September 30,** | ** ** |
|-----------------------------------------------------------------------------|------------|--------------------------------------|------------|------------------------------------------|------------|
| ** **                                                                  | ** ** | **2009**                             | ** ** | **2008**                                 | ** ** | **2009** | ** ** | **2008** | ** ** |
|                                                                        |       |                                 |       |                                     |       |   |   |   |   |
| **Operating revenues:**                                                     |       |                                 |       |                                     |       |   |   |   |   |
| Broadband                                                                   |       | $                                    | 40,175     |                                     | $          | 36,280 |   | $ | 119,656 |   | $ | 98,412 |   |
| Telecom                                                                     |       | 19,354                               |       | 23,990                                   |       | 61,745 |   | 73,023 |   |
| Total  operating revenues                                                   |       | 59,529                               |       | 60,270                                   |       | 181,401 |   | 171,435 |   |
|                                                                        |       |                                 |       |                                     |       |   |   |   |   |
| **Operating expenses:**                                                     |       |                                 |       |                                     |       |   |   |   |   |
| Cost  of services and products (exclusive of depreciation and amortization) |       | 24,563                               |       | 24,941                                   |       | 74,695 |   | 65,808 |   |
| Customer  operations and selling                                            |       | 9,017                                |       | 7,655                                    |       | 25,597 |   | 23,674 |   |
| General  and administrative                                                 |       | 8,073                                |       | 9,438                                    |       | 26,260 |   | 29,010 |   |
| Depreciation  and amortization                                              |       | 15,260                               |       | 14,219                                   |       | 44,298 |   | 40,361 |   |
| Total  operating expenses                                                   |       | 56,913                               |       | 56,253                                   |       | 170,850 |   | 158,853 |   |
|                                                                        |       |                                 |       |                                     |       |   |   |   |   |
| **Income from operations**                                                  |       | 2,616                                |       | 4,017                                    |       | 10,551 |   | 12,582 |   |
|                                                                        |       |                                 |       |                                     |       |   |   |   |   |
| Other  income (expense):                                                    |       |                                 |       |                                     |       |   |   |   |   |
| Interest  income                                                            |       | 28                                   |       | 35                                       |       | 99 |   | 593 |   |
| Interest  expense                                                           |       | (3,046                               | )          | (2,904                                   | )          | (8,402 | ) | (8,845 | ) |
| Other,  net                                                                 |       | 205                                  |       | 56                                       |       | 33 |   | 13 |   |
| Total  other income (expense), net                                          |       | (2,813                               | )          | (2,813                                   | )          | (8,270 | ) | (8,239 | ) |
|                                                                        |       |                                 |       |                                     |       |   |   |   |   |
| Income  (loss) from continuing operations before income taxes               |       | (197                                 | )          | 1,204                                    |       | 2,281 |   | 4,343 |   |
|                                                                        |       |                                 |       |                                     |       |   |   |   |   |
| Income  tax expense                                                         |       | 14                                   |       | 582                                      |       | 1,514 |   | 1,970 |   |
|                                                                        |       |                                 |       |                                     |       |   |   |   |   |
| **Income (loss) from continuing operations**                                |       | (211                                 | )          | 622                                      |       | 767 |   | 2,373 |   |
|                                                                        |       |                                 |       |                                     |       |   |   |   |   |
| Discontinued  operations, net of tax:                                       |       |                                 |       |                                     |       |   |   |   |   |
| Income  (loss) from discontinued operations                                 |       | —                               |       | (108                                     | )          | (69 | ) | 332 |   |
| Gain  (loss) on sale of discontinued operations                             |       | —                               |       | (615                                     | )          | 2,568 |   | 18,362 |   |
| Total  discontinued operations                                              |       | —                               |       | (723                                     | )          | 2,499 |   | 18,694 |   |
|                                                                        |       |                                 |       |                                     |       |   |   |   |   |
| **Net income (loss)**                                                       |       | $                                    | (211       | )                                        | $          | (101 | ) | $ | 3,266 |   | $ | 21,067 |   |
|                                                                        |       |                                 |       |                                     |       |   |   |   |   |
| **Basic and diluted earnings per common share:**                            |       |                                 |       |                                     |       |   |   |   |   |
| Income  (loss) from continuing operations                                   |       | $                                    | (0.02      | )                                        | $          | 0.04 |   | $ | 0.05 |   | $ | 0.17 |   |
| Discontinued  operations, net of tax                                        |       | —                               |       | (0.05                                    | )          | 0.18 |   | 1.32 |   |
| Net  income (loss) per basic and diluted common share                       |       | $                                    | (0.02      | )                                        | $          | (0.01 | ) | $ | 0.23 |   | $ | 1.49 |   |
|                                                                        |       |                                 |       |                                     |       |   |   |   |   |
| **Dividends per share**                                                     |       | $                                    | —     |                                     | $          | — |   | $ | — |   | $ | 0.50 |   |
|                                                                        |       |                                 |       |                                     |       |   |   |   |   |
| **Shares of common stock used to calculate****earnings  per share:**        |       |                                 |       |                                     |       |   |   |   |   |
| Basic                                                                       |       | 13,936                               |       | 13,970                                   |       | 13,973 |   | 14,138 |   |
| Diluted                                                                     |       | 13,936                               |       | 13,980                                   |       | 13,973 |   | 14,146 |   |

 

See accompanyingnotes.

 

1

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**SUREWESTCOMMUNICATIONS**

**CONDENSEDCONSOLIDATED BALANCE SHEETS**

*(Unaudited;Amounts in thousands)*

* *
| ** **                                                                                                                                                                         | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                         | ** ** | **2009**               | ** ** | **2008**              | ** ** |
| **ASSETS**                                                                                                                                                                         |       |                   |       |                  |       |
| Current  assets:                                                                                                                                                                   |       |                   |       |                  |       |
| Cash  and cash equivalents                                                                                                                                                         |       | $                      | 7,138      |                  | $          | 2,840 |   |
| Short-term  investments                                                                                                                                                            |       | 4,243                  |       | 610                   |       |
| Accounts  receivable, net                                                                                                                                                          |       | 20,878                 |       | 21,415                |       |
| Income  tax receivable                                                                                                                                                             |       | 3,656                  |       | 6,391                 |       |
| Inventories                                                                                                                                                                        |       | 5,188                  |       | 6,527                 |       |
| Prepaid  expenses                                                                                                                                                                  |       | 3,922                  |       | 4,539                 |       |
| Deferred  income taxes                                                                                                                                                             |       | 3,785                  |       | 2,989                 |       |
| Other  current assets                                                                                                                                                              |       | 1,777                  |       | 1,752                 |       |
| Assets  of discontinued operations                                                                                                                                                 |       | —                 |       | 5,002                 |       |
| Total  current assets                                                                                                                                                              |       | 50,587                 |       | 52,065                |       |
|                                                                                                                                                                               |       |                   |       |                  |       |
| Property,  plant and equipment, net                                                                                                                                                |       | 523,873                |       | 523,231               |       |
|                                                                                                                                                                               |       |                   |       |                  |       |
| Intangible  and other assets:                                                                                                                                                      |       |                   |       |                  |       |
| Long-term  investments                                                                                                                                                             |       | —                 |       | 3,508                 |       |
| Customer  relationships, net                                                                                                                                                       |       | 4,151                  |       | 5,062                 |       |
| Goodwill                                                                                                                                                                           |       | 45,814                 |       | 45,814                |       |
| Deferred  charges and other assets                                                                                                                                                 |       | 2,338                  |       | 4,129                 |       |
|                                                                                                                                                                               |       | 52,303                 |       | 58,513                |       |
|                                                                                                                                                                               |       | $                      | 626,763    |                  | $          | 633,809 |   |
| **LIABILITIES AND SHAREHOLDERS’ EQUITY**                                                                                                                                      |       |                   |       |                  |       |
| Current  liabilities:                                                                                                                                                              |       |                   |       |                  |       |
| Current  portion of long-term debt and capital lease obligations                                                                                                                   |       | $                      | 15,638     |                  | $          | 15,643 |   |
| Accounts  payable                                                                                                                                                                  |       | 3,191                  |       | 2,798                 |       |
| Other  accrued liabilities                                                                                                                                                         |       | 20,517                 |       | 19,050                |       |
| Advance  billings and deferred revenues                                                                                                                                            |       | 8,535                  |       | 8,960                 |       |
| Accrued  compensation                                                                                                                                                              |       | 8,708                  |       | 11,292                |       |
| Liabilities  of discontinued operations                                                                                                                                            |       | —                 |       | 453                   |       |
| Total  current liabilities                                                                                                                                                         |       | 56,589                 |       | 58,196                |       |
|                                                                                                                                                                               |       |                   |       |                  |       |
| Long-term  debt                                                                                                                                                                    |       | 211,045                |       | 226,045               |       |
| Deferred  income taxes                                                                                                                                                             |       | 50,836                 |       | 46,358                |       |
| Accrued  pension and other post-retirement benefits                                                                                                                                |       | 38,338                 |       | 36,046                |       |
| Other  liabilities and deferred revenues                                                                                                                                           |       | 4,979                  |       | 5,819                 |       |
|                                                                                                                                                                               |       |                   |       |                  |       |
| Commitments  and contingencies                                                                                                                                                     |       |                   |       |                  |       |
|                                                                                                                                                                               |       |                   |       |                  |       |
| Shareholders’  equity:                                                                                                                                                        |       |                   |       |                  |       |
| Common  stock, without par value; 100,000 shares authorized, 14,169 and 14,082 shares  issued and outstanding at September 30, 2009 and December 31, 2008,  respectively |       | 146,587                |       | 146,558               |       |
| Accumulated  other comprehensive loss                                                                                                                                              |       | (19,272                | )          | (19,248               | )          |
| Retained  earnings                                                                                                                                                                 |       | 137,661                |       | 134,035               |       |
| Total  shareholders’ equity                                                                                                                                                   |       | 264,976                |       | 261,345               |       |
|                                                                                                                                                                               |       | $                      | 626,763    |                  | $          | 633,809 |   |

 

See accompanyingnotes.

 

2

----

 

**SUREWESTCOMMUNICATIONS**

**CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS**

*(Unaudited;Amounts in thousands)*

 
| ** **                                                          | ** ** | **Nine Months Ended September 30,** | ** ** |
|---------------------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                                          | ** ** | **2009**                                                | ** ** | **2008** | ** ** |
| ** **                                                          | ** ** | ** **                                              | ** ** | ** ** | ** ** |
| Net  cash provided by continuing operations                         |       | $                                                       | 52,571     |   | $ | 34,746 |   |
| Net  cash used in discontinued operations                           |       | (514                                                    | )          | (184 | ) |
| Net  cash provided by operating activities                          |       | 52,057                                                  |       | 34,562 |   |
|                                                                |       |                                                    |       |   |   |
| Cash  flows from investing activities:                              |       |                                                    |       |   |   |
| Business  acquisition, net of cash acquired                         |       | —                                                  |       | (179,750 | ) |
| Proceeds  from sale of discontinued operations                      |       | 10,947                                                  |       | 66,296 |   |
| Proceeds  from the sale of property and equipment                   |       | 850                                                     |       | — |   |
| Capital  expenditures for property, plant and equipment             |       | (43,363                                                 | )          | (64,567 | ) |
| Purchases  of available-for-sale securities                         |       | (25                                                     | )          | — |   |
| Proceeds  from sale of available-for-sale securities                |       | —                                                  |       | 16,650 |   |
| Net  cash used in continuing operations                             |       | (31,591                                                 | )          | (161,371 | ) |
| Net  cash used in discontinued operations                           |       | —                                                  |       | (280 | ) |
| Net  cash used in investing activities                              |       | (31,591                                                 | )          | (161,651 | ) |
|                                                                |       |                                                    |       |   |   |
| Cash  flows from financing activities:                              |       |                                                    |       |   |   |
| Proceeds  from issuance of long-term debt                           |       | 10,500                                                  |       | 98,000 |   |
| Proceeds  from short-term borrowings                                |       | —                                                  |       | 60,000 |   |
| Principal  payments on long-term debt and capital lease obligations |       | (25,505                                                 | )          | (16,004 | ) |
| Repayment  of short-term borrowings                                 |       | —                                                  |       | (30,000 | ) |
| Dividends  paid                                                     |       | —                                                  |       | (7,124 | ) |
| Repurchases  and surrenders of common stock                         |       | (1,163                                                  | )          | (6,504 | ) |
| Net  cash (used in) provided by financing activities                |       | (16,168                                                 | )          | 98,368 |   |
|                                                                |       |                                                    |       |   |   |
| Increase  (decrease) in cash and cash equivalents                   |       | 4,298                                                   |       | (28,721 | ) |
|                                                                |       |                                                    |       |   |   |
| Cash  and cash equivalents at beginning of period                   |       | 2,840                                                   |       | 31,114 |   |
|                                                                |       |                                                    |       |   |   |
| Cash  and cash equivalents at end of period                         |       | $                                                       | 7,138      |   | $ | 2,393 |   |

 

See accompanyingnotes.

 

3

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**SUREWESTCOMMUNICATIONS**

**NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

*(Unaudited;Amounts in thousands, except share and per share amounts)*

 

**1.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**

 

**Businessand Basis of Accounting**

 

SureWest Communications(the “Company”, “we” or “our”) is a holding company with operating subsidiariesthat provide communications services in Northern California, primarily thegreater Sacramento region, and the greater Kansas City, Kansas and Missouriareas (“Kansas City area”). Our operating subsidiaries are SureWest Broadband,SureWest TeleVideo, SureWest Internet, SureWest Custom Data Services, SureWestKansas, Inc. (formerly “Everest Broadband, Inc.” with its variousdirect and indirect subsidiaries, “SureWest Kansas” or the “Kansas Cityoperations”), SureWest Telephone and SureWest Long Distance.

 

In February 2008 weacquired 100% of the issued and outstanding stock of Everest Broadband Inc. (“Everest”)and in May 2008 we sold the operating assets of our Wireless business, SureWestWireless. Further, in October of 2008 we entered into a definitivepurchase agreement to sell our communication tower assets and completed thetransaction on February 27, 2009. Accordingly, the financial results ofSureWest Wireless and our communication tower assets have been reported asdiscontinued operations for all periods presented in accordance with FinancialAccounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”)Topic No. 360, *Property, Plant andEquipment* (formerly Statement of Financial Accounting Standards (“SFAS”)No. 144, *Accounting for the Impairment or Disposal ofLong-Lived Assets)*. The notes to condensed consolidated financialstatements reflect historical amounts exclusive of discontinued operations,unless otherwise noted.

 

In the opinion ofmanagement, the accompanying condensed consolidated balance sheets and relatedinterim statements of operations and cash flows include all adjustments,consisting only of normal recurring items, necessary for their fair presentationin conformity with accounting principles generally accepted in the UnitedStates (“U.S. GAAP” or “GAAP”) for interim financial information and pursuantto the rules and regulations of the Securities and Exchange Commission(the “SEC”). Certain information and footnote disclosures normally included inannual financial statements prepared in accordance with U.S. GAAP have beencondensed or omitted pursuant to such SEC rules and regulations andaccounting principles applicable for interim periods. Events subsequent to thebalance sheet date have been evaluated for inclusion in the accompanyingcondensed consolidated financial statements through the issuance date, October 29,2009.  Management believes that the disclosures made are adequate to makethe information presented not misleading. Interim results are not necessarilyindicative of results for a full year. The information presented in this Form 10-Q should be read inconjunction with Management’s Discussion and Analysis of Financial Condition andResults of Operations and the consolidated financial statements and notesthereto included in our 2008 Annual Report on Form 10-K filed with theSEC.

 

**Stock-basedCompensation**

 

***Stock Plan***

*** ***

Our Board of Directorsmay grant share-based awards from our shareholder approved Equity IncentivePlan; the 2000 Equity Incentive Plan (the “Stock Plan”) to certain of ouremployees, outside directors and consultants. The Stock Plan permits issuanceof awards in the form of restricted common stock (“RSAs”), restricted commonstock units (“RSUs”), performance shares, stock options and stock appreciationrights. Under the Stock Plan, approximately 2.0 million shares of our commonstock were authorized for issuance, including those outstanding as of September 30,2009.

 

***Restricted Common Stock Awards and Units***

*** ***

Wemeasure the fair value of the RSAs and RSUs based upon the market price of theunderlying common stock as of the date of the grant.  RSAs and RSUs are amortized over theirrespective vesting periods, generally from immediate vest to a five-yearvesting period using the straight-line method. We have estimated expected forfeitures based on historical experienceand are recognizing compensation expense only for those RSAs and RSUs expectedto vest.

 

4

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The following table summarizes the grants thatoccurred under the Stock Plan during the quarters and nine-month periods ended September 30,2009 and 2008:

 
| ** **     | ** ** | **Quarter Ended September 30,** | ** ** | **Nine Months Ended September 30,** | ** ** |
|----------------|------------|------------------------------------------------|------------|------------------------------------------|------------|
| ** **     | ** ** | ** **                                     | ** ** | **Grant Date**                      | ** ** | ** ** | ** ** | **Grant Date** | ** ** | ** ** | ** ** | **Grant Date** | ** ** | ** ** | ** ** | **Grant Date** | ** ** |
| ** **     | ** ** | **2009**                                       | ** ** | **Fair Value**                      | ** ** | **2008** | ** ** | **Fair Value** | ** ** | **2009** | ** ** | **Fair Value** | ** ** | **2008** | ** ** | **Fair Value** | ** ** |
| ** **     | ** ** | ** **                                     | ** ** | ** **                               | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| RSAs  Granted  |       | —                                         |       | $                                        | —     |   | — |   | $ | — |   | 166,506 |   | $ | 11.56 |   | 7,056 |   | $ | 15.59 |   |
| RSUs  Granted  |       | —                                         |       | $                                        | —     |   | — |   | $ | — |   | 72,443 |   | $ | 11.56 |   | 22,240 |   | $ | 8.43 |   |
| RSU  Dividends |       | 500                                            |       | $                                        | 11.86      |   | — |   | $ | — |   | 8,470 |   | $ | 9.79 |   | 802 |   | $ | 8.88 |   |
| Total          |       | 500                                            |       |                                     |       | — |   |   |   | 247,419 |   |   |   | 30,098 |   |   |   |

 

RSUDividends consist of dividends that were previously granted to the holders ofRSUs, which have fully vested and were released during the quarters andnine-month periods ended September 30, 2009 and 2008 in accordance withthe underlying award agreement. Stock-based compensation expense for both RSAs and RSUs of $443 and$1,515 was recorded during the quarter and nine-month period ended September 30,2009, respectively.  During the sameprior year periods, we recorded stock-based compensation expense of $170 and$656, respectively.

