Table of Contents

 

 

 

**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 thequarterly period ended March 31, 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  xNo  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  oNo  o

 

Indicate by check markwhether the 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  (Do  not check if a smaller reporting company) |   | Smaller  reporting company o |

 

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

 

On April 28, 2009,the registrant had 14,281,481 shares of Common Stock outstanding.

 

 

 

----

Table ofContents

 

**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 |       | 16       |
|                                     |                                                                                        |       |     |
| Item 3.                                  | Quantitative  and Qualitative Disclosures About Market Risk                                 |       | 31       |
|                                     |                                                                                        |       |     |
| Item 4.                                  | Controls and  Procedures                                                                    |       | 31       |
|                                     |                                                                                        |       |     |
| **PART II  - OTHER INFORMATION**    | ** **                                                                                  | ** ** |
| ** **                               | ** **                                                                                  | ** ** |
| Item 1.                                  | Legal Proceedings                                                                           |       | 32       |
|                                     |                                                                                        |       |     |
| Item 6.                                  | Exhibits                                                                                    |       | 32       |
|                                     |                                                                                        |       |     |
| SIGNATURES                               |                                                                                        | 33         |

 

----

Table of Contents

 

**PART 1 — FINANCIAL INFORMATION**

 

**ITEM 1.  FINANCIAL STATEMENTS.**

 

**SUREWEST COMMUNICATIONS**

**CONDENSED CONSOLIDATED STATEMENTS OFINCOME**

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

* *
| ** **                                                                  | ** ** | **Quarter Ended March 31,** | ** ** |
|-----------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                  | ** ** | **2009**                                   | ** ** | **2008** | ** ** |
|                                                                        |       |                                       |       |   |   |
| **Operating  revenues:**                                                    |       |                                       |       |   |   |
| Broadband                                                                   |       | $                                          | 39,222     |   | $ | 26,831 |   |
| Telecom                                                                     |       | 21,720                                     |       | 24,482 |   |
| Total operating  revenues                                                   |       | 60,942                                     |       | 51,313 |   |
|                                                                        |       |                                       |       |   |   |
| **Operating  expenses:**                                                    |       |                                       |       |   |   |
| Cost of services  and products (exclusive of depreciation and amortization) |       | 25,014                                     |       | 18,553 |   |
| Customer  operations and selling                                            |       | 8,235                                      |       | 7,444 |   |
| General and  administrative                                                 |       | 9,563                                      |       | 10,558 |   |
| Depreciation and  amortization                                              |       | 14,810                                     |       | 12,067 |   |
| Total operating  expenses                                                   |       | 57,622                                     |       | 48,622 |   |
|                                                                        |       |                                       |       |   |   |
| **Income  from operations**                                                 |       | 3,320                                      |       | 2,691 |   |
|                                                                        |       |                                       |       |   |   |
| Other income  (expense):                                                    |       |                                       |       |   |   |
| Interest income                                                             |       | 37                                         |       | 334 |   |
| Interest expense                                                            |       | (2,310                                     | )          | (2,755 | ) |
| Other, net                                                                  |       | (84                                        | )          | 1 |   |
| Total other  income (expense), net                                          |       | (2,357                                     | )          | (2,420 | ) |
|                                                                        |       |                                       |       |   |   |
| Income from  continuing operations before income taxes                      |       | 963                                        |       | 271 |   |
|                                                                        |       |                                       |       |   |   |
| Income tax  expense                                                         |       | 884                                        |       | 249 |   |
|                                                                        |       |                                       |       |   |   |
| **Income  from continuing operations**                                      |       | 79                                         |       | 22 |   |
|                                                                        |       |                                       |       |   |   |
| Discontinued  operations, net of tax:                                       |       |                                       |       |   |   |
| Income (loss)  from discontinued operations                                 |       | (69                                        | )          | 261 |   |
| Gain on sale of  discontinued operations                                    |       | 2,508                                      |       | — |   |
| Total  discontinued operations                                              |       | 2,439                                      |       | 261 |   |
|                                                                        |       |                                       |       |   |   |
| **Net  income**                                                             |       | $                                          | 2,518      |   | $ | 283 |   |
|                                                                        |       |                                       |       |   |   |
| **Basic and  diluted earnings per common share:**                           |       |                                       |       |   |   |
| Income from  continuing operations                                          |       | $                                          | 0.01       |   | $ | 0.00 |   |
| Discontinued  operations, net of tax                                        |       | 0.17                                       |       | 0.02 |   |
| Net income per  basic and diluted common share                              |       | $                                          | 0.18       |   | $ | 0.02 |   |
|                                                                        |       |                                       |       |   |   |
| **Dividends  per share**                                                    |       | $                                          | —     |   | $ | 0.25 |   |
|                                                                        |       |                                       |       |   |   |
| **Shares  of common stock used to calculate earnings per share:**           |       |                                       |       |   |   |
| Basic                                                                       |       | 14,008                                     |       | 14,310 |   |
| Diluted                                                                     |       | 14,008                                     |       | 14,329 |   |

 

See accompanyingnotes.

 

1

----

Table ofContents

 

**SUREWESTCOMMUNICATIONS**

**CONDENSEDCONSOLIDATED BALANCE SHEETS**

*(Unaudited;Amounts in thousands)*

* *
| ** **                                                                                                                                                                     | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                     | ** ** | **2009**           | ** ** | **2008**              | ** ** |
| **ASSETS**                                                                                                                                                                     |       |               |       |                  |       |
| Current assets:                                                                                                                                                                |       |               |       |                  |       |
| Cash and cash  equivalents                                                                                                                                                     |       | $                  | 1,678      |                  | $          | 2,840 |   |
| Short-term  investments                                                                                                                                                        |       | 559                |       | 610                   |       |
| Accounts  receivable, net                                                                                                                                                      |       | 21,733             |       | 21,415                |       |
| Income tax  receivable                                                                                                                                                         |       | 6,624              |       | 6,391                 |       |
| Inventories                                                                                                                                                                    |       | 6,510              |       | 6,527                 |       |
| Prepaid expenses                                                                                                                                                               |       | 3,423              |       | 4,539                 |       |
| Deferred income  taxes                                                                                                                                                         |       | 3,186              |       | 2,989                 |       |
| Other current  assets                                                                                                                                                          |       | 1,832              |       | 1,752                 |       |
| Assets of  discontinued operations                                                                                                                                             |       | —             |       | 5,002                 |       |
| Total current  assets                                                                                                                                                          |       | 45,545             |       | 52,065                |       |
|                                                                                                                                                                           |       |               |       |                  |       |
| Property, plant  and equipment, net                                                                                                                                            |       | 527,115            |       | 523,231               |       |
|                                                                                                                                                                           |       |               |       |                  |       |
| Intangible and  other assets:                                                                                                                                                  |       |               |       |                  |       |
| Long-term  investments                                                                                                                                                         |       | 3,508              |       | 3,508                 |       |
| Customer  relationships, net                                                                                                                                                   |       | 4,737              |       | 5,062                 |       |
| Goodwill                                                                                                                                                                       |       | 45,814             |       | 45,814                |       |
| Deferred charges  and other assets                                                                                                                                             |       | 4,392              |       | 4,129                 |       |
|                                                                                                                                                                           |       | 58,451             |       | 58,513                |       |
|                                                                                                                                                                           |       | $                  | 631,111    |                  | $          | 633,809 |   |
|                                                                                                                                                                           |       |               |       |                  |       |
| **LIABILITIES  AND SHAREHOLDERS’ EQUITY**                                                                                                                                 |       |               |       |                  |       |
| Current  liabilities:                                                                                                                                                          |       |               |       |                  |       |
| Current portion  of long-term debt and capital lease obligations                                                                                                               |       | $                  | 15,642     |                  | $          | 15,643 |   |
| Accounts payable                                                                                                                                                               |       | 1,537              |       | 2,798                 |       |
| Other accrued  liabilities                                                                                                                                                     |       | 17,326             |       | 19,050                |       |
| Advance billings  and deferred revenues                                                                                                                                        |       | 9,007              |       | 8,960                 |       |
| Accrued  compensation                                                                                                                                                          |       | 7,455              |       | 11,292                |       |
| Liabilities of  discontinued operations                                                                                                                                        |       | —             |       | 453                   |       |
| Total current  liabilities                                                                                                                                                     |       | 50,967             |       | 58,196                |       |
|                                                                                                                                                                           |       |               |       |                  |       |
| Long-term debt  and capital lease obligations                                                                                                                                  |       | 224,545            |       | 226,045               |       |
| Deferred income  taxes                                                                                                                                                         |       | 48,873             |       | 46,358                |       |
| Accrued pension  and other post-retirement benefits                                                                                                                            |       | 36,904             |       | 36,046                |       |
| Other  liabilities and deferred revenues                                                                                                                                       |       | 5,461              |       | 5,819                 |       |
|                                                                                                                                                                           |       |               |       |                  |       |
| Commitments and  contingencies                                                                                                                                                 |       |               |       |                  |       |
|                                                                                                                                                                           |       |               |       |                  |       |
| Shareholders’  equity:                                                                                                                                                    |       |               |       |                  |       |
| Common stock,  without par value; 100,000 shares authorized, 14,281 and 14,082 shares issued  and outstanding at March 31, 2009 and December 31, 2008,  respectively |       | 147,023            |       | 146,558               |       |
| Accumulated  other comprehensive loss                                                                                                                                          |       | (19,283            | )          | (19,248               | )          |
| Retained  earnings                                                                                                                                                             |       | 136,621            |       | 134,035               |       |
| Total  shareholders’ equity                                                                                                                                               |       | 264,361            |       | 261,345               |       |
|                                                                                                                                                                           |       | $                  | 631,111    |                  | $          | 633,809 |   |

 

See accompanyingnotes.

 

2

----

Table of Contents

 

**SUREWESTCOMMUNICATIONS**

**CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS**

*(Unaudited;Amounts in thousands)*

 
| ** **                                                          | ** ** | **Three Months Ended March 31,** | ** ** |
|---------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                          | ** ** | **2009**                                             | ** ** | **2008** | ** ** |
| ** **                                                          | ** ** | ** **                                           | ** ** | ** ** | ** ** |
| Net cash  provided by continuing operations                         |       | $                                                    | 9,983      |   | $ | 8,641 |   |
| Net cash  provided by (used in) discontinued operations             |       | (439                                                 | )          | 1,242 |   |
| Net cash  provided by operating activities                          |       | 9,544                                                |       | 9,883 |   |
|                                                                |       |                                                 |       |   |   |
| Cash flows from  investing activities:                              |       |                                                 |       |   |   |
| Business  acquisition, net of cash acquired                         |       | —                                               |       | (180,133 | ) |
| Proceeds from  sale of discontinued operations                      |       | 9,222                                                |       | — |   |
| Capital  expenditures for property, plant and equipment             |       | (18,352                                              | )          | (18,270 | ) |
| Proceeds from  sale of available-for-sale securities                |       | —                                               |       | 16,650 |   |
| Net cash used in  continuing operations                             |       | (9,130                                               | )          | (181,753 | ) |
| Net cash used in  discontinued operations                           |       | —                                               |       | (111 | ) |
| Net cash used in  investing activities                              |       | (9,130                                               | )          | (181,864 | ) |
|                                                                |       |                                                 |       |   |   |
| Cash flows from  financing activities:                              |       |                                                 |       |   |   |
| Proceeds from  issuance of long-term debt                           |       | 10,500                                               |       | 96,000 |   |
| Proceeds from  short-term borrowings                                |       | —                                               |       | 60,000 |   |
| Principal  payments on long-term debt and capital lease obligations |       | (12,001                                              | )          | (1 | ) |
| Dividends paid                                                      |       | —                                               |       | (3,563 | ) |
| Repurchases and  surrenders of common stock                         |       | (75                                                  | )          | (3,867 | ) |
| Net cash  provided by (used in) financing activities                |       | (1,576                                               | )          | 148,569 |   |
|                                                                |       |                                                 |       |   |   |
| Decrease in cash  and cash equivalents                              |       | (1,162                                               | )          | (23,412 | ) |
|                                                                |       |                                                 |       |   |   |
| Cash and cash  equivalents at beginning of period                   |       | 2,840                                                |       | 31,114 |   |
|                                                                |       |                                                 |       |   |   |
| Cash and cash  equivalents at end of period                         |       | $                                                    | 1,678      |   | $ | 7,702 |   |

 

See accompanyingnotes.

