Table of Contents

 

 

 

**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**WASHINGTON,D.C. 20549**

 

**FORM 10-Q**

 

**x****      QUARTERLYREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF1934**

 

**For thequarterly period ended September 30, 2010**

 

**or**

 

**o****         TRANSITIONREPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF1934**

 

**CommissionFile Number 000-29660**

 

 

**SureWestCommunications**

(Exactname of registrant as specified in its charter)

 

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

 

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

 

**(916)786-6141**

(Registrant’stelephone number, including area code)

 

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

 

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

 

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

 

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

 

On October 19, 2010,the registrant had 13,891,745 shares of Common Stock outstanding.

 

 

 

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**TABLE OF CONTENTS**

 
| ** **                              | ** **                                                                                  | ** ** | **Page** |
|-----------------------------------------|---------------------------------------------------------------------------------------------|------------|----------|
| **PART I - FINANCIAL INFORMATION** |                                                                                        |       |
| Item 1.                                 | Financial  Statements                                                                       |       | 1        |
| Item 2.                                 | Management’s  Discussion and Analysis of Financial Condition and Results of Operations |       | 18       |
| Item 3.                                 | Quantitative  and Qualitative Disclosures About Market Risk                                 |       | 37       |
| Item 4.                                 | Controls and  Procedures                                                                    |       | 37       |
|                                    |                                                                                        |       |     |
| **PART II  - OTHER INFORMATION**   |                                                                                        |       |
| Item 1.                                 | Legal Proceedings                                                                           |       | 38       |
| Item 2.                                 | Unregistered  Sales of Equity Securities and Use of Proceeds                                |       | 38       |
| Item 6.                                 | Exhibits                                                                                    |       | 38       |
| SIGNATURES                              |                                                                                        | 39         |

 

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**PART 1 — FINANCIAL INFORMATION**

 

**ITEM 1. FINANCIAL STATEMENTS.**

 

**SUREWEST COMMUNICATIONS**

**CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS**

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

* *
| ** **                                                                         | ** ** | **Quarter Ended September 30,** | ** ** | **Nine Months Ended September 30,** | ** ** |
|------------------------------------------------------------------------------------|------------|------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                                                         | ** ** | **2010**                                       | ** ** | **2009**                                                | ** ** | **2010** | ** ** | **2009** | ** ** |
|                                                                               |       |                                           |       |                                                    |       |   |   |   |   |
| **Operating revenues:**                                                            |       |                                           |       |                                                    |       |   |   |   |   |
| Broadband                                                                          |       | $                                              | 43,861     |                                                    | $          | 40,175 |   | $ | 129,514 |   | $ | 119,656 |   |
| Telecom                                                                            |       | 17,256                                         |       | 19,354                                                  |       | 52,339 |   | 61,745 |   |
| Total  operating revenues                                                          |       | 61,117                                         |       | 59,529                                                  |       | 181,853 |   | 181,401 |   |
|                                                                               |       |                                           |       |                                                    |       |   |   |   |   |
| **Operating expenses:**                                                            |       |                                           |       |                                                    |       |   |   |   |   |
| Cost  of services and products (exclusive of depreciation and amortization)        |       | 26,672                                         |       | 25,450                                                  |       | 78,771 |   | 77,264 |   |
| Customer  operations and selling                                                   |       | 7,028                                          |       | 8,130                                                   |       | 22,542 |   | 23,028 |   |
| General  and administrative                                                        |       | 6,720                                          |       | 8,073                                                   |       | 24,296 |   | 26,260 |   |
| Depreciation  and amortization                                                     |       | 15,680                                         |       | 15,260                                                  |       | 46,048 |   | 44,298 |   |
| Total  operating expenses                                                          |       | 56,100                                         |       | 56,913                                                  |       | 171,657 |   | 170,850 |   |
|                                                                               |       |                                           |       |                                                    |       |   |   |   |   |
| **Income from operations**                                                         |       | 5,017                                          |       | 2,616                                                   |       | 10,196 |   | 10,551 |   |
|                                                                               |       |                                           |       |                                                    |       |   |   |   |   |
| Other  income (expense):                                                           |       |                                           |       |                                                    |       |   |   |   |   |
| Interest  income                                                                   |       | 16                                             |       | 28                                                      |       | 62 |   | 99 |   |
| Interest  expense                                                                  |       | (2,311                                         | )          | (3,046                                                  | )          | (6,189 | ) | (8,402 | ) |
| Other,  net                                                                        |       | 10                                             |       | 205                                                     |       | (323 | ) | 33 |   |
| Total  other income (expense), net                                                 |       | (2,285                                         | )          | (2,813                                                  | )          | (6,450 | ) | (8,270 | ) |
|                                                                               |       |                                           |       |                                                    |       |   |   |   |   |
| Income  (loss) from continuing operations before income taxes                      |       | 2,732                                          |       | (197                                                    | )          | 3,746 |   | 2,281 |   |
|                                                                               |       |                                           |       |                                                    |       |   |   |   |   |
| Income  tax expense                                                                |       | 1,328                                          |       | 14                                                      |       | 2,342 |   | 1,514 |   |
|                                                                               |       |                                           |       |                                                    |       |   |   |   |   |
| **Income (loss) from continuing operations**                                       |       | 1,404                                          |       | (211                                                    | )          | 1,404 |   | 767 |   |
|                                                                               |       |                                           |       |                                                    |       |   |   |   |   |
| Discontinued  operations, net of tax:                                              |       |                                           |       |                                                    |       |   |   |   |   |
| Loss  from discontinued operations                                                 |       | —                                         |       | —                                                  |       | — |   | (69 | ) |
| Gain  on sale of discontinued operations                                           |       | —                                         |       | —                                                  |       | — |   | 2,568 |   |
| Total  discontinued operations                                                     |       | —                                         |       | —                                                  |       | — |   | 2,499 |   |
|                                                                               |       |                                           |       |                                                    |       |   |   |   |   |
| **Net income (loss)**                                                              |       | $                                              | 1,404      |                                                    | $          | (211 | ) | $ | 1,404 |   | $ | 3,266 |   |
|                                                                               |       |                                           |       |                                                    |       |   |   |   |   |
| **Basic and diluted earnings per common share:**                                   |       |                                           |       |                                                    |       |   |   |   |   |
| Income  (loss) from continuing operations                                          |       | $                                              | 0.10       |                                                    | $          | (0.02 | ) | $ | 0.10 |   | $ | 0.05 |   |
| Discontinued  operations, net of tax                                               |       | —                                         |       | —                                                  |       | — |   | 0.18 |   |
| Net  income (loss) per basic and diluted common share                              |       | $                                              | 0.10       |                                                    | $          | (0.02 | ) | $ | 0.10 |   | $ | 0.23 |   |
|                                                                               |       |                                           |       |                                                    |       |   |   |   |   |
| **Shares of common stock used to calculate basic and diluted  earnings per share** |       | 13,736                                         |       | 13,936                                                  |       | 13,883 |   | 13,973 |   |