 

**The following table summarizesthe RSA and RSU activity during the nine-month period ended September 30,2009:**

 
| ** **                         | ** ** | ** ** | ** ** | **Weighted Average**      | ** ** |
|------------------------------------|------------|------------|------------|---------------------------|------------|
| **Nonvested Shares**               | ** ** | **Shares** | ** ** | **Grant Date Fair Value** | ** ** |
|                               |       |       |       |                      |       |
| Nonvested-January 1,  2009    |       | 269,038    |       | $                         | 14.98      |   |
| Granted                            |       | 247,419    |       | $                         | 11.50      |   |
| Vested                             |       | (79,843    | )          | $                         | 12.36      |   |
| Forfeited                          |       | (3,063     | )          | $                         | 18.36      |   |
| Nonvested-September 30,  2009 |       | 433,551    |       | $                         | 13.45      |   |

 

Asof September 30, 2009, total unrecognized compensation costs related tononvested restricted stock was $4,871 and will be recognized over aweighted-average period of approximately 2.91 years. The total fair value ofRSAs and RSUs vested during the nine-month period ended September 30, 2009was $987.

 

***Stock Options***

*** ***

In2003, we ceased granting stock options and have since granted RSAs and RSUs aspart of our equity compensation plans. We issue new shares of common stock uponexercise of stock options. The exercise price per share of the Company’s commonstock to be purchased under any incentive stock option shall not be less than100% of the fair market value of a share of the Company’s common stock on thedate of the grant, and the exercise price under a non-qualified stock optionshall not be less than 85% of the fair market value of the Company’s commonstock at the date of the grant. The term of any stock option shall not exceedten years.  There were no stock optionsgranted or exercised during the quarters or nine-month periods ended September 30,2009 and 2008. The aggregate intrinsic value is calculated as the differencebetween the exercise price of the stock options and the quoted price of ourcommon stock.  There were no options thatwere in-the-money as of September 30, 2009 and 2008.

 

The following table summarizes stock optionactivity for the nine-month period ended September 30, 2009:

 
| ** **                                         | ** ** | ** ** | ** ** | **Weighted** | ** ** | **Weighted**         | ** ** |
|----------------------------------------------------|------------|------------|------------|--------------|------------|----------------------|------------|
| ** **                                         | ** ** | ** ** | ** ** | **Average**  | ** ** | **Average**          | ** ** |
| ** **                                         | ** ** | ** ** | ** ** | **Exercise** | ** ** | **Remaining**        | ** ** |
| **Options**                                        | ** ** | **Shares** | ** ** | **Price**    | ** ** | **Contractual Life** | ** ** |
|                                               |       |       |       |         |       |                 |       |
| Outstanding-January 1,  2009                  |       | 335,839    |       | $            | 40.37      |                 |       |   |
| Expired                                            |       | (17,250    | )          | —       |       |                 |       |
| Outstanding-September 30,  2009               |       | 318,589    |       | $            | 40.45      |                 | 2          |   |
| Vested  and Exercisable at September 30, 2009 |       | 318,589    |       | $            | 40.45      |                 | 2          |   |

 

5

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**Per ShareAmounts**

 

Sharesused in the computation of basic earnings (loss) per share are based on theweighted average number of RSAs and RSUs outstanding, excluding unvested RSAsand unvested RSUs. Shares used in the computation of diluted earnings per shareare based on the weighted average number of RSAs and RSUs outstanding, alongwith other potentially dilutive securities outstanding in each period.

 

Cash dividends per shareare based on the actual dividends per share, as declared by our Board ofDirectors. On each date that we paid a cash dividend to the holders of theCompany’s common stock, we credited the holders of RSUs an additional number ofRSUs equal to the total number of whole RSUs and additional RSUs previouslycredited to the holders, multiplied by the dollar amount of the cash dividendper share of common stock, divided by the Company’s stock price on the dividendpayment date. Based on a decision of our Board of Directors to discontinuedividend payments for the foreseeable future, we have not paid a cash dividendsince June 2008.

 

**Other****Comprehensive Income**

 

Significant components ofour other comprehensive income are as follows:

 
| ** **                                                                 | ** ** | **Quarter Ended   September 30,** | ** ** | **Nine Months Ended   September 30,** | ** ** |
|----------------------------------------------------------------------------|------------|----------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                 | ** ** | **2009**                               | ** ** | **2008**                                   | ** ** | **2009** | ** ** | **2008** | ** ** |
| Net  income (loss)                                                         |       | $                                      | (211       | )                                          | $          | (101 | ) | $ | 3,266 |   | $ | 21,067 |   |
| Unrealized  holding losses on available-for-sale investments, net of tax   |       | (5                                     | )          | (89                                        | )          | (40 | ) | (692 | ) |
| Reclassification  adjustment for losses included in net income, net of tax |       | —                                 |       | —                                     |       | 16 |   | — |   |
| Comprehensive  income (loss)                                               |       | $                                      | (216       | )                                          | $          | (190 | ) | $ | 3,242 |   | $ | 20,375 |   |

 

Accumulated other comprehensive loss consists of adjustments, net oftax, related to unrealized losses on available-for-sale securities and minimumpension and post-retirement benefits.

 

**Reclassifications**

 

Certainamounts in our 2008 condensed consolidated financial statements have beenreclassified to conform to the presentation of our 2009 condensed consolidatedfinancial statements, which consists of the effects of reclassifications fromthe presentation of our Tower Assets as a discontinued operation.

 

**2.   INVESTMENTS AND FAIR VALUE OF FINANCIALINSTRUMENTS**

 

*Investments*

 

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

 
| ** **         | ** ** | **As of September 30, 2009** | ** ** | **As of December 31, 2008** | ** ** |
|--------------------|------------|-----------------------------------|------------|----------------------------------|------------|
| ** **         | ** ** | **Adjusted   Cost**               | ** ** | **Gross   Unrealized   Gains**   | ** ** | **Gross   Unrealized   Losses** | ** ** | **Estimated  Fair   Market   Value** | ** ** | **Adjusted   Cost** | ** ** | **Gross   Unrealized   Gains** | ** ** | **Gross   Unrealized   Losses** | ** ** | **Estimated   Fair   Market   Value** | ** ** |
| Equity  securities |       | $                                 | 645        |                             | $          | — |   | $ | (77 | ) | $ | 568 |   | $ | 648 |   | $ | — |   | $ | (38 | ) | $ | 610 |   |
|                    |            |                                   |            |                                  |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

As of September 30, 2009, the decline in the fair value of ourshort-term available-for-sale investments had been in a continuous lossposition for more than twelve months and as of December 31, 2008, the valueof these investments had been in a continuous loss position for less thantwelve months. We concluded that the gross unrealized losses of our equitysecurities are temporary.  Also, theextent of the decline, both in dollars and percentages of cost is notconsidered significant.  The unrealizedlosses, net of tax, on our short-term available-for-sale investments wererecorded as a component of other comprehensive income at such dates. Wedetermined the fair value of our short-term equity security investments byquoted market prices.

 

6

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*Fair Value of FinancialInstruments*

 

In accordance with ASCTopic 820, *Fair Value Measurements and Disclosures*(“ASC820”) (formerly SFAS No. 157, *Fair Value Measurements*),we measure our cash equivalents (money market funds) and short-term investments(equity securities, auction rate security and put option) at fair value.  ASC 820 clarifies that fair value is an exitprice, representing the amount that would be received to sell an asset or paidto transfer a liability in an orderly transaction between market participants.As such, fair value is a market-based measurement that should be determinedbased on assumptions that market participants would use in pricing an asset ora liability. A financial asset or liability’s classification within thehierarchy is determined based on the lowest level input that is significant tothe fair value measurement. As a basis for considering such assumptions, ASC820 establishes a three-tier value hierarchy, which prioritizes the inputs usedin the valuation methodologies in measuring fair value:

 

Level 1 — Observableinputs that reflect quoted prices (unadjusted) for identical assets orliabilities in active markets.

 

Level 2— Include other inputs that are directly or indirectly observable in themarketplace.

 

Level 3— Unobservable inputs which are supported by little or no market activity.

 

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

 
| ** **               | ** ** | **As of September 30, 2009** | ** ** |
|--------------------------|------------|-----------------------------------|------------|
| ** **               | ** ** | **Total**                         | ** ** | **Level 1** | ** ** | **Level 2** | ** ** | **Level 3** | ** ** |
| Money  market funds      |       | $                                 | 1,338      |   | $ | 1,338 |   | $ | — |   | $ | — |   |
| Equity  securities       |       | 568                               |       | 568 |   | — |   | — |   |
| Auction  rate securities |       | 3,054                             |       | — |   | — |   | 3,054 |   |
| Put  Option              |       | 621                               |       | — |   | — |   | 621 |   |
|                     |       | $                                 | 5,581      |   | $ | 1,906 |   | $ | — |   | $ | 3,675 |   |

 

Fair values for cashequivalents and equity securities in short-term investments were determined byquoted market prices. Fair values for the auction rate security and put optionwere determined based on discounted cash flow (“DCF”) models, as describedbelow.

 

The following tableprovides a reconciliation of the beginning and ending balances for the assetsmeasured at fair value using significant unobservable inputs (Level 3):

 
| ** **                                     | ** ** | **2009**       | ** ** | **2008**                      | ** ** |
|------------------------------------------------|------------|----------------|------------|-------------------------------|------------|
| ** **                                     | ** ** | **Put Option** | ** ** | **Auction Rate   Securities** | ** ** | **Auction Rate   Securities** | ** ** |
| Beginning  balance at January 1st         |       | $              | 1,383      |                          | $          | 2,125 |   | $ | — |   |
| Transfers  in and/or out of Level 3            |       | —         |       | —                        |       | 3,700 |   |
| Losses  included in other comprehensive income |       | —         |       | —                        |       | (440 | ) |
| Gains  (losses) included in earnings           |       | (745           | )          | 745                           |       | — |   |
| Balance  at March 31st                    |       | 638            |       | 2,870                         |       | 3,260 |   |
|                                           |       |           |       |                          |       |   |   |
| Losses  included in other comprehensive income |       | —         |       | —                        |       | (414 | ) |
| Gains  (losses) included in earnings           |       | (41            | )          | 162                           |       | — |   |
| Balance  at June 30th                     |       | 597            |       | 3,032                         |       | 2,846 |   |
|                                           |       |           |       |                          |       |   |   |
| Losses  included in other comprehensive income |       | —         |       | —                        |       | (83 | ) |
| Gains  included in earnings                    |       | 24             |       | 22                            |       | — |   |
| Balance  at September 30th                |       | $              | 621        |                          | $          | 3,054 |   | $ | 2,763 |   |

 

As of September 30, 2009, we held one $3,700par value auction rate security (“ARS”) with an estimated fair value of $3,054,which was measured using Level 3 inputs. This ARS is collateralized by studentloans that are guaranteed primarily by a monoline insurance company andpartially by the Federal Family Education Loan Program (“FFELP”).

 

7

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Weprepared a DCF model to estimate the fair value of the ARS as of September 30,2009.  The significant estimates thatwere used as inputs in our DCF model were the credit quality of the issuer, thecredit quality of the monoline insurance company, the percentage and the typesof guarantees (such as the monoline insurance company and FFELP), interestrates, expected holding period of the ARS, expected future cash flows, and anilliquidity discount factor. We compare this ARS, when possible, to otherobservable and relevant market data. Changes in the assumptions of the modelare based on dynamic market conditions which could have a significant impact onthe valuation of this security and may result in impairment charges for thissecurity in the future.

 

Based on our review ofour DCF model, the inputs to the model and the assessment of fair value as of September 30,2009, we determined there was an increase in the fair value of the ARSinvestment of $22 and $929 during the quarter and nine months ended September 30,2009, respectively.  Accordingly, theincrease in fair value has been recorded as a gain to other income (expense),other, net, in the condensed consolidated statements of operations in 2009.

 

As of December 31,2008, we classified the ARS as a long-term asset on our condensed consolidatedbalance sheet.  We did not expect to needto access these funds in the short-term; however, in the event we needed toaccess these funds, they were not expected to be accessible until one of thefollowing occurs: a successful auction, the issuer redeems the issue, a buyeris found outside of the auction process or the underlying securities mature. Inaddition, the underlying maturities of the securities are greater than20 years.  Since June 30, 2009,we have classified the ARS as a current asset in short-term investments on ourcondensed consolidated balance sheet, as a result of our Right, as describedbelow. We continue to earn and receive interest on our ARS, as specified in theterms of the prospectus.

 

In November 2008, weaccepted an offer (“Right” or “Put Option”) from UBS Financial Services, Inc.,a subsidiary of UBS AG (“UBS”), entitling us to sell at par value our ARSoriginally purchased from UBS at anytime during a two-year period from June 30,2010 through July 2, 2012. Although we expect to sell our ARS under theRight, if the Right is not exercised before July 2, 2012, it will expireand UBS will have no further rights or obligation to buy our ARS.  If UBS has insufficient funding to buy backthe ARS and the auction process continues to fail, then we may incur furtherlosses on the carrying value of the ARS.

 

Prior to accepting theRight, we recorded our ARS as an available-for-sale investment, and therefore,recorded resulting unrealized gains or losses, net of tax, in accumulated othercomprehensive income. In connection with the acceptance of the Right in November 2008,we transferred our ARS, subject to the Right, from available-for-sale totrading in accordance with ASC Topic 320, *Investment-Debt and EquitySecurities* (formerly SFAS No. 115, *Accounting for Certain Investments in Debt and Equity Securities*). The transfer to trading securitiesreflects management’s intent to exercise the Right during the period June 30,2010 to July 2, 2012.  As a resultof this put option period, we continue to classify this Right (put option) as acurrent asset in short-term investments on our condensed consolidated balancesheet as of September 30, 2009.

 

Upon transfer of the ARSto trading securities in November 2008, we recognized a loss of $1,575,included in other income (expense), other, net, for the amount of theunrealized loss not previously recognized in earnings. The enforceability ofthe Right results in a put option and is recognized as a separate freestandingasset and is accounted for separately from the ARS investment. We elected tomeasure the Right at fair value under ASC Topic 825, *FinancialInstruments* (formerly SFAS No.159, *The FairValue Option for Financial Assets and Financial Liabilities***-***Including an Amendmentof FASB Statement No. 115*)*,* which permits an entity to elect the fair valueoption for recognized financial assets, in order to match the changes in thefair value of the ARS.  Based on dataavailable as of December 31, 2008, we valued the Right using a DCFapproach which included estimates of interest rates, timing and amount of cashflow, adjusted for any bearer risk associated with UBS’s financial ability torepurchase the ARS beginning June 30, 2010. These assumptions are volatileand subject to change as the underlying sources of these assumptions and marketconditions change. As of December 31, 2008, we recorded $1,383 as the fairvalue of the Right asset and classified it as a long-term investment on theconsolidated balance sheet, with a corresponding credit to other income(expense), other, net, in the consolidated statement of income for the yearended December 31, 2008.  Therecording of the realized gain (fair value) of the Right during the year ended December 31,2008 largely offset the realized loss on the ARS during that same period.

 

As of September 30,2009, we estimated the fair value of the Right to be $621, which was measuredusing Level 3 inputs.  We prepared a DCFmodel to value the Right as of September 30, 2009.  Based on our DCF model, the inputs to themodel and the assessment of fair value as of September 30, 2009, wedetermined there was a decline in the fair value of the Right of $24 and $762during the quarter and nine months ended September 30, 2009,respectively.  Accordingly, these changesin fair value have been recorded to other income (expense), other, net, in thecondensed consolidated statements of operations in 2009.  The recording of the realized loss on theRight during the nine months ended September 30, 2009, largely offsets therealized gain on the ARS during that same period.

 

8

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We will continue to analyze our ARS and Right (putoption) each reporting period for additional changes in fair value and willrecord those gains or losses in the condensed consolidated statements ofoperations.

 

*Fair Value of Debt and CapitalLeases*

 

We had no short-term borrowings as of September 30, 2009 and December 31,2008. The fair value of our long-term debt and capital leases was estimatedusing a DCF analyses based on incremental borrowing rates for similar types ofborrowing arrangements.

 
| ** **                                                        | ** ** | **As of September 30, 2009** | ** ** | **As of December 31, 2008** | ** ** |
|-------------------------------------------------------------------|------------|-----------------------------------|------------|----------------------------------|------------|
| ** **                                                        | ** ** | **Carrying Value**                | ** ** | **Fair Value**                   | ** ** | **Carrying Value** | ** ** | **Fair Value** | ** ** |
| Long-term  debt and capital leases (including current maturities) |       | $                                 | 226,683    |                             | $          | 227,493 |   | $ | 241,688 |   | $ | 238,471 |   |
|                                                                   |            |                                   |            |                                  |            |  |  |  |  |  |  |  |  |

 

**3.   DISCONTINUED OPERATIONS**

 

*SureWest Wireless*

 

In May 2008, wecompleted the sale of the operating assets of our Wireless business, SureWestWireless, to Verizon Wireless (“Verizon”) for an aggregate cash purchase priceof $69,746, resulting in a gain of $18,864, net of tax.  Under the agreement, Verizon acquired thespectrum licenses and operating assets of SureWest Wireless, excluding our ownedcommunication towers.  See theCommunication Tower Assets section below for further discussion regarding ourowned communication towers.  SureWestWireless was previously reported as a separate reportable segment.