 

3

----

Tableof Contents

 

**SUREWESTCOMMUNICATIONS**

**NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

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

 

**1.  SUMMARY OFSIGNIFICANT 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 TeleVideo of Roseville, SureWest Internet,SureWest Custom Data Services, Everest Broadband, Inc. (with its variousdirect and indirect subsidiaries, “Everest” or the “Kansas City operations”),SureWest Telephone and SureWest Long Distance.

 

In February 2008 weacquired 100% of the issued and outstanding stock of Everest and in May 2008we sold the operating assets of our Wireless business, SureWest Wireless.Further, in October of 2008 we entered into a definitive purchaseagreement to sell our communication tower assets and completed the transactionon February 27, 2009. Accordingly, the financial results of SureWestWireless and our communication tower assets have been reported as discontinuedoperations for all periods presented in accordance with Statement of FinancialAccounting Standards (“SFAS”) No. 144, *Accounting for the Impairmentor Disposal of Long-Lived Assets*. The notes to condensedconsolidated financial statements reflect historical amounts exclusive ofdiscontinued operations, unless otherwise noted.

 

In the opinion ofmanagement, the accompanying condensed consolidated balance sheets and relatedinterim statements of income and cash flows include all adjustments, consistingonly of normal recurring items, necessary for their fair presentation inconformity with accounting principles generally accepted in the United States (“U.S.GAAP”) for interim financial information and pursuant to the rules andregulations of the Securities and Exchange Commission (the “SEC”). Certaininformation and footnote disclosures normally included in annual financialstatements prepared in accordance with U.S. GAAP have been condensed or omittedpursuant to such SEC rules and regulations and accounting principlesapplicable for interim periods. Management believes that the disclosures madeare adequate to make the information presented not misleading. Interim resultsare not necessarily indicative of results for a full year.  The information presented in this Form 10-Qshould be read in conjunction with Management’s Discussion and Analysis ofFinancial Condition and Results of Operations and the consolidated financialstatements and notes thereto included in our 2008 Annual Report on Form 10-Kfiled with the SEC.

 

**Stock-based Compensation**

 

***StockPlan***

*** ***

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 March 31,2009.

 

4

----

***Table of Contents***

*** ***

***RestrictedCommon 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. We will continue to recognize stock-based compensation for RSAs andRSUs granted prior to the adoption of SFAS No. 123(R), *Share-Based Payment,* using the graded vesting method.

 

Duringthe quarters ended March 31, 2009 and 2008, the following summarizes thegrants that occurred under our Stock Plan:

 
| ** **    | ** ** | **Quarter Ended March 31,** | ** ** |
|---------------|------------|--------------------------------------------|------------|
| ** **    | ** ** | ** **                                 | ** ** | **Grant Date** | ** ** | ** ** | ** ** | **Grant Date** | ** ** |
| ** **    | ** ** | **2009**                                   | ** ** | **Fair Value** | ** ** | **2008** | ** ** | **Fair Value** | ** ** |
|          |       |                                       |       |   |   |   |   |   |   |
| RSAs Granted  |       | 166,506                                    |       | $ | 11.56 |   | 7,056 |   | $ | 15.59 |   |
| RSUs Granted  |       | 72,443                                     |       | $ | 11.56 |   | — |   | $ | — |   |
| RSU Dividends |       | 7,037                                      |       | $ | 9.84 |   | — |   | $ | — |   |
| Total         |       | 245,986                                    |       |   |   | 7,056 |   |   |   |

 

Stock-basedcompensation expense for both RSAs and RSUs of $608 and $150 was recorded duringthe quarters ended March 31, 2009 and 2008, respectively.

 

**During the quarter ended March 31, 2009, thefollowing summarizes the restricted common stock activity:**

** **
| ** **                      | ** ** | ** ** | ** ** | **Weighted Average**                | ** ** |
|---------------------------------|------------|------------|------------|------------------------------------------|------------|
| **Nonvested Shares**       | ** ** | **Shares** | ** ** | **Grant Date Fair Value** | ** ** |
|                            |       |       |       |                                     |       |
| Nonvested-January 1,  2009 |       | 269,038    |       | $                                        | 14.98      |   |
| Granted                         |       | 245,986    |       | $                                        | 11.51      |   |
| Vested                          |       | (25,337    | )          | $                                        | 12.25      |   |
| Forfeited                       |       | (3,063     | )          | $                                        | 18.36      |   |
| Nonvested-March 31,  2009  |       | 486,624    |       | $                                        | 13.35      |   |

 

Asof March 31, 2009, total unrecognized compensation costs related to nonvestedrestricted stock was $5,791 and will be recognized over a weighted-averageperiod of approximately 3.38 years. The total fair value of RSAs and RSUsvested during the quarter ended March 31, 2009 was $310.

 

***StockOptions***

*** ***

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, exercised or expired during the quarters ended March 31, 2009 and2008. The aggregate intrinsic value is calculated as the difference between theexercise price of the stock options and the quoted price of our commonstock.  There were no options that werein-the-money as of the quarters ended March 31, 2009 and 2008.

 

5

----

Table ofContents

 

Thefollowing table summarizes stock option activity for the quarter ended March 31,2009:

 
| ** **                                     | ** ** | ** ** | ** ** | **Weighted** | ** ** | **Weighted**              | ** ** |
|------------------------------------------------|------------|------------|------------|--------------|------------|---------------------------|------------|
| ** **                                     | ** ** | ** ** | ** ** | **Average**  | ** ** | **Average**               | ** ** |
| ** **                                     | ** ** | ** ** | ** ** | **Exercise** | ** ** | **Remaining**             | ** ** |
| **Options**                                    | ** ** | **Shares** | ** ** | **Price**    | ** ** | **Contractual Life** | ** ** |
|                                           |       |       |       |         |       |                      |       |
| Outstanding-January 1,  2009              |       | 335,839    |       | $            | 40.37      |                      |       |   |
| Forfeited                                      |       | (8,650     | )          | —       |       |                      |       |
| Outstanding-March 31,  2009               |       | 327,189    |       | $            | 41.25      |                      | 2          |   |
| Vested and  Exercisable at March 31, 2009 |       | 327,189    |       | $            | 41.25      |                      | 2          |   |

 

**Per Share Amounts**

 

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.

 

Cashdividends per share are based on the actual dividends per share, as declared byour Board of Directors. On each date that we paid a cash dividend to theholders of the Company’s common stock, we credited the holders of RSUs anadditional number of RSUs equal to the total number of whole RSUs andadditional RSUs previously credited to the holders, multiplied by the dollaramount of the cash dividend per share of common stock. Any fractional RSUsresulting from such calculation are included in the additional RSUs.

 

**Other Comprehensive Income**

 

Significant components of our other comprehensive income (loss) are asfollows:

 
| ** **                                                                                             | ** ** | **Quarter Ended March 31,** | ** ** |
|--------------------------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                                             | ** ** | **2009**                                   | ** ** | **2008** | ** ** |
| Net income  (loss)                                                                                     |       | $                                          | 2,518      |   | $ | 283 |   |
| Unrealized loss  on available-for-sale investments, net of income taxes of $24 and $238,  respectively |       | (35                                        | )          | (346 | ) |
| Comprehensive  income (loss)                                                                           |       | $                                          | 2,483      |   | $ | (63 | ) |

 

Accumulated other comprehensive loss consists of adjustments, net oftax, related to unrealized gains and losses on available-for-sale securitiesand minimum pension 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 business as a discontinued operation.

 

**2.  FAIRVALUE OF FINANCIAL INSTRUMENTS**

 

Weadopted SFAS No. 157, *Fair Value Measurements*(“SFAS 157”) effective January 1, 2008 for financial assets andliabilities measured on a recurring basis. There was no impact for adoption ofSFAS 157 to our condensed consolidated financial statements. Additionally,effective January 1, 2009, in accordance with the Financial AccountingStandards Board (“FASB”) Staff Position (“FSP”) FAS 157-2 (“FSP FAS 157-2”), wenow apply SFAS 157 to financial and nonfinancial assets and liabilities. Theadoption of FSP FAS 157-2 did not have a material impact on our condensedconsolidated financial statements. SFAS 157 requires disclosure thatestablishes a framework for measuring fair value and expands disclosure aboutfair value measurements.

 

6

----

Table ofContents

 

SFAS157 establishes a valuation hierarchy for disclosure of the inputs to valuationused to measure fair value. This hierarchy prioritizes the inputs into threebroad levels as follows. Level 1 inputs are quoted prices (unadjusted) inactive markets for identical assets or liabilities. Level 2 inputs are quotedprices for similar assets and liabilities in active markets or inputs that areobservable for the asset or liability, either directly or indirectly throughmarket corroboration, for substantially the full term of the financialinstrument. Level 3 inputs are unobservable inputs based on management’s ownassumptions used to measure assets and liabilities at fair value. A financialasset or liability’s classification within the hierarchy is determined based onthe lowest level input that is significant to the fair value measurement.

 

The following tablesummarizes our financial assets (cash equivalents and investments) measured atfair value on a recurring basis:

 
| ** **               | ** ** | **As of March 31, 2009** | ** ** |
|--------------------------|------------|----------------------------------------------|------------|
| ** **               | ** ** | **Total**                                    | ** ** | **Level 1** | ** ** | **Level 2** | ** ** | **Level 3** | ** ** |
| Money market  funds      |       | $                                            | 297        |   | $ | 297 |   | $ | — |   | $ | — |   |
| Equity  securities       |       | 559                                          |       | 559 |   | — |   | — |   |
| Auction rate  securities |       | 2,870                                        |       | — |   | — |   | 2,870 |   |
| Put Option               |       | 638                                          |       | — |   | — |   | 638 |   |
|                     |       | $                                            | 4,364      |   | $ | 856 |   | $ | — |   | $ | 3,508 |   |

 

Fair values for cashequivalents and short-term investments were determined by quoted market prices.

 

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

 
| ** **                                    | ** ** | **Put Option** | ** ** | **Auction Rate  Securities** | ** ** |
|-----------------------------------------------|------------|---------------------|------------|-----------------------------------|------------|
| Balance at  December 31, 2008                 |       | $                   | 1,383      |                              | $          | 2,125 |   |
| Total gains or  (losses) included in earnings |       | (745                | )          | 745                               |       |
| Balance at March  31, 2009                    |       | $                   | 638        |                              | $          | 2,870 |   |

 

At March 31, 2009,we held one $3,700 par value auction rate security (“ARS”) with an estimatedfair value of $2,870, which was measured using Level 3 inputs. This ARS iscollateralized by student loans that are guaranteed primarily by a monolineinsurance company and partially by the Federal Family Education Loan Program (“FFELP”).

 

Weobtained a Level 3 valuation from an investment advisor, who utilized adiscounted cash flow (“DCF”) approach to arrive at this valuation. To supportthis valuation, we prepared a separate and comparable DCF model to estimate thefair value of the ARS at March 31, 2009. The significant estimates that were used as inputs in our DCF model werethe credit quality of the issuer, the credit quality of the monoline insurancecompany, the percentage and the types of guarantees (such as the monolineinsurance company and FFELP), interest rates, expected holding period of theARS, expected future cash flows, and an illiquidity discount factor. This ARSis compared, when possible, to other observable and relevant market data, whichare non-existent at this time. Changes in the assumptions of the model based ondynamic market conditions could have a significant impact on the valuation ofthis security, which may lead us in the future to take an impairment charge forthis security.

 

Based on our review ofthe investment advisors valuation, our DCF model, the inputs to the model andthe assessment of fair value as of March 31, 2009, we determined there wasan increase in the fair value of the ARS investment of $745.  Accordingly, the increase in fair value hasbeen recorded as a gain to the condensed consolidated statement of income in2009. We will continue to analyze our ARS each reporting period for additionalchanges in fair value and will record those gains or losses in the consolidatedstatements of income.