 

A portion of the purchaseprice equal to $3,450 was placed in escrow, half of which was received duringthe quarter ended June 30, 2009 and the balance of which will be availableduring the second quarter of 2010, less the amount of any pending claims, ineach case, to be held as security for certain losses, if any, incurred byVerizon in the event of (i) any breach of the representations andwarranties set forth in the agreement, (ii) any breach or nonperformanceof covenants set forth in the agreement and (iii) certain other specifiedevents. The actual gain on sale could vary based on future claims, if any, madeagainst the amounts held in escrow.

 

The results of SureWestWireless have been reported as a discontinued operation in our condensedconsolidated financial statements for all periods presented.

 

The followingtable summarizes the financial information for SureWest Wireless’ operations:

 
| ** **                                                  | ** ** | **Quarter Ended   September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-------------------------------------------------------------|------------|----------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                  | ** ** | **2008**                               | ** ** | **2009**                                  | ** ** | **2008** | ** ** |
| Operating  revenues                                         |       | $                                      | —     |                                      | $          | — |   | $ | 10,055 |   |
| Operating  expenses including depreciation and amortization |       | 407                                    |       | —                                    |       | 9,684 |   |
| Income  (loss) from operations                              |       | (407                                   | )          | —                                    |       | 371 |   |
| Other  income (expense)                                     |       | —                                 |       | —                                    |       | (7 | ) |
| Income  tax expense (benefit)                               |       | (165                                   | )          | —                                    |       | 147 |   |
| Income  (loss) from discontinued operations                 |       | $                                      | (242       | )                                         | $          | — |   | $ | 217 |   |
|                                                        |       |                                   |       |                                      |       |   |   |
| Gain  on sale of discontinued operations, net of tax        |       | $                                      | 202        |                                      | $          | 43 |   | $ | 19,179 |   |

 

During the quarter ended September 30,2008, the gain on sale was adjusted as a result of changes in the post-closingworking capital calculation and estimated transaction costs.

 

In connection with thesale, we entered into a short-term Transition Services Agreement (“TSA”) withVerizon to provide certain operating services during the transition of theWireless business to Verizon.  The TSAconcluded during the third quarter of 2008. During the transition period, our Telecommunications (“Telecom”) andBroadband segments provided certain services including long distance andinterconnect services to Verizon. Such services, which were provided toSureWest Wireless prior to the sale and eliminated in our condensedconsolidated financial statements, were $1,869 for the nine-month period ended September 30,2008.

 

9

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*Communication Tower Assets*

 

In February 2009, we sold our fifty-two wireless communicationstowers (“Tower Assets”) owned by our subsidiary West Coast PCS, LLC (“WestCoast PCS”) to Global Tower Partners. West Coast PCS was a component of ourBroadband segment. The sale was completed for an aggregate cash purchase priceof $9,222, based on the tower cash flow generated by commenced tenant leases,resulting in a gain of $2,525, net of tax.

 

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

 

At December 31,2008, the major components of the Tower Assets and liabilities to be sold wereas follows:

 
| ** **                               | ** ** | **December 31, 2008** | ** ** |
|------------------------------------------|------------|----------------------------|------------|
| Prepaid  expenses                        |       | $                          | 98         |   |
| Property,  plant and equipment, net      |       | 4,904                      |       |
| Total  assets                            |       | $                          | 5,002      |   |
|                                     |       |                       |       |
| Other  liabilities and deferred revenues |       | $                          | 453        |   |
| Total  liabilities                       |       | $                          | 453        |   |

 

The followingtable summarizes the financial information for the Tower Assets operations:

 
| ** **                                                  | ** ** | **Quarter   Ended  September 30,** | ** ** | **Nine Months Ended   September 30,** | ** ** |
|-------------------------------------------------------------|------------|-----------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                  | ** ** | **2008**                                | ** ** | **2009**                                   | ** ** | **2008** | ** ** |
| Operating  revenues                                         |       | $                                       | 491        |                                       | $          | 249 |   | $ | 1,196 |   |
| Operating  expenses including depreciation and amortization |       | 267                                     |       | 365                                        |       | 1,002 |   |
| Income  (loss) from operations                              |       | 224                                     |       | (116                                       | )          | 194 |   |
| Income  tax expense (benefit)                               |       | 90                                      |       | (47                                        | )          | 79 |   |
| Income  (loss) from discontinued operations                 |       | $                                       | 134        |                                       | $          | (69 | ) | $ | 115 |   |
|                                                        |       |                                    |       |                                       |       |   |   |
| Gain  on sale of discontinued operations, net of tax        |       | $                                       | —     |                                       | $          | 2,525 |   | $ | — |   |

 

*SureWest Directories*

 

In 2007, we sold 100% ofthe stock of SureWest Directories, our directory publishing business, for anaggregate cash purchase price of $110,123, resulting in a gain of $59,339, netof tax. During the quarter ended, September 30, 2008, the gain on sale wasreduced by $817 related to disputed claims owed to us under a transitionalservice agreement for billing services performed after the sale date. Theresults of SureWest Directories are reported as a discontinued operation in thecondensed consolidated financial statements for all periods presented.

 

**4.   BUSINESS SEGMENTS**

 

We have two reportablebusiness segments: Broadband and Telecom. We have aggregated certain of ouroperating segments within the Broadband and Telecom segments because we believethat such operating segments share similar economic characteristics.  We measure and evaluate the performance ofour segments based on income (loss) from operations. Corporate Operations areallocated to the appropriate segment, except for cash; investments; certainproperty, plant, and equipment; and miscellaneous other assets, which are notallocated to the segments. However, the investment income associated with cashand investments held by Corporate Operations is included in the results of theoperations of our segments.

 

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

 

The Telecom segmentoffers landline telecommunications services, Digital Subscriber Line (“DSL”)service, long distance services and certain non-regulated services operatingonly in the greater Sacramento area. SureWest Telephone, which is the principaloperating subsidiary of the Telecom segment, provides local services, tolltelephone services, network access services and certain non-regulated services.SureWest Long Distance is a reseller of long distance services.

 

10

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As discussed in Note 3, in May 2008 we sold the operating assetsof our Wireless business, SureWest Wireless, which was previously reported as aseparate reportable segment. The Wireless business sold has been presented as adiscontinued operation for all periods presented.

 

These segments are strategic business units that offer differentproducts and services. The accounting policies of these segments are the sameas those described in Note 1. We account for intersegment revenues and expensesat prevailing market rates.  Our businesssegment information is as follows:

 
| ** **                                                 | ** ** | ** **    | ** ** | ** **  | ** ** | **Intercompany** | ** ** | ** **       | ** ** |
|------------------------------------------------------------|------------|---------------|------------|-------------|------------|------------------|------------|------------------|------------|
| ** **                                                 | ** ** | **Broadband** | ** ** | **Telecom** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| **For the three months ended****September 30, 2009:** |       |          |       |        |       |             |       |             |       |
| Operating revenues fromexternal customers                  |       | $             | 40,175     |        | $          | 19,354           |       | $                | —     |   | $ | 59,529 |   |
| Intersegment revenues                                      |       | 93            |       | 5,043       |       | (5,136           | )          | —           |       |
| Operating expenses                                         |       |          |       |        |       |             |       |             |       |
| Cost of services and products*                             |       | 22,801        |       | 6,110       |       | (4,348           | )          | 24,563           |       |
| Customer operations and selling                            |       | 7,051         |       | 2,608       |       | (642             | )          | 9,017            |       |
| General and administrative                                 |       | 4,763         |       | 3,456       |       | (146             | )          | 8,073            |       |
| Depreciation and amortization                              |       | 12,199        |       | 3,061       |       | —           |       | 15,260           |       |
| Income (loss) from operations                              |       | (6,546        | )          | 9,162       |       | —           |       | 2,616            |       |
| Income (loss) from continuing operations                   |       | $             | (5,619     | )           | $          | 5,408            |       | $                | —     |   | $ | (211 | ) |

 

----

*Exclusive of depreciation and amortization

 
| ** **                                                 | ** ** | ** **    | ** ** | ** **  | ** ** | **Intercompany** | ** ** | ** **       | ** ** |
|------------------------------------------------------------|------------|---------------|------------|-------------|------------|------------------|------------|------------------|------------|
| ** **                                                 | ** ** | **Broadband** | ** ** | **Telecom** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| **For the three months ended****September 30, 2008:** |       |          |       |        |       |             |       |             |       |
| Operating revenues from external customers                 |       | $             | 36,280     |        | $          | 23,990           |       | $                | —     |   | $ | 60,270 |   |
| Intersegment revenues                                      |       | 138           |       | 4,706       |       | (4,844           | )          | —           |       |
| Operating expenses                                         |       |          |       |        |       |             |       |             |       |
| Cost of services and products*                             |       | 21,605        |       | 7,314       |       | (3,978           | )          | 24,941           |       |
| Customer operations and selling                            |       | 5,757         |       | 2,588       |       | (690             | )          | 7,655            |       |
| General and administrative                                 |       | 5,482         |       | 4,132       |       | (176             | )          | 9,438            |       |
| Depreciation and amortization                              |       | 10,700        |       | 3,519       |       | —           |       | 14,219           |       |
| Income (loss) from operations                              |       | (7,126        | )          | 11,143      |       | —           |       | 4,017            |       |
| Income (loss) from continuing operations                   |       | $             | (5,856     | )           | $          | 6,478            |       | $                | —     |   | $ | 622 |   |

 

----

*Exclusive of depreciation and amortization

 

11

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| ** **                                                | ** ** | ** **    | ** ** | ** **  | ** ** | **Intercompany** | ** ** | ** **       | ** ** |
|-----------------------------------------------------------|------------|---------------|------------|-------------|------------|------------------|------------|------------------|------------|
| ** **                                                | ** ** | **Broadband** | ** ** | **Telecom** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| **For the nine months ended****September 30, 2009:** |       |          |       |        |       |             |       |             |       |
| Operating revenues fromexternal customers                 |       | $             | 119,656    |        | $          | 61,745           |       | $                | —     |   | $ | 181,401 |   |
| Intersegment revenues                                     |       | 278           |       | 14,898      |       | (15,176          | )          | —           |       |
| Operating expenses                                        |       |          |       |        |       |             |       |             |       |
| Cost of services and products*                            |       | 68,524        |       | 18,944      |       | (12,773          | )          | 74,695           |       |
| Customer operations and selling                           |       | 19,779        |       | 7,784       |       | (1,966           | )          | 25,597           |       |
| General and administrative                                |       | 15,301        |       | 11,396      |       | (437             | )          | 26,260           |       |
| Depreciation and amortization                             |       | 35,102        |       | 9,196       |       | —           |       | 44,298           |       |
| Income (loss) from operations                             |       | (18,772       | )          | 29,323      |       | —           |       | 10,551           |       |
| Income (loss) from continuing operations                  |       | $             | (15,901    | )           | $          | 16,668           |       | $                | —     |   | $ | 767 |   |

 

----

*Exclusive of depreciation and amortization

 
| ** **                                                | ** ** | ** **    | ** ** | ** **  | ** ** | **Intercompany** | ** ** | ** **       | ** ** |
|-----------------------------------------------------------|------------|---------------|------------|-------------|------------|------------------|------------|------------------|------------|
| ** **                                                | ** ** | **Broadband** | ** ** | **Telecom** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| **For the nine months ended****September 30, 2008:** |       |          |       |        |       |             |       |             |       |
| Operating revenues from external customers                |       | $             | 98,412     |        | $          | 73,023           |       | $                | —     |   | $ | 171,435 |   |
| Intersegment revenues                                     |       | 419           |       | 13,609      |       | (14,028          | )          | —           |       |
| Operating expenses                                        |       |          |       |        |       |             |       |             |       |
| Cost of services and products*                            |       | 56,377        |       | 20,762      |       | (11,331          | )          | 65,808           |       |
| Customer operations and selling                           |       | 17,001        |       | 8,825       |       | (2,152           | )          | 23,674           |       |
| General and administrative                                |       | 16,574        |       | 12,981      |       | (545             | )          | 29,010           |       |
| Depreciation and amortization                             |       | 29,440        |       | 10,921      |       | —           |       | 40,361           |       |
| Income (loss) from operations                             |       | (20,561       | )          | 33,143      |       | —           |       | 12,582           |       |
| Income (loss) from continuing operations                  |       | $             | (17,017    | )           | $          | 19,390           |       | $                | —     |   | $ | 2,373 |   |

 

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*Exclusive of depreciation and amortization

 

**5.  REGULATORY MATTERS AND ESTIMATED SHAREABLEEARNINGS OBLIGATIONS**

 

Certainof our rates are subject to regulation by the Federal Communications Commission(“FCC”) and the state commissions. Intrastate service rates are subject toregulation by state commissions. With respect to toll calls initiated byinterexchange carriers’ customers, the interexchange carriers are assessedaccess charges based on tariffs filed by the Company. Interstate access ratesand resultant earnings are subject to regulation by the FCC. With respect tointerstate services, SureWest Telephone has detariffed its DSL services andfiles its own tariff with the FCC for switched and special access services. Forinterstate common line (“CL”) charges, SureWest Telephone concurs with tariffsfiled by the National Exchange Carrier Association (“NECA”). Pending and futureregulatory actions may have a material impact on our consolidated financialposition and results of operations.

 

*FCC Matters*

 

TheFCC monitors SureWest Telephone’s interstate earnings through the use of annualcost separation studies prepared by SureWest Telephone, which utilize estimatedcost information and projected demand usage. The FCC establishes rules thatcarriers must follow in the preparation of the annual studies. Additionally,under current FCC rules governing rate making, SureWest Telephone isrequired to establish interstate rates based on projected demand usage for itsvarious services and determine the actual earnings from these rates once actualvolumes and costs are known.

 

Asa result of periodic cost separation studies required by the FCC, SureWestTelephone changed its estimates for certain NECA CL accounts receivablebalances related to the current and prior year monitoring periods.  During the quarter and nine-month periodended September 30, 2009, these changes in estimates decreased ourconsolidated revenues and income from continuing operations by $583 and $562and net income by $335 ($0.02 per share) and $323 ($0.02 per share),respectively.  We did not record anysignificant changes in estimates during the quarter and nine-month period endedSeptember 30, 2008.

 

12

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*California Public UtilityCommission (“CPUC”) Matters*

 

In 2004, we entered intoa settlement agreement (the “Settlement Agreement”), which was ultimatelyapproved by the CPUC, to resolve an ongoing regulatory proceeding with variousparties.  The Settlement Agreementresolved past sharing liabilities and suspended future sharing requirements inthe intrastate jurisdiction.  Inaccordance with the Settlement Agreement, SureWest Telephone returnedapproximately $6,500, plus interest at the 90-day commercial paper rate fornon-financial institutions and an imputed rate of 3.15%, to its end-usersthrough a consumer dividend.  Thesurcredit was recorded as a reduction of our contractual shareable earningsobligations over a period of approximately four years, which began January 1,2005.  During the first quarter of 2009and prior to the cessation of the surcredit on February 9, 2009, wereturned approximately $165. For the quarter and nine-month period ended September 30,2008, we returned approximately $404 and $1,253, respectively, to end usersthrough the consumer dividends.

 

As part of the SettlementAgreement, SureWest Telephone was required to implement an additional annualconsumer dividend of $1,300 on January 1, 2007 to end-users receivingSureWest Telephone services subject to sharing on or after that date.  In December 2006, the CPUC authorized usto offset our annual $11,500 interim draw from the California High Cost Fund (“CHCF”)with the aforementioned $1,300 consumer dividend Settlement Agreement.  The CHCF was previously authorized by theCPUC to offset SureWest Telephone’s intrastate regulated operating expenses onan interim basis. In September 2007, the CPUC issued Decision 07-09-002which provides for SureWest Telephone to phase-down our annual CHCF interimdraw by approximately $2,000 over a five-year period to end on January 1,2012.  Our 2008 interim CHCF draw was$8,160 and we anticipate our 2009 interim CHCF draw will be approximately$6,120.

 

In an ongoing proceedingrelating to the New Regulatory Framework (under which SureWest Telephone hasbeen regulated since 1996), the CPUC adopted Decision 06-08-030 in 2006, whichgrants carriers broader pricing freedom in the provision of telecommunicationsservices, bundling of services, promotions and customer contracts.  This decision adopted a new regulatoryframework, the Uniform Regulatory Framework (“URF”), which among other things (i) eliminatesprice regulation and allows full pricing flexibility for all new and retailservices except basic residential services, which can only be raised up to$3.25 per year for 2009 and 2010 as described below,(ii) allows new forms of bundles andpromotional packages of telecommunication services, (iii) allocates allgains and losses from the sale of assets to shareholders and (iv) eliminatesalmost all elements of rate of return regulation, including the calculation ofshareable earnings.  On September 18,2008, the CPUC adopted Decision 08-09-042, which allows URF Incumbent LocalExchange Carriers (“ILECs”) to increase their basic residential rate by up to$3.25 per year over the next two years. Beginning January 1, 2011, the URF ILECs will be allowed fullpricing flexibility for the basic residential rate.

 

**6.   INCOME TAXES**

 

Our effective federalincome tax rates for continuing operations were 66.4% and 45.4% for thenine-month period ended September 30, 2009 and 2008, respectively. For thenine-month period ended September 30, 2009, our actual tax expensediffered from the federal statutory rate primarily due to state taxes andpermanent differences resulting from the decrease between the grant and vestingprices of RSAs and RSUs that vested during the current year period.

 

We had a liabilityfor unrecognized tax benefits of approximately $200 and $257 at September 30,2009 and December 31, 2008, respectively. The following table provides a reconciliation of the beginning andending amount of unrecognized tax benefits during the nine-month period ended September 30,2009:

 
| Balance at December 31, 2008                 |   | $   | 257    |   |
|----------------------------------------------|--------|-----|--------|--------|
| Additions based on prior year tax positions  |   | 4   |   |
| Reductions based on prior year tax positions |   | (61 | )      |
| Balance at September 30, 2009                |   | $   | 200    |   |

 

Our policy is torecognize interest and penalties related to uncertain tax positions in incometax expense.  We did not accruesignificant amounts of interest and penalties related to unrecognized taxbenefits during the quarters and nine-month periods ended September 30,2009 and 2008, respectively.  As of September 30,2009, we had approximately $60 of accrued interest and approximately $40 ofpenalties in the amount disclosed above for unrecognized tax benefits.

 

The total amount ofunrecognized tax benefits that, if recognized, would affect the effective taxrate were $126 and $123 at September 30, 2009 and December 31, 2008,respectively.

 

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As of September 30,2009, the following tax years and related taxing jurisdictions were open:

 

| **Tax Year** | ** ** | **Taxing Jurisdiction** | ** ** |
|--------------|------------|-------------------------|------------|
| 2002 - 2008  |       | Federal                 |       |
| 2004 - 2008  |       | California              |       |
| 2006 - 2008  |       | Kansas and Missouri     |       |

 

**7.****         ****PENSION AND OTHER POST-RETIREMENT BENEFITS**

 

Wemaintain a noncontributory defined benefit pension plan (the “Pension Plan”)which covers certain eligible employees. Benefits are based on years of serviceand the employee’s average compensation during the five highest consecutiveyears of the last ten years of credited service. Our funding policy is tocontribute annually an actuarially determined amount consistent with applicablefederal income tax regulations. Contributions are intended to provide forbenefits attributed to service to date. Pension Plan assets are primarilyinvested in domestic equity securities, fixed income and international equitysecurities.

 

We also maintain an unfunded Supplemental ExecutiveRetirement Plan (“SERP”), which provides supplemental retirement benefits tocertain of our retired executives. The SERP provides for incremental pensionpayments to partially offset the reduction in amounts that would have beenpayable under the Pension Plan if it were not for limitations imposed byfederal income tax regulations.

 

Inaddition, we provide certain post-retirement benefits other than pensions (“OtherBenefits Plan”) to certain eligible employees of our California location,including life insurance benefits and a stated reimbursement for Medicaresupplemental insurance.

 

In recent years, we substantiallymodified our employee compensation structure in order to attract and retain theright mix of talent necessary to successfully support our operations.  For that reason, we amended our Pension Plan,SERP and Other Benefits (collectively the “Plans”).  The amendments to the Plans, effective April 1,2007, froze the Plans so that no person is eligible to become a new participanton or following that date and all future benefit accruals for existingparticipants under the Plans cease.

 

Weaccount for our Pension Plan in accordance with ASC Topic 715, *Compensation-Retirement Benefits* (“ASC 715”) (formerly SFAS No. 158,*Employers’ Accounting for Defined Benefit Pensionand Other Postretirement Plans, an Amendment of FASB Statements No. 87,88, 106 and 132(R)*).  ASC 715requires an employer to recognize the overfunded or underfunded status of adefined benefit postretirement plan as an asset or liability in its statementof financial position, to recognize changes in that funded status in the yearin which the changes occur through comprehensive income and to measure thefunded status of a plan as of the date of its year-end statement of financialposition.

 

**Components of Net Periodic Pension Cost**

 

The following table summarizes the benefit costs (income) related toour Pension and SERP Plans:

 
| **Quarter ended September 30,**           | ** ** | **2009** | ** ** | **2008** | ** ** |
|------------------------------------------------|------------|----------|------------|----------|------------|
| Interest  cost on projected benefit obligation |       | $        | 1,809      |     | $          | 1,788 |   |
| Expected  return on plan assets                |       | (1,672   | )          | (2,266   | )          |
| Amortization  of:                              |       |     |       |     |       |
| Prior  service cost                            |       | 1        |       | —   |       |
| Net  actuarial loss                            |       | 648      |       | 6        |       |
| Net  periodic pension expense (income)         |       | $        | 786        |     | $          | (472 | ) |

 
| **Nine months ended  September 30,**      | ** ** | **2009** | ** ** | **2008** | ** ** |
|------------------------------------------------|------------|----------|------------|----------|------------|
| Interest  cost on projected benefit obligation |       | $        | 5,426      |     | $          | 5,365 |   |
| Expected  return on plan assets                |       | (5,014   | )          | (6,798   | )          |
| Amortization  of:                              |       |     |       |     |       |
| Prior  service cost                            |       | 2        |       | 1        |       |
| Net  actuarial loss                            |       | 1,944    |       | 17       |       |
| Net  periodic pension expense (income)         |       | $        | 2,358      |     | $          | (1,415 | ) |

 

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Net periodicbenefit costs related to the Other Benefits Plan were not significant to ourcondensed consolidated financial statements for the quarters or nine-monthperiods ended September 30, 2009 and 2008.

 

**8.****         ****COMMITMENTS AND CONTINGENCIES**

 

**Credit Arrangements**

 

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

 

The Term Loan A facility,prior to the Credit Agreement, which had $40,000 outstanding, was extinguishedin February 2008 resulting in a loss on extinguishment of debt of $607,which was recorded as a component of interest expense in the first quarter of2008. $40,000 of the Credit Agreement borrowings bore interest at a fixed rate.The remaining $80,000 of the Credit Agreement borrowings bore interest based,at our election, on the London Interbank Offered Rate (“LIBOR”) or the bank’sPrime Rate, in either case, plus an applicable margin. The Term Loan B facilitywas due and payable on February 12, 2009 and included automatic increasesto the applicable interest margins. On May 14, 2008, we repaid $30,000 ofthe Term Loan B and $16,000 of the Revolving facility with proceeds from thesale of the operating assets of our Wireless business, SureWest Wireless.

 

In September 2008,we entered into a Third Amended and Restated Credit Agreement (“New Agreement”)to restate and replace the Credit Agreement. The New Agreement terms, amongother things (i) reflected the repayment of $30,000 of the Term Loan Bfacility under the Credit Agreement to reduce the principal balance from$60,000 to $30,000, (ii) modified interest margins and (iii) extendedthe maturity date of the Term Loan B facility to May 1, 2012.

 

As of September 30,2009, $120,000, $30,000 and $10,500 were outstanding on the Term Loan A, TermLoan B and Revolving Loan facilities, respectively.

 

Our Series Aand Series B Senior Notes and the New Agreement contain financial andoperating covenants that may restrict, among other things, the repurchase ofthe Company’s capital stock, the making of certain other restricted paymentsand the incurrence of additional indebtedness. The covenants also require us tomaintain certain financial ratios and minimum levels of tangible net worth. At September 30,2009 and December 31, 2008, retained earnings of $104,976 and $101,345,respectively, were available for the payments described above. As of September 30,2009, we were in compliance with all of our debt covenants.

 

**Litigation,Regulatory Proceedings and Other Contingencies**

 

Weare subject to certain legal proceedings, Internal Revenue Service examinationsand other income tax exposures, and other claims arising in the ordinary courseof our business. In the opinion of management, the ultimate outcome of thesematters will not materially affect our consolidated financial position, resultsof operations or cash flows.

 

We are also subject to anumber of regulatory proceedings occurring at the federal and state levels thatmay have a material impact on our operations. These regulatory proceedings include,but are not limited to, consideration of changes to the jurisdictionalseparations process, the interstate universal service fund, intercarriercompensation access charge reform, broadband deployment, the regulation oflocal exchange carriers and their competitors, including providers of InternetProtocol-enabled services, and the provision of video services and competitionin the market. New proceedings to promote broadband deployment and to applynon-discrimination principles to providers of Internet services are in theirearly stages. The outcomes and impact on our operations due to theseproceedings and related court matters cannot be determined at this time.

 

The FCC continues topromulgate rules and regulations on competition, interconnection, accesscharges, broadband deployment and universal service reform.  There are various on-going legal challengesconsidering the validity of these FCC orders. As a result, it is not yet possible to determine fully the impact of therelated FCC regulations on our operations.

 

The regulatoryproceedings occurring at the state and federal levels described above may alsoauthorize new competition in the provision of regulated services and change therates and rate structure for regulated services that we furnish, of which theeffects cannot yet be determined.

 

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**9.****         ****RECENT ACCOUNTING PRONOUNCEMENTS**

 

**Recently IssuedAccounting Pronouncements**

 

In October 2009, the FASBissued Accounting Standards Update (“ASU”) No. 2009-13, *RevenueRecognition (Topic 605): Multiple-Deliverable Revenue Arrangements—a consensusof the FASB Emerging Issues Task Force*(“ASU 2009-13”).  ASU 2009-13 addresses the accounting formultiple-deliverable arrangements to enable vendors to account for products orservices separately rather than as a combined unit and modifies the manner inwhich the transaction consideration is allocated across the separatelyidentified deliverables.  ASU 2009-13significantly expands the disclosures requirements for multiple-deliverablerevenue arrangements.  ASU 2009-13 willbe effective for the first annual reporting period beginning on or after June15, 2010, and may be applied retrospectively for all periods presented or prospectivelyto arrangements entered into or materially modified after the adoptiondate.  Early adoption is permitted,provided that the guidance is retroactively applied to the beginning of theyear of adoption. We are currently evaluating the impact this update will haveon our consolidated financial statements.

 

In September 2009,the FASB issued ASU No. 2009-05, *Fair Value Measurementsand Disclosures (Topic 820) — Measuring Liabilities at Fair Value* (“ASU2009-05”).  ASU 2009-05 amends ASC 820 toprovide guidance concerning the measurement of liabilities at fair value. ASU2009-05 is effective for the first reporting period beginning after issuance orthe quarter ended December 31, 2009 for a calendar year company. We arecurrently evaluating the impact this update will have on our consolidatedfinancial statements.

 

In December 2008,the FASB issued guidance to require disclosure of additional information aboutassets held in a defined benefit pension or other postretirement plan (formerlyStaff Position (“FSP”) FAS No. 132(R)-1, *Employers’Disclosures about Postretirement Benefit Plan Assets*)**currently included in ASC 715. Specifically, this guidancerequires an employer to disclose (i) investment policies and strategiesincluding target allocation percentages, (ii) major categories of planassets, (iii) inputs and valuation techniques used to measure the fairvalue of plan assets and (iv) significant concentration of risk withinplan assets. The additional disclosure requirements are effective for fiscalyears ending after December 15, 2009, with earlier application permitted.We are currently evaluating the impact this guidance will have on ourconsolidated financial statements.

 

**Recently AdoptedAccounting Pronouncements**

** **

InJune 2009, the FASB issued an accounting standard, currently included inASC Topic 105, *Generally Accepted Accounting Principles*(“ASC105”), which established only two levels of GAAP, authoritative andnonauthoritative (formerly SFAS No. 168,*The FASBAccounting Standards Codification**TM** and the Hierarchy of Generally AcceptedAccounting Principles — a replacement of FASB Statement No. 162*). The FASB ASCbecame the only source of authoritative nongovernmental GAAP, except for rules andinterpretive releases of the SEC, which are sources of authoritative GAAP forSEC registrants.  All othernongrandfathered, non-SEC accounting literature not included in the ASC willbecome nonauthoritative.  ASC 105 waseffective for financial statements issued in interim or annual reportingperiods ending after September 15, 2009. The ASC was not intended to change or alter existing GAAP, consequentlyour adoption of ASC 105 did not have a material impact on our condensedconsolidated financial statements.

 

In May 2009, theFASB issued guidance, currently included in**ASC Topic 855,*Subsequent Events*, which establishedgeneral standards of accounting for and disclosure of events that occur afterthe balance sheet date but before financial statements are issued or availableto be issued (formerly SFAS No. 165, *Subsequent Events*).This guidance requires disclosure of the date through which subsequent eventshave been evaluated, as well as whether that is the date the financialstatements were issued or the date the financial statements were available tobe issued. The provisions of this guidance were effective for interim or annualfinancial periods ending after June 15, 2009.  Our adoption of this guidance did not have amaterial impact on our condensed consolidated financial position and results ofoperations.

 

In April 2009, theFASB issued three accounting standards that were intended to provide additionalapplication guidance and enhance disclosures about fair value measurements andimpairments of securities. The provisions included in these standards wereintended to (i) clarify the objective and method of fair value measurement evenwhen there has been a significant decrease in market activity for the assetbeing measured (formerly FSP FAS No. 157-4, *DeterminingFair Value When the Volume and Level of Activity for the Asset or Liability HaveSignificantly Decreased and Identifying Transactions That Are Not Orderly*),currently included in ASC 820*,*(ii) establisha new model for measuring other-than-temporary impairments for debt securities,including establishing criteria for when to recognize a write-down throughearnings versus other comprehensive income (formerly**FSPFAS No. 115-2 and FSP FAS No. 124-2, *Recognitionof Other-Than-Temporary Impairment*), currently included in ASC Topic320, *Investments-Debt and Equity Securities*and (iii) require fair value disclosures in interim periods for allfinancial instruments within the scope of ASC Topic 825, *FinancialInstruments* (formerly FAS No. 107-1 and APB 28-1, *Interim Disclosures about Fair Value of Financial Instruments*).Our adoption of the provisions of these standards, on April 1, 2009, didnot have a material impact on our condensed consolidated financial position andresults of operations.

 

In November 2008, the Emerging Issues Task Force (“EITF”) reacheda consensus (formerly EITF No. 08-7, *Accounting for DefensiveIntangible Assets)*which requires the acquirer of a defensiveintangible asset to account for a defensive intangible asset as a separate unitof accounting and assign a useful life for a defensive intangible assetaccording to the entity’s consumption of the expected benefits related to thatasset, currently included in ASC Topic 350, *Intangibles-Goodwill andOther*(“ASC 350”). Our adoption of this provision, on January 1,2009 did not have a material impact onour condensed consolidated financial position and results of operations.

 

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In June 2008, theFASB issued guidance which addresses whether instruments granted in share-basedpayment transactions are participating securities prior to vesting and,therefore, need to be included in the earnings allocation in computing earningsper share under the two-class method as described in ASC Topic 260, *Earnings Per Share* (formerly FSP EITF 03-6-1, *Determining Whether Instruments Granted in Share-Based PaymentTransactions Are Participating Securities)*. Under this guidance,unvested share-based payment awards that contain non-forfeitable rights todividends or dividend equivalents (whether paid or unpaid) are participatingsecurities and shall be included in the computation of earnings per sharepursuant to the two-class method.  Ouradoption of the requirements of this guidance, on January 1, 2009, did nothave a material impact on our condensedconsolidated financial position and results of operations.

 

In April 2008, theFASB issued guidance which amends the factors that should be considered indeveloping renewal or extension assumptions used for purposes of determiningthe useful life of a recognized intangible asset under ASC 350 (formerly FSP No. FAS142-3,*Determination of the Useful Life ofIntangible Assets*). This guidance was intended to improve theconsistency between the useful life of a recognized intangible asset under ASC350 and the period of expected cash flows used to measure the fair value of theasset under ASC Topic 805, *Business Combinations*(“ASC805”), and other U.S. GAAP.  Our adoption of this guidance, on January 1,2009, did not have a material impact onour condensed consolidated financial position and results of operations.

 

In February 2008,the FASB issued guidance which amended ASC 820 to delay the effective dateuntil January 1, 2009 for nonfinancial assets and nonfinancialliabilities, except for items that are recognized or disclosed at fair value inthe financial statements on a recurring basis, at least annually (formerly FSP No. FAS157-2, *Effective Date of FASB Statement No. 157).*  ASC 820, as amended, was effective forfinancial statements issued for fiscal years beginning after November 15,2008 and for interim periods within those fiscal years.  Our adoption of the provisions of thispronouncement, on January 1, 2009, did not have a material impact on our condensed consolidated financial position andresults of operations.

 

In December 2007,the FASB issued an accounting standard which establishes principles andrequirements for how the acquirer recognizes and measures, in its financialstatements, the identifiable assets acquired, the liabilities assumed and anynoncontrolling interest in the acquiree in a business combination, currentlyincluded in ASC 805, *Business Combinations*(formerly SFAS No. 141(R), *Business Combinations*).  This standard also establishes principlesaround how goodwill acquired in a business combination or gain from a bargainpurchase should be recognized and measured, as well as provides guidelines onthe disclosure requirements on the nature and financial impact of the businesscombination. In addition, this standard requires acquisition-relatedtransaction and restructuring costs to be expensed rather than treated as partof the cost of the acquisition.  In April 2009,the FASB issued an amendment to this standard by establishing a model toaccount for certain pre-acquisition contingencies (formerly FSP FAS 141(R)-1, *Accounting for Assets Acquired and Liabilities Assumed in a BusinessCombination That Arise from Contingencies)*.  Under the amendment, an acquirer is requiredto recognize at fair value an asset acquired or a liability assumed in abusiness combination that arises from a contingency if the acquisition-datefair value of that asset or liability can be determined during the measurementperiod.  If the acquisition-date fairvalue cannot be determined, then the acquirer should follow the recognitioncriteria requirements of ASC Topic 450,*Contingencies*.  Our adoption of the standard and amendment,on January 1, 2009, did not have a materialimpact on our condensed consolidated financial position and results ofoperations.