 

We do not expect the need to access these funds in the short-term;however, in the event we needed to access these funds, they are not expected tobe accessible until one of the following occurs: a successful auction occurs,the issuer redeems the issue, a buyer is found outside of the auction processor the underlying securities mature. Based on this, along with the underlyingmaturities of the securities, which is greater than 20 years, we haveclassified the entire ARS investment balance as a long-term asset on ourcondensed consolidated balance sheet as of March 31, 2009 and December 31,2008. The failures of these auctions do not affect the value of the collateralunderlying the ARS, and we continue to earn and receive interest on our ARS ata pre-determined formula with spreads tied to particular interest rate indexes.

 

7

----

Table ofContents

 

In November 2008, weaccepted an offer (“Right”) from UBS Financial Services, Inc., asubsidiary 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. In accepting the Right, we granted UBS theauthority to sell or auction the ARS at par at any time up until the expirationdate of the offer and released UBS from any claims relating to the marketingand sale of the ARS. Although we expect to sell our ARS under the Right, if theRight is not exercised before July 2, 2012, it will expire and UBS will haveno further rights or obligation to buy our ARS. In lieu of our acceptance ofthe Right, the ARS will continue to accrue and pay interest as determined bythe auction process or the terms specified in the prospectus of the ARS if theauction process fails. UBS’s obligations under the Right are not secured by itsassets and do not require UBS to obtain any financing to support itsperformance obligations under the Rights. UBS has disclaimed any assurance thatit will have sufficient financial resources to satisfy its obligations underthe Rights. If UBS has insufficient funding to buy back the ARS and the auctionprocess continues to fail, then we may incur further losses on the carryingvalue of the ARS.

 

The Right represents afirm agreement in accordance with FASB Statement No. 133, *Accounting for Derivative Instruments and Hedging Activities*(“SFAS 133”), which defines a firm agreement with an unrelated party, bindingon both parties and usually legally enforceable, with the followingcharacteristics: (i) the agreement specifies all significant terms,including the quantity to be exchanged, the fixed price and the timing of thetransaction and (ii) the agreement includes a disincentive fornonperformance that is sufficiently large to make performance probable. Theenforceability of the Right results in a put option and should be recognized asa separate freestanding asset and is accounted for separately from the ARSinvestment. As of December 31, 2008, we recorded $1,383 as the fair valueof the Right asset, classified as a long-term investment on the consolidatedbalance sheet as of December 31, 2008, with a corresponding credit toother income (expense), other, net, in the consolidated statement of income forthe year ended December 31, 2008. The Right does not meet the definitionof a derivative instrument under SFAS 133. Therefore, we elected to measure theRight at fair value under SFAS 159, which permits an entity to elect the fairvalue option for recognized financial assets, in order to match the changes inthe fair value of the ARS. Based on data available as of March 31, 2009,we valued the Right using a DCF approach which included estimates of interestrates, timing and amount of cash flow, adjusted for any bearer risk associatedwith UBS’s financial ability to repurchase the ARS beginning June 30,2010. These assumptions are volatile and subject to change as the underlyingsources of these assumptions and market conditions change. Based on our DCFmodel, the inputs to the model and the assessment of fair value as of March 31,2009, we determined there was a decline in the fair value of the Right of$745.  Accordingly, the decline in fairvalue has been recorded as a charge to the condensed consolidated statement ofincome during the quarter ended March 31, 2009. We will continue toanalyze our Right each reporting period for additional changes in fair valueand will record any further gains or losses in the consolidated statements ofincome.

 

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 stockholders’ equity. In connection with the acceptanceof the Right in November 2008, we have transferred our ARS subject to theRight from available-for-sale to trading in accordance with FASB Statement No. 115,*Accounting for Certain Investments in Debtand Equity Securities*. The transfer to trading securities reflectsmanagement’s intent to exercise the Right during the period June 30, 2010to July 2, 2012. Prior to the agreement with UBS, our intent was to holdthe ARS until the earlier of anticipated recovery in market value or maturity.Upon transfer to trading securities in November 2008, we recognized a lossof $1,575, included in other income (expense), other, net, for the amount ofthe unrealized loss not previously recognized in earnings.

 

**3.  DISCONTINUEDOPERATIONS**

 

*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 ourowned communication towers.  See theCommunication Tower Assets section below for further discussion regarding ourowned communication towers.  SureWestWireless was previously reported as a separate reportable segment.

 

8

----

Table of Contents

 

A portion of the purchaseprice equal to $3,450 was placed in escrow, half of which will be availableafter twelve months and the balance of which will be available twenty-fourmonths following the closing, less the amount of any pending claims, in eachcase, to be held as security for certain losses, if any, incurred by Verizon inthe event of (i) any breach of the representations and warranties setforth in the agreement, (ii) any breach or nonperformance of covenants setforth in the agreement and (iii) certain other specified events. Theactual gain on sale could vary based on future claims, if any, made against theamounts held in escrow.

 

The results of SureWestWireless are reported as a discontinued operation in our condensed consolidatedfinancial statements for all periods presented.

 

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

 
| ** **                                                  | ** ** | **Quarter Ended March 31,** | ** ** |
|-------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                  | ** ** | **2009**                                   | ** ** | **2008** | ** ** |
| Operating  revenues                                         |       | $                                          | —     |   | $ | 7,127 |   |
| Operating  expenses including depreciation and amortization |       | —                                     |       | 6,692 |   |
| Income from  operations                                     |       | —                                     |       | 435 |   |
| Other income  (expense)                                     |       | —                                     |       | 4 |   |
| Income tax  expense                                         |       | —                                     |       | 145 |   |
| Income from  discontinued operations                        |       | $                                          | —     |   | $ | 294 |   |
|                                                        |       |                                       |       |   |   |
| Gain on sale of  discontinued operations, net of tax        |       | $                                          | 43         |   | $ | — |   |

 

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 $1,433 for the quarter ended March 31,2008.

* *

*CommunicationTower Assets*

 

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 as of March 31,2009 of $2,465, net of tax.

 

The results of theTower Assets are reported as a discontinued operation in our condensed consolidatedfinancial 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        |   |

 

9

----

Table of Contents

 

The followingtable summarizes the financial information for the operations of the TowerAssets for the quarters ended March 31, 2009 and 2008:

 
| ** **                                                  | ** ** | **Quarter Ended March 31,** | ** ** |
|-------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                  | ** ** | **2009**                                   | ** ** | **2008** | ** ** |
| Operating  revenues                                         |       | $                                          | 249        |   | $ | 307 |   |
| Operating  expenses including depreciation and amortization |       | 365                                        |       | 357 |   |
| Loss from  operations                                       |       | (116                                       | )          | (50 | ) |
| Income tax  benefit                                         |       | (47                                        | )          | (17 | ) |
| Loss from  discontinued operations                          |       | $                                          | (69        | ) | $ | (33 | ) |
|                                                        |       |                                       |       |   |   |
| Gain on sale of  discontinued operations, net of tax        |       | $                                          | 2,465      |   | $ | — |   |

 

**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 bundledresidential and commercial services that include Internet protocol-baseddigital and high-definition television, high-speed internet, Voice overInternet Protocol and local and long distance telephone in the greaterSacramento 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.

 

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 arestrategic business units that offer different products and services. Theaccounting policies of these segments are the same as those described in Note1. We account for intersegment revenues and expenses at prevailing marketrates.  Our business segment informationis as follows:

 
| ** **                                           | ** ** | ** **    | ** ** | ** **  | ** ** | **Intercompany** | ** ** | ** **       | ** ** |
|------------------------------------------------------|------------|---------------|------------|-------------|------------|------------------|------------|------------------|------------|
| ** **                                           | ** ** | **Broadband** | ** ** | **Telecom** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| **For the  three months ended March 31, 2009:** |       |          |       |        |       |             |       |             |       |
| Operating  revenues from external customers          |       | $             | 39,222     |        | $          | 21,720           |       | $                | —     |   | $ | 60,942 |   |
| Intersegment  revenues                               |       | 91            |       | 4,874       |       | (4,965           | )          | —           |       |
| Operating  expenses*                                 |       | 34,695        |       | 13,082      |       | (4,965           | )          | 42,812           |       |
| Depreciation and  amortization                       |       | 11,620        |       | 3,190       |       | —           |       | 14,810           |       |
| Income (loss)  from operations                       |       | (7,002        | )          | 10,322      |       | —           |       | 3,320            |       |
| Income (loss)  from continuing operations            |       | $             | (5,398     | )           | $          | 5,477            |       | $                | —     |   | $ | 79 |   |

 

----

*Exclusive ofdepreciation and amortization

 

10

----

Tableof Contents

 
| ** **                                           | ** ** | ** **    | ** ** | ** **  | ** ** | **Intercompany** | ** ** | ** **       | ** ** |
|------------------------------------------------------|------------|---------------|------------|-------------|------------|------------------|------------|------------------|------------|
| ** **                                           | ** ** | **Broadband** | ** ** | **Telecom** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| **For the  three months ended March 31, 2008:** |       |          |       |        |       |             |       |             |       |
| Operating  revenues from external customers          |       | $             | 26,831     |        | $          | 24,482           |       | $                | —     |   | $ | 51,313 |   |
| Intersegment  revenues                               |       | 140           |       | 4,343       |       | (4,483           | )          | —           |       |
| Operating  expenses*                                 |       | 26,023        |       | 15,015      |       | (4,483           | )          | 36,555           |       |
| Depreciation and  amortization                       |       | 8,405         |       | 3,662       |       | —           |       | 12,067           |       |
| Income (loss)  from operations                       |       | (7,457        | )          | 10,148      |       | —           |       | 2,691            |       |
| Income (loss)  from continuing operations            |       | $             | (5,770     | )           | $          | 5,792            |       | $                | —     |   | $ | 22 |   |

 

----

*Exclusive ofdepreciation 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 charges, SureWest Telephone concurs with tariffs filedby the National Exchange Carrier Association. Pending and future regulatoryactions may have a material impact on our condensed 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.

 

*California Public UtilityCommission (“CPUC”) Matters*

 

In 2004, we entered intoa settlement agreement (the “Settlement Agreement”), which was ultimately approvedby 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.  Prior to the cessation of thesurcredit on February 9, 2009, we returned approximately $165 and $431 toend users through the consumer dividend for the quarters ended March 31,2009 and 2008, respectively.

 

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 receiving SureWestTelephone 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 over a five-year period.  In 2008,our interim CHCF draw was $8,160 and is being incrementally reduced byapproximately $2,000 annually.

 

11

----

Table of Contents

 

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 $3.25per year for 2009 and 2010 as describe 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 full pricingflexibility for the basic residential rate.

** **

**6.   INCOME TAXES**

 

Our effective federal andstate income tax rates for continuing operations were 91.8% and 91.9% for thequarter ended March 31, 2009 and 2008, respectively. For the quarter endedMarch 31, 2009, our actual tax expense differed from the federal statutory rateprimarily due to state taxes, a change to state deferred tax expense due toanticipated changes in our state tax apportionment factors and permanentdifferences resulting from the decrease between the grant and vesting prices ofRSAs and RSUs that vested during the quarter.

 

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 ended March 31, 2009 and 2008.  As of March 31, 2009, we hadapproximately $82 of accrued interest and approximately $40 of penalties in theunrecognized tax benefits above, respectively.

 

We had a liability forunrecognized tax benefits of approximately $213 and $257 at March 31, 2009and December 31, 2008, respectively. The following table provides a reconciliation of the beginning andending amount of unrecognized tax benefits during quarter ended March 31,2009:

 
| Balance at  December 31, 2008            |   | $   | 257    |   |
|-----------------------------------------------|--------|-----|--------|--------|
| Additions based  on prior year tax positions  |   | 2   |   |
| Reductions based  on prior year tax positions |   | (46 | )      |
| Balance at  March 31, 2009               |   | $   | 213    |   |

 

The total amount ofunrecognized tax benefits that, if recognized, would affect the effective taxrate were $123 and $125 at December 31, 2008 and March 31, 2009,respectively.  It is reasonably possiblethat a reduction of up to $89 of unrecognized tax benefits may occur withintwelve months as a result of the interest and penalties related to filedamended returns.