 

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

 

*(Amountsin thousands, except select operating metrics and share and per share amounts)*

 

Certain statementsincluded in this report, including that which relates to the impact on futurerevenue sources and potential sharing obligations of pending and futureregulatory orders, continued expansion of the telecommunications network andexpected changes in the sources of our revenue and cost structure resultingfrom our entrance into new communications markets, are forward-lookingstatements and are made pursuant to the safe harbor provisions of theSecurities Litigation Reform Act of 1995. These forward looking statementsgenerally are identified by the words “believe”, “expect”, “anticipate”, “estimate”,“intend”, “should”, “may”, “will”, “would”, “will be”, “will continue” orsimilar expressions. Such forward looking statements involve known and unknownrisks, the impact of current economic conditions, uncertainties and otherfactors that may cause actual results, performance or achievements of SureWestCommunications (the “Company, “we” or “our”) to be different from thoseexpressed or implied in the forward-looking statements. A detailed discussionof these and other risks and uncertainties that could cause actual results andevents to differ materially from such forward—looking statements is included inour 2008 Annual Report on Form 10-K filed with the Securities and ExchangeCommission (“SEC”). We disclaim any intention or obligation to update or revisepublicly any forward-looking statements. Management’s Discussion and Analysisshould be read in conjunction with our unaudited condensed consolidatedfinancial statements and accompanying notes to the financial statements (“Notes”)as of and for the nine months ended September 30, 2009 included in Item 1of this Quarterly Report on Form 10-Q.

 

**Overview**

** **

We are one of theleading integrated communications providers and are the bandwidth leader in themarkets we serve.  We provide voice, video and data services, eitherindividually or as bundled services to residential and business customers inthe greater Sacramento, California and greater Kansas City, Kansas and Missouriareas (“Kansas City area”). We deploy our services by combining fiber-tothe-home (“FTTH”) facilities with the use of Internet Protocol (“IP”) basedcommunications protocol.  Our advanced telecommunications networks give usa competitive edge that enables us to provide our customers with higher data speedsfor internet service and deploy multiple services at superior quality throughour high bandwidth capacity.  Our IP based communication protocol enablesus to provide dedicated bandwidth at symmetrical data speeds to each of ourcustomers in the greater Sacramento, California area. We classify ouroperations in two reportable segments: Broadband and Telecommunications (“Telecom”).

 

Our Broadband segmentearns revenues primarily through subscriptions to our video, high-speedInternet and digital phone services.  Ourvideo services range from a limited basic service to a full digital cableservice.  Many of our services aredelivered utilizing fiber-to-the-premise and fiber-to-the-node networks, whichallow us to offer a high quality experience with our digital TV Packages. Ourfull digital cable service provides access to over 340 and 260 channels in ourCalifornia and Kansas City area markets, respectively, including premium andpay-per-view channels (which include concerts, wrestling, boxing, sporting eventsand movies); video on demand (“VOD”) service (which allows access to a libraryof movies and the ability to start a selection at any time and to pause, rewindand fast-forward and replay); premium VOD channels, music channels and aninteractive, on-screen program guide (which allows the subscriber to navigatethe channel lineup and the video on demand library).  Digital cable subscribers can also subscribeto additional digital cable services, including a digital video recorder (“DVR”)(which allows subscribers to record two programs at the same time and pause,replay and rewind “live” television) and high-definition (“HD”) television (“HDTV”),which provides multiple channels in high definition.

 

Our high-speed Internetservice can provide Internet access at symmetrical speeds of up to 50 Mbps,depending on the level of service selected. As of September 30, 2009, approximately 32% of the homes in theareas we serve subscribed to one of our high-speed Internet services.  In March 2008, we launched our new Voiceover Internet Protocol (“VoIP”) digital phone product in the Sacramentomarket.  Our digital phone service isavailable in packages ranging from basic service to unlimited local anddomestic long distance calling plans. Nearly all of our digital phone service plans include an extensive arrayof calling features including caller identification and call waiting, FindMe/Follow Me, sequential ringing and selective call acceptance andrejection.  As of September 30,2009, approximately 13% of the homes in our Sacramento market have subscribedto our new VoIP phone service.

 

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Our Telecom segment,which operates only in the Sacramento area, offers a broad selection oftelecommunications services including traditional landline voice services,Digital Subscriber Line (“DSL”), long distance services and certainnon-regulated services. Traditional landline services are offered from basiclocal service to bundled packages ranging from unlimited local calling tounlimited local and domestic long distance calling plans.  Our voice products include long distanceservices and value-added services such as voicemail, call waiting, calleridentification and many other calling feature options.  Long distance services are offered by oursubsidiary SureWest Long Distance, which is a reseller of long distanceservices.

 

**Current Business Developments**

 

In February 2009, wesold our fifty-two wireless communications towers (“Tower Assets”) owned by oursubsidiary West Coast PCS, LLC (“West Coast PCS”) to Global Tower Partners.West Coast PCS was a component of our Broadband segment. The sale was completedfor an aggregate cash purchase price of $9,222, based on the tower cash flowgenerated by commenced tenant leases, resulting in a gain of $2,525, net oftax. Proceeds from the sale of the Tower Assets were used to repay a portion ofoutstanding long-term debt.

 

In May 2008, wecompleted the sale of the operating assets of our Wireless business, SureWestWireless, to Verizon Wireless (“Verizon”) for an aggregate cash purchase priceof $69,746, resulting in a gain of $18,864, net of tax.  Under the agreement, Verizon acquired thespectrum licenses and operating assets of SureWest Wireless, excluding our ownedcommunication towers.  SureWest Wirelesswas previously reported as a separate reportable segment.

 

On February 13,2008, we acquired 100% of the issued and outstanding stock of Everest Broadband, Inc.(“Everest”, “SureWest Kansas” or the “Kansas City operations”) for a totalpurchase price of $181,459, including transaction costs. Subsequent to theacquisition, the Kansas City operations have been included in our Broadbandsegment. SureWest Kansas is a competitive provider of high-speed data, videoand voice services in the greater Kansas City area. The addition of our KansasCity operations accelerates our growth strategy and has positioned us as apremier provider of network services to residential and business customers inthe markets we serve.

 

**Results of Operations**

 

The tables below reflectcertain financial data (on a consolidated and segment basis) and selectoperating metrics for each of our reportable segments as of and for thequarters and nine months ended September 30, 2009 and 2008.

 

**Financial Data**

 
| ** **                                   | ** ** | **Quarter Ended September 30,** | ** ** | **Nine Months Ended September 30,** | ** ** |
|----------------------------------------------|------------|--------------------------------------|------------|------------------------------------------|------------|
| ** **                                   | ** ** | ** **                           | ** ** | ** **                               | ** ** | **$** | ** ** | **%** | ** ** | ** ** | ** ** | ** ** | ** ** | **$** | ** ** | **%** | ** ** |
| ** **                                   | ** ** | **2009**                             | ** ** | **2008**                                 | ** ** | **Change** | ** ** | **Change** | ** ** | **2009** | ** ** | **2008** | ** ** | **Change** | ** ** | **Change** | ** ** |
| **Operating revenues**(1)                    |       |                                 |       |                                     |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Broadband                                    |       | $                                    | 40,175     |                                     | $          | 36,280 |   | $ | 3,895 |   | 11 | % | $ | 119,656 |   | $ | 98,412 |   | $ | 21,244 |   | 22 | % |
| Telecom                                      |       | 19,354                               |       | 23,990                                   |       | (4,636 | ) | (19 | ) | 61,745 |   | 73,023 |   | (11,278 | ) | (15 | ) |
| Operating  revenues                          |       | 59,529                               |       | 60,270                                   |       | (741 | ) | (1 | ) | 181,401 |   | 171,435 |   | 9,966 |   | 6 |   |
|                                         |       |                                 |       |                                     |       |   |   |   |   |   |   |   |   |   |   |   |   |
| **Income (loss) from operations**            |       |                                 |       |                                     |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Broadband                                    |       | (6,546                               | )          | (7,126                                   | )          | 580 |   | 8 |   | (18,772 | ) | (20,561 | ) | 1,789 |   | 9 |   |
| Telecom                                      |       | 9,162                                |       | 11,143                                   |       | (1,981 | ) | (18 | ) | 29,323 |   | 33,143 |   | (3,820 | ) | (12 | ) |
| Income  from operations                      |       | 2,616                                |       | 4,017                                    |       | (1,401 | ) | (35 | ) | 10,551 |   | 12,582 |   | (2,031 | ) | (16 | ) |
|                                         |       |                                 |       |                                     |       |   |   |   |   |   |   |   |   |   |   |   |   |
| **Income (loss) from continuing operations** |       |                                 |       |                                     |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Broadband                                    |       | (5,619                               | )          | (5,856                                   | )          | 237 |   | 4 |   | (15,901 | ) | (17,017 | ) | 1,116 |   | 7 |   |
| Telecom                                      |       | 5,408                                |       | 6,478                                    |       | (1,070 | ) | (17 | ) | 16,668 |   | 19,390 |   | (2,722 | ) | (14 | ) |
| Income  (loss) from continuing operations    |       | $                                    | (211       | )                                        | $          | 622 |   | $ | (833 | ) | (134 | )% | $ | 767 |   | $ | 2,373 |   | $ | (1,606 | ) | (68 | )% |

 

----

(1) Externalcustomers only

 

19

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** **

**Select Operating Metrics**

 
| ** **                                          | ** ** | **As of September 30,** | ** ** |
|-----------------------------------------------------|------------|------------------------------|------------|
| ** **                                          | ** ** | **2009**                     | ** ** | **2008** | ** ** | **Change** | ** ** | **% Change** | ** ** |
| **Broadband**                                       |       |                         |       |   |   |   |   |   |   |
| Total  residential subscribers (1)                  |       | 102,500                      |       | 100,600 |   | 1,900 |   | 2 | % |
| Broadband  residential revenue-generating units (2) |       | 227,200                      |       | 214,200 |   | 13,000 |   | 6 |   |
| Data                                                |       | 97,700                       |       | 95,700 |   | 2,000 |   | 2 |   |
| Video                                               |       | 59,200                       |       | 58,500 |   | 700 |   | 1 |   |
| Voice                                               |       | 70,300                       |       | 60,000 |   | 10,300 |   | 17 |   |
| Total  business customers (3)                       |       | 7,000                        |       | 6,300 |   | 700 |   | 11 |   |
| ** **                                          | ** ** | ** **                   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Telecom**                                         |       |                         |       |   |   |   |   |   |   |
| Voice  revenue-generating units (4)                 |       | 41,300                       |       | 58,500 |   | (17,200 | ) | (29 | ) |
| Total  business customers (3)                       |       | 8,700                        |       | 9,400 |   | (700 | ) | (7 | )% |

 

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(1)             Total residential subscribers are customers whoreceive one or more residential data, video or voice services from one of oursubsidiaries in the Broadband segment.

 

(2)             We can deliver multiple services to acustomer. Accordingly, we maintain statistical data regardingrevenue-generating units (“RGUs”) for digital video, voice and data, inaddition to the number of subscribers. For example, a single customer whopurchases digital video, voice and data services would be reflected as threeRGUs.

 

(3)             Total business customers are customerswho receive business data, voice or video services and represent a distinctcustomer account.

 

(4)             Voice RGUs are residential customers whosubscribe to one or more voice access lines.

 

**Consolidated Overview**

 

*OperatingRevenues*

 

Operating revenues in theBroadband segment increased $3,895 and $21,244 during the quarter andnine-month period ended September 30, 2009, respectively, compared to thesame periods in 2008. The Broadband segment results of operations in thecurrent year periods compared to the same prior year periods have been impactedby the effects of the Everest acquisition in February 2008, as describedabove.

 

At September 30, 2009, the Broadband segment experienced a 2%annual increase in the number of residential subscribers compared to the prioryear. Data and video RGUs increased 2% and 1%, respectively, compared to 2008which was reflective of our ability to offer subscribers high-speed data, HDTV,HD DVR and other enhanced services.  Inaddition, Broadband operating revenues increased as a result of higher pricingfor video and data services in 2009, as well as the continued expansion of thebroadband network and growth in the demand for digital video, voice and dataoffered as a bundled triple-play package.

 

The introduction of ourVoIP Digital Phone product in the Sacramento market during 2008, including inthe Telecom segment service territory, has resulted in an elevated take rateand an increase in broadband residential triple-play RGUs, while mitigatingnearly half of the access line losses in the Telecom segment by migrating thosecustomers to voice RGUs in the Broadband segment.  Broadband voice RGUs in the Sacramento marketincreased 17% as of September 30, 2009 compared to the same prior yearperiod.

 

We will continue toinvest in success-based capital to develop and enhance the broadbandinfrastructure and the services we offer, while focusing on the generation ofnew customers and increasing residential penetration on existing marketablehomes.

 

Operating revenues in theTelecom segment decreased $4,636 and $11,278 during the quarter and nine-monthperiod ended September 30, 2009, respectively, compared to the sameperiods in 2008. Residential services were largely impacted by our customer’smigration toward alternative communication services, including those offered byour Broadband segment, which contributed to an approximate 29% decline in theTelecom segment voice RGUs as of September 30, 2009 compared to the sameperiod in 2008.  In an effort to mitigatefuture operating revenue and voice RGU declines, we offer various flat-rate andbundled service packages and provide a broadband VoIP service to customersresiding within SureWest Telephone’s service area.  The decrease in operating revenues was alsoimpacted by the scheduled reduction in California High Cost Fund (“CHCF”)subsidies of approximately $510 and $1,530 during the quarter and nine-monthperiod ended September 30, 2009, respectively, compared to the sameperiods in 2008.  See the RegulatoryMatters section below for a further discussion regarding the regulatorysubsidies we receive.

 

20

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*OperatingExpenses*

 

Consolidated operatingexpenses, excluding depreciation and amortization, decreased $381 and increased$8,060 during the quarter and nine-month period ended September 30, 2009,respectively, compared to the same periods in 2008. The Broadband segmentaccounted for substantially all of the year-over-year increase in ourconsolidated operating expenses primarily as a result of the addition andgrowth of our Kansas City operations. The increase in operating expenses in thecurrent year periods from the Broadband segment was offset in part by a declinein operating expenses in the Telecom segment resulting from the decline inTelecom operating revenues and voice RGUs.

 

Cost of services andproducts expense decreased $378 and increased $8,887 during the quarter andnine-month period ended September 30, 2009, respectively, compared to thesame periods in 2008.  The change waslargely due to increases in programming and network costs related to providingvideo services and to the growth in Broadband subscribers, which were reducedin part by savings in property maintenance costs through a consolidation ofoffice space and cost cutting initiatives. Customer operations and sellingexpense increased $1,362 and $1,923 during the quarter and nine-month periodended September 30, 2009, respectively, compared to the same periods in2008 due in part to an increase in labor costs as a result of the addition andgrowth in our Kansas City Operations as well as an increase in pension costs asdescribed below. General and administrative expenses decreased $1,365 and$2,750 during the quarter and nine-month period ended September 30, 2009,respectively, compared to the same periods in 2008 primarily as a result of (i) adecline in consulting and advisory fees related to strategic initiatives and (ii) informationtechnology costs related to production support projects in the prior yearperiods.

 

The increase in theconsolidated operating expenses in 2009 compared to 2008 was also due to anincrease in the costs associated with our defined benefit pension plan (the “PensionPlan”), Supplemental Executive Retirement Plan and certain post-retirementbenefits other than pensions (“Other Benefits Plan”) (collectively the “Plans”).As a result of an increase in costs related to the Plans, consolidatedoperating expenses increased $1,101 and $3,324 during the quarter andnine-month period ended September 30, 2009 compared to the same periods in2008. See Note 7 for more information on the Plans.

 

Our consolidateddepreciation and amortization expense increased $1,041 and $3,937 during thequarter and nine-month period ended September 30, 2009, respectively,compared to the same periods in 2008. The increase in depreciation and amortization expense was primarily dueto the addition and growth of our Kansas City operations, continued networkbuild-out and success-based capital projects undertaken within the residentialbroadband service territories; however, was partially offset by certain Telecomassets becoming fully depreciated in the current year period.

 

*Reclassifications*

 

Certain amounts in our2008 condensed consolidated financial statements have been reclassified toconform to the presentation of our 2009 condensed consolidated financial statements,which primarily consists of the effects of reclassifications from presentationof our Tower Assets as a discontinued operation.

 

21

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**Segment Results of Operations**

 

**Broadband**

 
| ** **                                        | ** ** | **Quarter Ended September 30,** | ** ** | **Nine Months Ended September 30,** | ** ** |
|---------------------------------------------------|------------|--------------------------------------|------------|------------------------------------------|------------|
| ** **                                        | ** ** | ** **                           | ** ** | ** **                               | ** ** | **$** | ** ** | **%** | ** ** | ** ** | ** ** | ** ** | ** ** | **$** | ** ** | **%** | ** ** |
| ** **                                        | ** ** | **2009**                             | ** ** | **2008**                                 | ** ** | **Change** | ** ** | **Change** | ** ** | **2009** | ** ** | **2008** | ** ** | **Change** | ** ** | **Change** | ** ** |
|                                              |       |                                 |       |                                     |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Data                                              |       | $                                    | 11,236     |                                     | $          | 10,348 |   | $ | 888 |   | 9 | % | $ | 33,183 |   | $ | 29,475 |   | $ | 3,708 |   | 13 | % |
| Video                                             |       | 11,711                               |       | 10,264                                   |       | 1,447 |   | 14 |   | 35,395 |   | 27,998 |   | 7,397 |   | 26 |   |
| Voice                                             |       | 6,442                                |       | 5,542                                    |       | 900 |   | 16 |   | 19,435 |   | 14,686 |   | 4,749 |   | 32 |   |
| Total  residential revenues                       |       | 29,389                               |       | 26,154                                   |       | 3,235 |   | 12 |   | 88,013 |   | 72,159 |   | 15,854 |   | 22 |   |
| Business                                          |       | 10,018                               |       | 9,271                                    |       | 747 |   | 8 |   | 29,218 |   | 23,993 |   | 5,225 |   | 22 |   |
| Access                                            |       | 427                                  |       | 414                                      |       | 13 |   | 3 |   | 1,209 |   | 1,004 |   | 205 |   | 20 |   |
| Other                                             |       | 341                                  |       | 441                                      |       | (100 | ) | (23 | ) | 1,216 |   | 1,256 |   | (40 | ) | (3 | ) |
| Total  operating revenues from external customers |       | 40,175                               |       | 36,280                                   |       | 3,895 |   | 11 |   | 119,656 |   | 98,412 |   | 21,244 |   | 22 |   |
| Intersegment  revenues                            |       | 93                                   |       | 138                                      |       | (45 | ) | (33 | ) | 278 |   | 419 |   | (141 | ) | (34 | ) |
| Operating  expenses                               |       |                                 |       |                                     |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Cost  of services and products*                   |       | 22,801                               |       | 21,605                                   |       | 1,196 |   | 6 |   | 68,524 |   | 56,377 |   | 12,147 |   | 22 |   |
| Customer  operations and selling                  |       | 7,051                                |       | 5,757                                    |       | 1,294 |   | 22 |   | 19,779 |   | 17,001 |   | 2,778 |   | 16 |   |
| General  and administrative                       |       | 4,763                                |       | 5,482                                    |       | (719 | ) | (13 | ) | 15,301 |   | 16,574 |   | (1,273 | ) | (8 | ) |
| Depreciation  and amortization                    |       | 12,199                               |       | 10,700                                   |       | 1,499 |   | 14 |   | 35,102 |   | 29,440 |   | 5,662 |   | 19 |   |
| Loss  from operations                             |       | (6,546                               | )          | (7,126                                   | )          | 580 |   | 8 |   | (18,772 | ) | (20,561 | ) | 1,789 |   | 9 |   |
| Loss  from continuing operations                  |       | $                                    | (5,619     | )                                        | $          | (5,856 | ) | $ | 237 |   | 4 | % | $ | (15,901 | ) | $ | (17,017 | ) | $ | 1,116 |   | 7 | % |

 

----

*Exclusive of depreciation and amortization

 

**Broadband Segment Operating Revenues**

 

Operating revenues fromexternal customers in the Broadband segment increased $3,895 and $21,244 duringthe quarter and nine-month period ended September 30, 2009, respectively,compared to the same periods in 2008. The increase in operating revenues was due in part to the acquisition ofEverest in February 2008, as described above, as well as from growth inresidential RGUs and business customers.

 

**ResidentialRevenues**

 

Broadband residentialrevenues increased $3,235 and $15,854 during the quarter and nine-month periodended September 30, 2009, respectively, compared to the same periods in2008.  Broadband residential subscribersand RGUs increased 2% and 6%, respectively, as of September 30, 2009compared to the same period in 2008.  Weanticipate continued growth in residential broadband RGUs and average revenueper user resulting from the HD DVR, VoIP digital phone services and theanticipated launch during the fourth quarter of 2009 of Microsoft Mediaroominto our copper and fiber networks in the greater Sacramento area.  The integration of the new Mediaroom platformwill include a Whole Home DVR, which allows customers the ability to watchrecorded shows on any television in the house, record multiple shows at onetime and utilize an intuitive on-screen guide and user interface.

 

*Data*

 

We offer high speedInternet access at symmetrical speeds of up to 50 Mbps, depending on the levelof service selected.  The reliability andhigh speeds of the data service in both the Sacramento and Kansas City marketsenhance other services such as the SureWest Digital Phone, where customersmanage phone services through the online SureWest portal.  Through the SureWest portal, customers canmanage their SureWest Digital Phone service and access a variety of value addedfeatures and enhancements that are designed to take advantage of the speed ofthe Internet service we provide.

 

Our residential datarevenues increased $888 and $3,708 during the quarter and nine-month periodended September 30, 2009, respectively, compared to the same periods in2008 as a result of subscriber growth and the addition of our Kansas Cityoperations.  Data RGUs increased 2% as ofSeptember 30, 2009 compared to the same period in 2008.

 

22

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*Video*

 

Our video services rangefrom limited basic service to a full digital cable service.  Our services are delivered utilizing FTTH andfiber-to-the-node networks, which allow us to offer a high quality experiencewith digital TV Packages. Our full digital cable service provides access toover 340 and 260 channels in our California and Kansas City markets,respectively, including premium and pay-per-view channels, VOD service, premiumVOD channels, music channels and an interactive, on-screen program guide.Digital cable subscribers can also subscribe to additional digital cableservices, including a DVR and HDTV.

 

Residential videorevenues increased $1,447 and $7,397 during the quarter and nine-month periodended September 30, 2009, respectively, compared to the same periods in2008.  The Broadband segment experiencedgrowth in Video RGUs and residential subscribers of 1% and 2%, respectively, asof September 30, 2009 compared to the same period in 2008.  Revenues also increased as a result of higherpricing on our video services effective January 2009 and demand forenhanced video offerings such as VOD, DVR and HDTV.

 

*Voice*

 

In March 2008, welaunched our new VoIP digital phone product in the Sacramento market.  Our digital phone service is available inpackages ranging from basic service to unlimited local and domestic longdistance calling plans.  Nearly all ofour digital phone service plans include a broad array of calling featuresincluding Caller ID and Call Waiting, Find Me/Follow Me, sequential ringing andselective call acceptance and rejection. As of September 30, 2009, approximately 13% of the homes in ourSacramento market have subscribed to our new digital phone service and weanticipate that the take rate on this service will continue to increasethroughout 2009.  The VoIP digital phoneproduct presents our customers with a more competitive triple-play offeringwith increased options and multiple packages. We also offer traditional voiceservices in some of the areas we serve.

 

Residential voicerevenues increased $900 and $4,749 during the quarter and nine-month periodended September 30, 2009, respectively, compared to the same periods in2008.  The increase was due in part tothe growth in voice RGUs of 17% as of September 30, 2009 compared to thesame period in 2008.  As anticipated, thelaunch of our VoIP Digital Phone product in the Sacramento market, including inthe Telecom service territory, has resulted in elevated take rates and anincrease in Broadband residential triple-play RGUs.

 

**Business Revenues**

 

We provide a variety ofbusiness communications services to small, medium and large businesscustomers.  The services we offer to ourbusiness customers include: fiber-optics based high-speed Internet, customizeddata and Ethernet transport services, data center and disaster recoverysolutions, traditional landline and VoIP phone services and digital TV.

 

Business revenuesincreased $747 and $5,225 during the quarter and nine-month period ended September 30,2009, respectively, compared to the same periods in 2008 due primarily to an11% increase in business customers as of September 30, 2009 compared tothe same period in 2008.  A significantportion of the business revenue growth was due to our Kansas City operations.

 

**Broadband Segment Operating Expenses**

 

Total operatingexpenses in the Broadband segment increased $1,771 and $13,652 during thequarter and nine-month period ended September 30, 2009, respectively,compared to the same periods in 2008. The increase was due in part to the addition of our Kansas Cityoperations in February 2008 and an increase in costs related to the Plansof approximately $384 and $1,138 during the quarter and nine-month period endedSeptember 30, 2009, respectively, as described in the ConsolidatedOverview section above.

 

Cost of services andproducts (exclusive of depreciation and amortization) increased $1,196 and$12,147 during the quarter and nine-month period ended September 30, 2009,respectively, compared to the same periods in 2008.  The increase in costs in the current yearperiods was largely due to direct costs incurred to provide videoservices.  Programming costs have beenincreasing over the last several years due to an increase in our video RGUs andon a per subscriber basis due to an increase in costs per program channel,particularly for sports and HD channels. Further, in 2009 local commercial television broadcast stations begancharging retransmission fees, similar to fees charged by other programproviders.  Costs to provide data andvoice services increased due to the additional capacity required to handle theincreasing volume of data usage, including our VoIP digital phone product inthe Sacramento market.

 

23

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Customer operations expense increased $1,294 and $2,778 during thequarter and nine-month period ended September 30, 2009, respectively,compared to the same periods in 2008. The increase in the current year periods was mostly attributable to anincrease in salaries and wages and advertising costs in the Kansas City market.We have experienced a modest decrease in the Sacramento market in sales andadvertising costs due to decreases in radio and television advertising in thenine-month period ended September 30, 2009.

 

General andadministrative expense decreased $719 and $1,273 during the quarter andnine-month period ended September 30, 2009, respectively, compared to thesame periods in 2008 primarily due to decreases in (i) informationtechnology costs related to system maintenance and development, includingintegration of our Kansas City operations and increased production supportprojects in the prior year period and (ii) headcount in the current yearperiod.

 

Depreciation andamortization increased $1,499 and $5,662 during the quarter and nine-monthperiod ended September 30, 2009, respectively, compared to the sameperiods in 2008 due primarily to the acquisition of the Kansas City operationsin February 2008, as well as the continued expansion of the broadbandnetwork and success-based capital projects.

 

**Telecom**

 
| ** **                                        | ** ** | **Quarter Ended September 30,** | ** ** | **Nine Months Ended September 30,** | ** ** |
|---------------------------------------------------|------------|--------------------------------------|------------|------------------------------------------|------------|
| ** **                                        | ** ** | ** **                           | ** ** | ** **                               | ** ** | **$** | ** ** | **%** | ** ** | ** ** | ** ** | ** ** | ** ** | **$** | ** ** | **%** | ** ** |
| ** **                                        | ** ** | **2009**                             | ** ** | **2008**                                 | ** ** | **Change** | ** ** | **Change** | ** ** | **2009** | ** ** | **2008** | ** ** | **Change** | ** ** | **Change** | ** ** |
|                                              |       |                                 |       |                                     |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Residential                                       |       | $                                    | 5,857      |                                     | $          | 7,805 |   | $ | (1,948 | ) | (25 | )% | $ | 19,126 |   | $ | 25,230 |   | $ | (6,104 | ) | (24 | )% |
| Business                                          |       | 8,687                                |       | 10,071                                   |       | (1,384 | ) | (14 | ) | 26,824 |   | 28,932 |   | (2,108 | ) | (7 | ) |
| Access                                            |       | 4,604                                |       | 5,894                                    |       | (1,290 | ) | (22 | ) | 15,204 |   | 18,259 |   | (3,055 | ) | (17 | ) |
| Other                                             |       | 206                                  |       | 220                                      |       | (14 | ) | (6 | ) | 591 |   | 602 |   | (11 | ) | (2 | ) |
| Total  operating revenues from external customers |       | 19,354                               |       | 23,990                                   |       | (4,636 | ) | (19 | ) | 61,745 |   | 73,023 |   | (11,278 | ) | (15 | ) |
| Intersegment  revenues                            |       | 5,043                                |       | 4,706                                    |       | 337 |   | 7 |   | 14,898 |   | 13,609 |   | 1,289 |   | 9 |   |
| Operating  expenses                               |       |                                 |       |                                     |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Cost  of services and products*                   |       | 6,110                                |       | 7,314                                    |       | (1,204 | ) | (16 | ) | 18,944 |   | 20,762 |   | (1,818 | ) | (9 | ) |
| Customer  operations and selling                  |       | 2,608                                |       | 2,588                                    |       | 20 |   | 1 |   | 7,784 |   | 8,825 |   | (1,041 | ) | (12 | ) |
| General  and administrative                       |       | 3,456                                |       | 4,132                                    |       | (676 | ) | (16 | ) | 11,396 |   | 12,981 |   | (1,585 | ) | (12 | ) |
| Depreciation  and amortization                    |       | 3,061                                |       | 3,519                                    |       | (458 | ) | (13 | ) | 9,196 |   | 10,921 |   | (1,725 | ) | (16 | ) |
| Income  from operations                           |       | 9,162                                |       | 11,143                                   |       | (1,981 | ) | (18 | ) | 29,323 |   | 33,143 |   | (3,820 | ) | (12 | ) |
| Income  from continuing operations                |       | $                                    | 5,408      |                                     | $          | 6,478 |   | $ | (1,070 | ) | (17 | )% | $ | 16,668 |   | $ | 19,390 |   | $ | (2,722 | ) | (14 | )% |

 

----

*Exclusive ofdepreciation and amortization

 

**Telecom Segment Operating Revenues**

 

Operating revenues fromexternal customers in the Telecom segment decreased $4,636 and $11,278 duringthe quarter and nine-month period ended September 30, 2009, respectively,compared to the same periods in 2008.

 

**ResidentialRevenues**

 

SureWest Telephone offers several different phone services, from basiclocal service packages to unlimited California and nationwide flat-rateplans.  All of the plans include optionsfor voicemail and other calling features such as Caller ID and Call Forwarding.* *SureWest Telephoneresidential revenues decreased by $1,948 and $6,104 in the quarter andnine-month period ended September 30, 2009, respectively, as we continue toexperience decreases in revenue due to competition from wireless, wirelinecompetitors and cable providers (including SureWest Broadband).  Residential subscribers and voice RGUsdeclined approximately 29% as of September 30, 2009 compared to the same periodin 2008.  In addition, some competitorsinitiated marketing campaigns to include voice services targeted directly toresidential subscribers within SureWest Telephone’s service area.  We continue to mitigate additional voiceoperating revenue losses through our VoIP phone service now offered tocustomers within the Telecom service area through our Broadband segment.  As a result, we expect a portion of theTelecom segment’s voice revenue will continue to shift to the VoIP servicebeing offered by our Broadband segment. As of September 30, 2009, approximately 7,800, or 45%, of thedecline in Telecom voice RGUs, see the Select Operating Metrics section above,have transferred to SureWest Broadband’s VoIP phone service.  See the Broadband segment residential revenuesection above for a more detailed discussion regarding VoIP and other servicesoffered by SureWest Broadband.

 

24

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***BusinessRevenues***

* *

We provide a variety ofbusiness service offerings to small, medium and large business customers on ouradvanced fiber network.  The services weoffer to our business customers include: Fiber-optics based high-speedInternet, customized data and Ethernet transport services, data center anddisaster recovery solutions, traditional landline and scalable IP communicationsystems.  SureWest Telephone businessrevenues decreased by $1,384 and $2,108 in the quarter and nine-month periodended September 30, 2009, respectively, largely due to the currenteconomic impact on small to medium sized businesses and the continued strongcompetitive pressures, as discussed above. In addition, subsequent to the saleof our Wireless business in May 2008 to Verizon, SureWest Telephonerecorded additional business revenues of approximately $400 and $850 during thequarter and nine-month period ended September 30, 2008, respectively, forlong distance services provided to Verizon during the transition of thewireless business to Verizon. The additional revenue in the prior year periodstemporarily increased Average Revenue Per Unit (“ARPU”) during those periods. Asa result, ARPU declined 7% for the quarter ended September 30, 2009compared to the same prior year period. While our business customer basedeclined 7% as of September 30, 2009 compared to the same period in 2008,ARPU remained relatively flat, but would have shown an increase without theadditional revenue from Verizon recognized in the same prior year period. Wehave mostly alleviated business revenue losses, which could have resulted fromthe decline in the customer base, with a continued strong demand for dataservices and the increasing requirement for businesses to network multiplelocations in order to share data.

 

**Access Revenues**

 

Accessrevenues, which include switched access revenue, interstate common line (“CL”)revenue and draws from the CHCF, decreased $1,290 and $3,055 during the quarterand nine-month period ended September 30, 2009, respectively, compared tothe same periods in 2008. As anticipated, subsidies received during the quarterand nine-month period ended September 30, 2009 from the CHCF havedecreased by approximately $510 and $1,530, respectively, compared to the sameprior year periods. The CHCF decrease was offset in part by approximately $224,primarily due to a settlement received from CHCF-B in the current year relatedto 2008.  Switched access revenues alsodeclined by approximately $540 and $2,245 during the quarter and nine-monthperiod ended September 30, 2009, respectively, compared to the sameperiods in 2008 due to declines in minutes of use associated with the reductionof residential voice services previously discussed.  The decline in access revenues was partiallyoffset by an increase in interstate CL settlements received from the NationalExchange Carrier Association (“NECA”) of approximately $1,095 during thenine-months ended September 30, 2009 as a result of a shift in revenuerecovery from end users to the NECA pool. The increase in the interstate CL settlements includes a change in estimateto the NECA CL accounts receivable balance which resulted in a decrease toaccess revenue of $583 and $562 during the quarter and nine-month period ended September 30,2009.  See the Regulatory Matters**section below for a more detailed discussion regardingSureWest Telephone’s regulated revenues.

 

**Telecom Segment Operating Expenses**

 

Operating expensesfor the Telecom segment decreased $1,860 and $4,444 during the quarter andnine-month period ended September 30, 2009, respectively, compared to the sameperiods in 2008.  As discussed in the Residential Revenue section above,during the nine months ended September 30, 2009 we have experienced adecline in voice RGUs due in part to subscribers opting to initiate VoIPdigital phone service offered by our Broadband segment.  As a result, certain of the operating costsassociated with these subscribers are now included in the Broadbandsegment.  The decrease in operatingexpenses was offset in part by an increase in costs related to the Plans ofapproximately $717 and $2,186 during the quarter and nine month period ended September 30,2009, respectively, as described in the Consolidated Overview section above.

 

Cost of services andproducts (exclusive of depreciation and amortization) decreased $1,204 and $1,818during the quarter and nine-month period ended September 30, 2009,respectively, compared to the same periods in 2008. This decrease waspredominately due to the decline in local and long distance expenses as aresult of decreases in voice RGUs and business customers of 29% and 7%,respectively, as of September 30, 2009 compared to the same prior yearperiod.  Additionally, in the currentyear periods property maintenance costs declined through a consolidation ofoffice space and cost cutting initiatives.