 

As of March 31,2009, 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          |       |

 

For the quarter ended March 31,2009, our actual tax expense differed from the federal statutory rate primarilydue to state taxes, a change to state deferred tax expense due to anticipatedchanges in our state tax apportionment factors and permanent differencesresulting from the decrease between the grant and vesting prices of RSAs andRSUs that vested during the quarter.

** **

**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.

 

12

----

Tableof Contents

 

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 SFAS No. 158, *Employers’ Accounting for Defined Benefit Pension and OtherPostretirement Plans, an Amendment of FASB Statements No’s 87, 88, 106 and 132(R) *(“SFAS158”).  SFAS 158 requires an employer torecognize the overfunded or underfunded status of a defined benefitpostretirement plan as an asset or liability in its statement of financialposition and to recognize changes in that funded status in the year in whichthe changes occur through comprehensive income. The Statement also requires an employer to measure the funded status ofa plan as of the date of its year-end statement of financial position.

 

**Components of Net Periodic Pension Cost**

 

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

 
| **Quarter ended March 31,**     | ** ** | **2009** | ** ** | **2008** | ** ** |
|------------------------------------------------|------------|----------|------------|----------|------------|
| Interest cost on  projected benefit obligation |       | $        | 1,808      |     | 1,808      |   |
| Expected return  on plan assets                |       | (1,675   | )          | (2,250   | )          |
| Amortization of:                               |       |     |       |     |       |
| Prior service  cost                            |       | 1        |       | 1        |       |
| Net actuarial  loss                            |       | 730      |       | 6        |       |
| Net periodic  pension expense (income)         |       | $        | 864        |     | $          | (435 | ) |
|                                                |            |          |            |          |            |  |  |

 

Net periodicbenefit costs related to the Other Benefits Plan were not significant to ourcondensed consolidated financial statements for the quarters ended March 31,2009 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 the 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) issued a 1-year $60,000Term Loan B facility and (iii) modified certain financial covenants. Nosignificant changes were made to the existing $60,000 Revolving Loan facility.The credit facilities were used in part to acquire Everest and were availablefor general corporate purposes. The Term Loan A facility and the Revolving Loanfacility are due and payable on May 1, 2012.

 

The Term Loan A facility,prior to the Credit Agreement, which had $40,000 outstanding, was extinguishedresulting in a loss on extinguishment of debt of $607, which was recorded as acomponent of interest expense in the first quarter of 2008. $40,000 of theCredit Agreement borrowings bore interest at a fixed rate. The remaining$80,000 of the Credit Agreement borrowings bore interest based, at ourelection, on the London Interbank Offered Rate (“LIBOR”) or the bank’s PrimeRate, in either case, plus an applicable margin. The Term Loan B facility wasdue and payable on February 12, 2009 and included automatic increases tothe applicable interest margins. On May 14, 2008, we repaid $30,000 of theTerm Loan B and $16,000 of the Revolving facility with proceeds from the saleof 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.

 

13

----

Table of Contents

 

The Term Loan Afacility has $120,000 outstanding as of March 31, 2009, of which $40,000bears a fixed interest rate and the remaining $80,000 bears interest based, atour election, on LIBOR or the bank’s Prime Rate, in either case, plus anapplicable margin. As of March 31, 2009, $30,000 and $24,000 wereoutstanding on the Term Loan 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 March 31,2009 and December 31, 2008, retained earnings of $104,361 and $101,345,respectively, were available for the payments described above. As of March 31,2009, 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 proceedingsinclude, 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. 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, and the variouson-going legal challenges considering the validity of these FCC orders and itis not yet possible to determine fully the impact of the related FCCregulations 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 on us cannot yet be determined.

** **

**9.   RECENT ACCOUNTING PRONOUNCEMENTS**

** **

**Recently IssuedAccounting Pronouncements**

 

In April 2009, FASBissued three FSPs that are intended to provide additional application guidanceand enhance disclosures about fair value measurements and impairments ofsecurities. FSP FAS No. 157-4, *Determining Fair ValueWhen the Volume and Level of Activity for the Asset or Liability HaveSignificantly Decreased and Identifying Transactions That Are Not Orderly*(“FSPFAS 157-4”) clarifies the objective and method of fair value measurement evenwhen there has been a significant decrease in market activity for the assetbeing measured. FSP FAS No. 115-2 and FSP FAS No. 124-2, *Recognition of Other-Than-Temporary Impairments* (“FSP FAS115-2 and FSP FAS 124-2”)**establishes a new model for measuringother-than-temporary impairments for debt securities, including establishingcriteria for when to recognize a write-down through earnings versus othercomprehensive income. FAS No. 107-1 and APB 28-1, *InterimDisclosures about Fair Value of Financial Instruments* (“FSP FAS107-1 and APB 28-1”) expands the fair value disclosures required for allfinancial instruments within the scope of SFAS No. 107, *Disclosures about Fair Value of Financial Instruments*, tointerim periods. All of these FSPs are effective for us beginning April 1,2009. We are assessing the potential impact that the adoption of FSP FAS 157-4,FSP FAS 115-2 and FAS 124-2 may have on our consolidated financial statements.FSP FAS 107-1 and APB 28-1 will result in increased disclosures in our interimperiods.

 

In December 2008,the FASB issued FSP FAS No. 132(R)-1, *Employers’ Disclosuresabout Postretirement Benefit Plan Assets* (“FSP FAS 132(R)-1”). FSPFAS 132(R)-1 amends FASB Statement No. 132 (revised 2003), *Employers’ Disclosures about Pensions and Other PostretirementBenefits,*to require disclosure of additional information aboutassets held in a defined benefit pension or other postretirement plan.Specifically, FSP FAS 132(R)-1 requires an employer to disclose (i) investmentpolicies and strategies including target allocation percentages, (ii) majorcategories of plan assets, (iii) inputs and valuation techniques used tomeasure the fair value of plan assets and (iv) significant concentrationof risk within plan assets. The additional disclosure requirements of FSP FAS132(R)-1 are effective for fiscal years ending after December 15, 2009,with earlier application permitted. We are currently evaluating the impact thisstatement will have on our consolidated financial statements.

 

14

----

Table of Contents

 

In May 2008, theFASB issued SFAS No. 162,*The Hierarchyof Generally Accepted Accounting Principles* (“SFAS 162”). SFAS 162identifies a consistent framework, or hierarchy, for selecting accountingprinciples to be used in preparing financial statements that are presented inconformity with U.S. generally accepted accounting principles GAAP fornongovernmental entities (the “Hierarchy”). The Hierarchy within SFAS 162 isconsistent with that previously defined in the AICPA Statement on AuditingStandards No. 69, *The Meaning ofPresent Fairly in Conformity With Generally Accepted Accounting Principles*.SFAS 162 is effective 60 days following the SEC’s approval of the PublicCompany Accounting Oversight Board amendments to AU Section 411,*The Meaning of Presents Fairly in Conformity WithGenerally Accepted Accounting Principles*. We do not expect the adoption of SFAS 162 to have a material effect onour condensed consolidated financial position and results of operations.

** **

**Recently Adopted AccountingPronouncements**

 

In November 2008,the Emerging Issues Task Force (“EITF”) reached a consensus on EITF No. 08-7,*Accounting for Defensive Intangible Assets*(“EITF08-7”)*.*EITF 08-7 requires the acquirer of adefensive intangible asset to account for a defensive intangible asset as aseparate unit of accounting and assign a useful life for a defensive intangibleasset according to the entity’s consumption of the expected benefits related tothat asset.  Our adoption of EITF No. 08-7,on a prospective basis, on January 1, 2009 did not have a material impact on our condensed consolidatedfinancial position and results of operations.

 

In June 2008, theFASB issued FSP EITF 03-6-1, *Determining WhetherInstruments Granted in Share-Based Payment Transactions Are ParticipatingSecurities* (“FSP EITF 03-6-1”). FSP EITF 03-6-1 addresses whetherinstruments granted in share-based payment transactions are participatingsecurities prior to vesting and, therefore, need to be included in the earningsallocation in computing earnings per share under the two-class method asdescribed in SFAS No. 128, *Earnings per Share*.Under the guidance in FSP EITF 03-6-1, unvested share-based payment awards thatcontain non-forfeitable rights to dividends or dividend equivalents (whetherpaid or unpaid) are participating securities and shall be included in thecomputation of earnings per share pursuant to the two-class method. Ouradoption of EITF 03-6-1, on January 1, 2009, did not have a material impact on our condensed consolidatedfinancial position and results of operations.

 

In April 2008, theFASB issued FSP No. FAS 142-3,*Determination of the Useful Life of Intangible Assets* (“FSP FAS142-3”). FSP FAS 142-3 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 SFAS 142.  FSP FAS142-3 is intended to improve the consistency between the useful life of arecognized intangible asset under SFAS 142 and the period of expected cashflows used to measure the fair value of the asset under SFAS 141(R),*Business Combinations*(“SFAS 141(R)”), and other U.S.GAAP. Our adoption of FSP FAS 142-3, on January 1, 2009, did not have a material impact on our condensed consolidatedfinancial position and results of operations.

 

In December 2007,the FASB issued SFAS No. 141(R) 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.  SFAS 141(R) 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. SFAS 141(R) also requires acquisition-related transaction andrestructuring costs to be expensed rather than treated as part of the cost ofthe acquisition.  In April 2009, theFASB issued FSP FAS 141(R)-1, *Accounting for AssetsAcquired and Liabilities Assumed in a Business Combination That Arise fromContingencies*(“FSP FAS 141(R)-1”*)*. FSP FAS141(R)-1 amends SFAS 141(R) by establishing a model to account for certainpre-acquisition contingencies.  Under FSPFAS 141(R)-1, an acquirer is required to recognize at fair value an assetacquired or a liability assumed in a business combination that arises from acontingency if the acquisition-date fair value of that asset or liability canbe determined during the measurement period. If the acquisition-date fair value cannot be determined, then theacquirer should follow the recognition criteria in SFAS No. 5, *Accounting for Contingencies*, and FASB Interpretation No. 14,*Reasonable Estimation of the Amount of a Loss - aninterpretation of FASB Statement No. 5*.  SFAS 141(R) and FSP FAS 141(R)-1applied prospectively to business combinations.  Our adoption of SFAS 141(R) andFSP FAS 141(R)-1, on January 1, 2009, did not have a material impact on our condensed consolidatedfinancial position and results of operations.

 

15

----

Table ofContents

 

In September 2006,the FASB issued SFAS 157*,* which definesfair value, establishes a framework for measuring fair value in U.S. GAAP andexpands disclosures about fair value measurements.  In February 2008, the FASB issued FSP No. FAS157-2, *Effective Date of FASB Statement No. 157*(“FSPFAS 157-2”).  FSP FAS 157-2 amends SFAS157 to delay the effective date 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.  SFAS 157, as amended, was effective forfinancial statements issued for fiscal years beginning after November 15,2008 and for interim periods within those fiscal years. We adopted SFAS 157effective for 2008, except as it applied to those non-financial assets andnon-financial liabilities as noted in FSP FAS 157-2.  The partial adoption of SFAS 157 did not havean impact on our condensed consolidated financial statements. Effective for2009, we adopted the provisions of FSP FAS 157-2.  The adoption of FSP FAS 157-2 did not have a material impact on our condensed consolidatedfinancial position and results of operations.  For a more detailed discussion of the effectsof applying the provisions of SFAS 157 refer to the Fair Value of FinancialInstruments section of Note 2.

 

16

----

Table of Contents

 

**ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OFFINANCIAL CONDITION AND RESULTS OF 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 those expressedor implied in the forward-looking statements. A detailed discussion of theseand other risks and uncertainties that could cause actual results and events todiffer materially from such forward—looking statements is included in our 2008Annual 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 three months ended March 31, 2009 included in Item 1 ofthis Quarterly Report on Form 10-Q.

** **

**Overview**

 

We are one of the nation’sleading integrated communications providers and are the bandwidth leader in themarkets we serve.  We classify ouroperations in two reportable segments: Broadband and Telecommunications (“Telecom”).We market our services individually and as bundled services to both residentialand business customers in the greater Sacramento, California and greater KansasCity, Kansas and Missouri areas (“Kansas City area”).