 

Customer operationsexpense decreased $1,041 during the nine-month period ended September 30,2009, compared to the same period in 2008. The decrease was due in part to a reduction in spending on sales andadvertising, which included radio and television advertising in the currentyear period in the Telecom segment service territory.  Further, costs directly related to providingservices to customers, such as billing and collection costs, have decreased asa result of the decline in our voice RGUs and business customers, as discussedabove.

 

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General andadministrative expense decreased $676 and $1,585 during the quarter andnine-month period ended September 30, 2009, respectively, compared to thesame periods in 2008.  The decrease wasprimarily due to (i) a decline in consulting and advisory fees and (ii) theincurrence in the prior year period of additional information technology costsrelated to production support projects.

 

Depreciation and amortization decreased $458 and $1,725 during thequarter and nine-month period ended September 30, 2009, respectively,compared to the same periods in 2008. This decrease was due predominately to a portion of aerial andunderground cable becoming fully depreciated in the current year period and aportion of general purpose software becoming fully depreciated during the thirdquarter of 2008.

 

**Regulatory Matters**

 

Revenues from servicessubject to regulation constituted approximately 30% and 31% of our total operatingrevenues from continuing operations during the quarter and nine-month periodended September 30, 2009, respectively. For the same prior year periods, revenues from services subject toregulation constituted approximately 35% and 38% of our total operatingrevenues from continuing operations, respectively.  Those revenues, which include local service,network access service and toll service, are derived from various sources,including:

 

·                  business and residential subscribers of basic exchange services;

·                  surcharges mandated by State Commissions;

·                  long distance carriers, for network access service;

·                  competitive access providers and commercial enterprises for networkaccess service;

·                  interstate pool settlements from NECA;

·                  support payments from federal or state programs; and

·                  support payments from the CHCF, recovering costs of services includingextended area service.

 

Significant portions ofour telephone rates and charges are subject to regulation by the FederalCommunications Commission (“FCC”) and state commissions. Rates and charges arebased on various tariffs filed by the Company and others, including those filedby the NECA for interstate CL charges. Pending and future regulatory actions,with respect to these and other matters and the filing of new or amendedtariffs, may have a material impact on our consolidated financial position andresults of operations.

 

Intrastateservice rates are subject to regulation by state commissions. With respect totoll calls initiated by interexchange carriers’ customers, the interexchangecarriers are assessed access charges based on tariffs filed by the Company.Interstate access rates and resultant earnings are subject to regulation by theFCC. With respect to interstate services, SureWest Telephone has detariffed itsDSL services and files its own tariff with the FCC for switched and specialaccess services. For interstate CL charges, SureWest Telephone concurs withtariffs filed by NECA. Pending and future regulatory actions may have amaterial impact on our consolidated financial position and results ofoperations.

 

*FCC Matters*

 

TheFCC monitors SureWest Telephone’s interstate earnings through the use of annualcost separation studies prepared by SureWest Telephone, which utilize estimatedcost information and projected demand usage. The FCC establishes rules thatcarriers must follow in the preparation of the annual studies. Additionally,under current FCC rules governing rate making, SureWest Telephone isrequired to establish interstate rates based on projected demand usage for itsvarious services and determine the actual earnings from these rates once actualvolumes and costs are known.

 

Asa result of periodic cost separation studies required by the FCC, SureWestTelephone changed its estimates for certain NECA CL accounts receivablebalances related to the current and prior year monitoring periods.  During the quarter and nine-month periodended September 30, 2009, these changes in estimates decreased ourconsolidated revenues and income from continuing operations by $583 and $562and net income by $335 ($0.02 per share) and $323 ($0.02 per share),respectively.  We did not record anysignificant changes in estimates during the quarter and nine-month period endedSeptember 30, 2008.

 

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*California Public UtilityCommission (“CPUC”) Matters*

 

In 2004, we entered into a settlement agreement (the “SettlementAgreement”), which was ultimately approved by the CPUC, to resolve an ongoingregulatory proceeding with various parties. The Settlement Agreement resolved past sharing liabilities and suspendedfuture sharing requirements in the intrastate jurisdiction.  In accordance with the Settlement Agreement,SureWest Telephone returned approximately $6,500, plus interest at the 90-daycommercial paper rate for non-financial institutions and an imputed rate of3.15%, to its end-users through a consumer dividend.  The surcredit was recorded as a reduction ofour contractual shareable earnings obligations over a period of approximatelyfour years, which began January 1, 2005. During the first quarter of 2009 and prior to the cessation of thesurcredit on February 9, 2009, we returned approximately $165. For thequarter and nine-month period ended September 30, 2008, we returnedapproximately $404 and $1,253, respectively, to end users through the consumerdividends.

 

As part of the SettlementAgreement, SureWest Telephone was required to implement an additional annualconsumer dividend of $1,300 on January 1, 2007 to end-users receivingSureWest Telephone services subject to sharing on or after that date.  In December 2006, the CPUC authorized usto offset our annual $11,500 interim draw from the CHCF with the aforementioned$1,300 consumer dividend Settlement Agreement.  The CHCF was previously authorized by the CPUCto offset SureWest Telephone’s intrastate regulated operating expenses on aninterim basis. In September 2007, the CPUC issued Decision 07-09-002 whichprovides for SureWest Telephone to phase-down our annual CHCF interim draw overa five-year period.  In 2008, our interimCHCF draw was $8,160 and is being incrementally reduced by approximately $2,000annually.  We anticipate our 2009 interimCHCF draw will be approximately $6,120.

 

In an ongoing proceeding relating to the New Regulatory Framework(under which SureWest Telephone has been regulated since 1996), the CPUCadopted Decision 06-08-030 in 2006, which grants carriers broader pricingfreedom in the provision of telecommunications services, bundling of services,promotions and customer contracts.  Thisdecision adopted a new regulatory framework, the Uniform Regulatory Framework (“URF”),which among other things (i) eliminates price regulation and allows fullpricing flexibility for all new and retail services except basic residentialservices which can only be raised up to $3.25 per year for 2009 and2010 as described below,(ii) allows new forms of bundles and promotionalpackages of telecommunication services, (iii) allocates all gains andlosses from the sale of assets to shareholders and (iv) eliminates almostall elements of rate of return regulation, including the calculation ofshareable earnings.  On September 18,2008, the CPUC adopted Decision 08-09-042, which allows URF Incumbent LocalExchange Carriers (“ILECs”) to increase their basic residential rate by up to$3.25 per year over the next two years. Beginning January 1, 2011, the URF ILECs will be allowed fullpricing flexibility for the basic residential rate.

 

*OtherRegulatory Matters*

 

There are a number ofother regulatory proceedings occurring at the federal and state levels that mayhave a material impact on us. These regulatory proceedings include, but are notlimited to, consideration of changes to the jurisdictional separations process,the interstate universal service fund, intercarrier compensation access chargereform, broadband deployment, the regulation of local exchange carriers andtheir competitors, including providers of IP-enabled services and the provisionof video services and competition in the market. The outcomes and impact on ouroperations due to these proceedings and related court matters cannot bedetermined at this time.

 

The regulatoryproceedings occurring at the state and federal levels described above may alsoauthorize new competition in the provision of regulated services and change therates and rate structure for regulated services that we furnish, of which theeffects cannot yet be determined.

 

**Non-OperatingItems**

 

*Other Income andExpense, Net*

* *

Consolidated interestincome decreased $7 and $494 during the quarter and nine-month period ended September 30,2009, respectively, compared to the same periods in 2008. During the prior yearperiods, we had higher cash and investment balances due primarily to the receiptof proceeds from the sale of certain non-core assets, including our Wirelessbusiness. The higher cash and investment balances in the prior year periodsresulted in a decrease in interest income in the current year periods.  Further, decreases in interest rates on ourinvested balances have also contributed to the reduction of interest income.

 

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Consolidated interest expense increased $142 anddecreased $443 during the quarter and nine-month period ended September 30,2009, respectively, compared to the same periods in 2008. Interest expense onour existing debt increased $385 during the nine-month period ended September 30,2009 compared to the same period in 2008, although it was offset by (i) thereceipt of patronage dividends of $963 and $400 during the quarters ended March 31,2009 and 2008, respectively, (ii) the impact of the loss on theextinguishment of debt of $607 recorded during the quarter ended March 31,2008, as described in the Liquidity and Capital Resources section below, and (iii) adecrease in capitalized interest of approximately $280. We earn patronagedividends from CoBank, ACB (“CoBank”) based on our share of the net incomeearned by CoBank.  We record the receiptof the patronage dividends against interest expense.

 

*Income Taxes*

* *

Income taxes decreased$568 during the quarter ended September 30, 2009 compared to the sameperiod in 2008 due primarily to a decrease in income before income taxes.  Income taxes decreased $456 during the nine-monthperiod ended September 30, 2009 compared to the same period in 2008 dueprimarily to a decrease in income before taxes and due to an increase inpermanent differences resulting from the decrease between the grant and vestingprices of restricted common stock and restricted common stock units that vestedduring the nine-month period ended September 30, 2009.  The effective federal income tax rates forcontinuing operations were 66.4% and 45.4% for the nine-month periods ended September 30,2009 and 2008, respectively.

 

**Liquidity and Capital Resources**

 

**Overview**

 

We generate significantcash flows from operating activities. The proceeds from monetizing our non strategic investments have alsoprovided us with a significant source of cash flow.  We believe that we will be able to meet ourcurrent and long-term liquidity and capital requirements through our cash flowfrom operating activities, existing cash, cash equivalents and investments;through available borrowings under our existing credit facilities; and throughour ability to obtain future external financing.  Our primary use of cash in 2009 has been forcapital expenditures, scheduled payments of long-term debt (including interest)and the payment during the current year related to our 2008 incentivecompensation plan. We anticipate continuing to use a substantial portion of ourcash flow to fund our capital expenditures, invest in new businessopportunities, fund network expansion and modernization, meet scheduledpayments of long-term debt and may fund the authorized share repurchase plan.

 

The followingtable summarizes our cash flows:

 

| ** **                                        | ** ** | **Nine Months Ended September 30,** | ** ** |
|---------------------------------------------------|------------|------------------------------------------|------------|
| ** **                                        | ** ** | **2009**                                 | ** ** | **2008** | ** ** | **$ Change** | ** ** |
| Cash  Flows Provided By (Used In)                 |       |                                     |       |   |   |   |   |
| Operating  Activities:                            |       |                                     |       |   |   |   |   |
| Continuing  operations                            |       | $                                        | 52,571     |   | $ | 34,746 |   | $ | 17,825 |   |
| Discontinued  operations                          |       | (514                                     | )          | (184 | ) | (330 | ) |
|                                              |       |                                     |       |   |   |   |   |
| Investing  Activities:                            |       |                                     |       |   |   |   |   |
| Continuing  operations                            |       | (31,591                                  | )          | (161,371 | ) | 129,780 |   |
| Discontinued  operations                          |       | —                                   |       | (280 | ) | 280 |   |
|                                              |       |                                     |       |   |   |   |   |
| Financing  Activities:                            |       |                                     |       |   |   |   |   |
| Continuing  operations                            |       | (16,168                                  | )          | 98,368 |   | (114,536 | ) |
|                                              |       |                                     |       |   |   |   |   |
| Increase  (decrease) in Cash and Cash Equivalents |       | $                                        | 4,298      |   | $ | (28,721 | ) | $ | 33,019 |   |

 

**Cash Flows Provided By Operating Activities**

 

Net cash provided bycontinuing operating activities was $52,571 during the nine-month period ended September 30,2009.  Significant adjustments to netincome to arrive at cash provided by operating activities include (i) non-cashcharges of $47,833 consisting primarily of (a) depreciation andamortization of $44,298 due to capital investments principally in the Broadbandsegment, (b) deferred income taxes of $1,983 and (c) stockcompensation expense of $1,552 and (ii) a decrease in income taxreceivable of $2,735 primarily as a result of a refund received for anoverpayment of estimated income taxes related to 2008.  Cash provided by operating activities wasoffset in part due to improved working capital as a result of a decrease inaccrued compensation of $2,584 related to the payment in the current year of2008 incentive compensation.

 

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**CashFlows Used In Investing Activities***.*

 

Net cash used incontinuing investing activities was $31,591 and $161,371 during the nine-monthperiods ended September 30, 2009 and 2008, respectively. Net cash usedduring the prior year period was primarily attributable to the acquisition ofEverest for $179,750, net of cash acquired.

 

*Capital Expenditures*

 

Capital expenditurescontinue to be our primary recurring investing activity and were $43,363 and $64,567in the nine-month periods ended September 30, 2009 and 2008, respectively.We invest a significant portion of our capital spending in our Broadbandsegment as a result of business growth, the introduction of new products andservices and the expansion of the network.

 

*Proceeds from Sale of Discontinued Operations*

 

In February 2009, wesold our fifty-two Tower Assets owned by our subsidiary West Coast PCS toGlobal Tower Partners. The sale was completed for an aggregate cash purchaseprice of $9,222, based on the tower cash flow generated by commenced tenantleases. Proceeds from the sale of the Tower Assets were used to repay a portionof outstanding long-term debt.

 

In May 2008, we soldthe operating assets of our Wireless business, SureWest Wireless, to Verizonfor an aggregate cash purchase price of $69,746. A portion of the purchaseprice equal to $3,450 was placed in escrow, half of which was received duringthe quarter ended June 30, 2009 and the balance of which will be availableduring the second quarter of 2010. See Note 3 for more information regardingthe escrow. Proceeds from the sale of the Wireless business were used in partto repay a portion of the Credit Agreement, as described below.

 

**CashFlows Provided By Financing Activities**

 

Net cash provided byfinancing activities consists primarily of our proceeds from short andlong-term borrowings offset by cash payments for dividends, principal paymentson long-term debt and planned repurchases of our common stock.

 

*Long-term Debt*

 

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

 

The Term Loan A facility,prior to the Credit Agreement, which had $40,000 outstanding, was extinguishedin February 2008 resulting in a loss on extinguishment of debt of $607,which was recorded as a component of interest expense in the first quarter of2008. $40,000 of the Credit Agreement borrowings bore interest at a fixed rate.The remaining $80,000 of the Credit Agreement borrowings bore interest based,at our election, on the London Interbank Offered Rate (“LIBOR”) or the bank’sPrime Rate, in either case, plus an applicable margin. The Term Loan B facilitywas due and payable on February 12, 2009 and included automatic increasesto the applicable interest margins. On May 14, 2008, we repaid $30,000 ofthe Term Loan B and $16,000 of the Revolving facility with proceeds from thesale of SureWest Wireless.

 

In September 2008,we entered into a Third Amended and Restated Credit Agreement (“New Agreement”)to restate and replace the Credit Agreement. The New Agreement terms, amongother things (i) reflected the repayment of $30,000 of the Term Loan Bfacility under the Credit Agreement to reduce the principal balance from$60,000 to $30,000, (ii) modified interest margins and (iii) extendedthe maturity date of the Term Loan B facility to May 1, 2012.

 

As of September 30,2009, $120,000, $30,000 and $10,500 were outstanding on the Term Loan A, TermLoan B and Revolving Loan facilities, respectively.

 

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*Debt Covenants*

 

Our Series Aand Series B Senior Notes and the New Agreement contain financial andoperating covenants that may restrict, among other things, the repurchase ofthe Company’s capital stock, the making of certain other restricted paymentsand the incurrence of additional indebtedness. The covenants also require us tomaintain certain financial ratios and minimum levels of tangible net worth. At September 30,2009 and December 31, 2008, retained earnings of $104,976 and $101,345,respectively, were available for the payments described above. As of September 30,2009, we were in compliance with all of our debt covenants.

 

*Share Repurchase Program and Dividends*

 

Our Board of Directorshas authorized the repurchase of up to 2.5 million shares of our commonstock. Shares are purchased from time to time in the open market or throughprivately negotiated transactions, subject to overall financial and marketconditions. Starting in the first quarter of 2000 through September 30,2009, approximately 1.9 million shares of common stock had been repurchased. Asof September 30, 2009, we had remaining authorization from the Board ofDirectors to repurchase approximately 611 thousand additional outstandingshares. We repurchased approximately 108 thousand shares during the nine-monthperiod ended September 30, 2009 (none in the quarter ended September 30,2009) and approximately 48 thousand and 553 thousand shares during the quarterand nine-month period ended September 30, 2008, respectively.  The purchase of common shares did not have asubstantive effect on the average number of common shares outstanding or thecalculation of basic and diluted earnings per share for the quarters ornine-month periods ended September 30, 2009 or 2008.

 

In April 2008, ourBoard of Directors announced the decision to discontinue dividend payments forthe foreseeable future in an effort to foster our growth strategy byreinvesting the approximate $14,500 of annual dividend distributions back intothe Company.  The cash dividend of $0.25per share, paid on June 16, 2008 to shareholders of record at the close ofbusiness on May 15, 2008, was the last dividend paid to shareholders forthe foreseeable future.  Anyreinstatement of future dividend payments is at the discretion of our Board ofDirectors.

 

**Sufficiency of Cash Resources**

 

We had cash, cashequivalents and short-term investments at September 30, 2009 of$11,381.  We believe, given our financialposition and debt-to-equity position, that we have substantial additionallong-term borrowing capacity of approximately $49,500 available to us throughour Revolving Loan facility.  TheRevolving Loan facility is subject to mandatory reductions of $7,500 on December 31,2009 and December 31, 2010, less all voluntary reductions of the RevolvingCredit facility and voluntary prepayments or mandatory repayments of the TermLoan A or the Term Loan B facilities.  We believe our operating cash flowsand our borrowing capacity are sufficient to satisfy our liquidity requirementsfor the next twelve months, while maintaining adequate cash and cashequivalents.

 

Our most significant useof funds in the remainder of 2009 is expected to be for (i) budgetedcapital expenditures of $10,000 to $15,000, (ii) scheduled payments oflong-term debt of $3,636 and (iii) anticipated interest payments of$3,738. As discussed above, throughout the year we may repurchase shares of theCompany’s common stock in the open market at the prevailing market price up toan amount authorized by the Board of Directors.

 

A portion of the 2009budgeted capital expenditures is at our discretion and dependent upon ourworking capital position, operating cash flows and ability to borrow. We canmodify our planned construction and commitments if the results of operations oravailable capital so require. A significant portion of our 2009 budgetedcapital expenditures are success based and is partially dependent on ourability to manage our growth and expansion. We are required to comply with ourcable franchise agreements to continue our build-out in the franchise areas.

 

*Defined Benefit Pension Plan*

 

As required, wecontribute to the Pension and Other Benefits Plans, which provide retirementbenefits to certain eligible employees. Contributions are intended to providefor benefits attributed to service to date. Our funding policy is to contributeannually an actuarially determined amount consistent with applicable federalincome tax regulations. As discussed in the Consolidated Overview sectionabove, we stopped accruing benefits for active participants effective April 1,2007 and we anticipate that future funding requirements will decreasesignificantly as a result of the freeze of the Plans.  However, the significant decline in theequity markets precipitated by the recent credit crisis and financial systeminstability has negatively affected the value of our pension plan assets.  We will continue to evaluate the futurefunding requirements of the Plans and fund them as deemed necessary. SeeNote 7 for a more detailed discussion regarding our Pension and OtherBenefits Plans.

 

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**RegulatoryMatters**

 

As discussed more fullyin the Regulatory Matterssection above, the CPUC issued a final decision which phases down our $11,500current annual CHCF interim draw by approximately $2,000 annually, over a5-year period ending on January 1, 2012.

 

**CriticalAccounting Estimates**

 

Our condensedconsolidated financial statements and accompanying notes are prepared inaccordance with accounting principles generally accepted in the United States (“U.S.GAAP” or “GAAP”). Preparing financial statements requires management to makeestimates and assumptions that affect the reported amounts of assets,liabilities, revenue, and expenses. These estimates and assumptions areaffected by management’s application of accounting policies. Our judgments arebased on historical experience and on various other assumptions that arebelieved to be reasonable under the circumstances, the results of which formthe basis for making estimates about the carrying values of assets andliabilities that are not readily apparent from other sources. For a fulldiscussion of our accounting estimates and assumptions that we have identifiedas critical in the preparation of our condensed consolidated financialstatements, refer to our 2008 Annual Report on Form 10-K.

 

**Recent Accounting Pronouncements**

 

**Recently IssuedAccounting Pronouncements**

** **

In October 2009, theFinancial Accounting Standards Board (“FASB”) issued Accounting StandardsUpdate (“ASU”) No. 2009-13, *Revenue Recognition (Topic605): Multiple-Deliverable Revenue Arrangements—a consensus of the FASBEmerging Issues Task Force*(“ASU 2009-13”).  ASU 2009-13 addresses the accounting formultiple-deliverable arrangements to enable vendors to account for products orservices separately rather than as a combined unit and modifies the manner inwhich the transaction consideration is allocated across the separatelyidentified deliverables.  ASU 2009-13significantly expands the disclosures requirements for multiple-deliverablerevenue arrangements.  ASU 2009-13 willbe effective for the first annual reporting period beginning on or after June15, 2010, and may be applied retrospectively for all periods presented orprospectively to arrangements entered into or materially modified after theadoption date.  Early adoption ispermitted, provided that the guidance is retroactively applied to the beginningof the year of adoption. We are currently evaluating the impact this updatewill have on our consolidated financial statements.

 

In September 2009,the FASB issued ASU No. 2009-05, *Fair Value Measurementsand Disclosures (Topic 820) – Measuring Liabilities at Fair Value* (“ASU2009-05”).  ASU 2009-05 amends AccountingStandards Codification (“ASC”) Topic 820 (“ASC 820”) to provide guidanceconcerning the measurement of liabilities at fair value. ASU 2009-05 iseffective for the first reporting period beginning after issuance or thequarter ended December 31, 2009 for a calendar year company. We arecurrently evaluating the impact this update will have on our consolidatedfinancial statements.

 

In December 2008,the FASB issued guidance to require disclosure of additional information aboutassets held in a defined benefit pension or other postretirement plan (formerlyStaff Position (“FSP”) FAS No. 132(R)-1, *Employers’Disclosures about Postretirement Benefit Plan Assets*)**currently included in ASC Topic 715, *Compensation-RetirementBenefits*. Specifically, this guidance requires an employer todisclose (i) investment policies and strategies including targetallocation percentages, (ii) major categories of plan assets, (iii) inputsand valuation techniques used to measure the fair value of plan assets and (iv) significantconcentration of risk within plan assets. The additional disclosurerequirements are effective for fiscal years ending after December 15,2009, with earlier application permitted. We are currently evaluating theimpact this guidance will have on our consolidated financial statements.

 

**Recently AdoptedAccounting Pronouncements**

** **

InJune 2009, the FASB issued an accounting standard, currently included inASC Topic 105, *Generally Accepted Accounting Principles*(“ASC105”), which established only two levels of GAAP, authoritative andnonauthoritative (formerly Statement of Financial Accounting Standards (“SFAS”) No. 168,*The FASBAccounting Standards Codification**TM** and the Hierarchy of Generally AcceptedAccounting Principles – a replacement of FASB Statement No. 162*). The FASB ASCbecame the only source of authoritative nongovernmental GAAP, except for rules andinterpretive releases of the SEC, which are sources of authoritative GAAP for SECregistrants.  All other nongrandfathered,non-SEC accounting literature not included in the ASC will becomenonauthoritative.  ASC 105 was effectivefor financial statements issued in interim or annual reporting periods endingafter September 15, 2009.  The ASCwas not intended to change or alter existing GAAP, consequently our adoption ofASC 105 did not have a material impact on our condensed consolidated financialstatements.

 

In May 2009, theFASB issued guidance, currently included in**ASC Topic 855,*Subsequent Events*, which establishedgeneral standards of accounting for and disclosure of events that occur afterthe balance sheet date but before financial statements are issued or availableto be issued (formerly SFAS No. 165, *Subsequent Events*).This guidance requires disclosure of the date through which subsequent eventshave been evaluated, as well as whether that is the date the financialstatements were issued or the date the financial statements were available tobe issued. The provisions of this guidance were effective for interim or annualfinancial periods ending after June 15, 2009.  Our adoption of this guidance did not have amaterial impact on our condensed consolidated financial position and results ofoperations.

 

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In April 2009, theFASB issued three accounting standards that were intended to provide additionalapplication guidance and enhance disclosures about fair value measurements andimpairments of securities. The provisions included in these standards wereintended to (i) clarify the objective and method of fair value measurementeven when there has been a significant decrease in market activity for theasset being measured (formerly FSP FAS No. 157-4, *DeterminingFair Value When the Volume and Level of Activity for the Asset or LiabilityHave Significantly Decreased and Identifying Transactions That Are Not Orderly*),currently included in ASC 820*,*(ii) establisha new model for measuring other-than-temporary impairments for debt securities,including establishing criteria for when to recognize a write-down throughearnings versus other comprehensive income (formerly**FSPFAS No. 115-2 and FSP FAS No. 124-2, *Recognitionof Other-Than-Temporary Impairment*), currently included in ASC Topic320, *Investments-Debt and Equity Securities*and (iii) require fair value disclosures in interim periods for allfinancial instruments within the scope of ASC Topic 825, *FinancialInstruments* (formerly FAS No. 107-1 and APB 28-1, *Interim Disclosures about Fair Value of Financial Instruments*).Our adoption of the provisions of these standards, on April 1, 2009, didnot have a material impact on our condensed consolidated financial position andresults of operations.

 

In November 2008,the Emerging Issues Task Force (“EITF”) reached a consensus (formerly EITF No. 08-7,*Accounting for Defensive Intangible Assets)*whichrequires the acquirer of a defensive intangible asset to account for adefensive intangible asset as a separate unit of accounting and assign a usefullife for a defensive intangible asset according to the entity’s consumption ofthe expected benefits related to that asset, currently included in ASC Topic350, *Intangibles-Goodwill and Other*(“ASC 350”).Our adoption of this provision, on January 1, 2009 did not have a material impact on our condensed consolidatedfinancial position and results of operations.

 

In June 2008, theFASB issued guidance which addresses whether instruments granted in share-basedpayment transactions are participating securities prior to vesting and,therefore, need to be included in the earnings allocation in computing earningsper share under the two-class method as described in ASC Topic 260, *Earnings Per Share* (formerly FSP EITF 03-6-1, *Determining Whether Instruments Granted in Share-Based PaymentTransactions Are Participating Securities)*. Under this guidance,unvested share-based payment awards that contain non-forfeitable rights todividends or dividend equivalents (whether paid or unpaid) are participatingsecurities and shall be included in the computation of earnings per sharepursuant to the two-class method.  Ouradoption of the requirements of this guidance, on January 1, 2009, did nothave a material impact on our condensedconsolidated financial position and results of operations.

 

In April 2008, theFASB issued guidance which amends the factors that should be considered indeveloping renewal or extension assumptions used for purposes of determiningthe useful life of a recognized intangible asset under ASC 350 (formerly FSP No. FAS142-3,*Determination of the Useful Life ofIntangible Assets*). This guidance was intended to improve theconsistency between the useful life of a recognized intangible asset under ASC350 and the period of expected cash flows used to measure the fair value of theasset under ASC Topic 805, *Business Combinations*(“ASC805”), and other U.S. GAAP.  Our adoption of this guidance, on January 1,2009, did not have a material impact onour condensed consolidated financial position and results of operations.

 

In February 2008,the FASB issued guidance which amended ASC 820 to delay the effective dateuntil January 1, 2009 for nonfinancial assets and nonfinancialliabilities, except for items that are recognized or disclosed at fair value inthe financial statements on a recurring basis, at least annually (formerly FSP No. FAS157-2, *Effective Date of FASB Statement No. 157).*  ASC 820, as amended, was effective forfinancial statements issued for fiscal years beginning after November 15,2008 and for interim periods within those fiscal years.  Our adoption of the provisions of thispronouncement, on January 1, 2009, did not have a material impact on our condensed consolidated financial position andresults of operations.

 

In December 2007,the FASB issued an accounting standard which establishes principles andrequirements for how the acquirer recognizes and measures, in its financialstatements, the identifiable assets acquired, the liabilities assumed and anynoncontrolling interest in the acquiree in a business combination, currentlyincluded in ASC 805 (formerly SFAS No. 141(R), *BusinessCombinations*).  This standardalso establishes principles around how goodwill acquired in a businesscombination or gain from a bargain purchase should be recognized and measured,as well as provides guidelines on the disclosure requirements on the nature andfinancial impact of the business combination. In addition, this standardrequires acquisition-related transaction and restructuring costs to be expensedrather than treated as part of the cost of the acquisition.  In April 2009, the FASB issued anamendment to this standard by establishing a model to account for certainpre-acquisition contingencies (formerly FSP FAS 141(R)-1, *Accountingfor Assets Acquired and Liabilities Assumed in a Business Combination ThatArise from Contingencies)*. Under the amendment, an acquirer is required to recognize at fair valuean asset acquired or a liability assumed in a business combination that arisesfrom a contingency if the acquisition-date fair value of that asset orliability can be determined during the measurement period.  If the acquisition-date fair value cannot bedetermined, then the acquirer should follow the recognition criteriarequirements of ASC Topic 450,*Contingencies*.  Our adoption of the standard and amendment,on January 1, 2009, did not have a materialimpact on our condensed consolidated financial position and results ofoperations.

 

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**Regulatoryand Legal Matters**

** **

Significant portions ofSureWest Telephone’s rates and charges are subject to regulation by the FCC andthe CPUC.  Rates and charges are based onvarious tariffs filed by SureWest and others, including those filed by the NECAfor CL charges.  Pending and futureregulatory actions, with respect to these and other matters and the filing ofnew or amended tariffs, may have a material impact on our consolidatedfinancial position and results of operations. In addition, the emergence of a range of products and services thatoperate partially or entirely outside traditional regulatory frameworks butthat compete with regulated service offerings has created new challenges forboth us and the regulators.

 

Our consolidatedfinancial condition and results of operations have been and will be affected byrecent and future proceedings before the CPUC and FCC. Pending before the FCCand CPUC are proceedings that, among other things, are considering:

 

·                              additional rules governing theopening of markets to competition and the regulation of the competingtelecommunications providers;

·                              the nature and extent of thecompensation, if any, to be paid by carriers and other providers to one anotherfor network use, and the sums to be recovered through end users and othersources;

·                              the goals and definition of universaltelephone service in a changing environment, including examination of subsidysupport mechanisms for subscribers of different carriers (including incumbentcarriers) and in various geographic areas;

·                              rules that will providenon-discriminatory access by competing service providers to the networkcapabilities of local exchange carriers; and

·                              the regulated rates and earnings ofSureWest Telephone.

 

There are a number ofpending and anticipated other regulatory proceedings occurring at the federaland state levels that may have a material impact on SureWest Telephone and alsoon subsidiaries in the Broadband segment. These regulatory proceedings also includenewer issues, such as consideration of broadband deployment and regulation ofIP-enabled services. The outcomes and impact of these proceedings and relatedcourt matters on the Telecom segment, the Broadband segment and the Company asa whole cannot be determined at this time.

 

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**ITEM 3.  QUANTITATIVE ANDQUALITATIVE DISCLOSURES ABOUT MARKET RISK.**

 

Our 2008 Annual Report onForm 10-K contains certain disclosures about our limited exposure tomarket risk for changes in interest rates.  There have been no materialchanges to the information provided which would require additional disclosuresas of the date of this filing.

 

**ITEM4.  CONTROLS AND PROCEDURES.**

 

**Evaluation of disclosure controls and procedures**

 

Our management, with theparticipation of our Chief Executive Officer and Chief Financial Officer,evaluated the effectiveness of the design and operation of our disclosurecontrols and procedures (as defined in Rule 13a-15(e) under theSecurities Exchange Act of 1934, as amended) as of the end of the periodcovered by this Quarterly Report on Form 10-Q. Based upon, and as of thedate of this evaluation, the Chief Executive Officer and Chief FinancialOfficer have concluded that our disclosure controls and procedures wereeffective, at the reasonable assurance level, to ensure that informationrequired to be disclosed by us in reports that we file or submit under theSecurities Exchange Act is authorized, recorded, processed, summarized andreported within the time periods specified in the Securities and ExchangeCommission rules and forms.

 

**Changein internal control over financial reporting**

 

There has been no changein our internal control over financial reporting during the quarter andnine-month period ended September 30, 2009.

 

**Limitations on the effectiveness of controls**

 

Our management isresponsible for establishing and maintaining adequate internal control overfinancial reporting. Our internal control system was designed to providereasonable assurance to our management, Board of Directors and Audit Committeeregarding the reliability of financial reporting and the preparation ofpublished financial statements in accordance with generally accepted accountingprinciples.

 

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**PART II –OTHER INFORMATION**

 

**ITEM 1**.      **LEGAL PROCEEDINGS.**

 

Refer to Notes 5 and 8 toour condensed consolidated financial statements of the Quarterly Report on Form 10-Qfor a discussion of recent developments related to our regulatory and legalproceedings.

 

**ITEM6.  EXHIBITS.**

 

(a)          Index to Exhibits.

 
| **Exhibit  No.** | ** ** | **Description**                                                                                                                                                                                  | ** ** | **Method  of Filing**      |
|------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------|
| ** **       | ** ** | ** **                                                                                                                                                                                       | ** ** | ** **                 |
| 3.1              |       | Amended and Restated Bylaws of the Registrant,  effective September 30, 2009 (Filed as Exhibit 3.1 to  Form 8-K filed October 6, 2009)                                  |       | Incorporated by  reference |
|             |       |                                                                                                                                                                                             |       |                       |
| 31.1             |       | Certification of Steven C. Oldham, President and  Chief Executive Officer, as adopted pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002                                            |       | Filed herewith             |
|             |       |                                                                                                                                                                                             |       |                       |
| 31.2             |       | Certification of Dan T. Bessey, Vice President and  Chief Financial Officer, as adopted pursuant to Section 302 of the Sarbanes-Oxley  Act of 2002                                          |       | Filed herewith             |
|             |       |                                                                                                                                                                                             |       |                       |
| 32.1             |       | Certification of Steven C. Oldham, President and  Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as adopted  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002   |       | Filed herewith             |
|             |       |                                                                                                                                                                                             |       |                       |
| 32.2             |       | Certification of Dan T. Bessey, Vice President and  Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |       | Filed herewith             |

 

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**SIGNATURES**

 

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned, thereuntoduly authorized.

 
|                        |   | SUREWEST COMMUNICATIONS  |
|-----------------------------|--------|--------------------------|
|                        |   | (Registrant)             |
|                        |   |                     |
|                        |   |                     |
|                        | By:    | /s/ STEVEN C.  OLDHAM    |
|                        |   | Steven C.  Oldham,       |
|                        |   | President and  Chief     |
|                        |   | Executive  Officer       |
|                        |   |                     |
|                        |   |                     |
|                        | By:    | /s/ DAN T.  BESSEY       |
|                        |   | Dan T. Bessey,           |
|                        |   | Vice President  and      |
|                        |   | Chief Financial  Officer |
|                        |   |                     |
|                        |   |                     |
| Date: October 29, 2009 |   |                     |

 

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