 

Our Broadband segmentearns revenues primarily through subscriptions to our video, high-speed Internetand digital phone services.  Our videoservices 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 markets, respectively, including premium andpay-per-view channels (which include concerts, wrestling, boxing, sportingevents and movies); video on demand (“VOD”) service (which allows access to alibrary of movies and the ability to start a selection at any time and topause, rewind and fast-forward and replay); premium VOD channels, musicchannels and an interactive, on-screen program guide (which allows thesubscriber to navigate the channel lineup and the video on demandlibrary).  Digital cable subscribers canalso subscribe to additional digital cable services, including a digital videorecorder (“DVR”) (which allows subscribers to record two programs at the sametime and pause, replay and rewind “live” television) and high-definition (“HD”)television, 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 March 31, 2009, approximately 32% of the homes in the areaswe 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 ID and Call Waiting, Find Me/Follow Me,sequential ringing and selective call acceptance and rejection.  As of March 31, 2009, approximately 9%of the homes in our Sacramento market have subscribed to our new VoIP phoneservice.

 

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.

 

17

----

Table of Contents

 

**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 as of March 31,2009 of $2,465, net of tax. Proceeds from the sale of the Tower Assets wereused to repay a portion of outstanding 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 ourowned communication towers.  SureWestWireless was 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” or the “Kansas City operations”) for a total purchase price of$181,459, including transaction costs. Subsequent to the acquisition, theKansas City operations have been included in our Broadband segment. Everest isa competitive provider of high-speed data, video and voice services in thegreater Kansas City area. The acquisition of Everest accelerates our growthstrategy and has positioned us as the premier provider of network services toresidential and business customers in the markets we serve.

** **

**Results of Operations**

 

**Consolidated Overview**

 

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 ended March 31, 2009 and 2008.

 

**Financial Data**

 
| ** **                                    | ** ** | **Quarter Ended March 31,** | ** ** |
|-----------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                    | ** ** | ** **                                 | ** ** | ** ** | ** ** | **$** | ** ** | **%** | ** ** |
| ** **                                    | ** ** | **2009**                                   | ** ** | **2008** | ** ** | **Change** | ** ** | **Change** | ** ** |
| **Operating  revenues (1)**                   |       |                                       |       |   |   |   |   |   |   |
| Broadband                                     |       | $                                          | 39,222     |   | $ | 26,831 |   | $ | 12,391 |   | 46 | % |
| Telecom                                       |       | 21,720                                     |       | 24,482 |   | (2,762 | ) | (11 | ) |
| Operating  revenues                           |       | 60,942                                     |       | 51,313 |   | 9,629 |   | 19 |   |
|                                          |       |                                       |       |   |   |   |   |   |   |
| **Income  (loss) from operations**            |       |                                       |       |   |   |   |   |   |   |
| Broadband                                     |       | (7,002                                     | )          | (7,457 | ) | 455 |   | 6 |   |
| Telecom                                       |       | 10,322                                     |       | 10,148 |   | 174 |   | 2 |   |
| Income from  operations                       |       | 3,320                                      |       | 2,691 |   | 629 |   | 23 |   |
|                                          |       |                                       |       |   |   |   |   |   |   |
| **Income  (loss) from continuing operations** |       |                                       |       |   |   |   |   |   |   |
| Broadband                                     |       | (5,398                                     | )          | (5,770 | ) | 372 |   | 6 |   |
| Telecom                                       |       | 5,477                                      |       | 5,792 |   | (315 | ) | (5 | ) |
| Income from  continuing operations            |       | $                                          | 79         |   | $ | 22 |   | $ | 57 |   | 259 | % |

 

----

(1) Externalcustomers only

 

18

----

Table of Contents

 

**Select Operating Metrics**

** **
| ** **                                          | ** ** | **As of March 31,** | ** ** |
|-----------------------------------------------------|------------|------------------------------------|------------|
| ** **                                          | ** ** | **2009**                           | ** ** | **2008** | ** ** | **Change** | ** ** | **% Change** | ** ** |
| **Broadband**                                       |       |                               |       |   |   |   |   |   |   |
| Total  residential subscribers (1)                  |       | 102,800                            |       | 96,900 |   | 5,900 |   | 6 | % |
| Broadband  residential revenue-generating units (2) |       | 224,400                            |       | 200,800 |   | 23,600 |   | 12 |   |
| Data                                                |       | 98,100                             |       | 91,800 |   | 6,300 |   | 7 |   |
| Video                                               |       | 60,000                             |       | 55,200 |   | 4,800 |   | 9 |   |
| Voice                                               |       | 66,300                             |       | 53,800 |   | 12,500 |   | 23 |   |
| Total business  customers (3)                       |       | 6,700                              |       | 6,000 |   | 700 |   | 12 |   |
| ** **                                          | ** ** | ** **                         | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Telecom**                                         |       |                               |       |   |   |   |   |   |   |
| Voice  revenue-generating units (4)                 |       | 49,500                             |       | 66,800 |   | (17,300 | ) | (26 | ) |
| Total business  customers (3)                       |       | 9,000                              |       | 9,600 |   | (600 | ) | (6 | )% |

 

----

(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.

* *

*OperatingRevenues*

 

Operating revenues forthe Broadband segment increased $12,391 in the quarter ended March 31,2009 compared to the same period in 2008. The Broadband segment results ofoperations in the current year compared to the same prior year period have beenimpacted by the effects of the Everest acquisition in February 2008, asdescribed above.  The Kansas Cityoperations contributed approximately $9,451 of the increase in operatingrevenues during the quarter ended March 31, 2009 compared to the sameprior year period.

 

At March 31, 2009, the Broadband segment experienced a 6% annualincrease in the number of residential subscribers compared to the prior year.Data and video RGUs increased 7% and 9%, respectively, compared to 2008 whichwas reflective of our ability to offer subscribers high-speed data, HD TV, HDDVR and other enhanced services.  Inaddition, Broadband operating revenues increased due to the continued expansionof the broadband network and growth in the demand for digital video, voice anddata offered as a bundled triple-play package.

 

The introduction of our VoIPDigital Phone product in the Sacramento market during 2008, including theTelecom segment service territory, has resulted in an elevated take rate and anincrease in broadband residential triple-play RGUs, while successfullymitigating access line losses in the Telecom segment by migrating thesecustomers to voice RGUs in the Broadband segment.  Broadband voice RGUs in the Sacramento marketincreased 55% as of March 31, 2009 compared to the same prior year period.

 

We will continue toinvest in success-based capital and building and deploying the broadbandinfrastructure primarily within the Kansas City area, while focusing on thegeneration of new customers and increasing residential penetration on existingmarketable homes.

 

Operating revenues in theTelecom segment decreased $2,762 in the quarter ended March 31, 2009compared to the same period in 2008. Residential revenues accounted for $2,040of the decrease in the current year period. Residential services were largely impacted by our customer’s migrationtoward alternative communication services, including those offered by ourBroadband segment, which contributed to an approximate 26% decline in theTelecom segment voice RGUs as of March 31, 2009 compared to 2008.  In an effort to mitigate future operatingrevenue and voice RGU declines, we offer various flat-rate and bundled servicepackages and provide a broadband VoIP service to customers residing withinSureWest Telephone’s service area.  Thedecrease in operating revenues was also impacted by the scheduled reduction inCalifornia High Cost Fund (“CHCF”) subsidies of approximately $510 during thequarter ended March 31, 2009 compared to the same period in 2008.  See the Regulatory Matters section within theTelecom Segment Result of Operations section below, for a further discussionregarding the regulatory subsidies we receive.

 

19

----

Table of Contents

 

*OperatingExpenses*

 

Consolidated operatingexpenses, excluding depreciation and amortization, increased $6,257 in thequarter ended March 31, 2009 compared to the same prior year period. OurBroadband segment accounted for substantially all of the increases in ourconsolidated operating expenses primarily as a result of the addition of ourKansas City operations, which accounted for $8,042 of the current yearincrease. The change was also impacted by a decline in operating expenses forthe Telecom segment in connection with the decline in Telecom operatingrevenues and voice RGUs.

 

Cost of services andproducts expense increased $6,461 in the current year period compared to thesame prior year period primarily as a result of the Kansas City operations, aswell as increases in programming costs related to the growth in Broadbandsubscribers. Customer operations and selling expense increased $791 during thequarter ended March 31, 2009 compared to the same prior year period dueprimarily to the addition of the Kansas City operations, but was also impactedby a decrease in sales and advertising costs as a result of a reduction inradio and television advertising in the current year period. General andadministrative expenses decreased $995 during the quarter ended March 31,2009 compared to the same period in 2008 primarily as a result of (i) adecline in consulting and advisory fees related to strategic initiatives, (ii) informationtechnology costs related to production support projects in the prior year and (iii) adecrease in salaries and wages from a reduction in headcount.

 

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”).Consolidated operating expenses increased $1,147 as a result of an increase inpension costs related to the Plans during the quarter ended March 31, 2009as compared to the same period in 2008. See Note 7 for more information onthe Plans.

 

Our consolidateddepreciation and amortization expense increased $2,743 during the quarter endedMarch 31, 2009 compared to the same prior year period due to the KansasCity operations, continued network build-out and success-based capital projectsundertaken within the residential broadband service territories, partiallyoffset by certain Telecom assets becoming fully depreciated in the current yearperiod.

* *

*Reclassifications*

 

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

* *

*Revenueand Cost Structure*

 

We expect that thesources of our revenues and our cost structure may be different in futureperiods, as a result of our entry into new communications markets andregulatory and competitive forces in each of the markets in which we haveoperations.

 

20

----

Table ofContents

 

**SegmentResults of Operations**

 

**Broadband**

** **
| ** **                                        | ** ** | **Quarter Ended March 31,** | ** ** |
|---------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                        | ** ** | ** **                                 | ** ** | ** ** | ** ** | **$** | ** ** | **%** | ** ** |
| ** **                                        | ** ** | **2009**                                   | ** ** | **2008** | ** ** | **Change** | ** ** | **Change** | ** ** |
|                                              |       |                                       |       |   |   |   |   |   |   |
| Data                                              |       | $                                          | 10,763     |   | $ | 8,789 |   | $ | 1,974 |   | 22 | % |
| Video                                             |       | 11,689                                     |       | 7,369 |   | 4,320 |   | 59 |   |
| Voice                                             |       | 6,399                                      |       | 3,749 |   | 2,650 |   | 71 |   |
| Total residential  revenues                       |       | 28,851                                     |       | 19,907 |   | 8,944 |   | 45 |   |
| Business                                          |       | 9,585                                      |       | 6,348 |   | 3,237 |   | 51 |   |
| Access                                            |       | 384                                        |       | 220 |   | 164 |   | 75 |   |
| Other                                             |       | 402                                        |       | 356 |   | 46 |   | 13 |   |
| Total operating  revenues from external customers |       | 39,222                                     |       | 26,831 |   | 12,391 |   | 46 |   |
| Intersegment  revenues                            |       | 91                                         |       | 140 |   | (49 | ) | (35 | ) |
| Operating  expenses*                              |       | 34,695                                     |       | 26,023 |   | 8,672 |   | 33 |   |
| Depreciation and  amortization                    |       | 11,620                                     |       | 8,405 |   | 3,215 |   | 38 |   |
| Loss from  operations                             |       | (7,002                                     | )          | (7,457 | ) | 455 |   | 6 |   |
| Loss from  continuing operations                  |       | $                                          | (5,398     | ) | $ | (5,770 | ) | $ | 372 |   | 6 | % |

 

----

*Exclusive of depreciation and amortization

 

**Broadband Segment Operating Revenues**

 

Operating revenues fromexternal customers in the Broadband segment increased $12,391 during thequarter ended March 31, 2009 compared to the same period in 2008.  Our Kansas City operations, as describedabove, contributed $9,451 of the increase in operating revenues in the currentyear period due to the acquisition of Everest in February of 2008.  The change also included growth inresidential and business revenues in the Sacramento markets as described below.

** **

**ResidentialRevenues**

 

Broadband residentialrevenues increased $8,944 during the quarter ended March 31, 2009 comparedto the same period in 2008, of which $6,854 was attributable to our Kansas Cityoperations.  Broadband residentialsubscribers and RGUs increased 6% and 12%, respectively, as of March 31,2009 compared to 2008.  We anticipatecontinued growth in residential broadband RGUs and average revenue per userresulting from the HD DVR and VoIP digital phone services.  The digital phone product presents ourcustomers with a more competitive triple-play offering with increased optionsand multiple packages.

* *

*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 $1,974 during the quarter ended March 31, 2009 comparedto the same period in 2008 as a result of subscriber growth and the addition ofour Kansas City operations.  Data RGUsincreased 7% as of March 31, 2009 compared to the same period in 2008.

* *

*Video*

 

Many of our videoservices range from a limited basic service to a full digital cableservice.  Our services are deliveredutilizing fiber-to-the-premise and fiber-to-the-node networks, which allow usto offer a high quality experience with digital TV Packages. Our full digitalcable service provides access to over 340 and 260 channels in our Californiaand Kansas City markets, respectively, including premium and pay-per-viewchannels, VOD service, premium VOD channels, music channels and an interactive,on-screen program.  Digital cablesubscribers can also subscribe to additional digital cable services, includinga DVR and HDTV.

 

21

----

Table of Contents

 

Residential videorevenues increased $4,320 during the quarter ended March 31, 2009 comparedto the same period in 2008.  TheBroadband segment (including our Kansas City operations) experienced growth inVideo RGUs and residential subscribers of 9% and 6%, respectively, as of March 31,2009 compared to the same period in 2008. Revenues also increased as a result of higher pricing on our videoservices effective January 2009 and demand for enhanced video offeringssuch 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 ofdigital phone service plans include a broad array of calling features;including Caller ID and Call Waiting, Find Me/Follow Me, sequential ringing andselective call acceptance and rejection. As of March 31, 2009, approximately 9% of the homes in ourSacramento market have subscribed to our new digital phone service and weanticipate that the take rate on this service will increase to 13% by the endof 2009.  We also offer traditional voiceservices in some of the areas we serve.

 

Residential voicerevenues increased $2,650 during the quarter ended March 31, 2009 comparedto the same period in 2008.  The increasewas due in part to the growth in voice RGUs of 23% as of March 31, 2009compared to 2008 and the addition of our Kansas City operations in February of2008.  As anticipated, the launch of ourVoIP Digital Phone product in the Sacramento market, including the Telecomservice territory, has resulted in elevated take rates and an increase inBroadband 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 $3,237 during the quarter ended March 31, 2009 compared to thesame period in 2008 due primarily to a 12% increase in business customers as ofMarch 31, 2009 compared to 2008.  Wecontinue to expand our business broadband services in Sacramento; however, asignificant portion of the business revenue growth was due to the addition ofour Kansas City operations.

** **

**Broadband Segment Operating Expenses**

 

Total operatingexpenses in the Broadband segment increased $8,672 during the quarter ended March 31,2009 compared to the same period in 2008. The increase was due to the addition of Kansas City operations in February 2008of $8,042 and an increase in costs related to the Plans of approximately $487,as described in the Consolidated Overview section above.

 

Cost of servicesand products (exclusive of depreciation and amortization) increased $7,566during the quarter ended March 31, 2009 compared to the same period in2008.  The increase in costs in thecurrent year period was primarily due to the Kansas City operations,contributing $6,046 in additional expenses due to the acquisition in February of2008.  The increase was also attributableto (i) an increase in programming, transport and access costs related tothe growth in Broadband subscribers, residential broadband RGUs and businesscustomers and (ii) an increase in maintenance costs corresponding to theincreased subscriber count, as well as the expanded network footprint.

 

Customer operationsexpense increased $1,373 during the quarter ended March 31, 2009 comparedto the same period in 2008. Substantially all of the increase in the current year period wasattributable to our Kansas City operations resulting from the acquisition in February of2008, and from increased advertising in the Kansas City market. We haveexperienced a modest decrease in the Sacramento market in sales and advertisingcosts due to decreases in radio and television advertising in the current yearperiod.

 

General andadministrative expense decreased $267 during the quarter ended March 31,2009 compared to the same period in 2008 primarily due to decreases in (i) informationtechnology costs related to system maintenance and development, includingintegration of Kansas City operations and increased production support projectsin the prior year period and (ii) headcount in the current year period.

 

22

----

Tableof Contents

 

Depreciation and amortization increased $3,215 during the quarter endedMarch 31, 2009 compared to the same period in 2008 due to the continuedexpansion of the broadband network and success based capital projects.  Our Kansas City operations increaseddepreciation and amortization expense by $2,939 in the current year period dueto the acquisition of Everest in February of 2008.

** **

**Telecom**

** **
| ** **                                        | ** ** | **Quarter Ended March 31,** | ** ** |
|---------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                        | ** ** | ** **                                 | ** ** | ** ** | ** ** | **$** | ** ** | **%** | ** ** |
| ** **                                        | ** ** | **2009**                                   | ** ** | **2008** | ** ** | **Change** | ** ** | **Change** | ** ** |
|                                              |       |                                       |       |   |   |   |   |   |   |
| Residential                                       |       | $                                          | 6,862      |   | $ | 8,902 |   | $ | (2,040 | ) | (23 | )% |
| Business                                          |       | 9,048                                      |       | 9,047 |   | 1 |   | 0 |   |
| Access                                            |       | 5,647                                      |       | 6,342 |   | (695 | ) | (11 | ) |
| Other                                             |       | 163                                        |       | 191 |   | (28 | ) | (15 | ) |
| Total operating  revenuesfrom  external customers |       | 21,720                                     |       | 24,482 |   | (2,762 | ) | (11 | ) |
| Intersegment  revenues                            |       | 4,874                                      |       | 4,343 |   | 531 |   | 12 |   |
| Operating  expenses*                              |       | 13,082                                     |       | 15,015 |   | (1,933 | ) | (13 | ) |
| Depreciation and  amortization                    |       | 3,190                                      |       | 3,662 |   | (472 | ) | (13 | ) |
| Income from  operations                           |       | 10,322                                     |       | 10,148 |   | 174 |   | 2 |   |
| Income from  continuing operations                |       | $                                          | 5,477      |   | $ | 5,792 |   | $ | (315 | ) | (5 | )% |

 

----

*Exclusive ofdepreciation and amortization

 

**TelecomSegment Operating Revenues**

 

Operating revenues from external customers in theTelecom segment decreased $2,762 during the quarter ended March 31, 2009compared to the same period in 2008.

** **

**Residential Revenues**

 

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 $2,040 as we continue to experience decreasesin revenue due to competition from wireless, wireline competitors and cableproviders (including SureWest Broadband). Residential subscribers and voice RGUs declined approximately 26% as of March 31,2009 compared to 2008.  In addition, somecompetitors initiated marketing campaigns to include voice services targeteddirectly to residential subscribers within SureWest Telephone’s servicearea.  We continue to mitigate additionalvoice operating 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 March 31, 2009, approximately 6,900, or 40%, of the declinesin Telecom voice RGUs mentioned above have transferred to SureWest Broadband’sVoIP phone service.  See the Broadbandsegment residential revenue section above for a more detailed discussionregarding VoIP and other services offered by SureWest Broadband.

*** ***

***BusinessRevenues***

 

We provide a variety of business service offerings tosmall, medium and large business customers on our advanced fiber network.  The services we offer to our businesscustomers include: Fiber-optics based high-speed Internet, customized data andEthernet transport services, data center and disaster recovery solutions,traditional landline and scalable Internet protocol (“IP”) communicationsystems.  While our business customerbase declined 6% as of March 31, 2009 compared to 2008, Average RevenuePer Unit grew 7% during the same time period due to continued strong demand fordata services and the increasing requirement for businesses to network multiplelocations in order to share data have mostly alleviated the business revenuelosses which could have resulted from the decline in the customer base.

 

23

----

Table of Contents

 

**Access Revenues**

 

Access revenues, whichinclude switched access revenue, interstate common line (“CL”) revenue anddraws from the CHCF decreased $695 during the quarter ended March 31, 2009compared to the same period in 2008. As anticipated, subsidies received fromthe CHCF decreased by approximately $510. The CHCF decrease was offset in part byapproximately $224, primarily due to a settlement received from CHCF-B in thecurrent year period related to 2008. Switched access revenues also declined by approximately $786 due todeclines in minutes of use associated with the reduction of residential voiceservices previously discussed.  Thesedecreases were partially offset during 2009 by an increase in interstate CLsettlements received from National Exchange Carrier Association (“NECA”) ofapproximately $470 as a result of a shift in revenue recovery from end users tothe NECA pool.  See the RegulatoryMatters**section below for a more detaileddiscussion regarding SureWest Telephone’s regulated revenues.

** **

**Telecom Segment OperatingExpenses**

 

Operating expenses for the Telecom segment decreased $1,933 during thequarter ended March 31, 2009 compared to the same period in 2008. The decrease in operating expenses was also impacted by an increase in costsrelated to the Plans of approximately $660, as described in the ConsolidatedOverview section above.

 

Cost of services and products (exclusive of depreciation andamortization) decreased $544 during the quarter ended March 31, 2009compared to the same period in 2008. This decrease was predominately due to thedecline in local and long distance expenses as a result of decreases in VoiceRGUs and business customers of 26% and 6%, respectively, as of March 31,2009 compared to the prior year.

 

Customer operations expense decreased $615 during the quarter ended March 31,2009 compared to the same period in 2008. The decrease was primarily due to a decrease in sales and advertisingcosts as a result of a reduction in radio and television advertising in thecurrent year period in the Telecom segment service territory.

 

General and administrative expense decreased $774 during the quarterended March 31, 2009 compared to the same period in 2008.  The decrease was primarily due to (i) adecline in consulting and advisory fees and (ii) the incurrence in theprior year period of additional information technology costs related toproduction support projects.

 

Depreciation and amortization decreased $472 during the quarter ended March 31,2009 compared to the same period in 2008. This decrease was due predominately to a portion of aerial andunderground cable becoming fully depreciated in the current year period.

 

**Regulatory Matters**

 

Revenues from services subject to regulationconstituted approximately 33% and 44% of our total operating revenues fromcontinuing operations during the quarters ended March 31, 2009 and 2008,respectively.  Those revenues, whichinclude local service, network access service and toll service, are derivedfrom various sources, including:

 

·                  business and residential subscribers of basic exchangeservices;

·                  surcharges, mandated by State Commissions;

·                  long distance carriers, for network access service;

·                  competitive access providers and commercialenterprises, for network access service;

·                  interstate pool settlements from NECA;

·                  support payments from federal or state programs; and

·                  support payments from the CHCF, recovering costs ofservices including extended area service.

 

Significant portions of our telephone rates andcharges are subject to regulation by the Federal Communications Commission (“FCC”)and state commissions. Rates and charges are based on various tariffs filed bythe Company and others, including those filed by the NECA for interstate CLcharges. Pending and future regulatory actions, with respect to these and othermatters and the filing of new or amended tariffs, may have a material impact onour consolidated financial position and results of operations.

 

Intrastate service ratesare subject to regulation by state commissions. With respect to toll callsinitiated by interexchange carriers’ customers, the interexchange carriers areassessed access charges based on tariffs filed by the Company. Interstateaccess rates and resultant earnings are subject to regulation by the FCC. Withrespect to interstate services, SureWest Telephone has detariffed its DSLservices and files its own tariff with the FCC for switched and special accessservices. For interstate CL charges, SureWest Telephone concurs with tariffsfiled by NECA. Pending and future regulatory actions may have a material impacton our consolidated financial position and results of operations.

 

24

----

Table ofContents

 

*FCCMatters*

 

The FCC monitorsSureWest Telephone’s interstate earnings through the use of annual costseparation studies prepared by SureWest Telephone, which utilize estimated costinformation 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.

* *

*CaliforniaPublic Utility Commission (“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. Prior to the cessation of the surcredit on February 9, 2009, wereturned approximately $165 and $431 to end users through the consumer dividendfor the quarters ended March 31, 2009 and 2008, respectively.

 

As part of the Settlement Agreement, SureWest Telephone was required toimplement an additional annual consumer dividend of $1,300 on January 1,2007 to end-users receiving SureWest Telephone services subject to sharing onor after that date.  In December 2006,the CPUC authorized us to offset our annual $11,500 interim draw from the CHCFwith 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 over a five-year period.  In 2008,our interim CHCF draw was $8,160 and is being incrementally reduced byapproximately $2,000 annually.  Weanticipate 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 $3.25per year for 2009 and 2010 as describe 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.

 

*OtherRegulatory Matters*

 

There are a number of other regulatory proceedingsoccurring at the federal and state levels that may have a material impact onus. These regulatory proceedings include, but are not limited to, considerationof changes to the jurisdictional separations process, the interstate universalservice fund, intercarrier compensation access charge reform, broadband deployment,the regulation of local exchange carriers and their competitors, includingproviders of IP-enabled services and the provision of video services andcompetition in the market. The outcomes and impact on our operations due tothese proceedings and related court matters cannot be determined at this time.

 

The regulatory proceedings occurring at the state andfederal levels described above may also authorize new competition in theprovision of regulated services and change the rates and rate structure forregulated services that we furnish, of which the effects on us cannot yet bedetermined.

 

25

----

Tableof Contents

 

**Non-Operating Items**

 

*Other Income andExpense, Net*

* *

Consolidated interest income decreased $297 during thequarter ended March 31, 2009 compared to the same period in 2008.  This decrease was primarily due to the use ofcash and short-term investments to fund the acquisition of Everest during theprior year period. Consolidated interest expense decreased $445 during thequarter ended March 31, 2009 compared to the same period in 2008 dueprimarily to decreased principal balances and the receipt of patronagedividends.  We received patronagedividends of $963 and $400 during the quarters ended March 31, 2009 and2008, respectively.  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. The change in interestexpense was also impacted by a loss on the extinguishment of debt of $607during the quarter ended March 31, 2008, as described in the Liquidity andCapital Resources section below.

 

*Income Taxes*

* *

Income taxes increased $635 during the quarter ended March 31,2009 compared to the same period in 2008 due primarily to anticipated changesin our state tax apportionment factors and permanent differences resulting fromthe decrease between the grant and vesting prices of RSAs and RSUs, that vestedduring the quarter.  The effectivefederal and state income tax rates for continuing operations were 91.8% and91.9% for the quarter ended March 31, 2009 and 2008, respectively.

 

**Liquidity and Capital Resources**

 

**Overview**

 

We generate significant cash flows from operating activities.  The proceeds from monetizing our nonstrategic investments have also provided us with a significant source of cashflow.  We believe that we will be able tomeet our current and long-term liquidity and capital requirements, through ourcash flow from operating activities, existing cash, cash equivalents andinvestments; through available borrowings under our existing credit facilities;and through our ability to obtain future external financing.  Our primary use of cash in 2009 has been forcapital expenditures, scheduled payments of long-term debt and the paymentduring the current year quarter related to our 2008 incentive compensation plan.We anticipate continuing to use a substantial portion of our cash flow to fundour capital expenditures, invest in new business opportunities, fund networkexpansion and modernization, scheduled payments of long-term debt and may fundthe authorized share repurchase plan.

 

The following table summarizes our cash flows:

 
| ** **                             | ** ** | **Three Months Ended March 31,** | ** ** |
|----------------------------------------|------------|------------------------------------------------------|------------|
| ** **                             | ** ** | **2009**                                             | ** ** | **2008** | ** ** | **$ Change** | ** ** |
| Cash Flows  Provided By (Used In)      |       |                                                 |       |   |   |   |   |
| Operating  Activities:                 |       |                                                 |       |   |   |   |   |
| Continuing  operations                 |       | $                                                    | 9,983      |   | $ | 8,641 |   | $ | 1,342 |   |
| Discontinued  operations               |       | (439                                                 | )          | 1,242 |   | (1,681 | ) |
|                                   |       |                                                 |       |   |   |   |   |
| Investing  Activities:                 |       |                                                 |       |   |   |   |   |
| Continuing  operations                 |       | (9,130                                               | )          | (181,753 | ) | 172,623 |   |
| Discontinued  operations               |       | —                                               |       | (111 | ) | 111 |   |
|                                   |       |                                                 |       |   |   |   |   |
| Financing  Activities:                 |       |                                                 |       |   |   |   |   |
| Continuing  operations                 |       | (1,576                                               | )          | 148,569 |   | (150,145 | ) |
|                                   |       |                                                 |       |   |   |   |   |
| Decrease in Cash  and Cash Equivalents |       | $                                                    | (1,162     | ) | $ | (23,412 | ) | $ | 22,250 |   |

 

**Cash Flows Provided By Operating Activities**

 

Net cash provided by continuing operating activities was $9,983 for thethree-month period ended March 31, 2009. Significant adjustments to net income to arrive at cash provided byoperating activities include (i) non-cash charges of $14,810 consistingprimarily of depreciation and amortization due to capital investmentsprincipally in the Broadband segment and (ii) stock compensation expenseof $608.  Cash provided by operatingactivities was offset in part due to improved working capital as a result of adecrease in (i) accounts payable and accrued liabilities of $2,985 relatedto the timing of outstanding obligations for inventory and capital projectexpenditures and (ii) accrued compensation of $3,837 related to thepayment in the current year period of 2008 incentive compensation.

 

26

----

Tableof Contents

 

**Cash Flows Used In Investing Activities***.*

 

Net cash used in continuing investing activities was $9,130 and$181,753 for the three-month periods ended March 31, 2009 and 2008,respectively. Net cash used during the quarter ended March 31, 2008 wasprimarily attributable to the acquisition of Everest for $180,133, net of cashacquired.

 

*Proceeds from Sale ofDiscontinued Operations*

 

In February 2009, we sold our fifty-two Tower Assets owned by oursubsidiary West Coast PCS to Global Tower Partners. The sale was completed foran aggregate cash purchase price of $9,222, based on the tower cash flowgenerated by commenced tenant leases. Proceeds from the sale of the TowerAssets were used to repay a portion of outstanding long-term debt.

 

*Capital Expenditures*

 

Capital expenditures continue to be our primary recurring investingactivity and were $18,352 and $18,270 in the three-month periods ended March 31,2009 and 2008, respectively. We invest a significant portion of our capitalspending in our Broadband segment as a result of business growth, theintroduction of new products and services and the expansion of the network.

 

**Cash Flows Provided By Financing Activities**

 

Net cash provided by financing activities consists primarily of ourproceeds from short and long-term borrowings offset by cash payments fordividends, principal payments on long-term debt and planned repurchases of ourcommon stock.

 

*Long-term Debt*

 

In February 2008, we entered into a SecondAmended and Restated Credit Agreement (“Credit Agreement”) to restate andreplace the May 2007 credit agreement. The Credit Agreement terms, amongother things (i) revised the amount available under the Term Loan Afacility from $40,000 to $120,000, (ii) issued a 1-year $60,000 Term LoanB facility and (iii) modified certain financial covenants. No significantchanges were made to the existing $60,000 Revolving Loan facility. The creditfacilities were used in part to acquire Everest and were available for generalcorporate purposes. The Term Loan A facility and the Revolving Loan facilityare due and payable on May 1, 2012.

 

The Term Loan A facility, prior to the CreditAgreement, which had $40,000 outstanding, was extinguished resulting in a losson extinguishment of debt of $607, which was recorded as a component ofinterest expense in the first quarter of 2008. $40,000 of the Credit Agreementborrowings bore interest at a fixed rate. The remaining $80,000 of the CreditAgreement borrowings bore interest based, at our election, on the LondonInterbank Offered Rate (“LIBOR”) or the bank’s Prime Rate, in either case, plusan applicable margin. The Term Loan B facility was due and payable on February 12,2009 and included automatic increases to the applicable interest margins. On May 14,2008, we repaid $30,000 of the Term Loan B and $16,000 of the Revolvingfacility with proceeds from the sale of SureWest Wireless.

 

In September 2008, we entered into a ThirdAmended and Restated Credit Agreement (“New Agreement”) to restate and replacethe Credit Agreement. The New Agreement terms, among other things (i) reflectedthe repayment of $30,000 of the Term Loan B facility under the Credit Agreementto reduce the principal balance from $60,000 to $30,000, (ii) modifiedinterest margins and (iii) extended the maturity date of the Term Loan Bfacility to May 1, 2012.

 

The Term Loan A facility has $120,000 outstanding as of March 31,2009, of which $40,000 bears a fixed interest rate and the remaining $80,000bears interest based, at our election, on LIBOR or the bank’s Prime Rate, ineither case, plus an applicable margin. As of March 31, 2009, $30,000 and$24,000 were outstanding on the Term Loan B and Revolving Loan facilities,respectively.

 

27

----

Tableof Contents

 

*Debt Covenants*

 

Our Series A and Series B Senior Notes and the New Agreementcontain financial and operating covenants that may restrict, among otherthings, the repurchase of the Company’s capital stock, the making of certainother restricted payments and the incurrence of additional indebtedness. Thecovenants also require us to maintain certain financial ratios and minimumlevels of tangible net worth. At March 31, 2009 and December 31,2008, retained earnings of $104,361 and $101,345, respectively, were availablefor the payments described above. As of March 31, 2009, we were incompliance with all of our debt covenants.

 

*Share Repurchase Program andDividends*

 

Our Board of Directors has authorized the repurchaseof up to 2.5 million shares of our common stock. Shares are purchased fromtime to time in the open market or through privately negotiated transactions,subject to overall financial and market conditions. Starting in the firstquarter of 2000 through March 31, 2009, approximately 1.8 million sharesof common stock had been repurchased. As of March 31, 2009, we hadremaining authorization from the Board of Directors to repurchase approximately719 thousand additional outstanding shares. We repurchased no shares during thethree-month period ended March 31, 2009 and approximately 269 thousandshares during the three-month period ended March 31, 2008.  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 three-month periodsended March 31, 2009 and 2008.

 

In April 2008, our Board of Directors announcedthe decision to discontinue dividend payments for the foreseeable future in aneffort to foster our growth strategy by reinvesting the approximate $14,500 ofannual dividend distributions back into the Company.  The cash dividend of $0.25 per share, paid onJune 16, 2008 to shareholders of record at the close of business on May 15,2008, was the last dividend paid to shareholders for the foreseeablefuture.  The reinstatement of futuredividend payments is at the discretion of our Board of Directors.

 

**Sufficiency of Cash Resources**

 

We had cash, cash equivalents and short-term investments at March 31,2009 of $2,237.  We believe, given ourfinancial position and debt-to-equity position, that we have substantialadditional long-term borrowing capacity of approximately $36,000 available tous through our Revolving Loan facility. The Revolving Loan facility is subject to mandatory reductions of $7,500on December 31, 2009 and December 31, 2010, as reduced by anyvoluntary reductions of the Revolving Credit facility or prepayments orrepayments of the Term Loan A or the Term Loan B facilities.  We believeour operating cash flows and our borrowing capacity are sufficient to satisfyour liquidity requirements for the next twelve months, while maintainingadequate cash and cash equivalents.

 

Our most significant use of funds in the remainder of2009 is expected to be for (i) budgeted capital expenditures of $35,000 to$40,000, (ii) scheduled payments of long-term debt of $3,636 and (iii) anticipatedinterest payments of $8,598. As discussed above, throughout the year we mayrepurchase shares of the Company’s common stock in the open market at theprevailing market price up to an amount authorized by the Board of Directors.

 

A portion of the 2009 budgeted capital expenditures isat our discretion and dependent upon our working capital position, operatingcash flows and ability to borrow. We can modify our planned construction andcommitments if the results of operations or available capital so require. A significantportion of our 2009 budgeted capital expenditures are success based and ispartially dependent on our ability to manage our growth and expansion. We arerequired to comply with our cable franchise agreements to continue ourbuild-out in the franchise areas.

 

*Defined Benefit Pension Plan*

 

As required, we contribute to the Pension and OtherBenefits Plans, which provide retirement benefits to certain eligibleemployees. Contributions are intended to provide for benefits attributed toservice to date. Our funding policy is to contribute annually an actuariallydetermined amount consistent with applicable federal income tax regulations. Asdiscussed in the Consolidated Overview section above, we stopped accruingbenefits for active participants effective April 1, 2007 and we anticipatethat future funding requirements will decrease significantly as a result of thefreeze of the Plans.  However, the significantdecline in the equity markets precipitated by the recent credit crisis andfinancial system instability has negatively affected the value of our pensionplan assets.  It is possible that we willbe required to fund the Plan assets of up to approximately $2,500 in 2010 forthe 2009 plan year.  We will continue toevaluate the future funding requirements of the Plans and fund them as deemednecessary. See Note 7 for a more detailed discussion regarding our Pensionand Other Benefits Plans.

 

28

----

Tableof Contents

 

**Regulatory Matters**

 

As discussed more fully in the Regulatory Matters section above, the CPUC issued a finaldecision which phases down our $11,500 current annual CHCF interim draw byapproximately $2,000 annually, over a 5-year period ending on January 1,2012.

 

**Critical Accounting Estimates**

 

Our condensed consolidated financial statements and accompanying notesare prepared in accordance with accounting principles generally accepted in theUnited States (“U.S. GAAP”). Preparing financial statements requires managementto make estimates 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 April 2009, the Financial Accounting StandardsBoard (“FASB”) issued three Staff Positions (“FSPs”) that are intended toprovide additional application guidance and enhance disclosures about fairvalue measurements and impairments of securities. FSP FAS No. 157-4, *Determining Fair Value When the Volume and Level of Activity for theAsset or Liability Have Significantly Decreased and Identifying TransactionsThat Are Not Orderly*(“FSP FAS 157-4”) clarifies the objective andmethod of fair value measurement even when there has been a significantdecrease in market activity for the asset being measured. FSP FAS No. 115-2and FSP FAS No. 124-2, *Recognition ofOther-Than-Temporary Impairments* (“FSP FAS 115-2 and FSP FAS 124-2”)**establishes a new model for measuringother-than-temporary impairments for debt securities, including establishingcriteria for when to recognize a write-down through earnings versus othercomprehensive income. FAS No. 107-1 and APB 28-1, *InterimDisclosures about Fair Value of Financial Instruments* (“FSP FAS107-1 and APB 28-1”) expands the fair value disclosures required for allfinancial instruments within the scope of SFAS No. 107, *Disclosures about Fair Value of Financial Instruments*, tointerim periods. All of these FSPs are effective for us beginning April 1,2009. We are assessing the potential impact that the adoption of FSP FAS 157-4,FSP FAS 115-2 and FAS 124-2 may have on our consolidated financial statements.FSP FAS 107-1 and APB 28-1 will result in increased disclosures in our interimperiods.

 

In December 2008, the FASB issued FSP FAS No. 132(R)-1, *Employers’ Disclosures about Postretirement Benefit Plan Assets*(“FSP FAS 132(R)-1”). FSP FAS 132(R)-1 amends FASB Statement No. 132(revised 2003), *Employers’ Disclosures about Pensions andOther Postretirement Benefits,*to require disclosure of additionalinformation about assets held in a defined benefit pension or otherpostretirement plan. Specifically, FSP FAS 132(R)-1 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 of FSP FAS 132(R)-1 are effective for fiscal years ending after December 15,2009, with earlier application permitted. We are currently evaluating theimpact this statement will have on our consolidated financial statements.

 

29

----

Tableof Contents

 

In May 2008, the FASB issued SFAS No. 162,*The Hierarchy of Generally Accepted AccountingPrinciples* (“SFAS 162”). SFAS 162 identifies a consistent framework,or hierarchy, for selecting accounting principles to be used in preparingfinancial statements that are presented in conformity with GAAP fornongovernmental entities (the “Hierarchy”). The Hierarchy within SFAS 162 isconsistent with that previously defined in the AICPA Statement on AuditingStandards No. 69, *The Meaning ofPresent Fairly in Conformity With Generally Accepted Accounting Principles*.SFAS 162 is effective 60 days following the SEC’s approval of the PublicCompany Accounting Oversight Board amendments to AU Section 411,*The Meaning of Presents Fairly in Conformity WithGenerally Accepted Accounting Principles*. We do not expect the adoption of SFAS 162 to have a material effect onour condensed consolidated financial position and results of operations.

 

**Recently Adopted Accounting Pronouncements**

 

In November 2008, the Emerging Issues Task Force (“EITF”) reacheda consensus on EITF No. 08-7, *Accounting for DefensiveIntangible Assets*(“EITF 08-7”)*.*EITF 08-7requires the acquirer of a defensive intangible asset to account for defensiveintangible asset as a separate unit of accounting and assign a useful life fordefensive intangible asset according to the entity’s consumption of theexpected benefits related to that asset. Our adoption of EITF No. 08-7, on a prospective basis, on January 1,2009 did not have a material impact onour condensed consolidated financial position and results of operations.

 

In June 2008, the FASB issued FSP EITF 03-6-1, *Determining Whether Instruments Granted in Share-Based PaymentTransactions Are Participating Securities* (“FSP EITF 03-6-1”). FSPEITF 03-6-1 addresses whether instruments granted in share-based paymenttransactions are participating securities prior to vesting and, therefore, needto be included in the earnings allocation in computing earnings per share underthe two-class method as described in SFAS No. 128, *Earnings perShare*. Under the guidance in FSP EITF 03-6-1, unvested share-basedpayment awards that contain non-forfeitable rights to dividends or dividendequivalents (whether paid or unpaid) are participating securities and shall beincluded in the computation of earnings per share pursuant to the two-classmethod. Our adoption of EITF 03-6-1, on January 1, 2009, did not have a material impact on our condensed consolidatedfinancial position and results of operations.

 

In April 2008, the FASB issued FSP No. FAS 142-3,*Determination of the Useful Life of IntangibleAssets* (“FSP FAS 142-3”). FSP FAS 142-3 amends the factors thatshould be considered in developing renewal or extension assumptions used forpurposes of determining the useful life of a recognized intangible asset underSFAS 142.  FSP FAS 142-3 is intended to improve the consistency betweenthe useful life of a recognized intangible asset under SFAS 142 and the periodof expected cash flows used to measure the fair value of the asset under SFAS141(R),*Business Combinations*(“SFAS 141(R)”), andother U.S. GAAP. Our adoption of FSP FAS 142-3, on January 1, 2009, didnot have a material impact on ourcondensed consolidated financial position and results of operations.

 

In December 2007, the FASB issued SFAS No. 141(R) whichestablishes principles and requirements for how the acquirer recognizes andmeasures in its financial statements the identifiable assets acquired, theliabilities assumed and any noncontrolling interest in the acquiree in abusiness combination.  SFAS 141(R) alsoestablishes principles around how goodwill acquired in a business combinationor gain from a bargain purchase should be recognized and measured, as well asprovides guidelines on the disclosure requirements on the nature and financialimpact of the business combination. SFAS 141(R) also requiresacquisition-related transaction and restructuring costs to be expensed ratherthan treated as part of the cost of the acquisition.  In April 2009, the FASB issued FSP FAS141(R)-1, *Accounting for Assets Acquired and LiabilitiesAssumed in a Business Combination That Arise from Contingencies*(“FSPFAS 141(R)-1”*)*. FSP FAS 141(R)-1 amends SFAS141(R) by establishing a model to account for certain pre-acquisitioncontingencies.  Under FSP FAS 141(R)-1,an acquirer is required to recognize at fair value an asset acquired or aliability assumed in a business combination that arises from a contingency if theacquisition-date fair value of that asset or liability can be determined duringthe measurement period.  If theacquisition-date fair value cannot be determined, then the acquirer shouldfollow the recognition criteria in SFAS No. 5, *Accountingfor Contingencies*, and FASB Interpretation No. 14, *Reasonable Estimation of the Amount of a Loss - an interpretation ofFASB Statement No. 5*. SFAS 141(R) and FSP FAS 141(R)-1 apply prospectively to businesscombinations.  Our adoption of SFAS 141(R) andFSP FAS 141(R)-1, on January 1, 2009, did not have a material impact on our condensed consolidatedfinancial position and results of operations.

 

30

----

Tableof Contents

 

In September 2006, the FASB issued SFAS 157*,*which defines fair value, establishes a framework for measuring fair value inU.S. GAAP and expands disclosures about fair value measurements.  In February 2008, the FASB issued FSP No. FAS157-2, *Effective Date of FASB Statement No. 157*(“FSPFAS 157-2”).  FSP FAS 157-2 amends SFAS157 to delay the effective date 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.  SFAS 157, as amended, was effective forfinancial statements issued for fiscal years beginning after November 15,2008 and for interim periods within those fiscal years. We adopted SFAS 157effective for 2008, except as it applied to those non-financial assets andnon-financial liabilities as noted in FSP FAS 157-2.  The partial adoption of SFAS 157 did not havean impact on our condensed consolidated financial statements. Effective for2009, we adopted the provisions of FSP FAS 157-2.  The adoption of FSP FAS 157-2 did not have a material impact on our condensed consolidatedfinancial position and results of operations.  For a more detailed discussion of the effectsof applying the provisions of SFAS 157 refer to the Fair Value of FinancialInstruments section of Note 2.

 

**Regulatoryand Legal Matters**

** **

Significant portions of SureWest Telephone’s rates and charges aresubject to regulation by the FCC and the CPUC. Rates and charges are based on various tariffs filed by SureWest and others,including those filed by the NECA for CL charges.  Pending and future regulatory actions, withrespect to these and other matters and the filing of new or amended tariffs,may have a material impact on our consolidated financial position and results ofoperations.  In addition, the emergenceof a range of products and services that operate partially or entirely outsidetraditional regulatory frameworks but that compete with regulated serviceofferings has created new challenges for both us and the regulators.

 

Our consolidated financial condition and results of operations havebeen and will be affected by recent and future proceedings before the CPUC andFCC. Pending before the FCC and 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 of pending and anticipated other regulatoryproceedings occurring at the federal and state levels that may have a materialimpact on SureWest Telephone and also on subsidiaries in the Broadband segment.These regulatory proceedings also include newer issues, such as considerationof broadband deployment and regulation of IP-enabled services. The outcomes andimpact of these proceedings and related court matters on the Telecom segment,the Broadband segment and the Company as a whole cannot be determined at thistime.

 

31

----

Tableof Contents

 

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

 

Our 2008 Annual Report on Form 10-K contains certain disclosuresabout our limited exposure to market risk for changes in interest rates. There have been no material changes to the information provided which wouldrequire additional disclosures as of the date of this filing.

 

**ITEM 4.  CONTROLS ANDPROCEDURES.**

 

**Evaluation of disclosure controls and procedures**

 

Our management, with the participation of our ChiefExecutive Officer and Chief Financial Officer, evaluated the effectiveness ofthe design and operation of our disclosure controls and procedures (as definedin Rule 13a-15(e) under the Securities Exchange Act of 1934, asamended) as of the end of the period covered by this Quarterly Report on Form 10-Q.Based upon, and as of the date of this evaluation, the Chief Executive Officerand Chief Financial Officer have concluded that, our disclosure controls andprocedures were effective, at the reasonable assurance level, to ensure thatinformation required to be disclosed by us in reports that we file or submit underthe Securities 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 change in our internal control overfinancial reporting during the quarter ended March 31, 2009.

 

**Limitations on the effectiveness of controls**

 

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

 

32

----

Tableof Contents

 

**PART II —OTHER INFORMATION**

 

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

 

Refer to Notes 5 and 8 to our condensed consolidated financialstatements of the Quarterly Report on Form 10-Q for a discussion of recentdevelopments related to our regulatory and legal proceedings.

 

**ITEM6.  EXHIBITS.**

 

(a)          Index to Exhibits.

 
| Exhibit  No. | ** ** | **Description**                                                                                                                                                                                   | ** ** | **Method  of Filing** |
|--------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------|
|         |       |                                                                                                                                                                                              |       |                       |
| 10.1         |       | 2000  Equity Incentive Plan, as amended                                                                                                                                                           |       | Filed herewith             |
|         |       |                                                                                                                                                                                              |       |                       |
| 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             |

 

33

----

Table of Contents

 

**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: May 5, 2009 |   |                                        |

 

34