 

Seeaccompanying notes.

 

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**SUREWESTCOMMUNICATIONS**

**CONDENSEDCONSOLIDATED BALANCE SHEETS**

*(Unaudited;Amounts in thousands)*

 
| ** **                                                                                                                                                                         | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                         | ** ** | **2010**               | ** ** | **2009**              | ** ** |
| **ASSETS**                                                                                                                                                                         |       |                   |       |                  |       |
| Current  assets:                                                                                                                                                                   |       |                   |       |                  |       |
| Cash  and cash equivalents                                                                                                                                                         |       | $                      | 3,215      |                  | $          | 7,489 |   |
| Short-term  investments                                                                                                                                                            |       | 690                    |       | 4,306                 |       |
| Accounts  receivable, net                                                                                                                                                          |       | 20,581                 |       | 19,734                |       |
| Income  tax receivable                                                                                                                                                             |       | 916                    |       | 2,221                 |       |
| Prepaid  expenses                                                                                                                                                                  |       | 3,673                  |       | 3,704                 |       |
| Deferred  income taxes                                                                                                                                                             |       | 3,926                  |       | 3,373                 |       |
| Other  current assets                                                                                                                                                              |       | —                 |       | 1,760                 |       |
| Assets  held for sale                                                                                                                                                              |       | 6,009                  |       | 6,009                 |       |
| Total  current assets                                                                                                                                                              |       | 39,010                 |       | 48,596                |       |
|                                                                                                                                                                               |       |                   |       |                  |       |
| Property,  plant and equipment, net                                                                                                                                                |       | 516,923                |       | 522,493               |       |
|                                                                                                                                                                               |       |                   |       |                  |       |
| Intangible  and other assets:                                                                                                                                                      |       |                   |       |                  |       |
| Customer  relationships, net                                                                                                                                                       |       | 2,936                  |       | 3,847                 |       |
| Goodwill                                                                                                                                                                           |       | 45,814                 |       | 45,814                |       |
| Deferred  charges and other assets                                                                                                                                                 |       | 2,370                  |       | 2,113                 |       |
|                                                                                                                                                                               |       | 51,120                 |       | 51,774                |       |
|                                                                                                                                                                               |       | $                      | 607,053    |                  | $          | 622,863 |   |
|                                                                                                                                                                               |       |                   |       |                  |       |
| **LIABILITIES AND SHAREHOLDERS’ EQUITY**                                                                                                                                      |       |                   |       |                  |       |
| Current  liabilities:                                                                                                                                                              |       |                   |       |                  |       |
| Current  portion of long-term debt                                                                                                                                                 |       | $                      | 15,636     |                  | $          | 15,636 |   |
| Accounts  payable                                                                                                                                                                  |       | 1,657                  |       | 2,547                 |       |
| Other  accrued liabilities                                                                                                                                                         |       | 16,105                 |       | 18,315                |       |
| Advance  billings and deferred revenues                                                                                                                                            |       | 8,272                  |       | 8,580                 |       |
| Accrued  compensation                                                                                                                                                              |       | 7,470                  |       | 9,172                 |       |
| Total  current liabilities                                                                                                                                                         |       | 49,140                 |       | 54,250                |       |
|                                                                                                                                                                               |       |                   |       |                  |       |
| Long-term  debt                                                                                                                                                                    |       | 193,409                |       | 207,409               |       |
| Deferred  income taxes                                                                                                                                                             |       | 56,535                 |       | 54,856                |       |
| Accrued  pension and other post-retirement benefits                                                                                                                                |       | 33,704                 |       | 32,451                |       |
| Other  liabilities and deferred revenues                                                                                                                                           |       | 4,627                  |       | 4,714                 |       |
|                                                                                                                                                                               |       |                   |       |                  |       |
| Commitments  and contingencies                                                                                                                                                     |       |                   |       |                  |       |
|                                                                                                                                                                               |       |                   |       |                  |       |
| Shareholders’  equity:                                                                                                                                                        |       |                   |       |                  |       |
| Common  stock, without par value; 100,000 shares authorized, 13,908 and 14,148 shares  issued and outstanding at September 30, 2010 and December 31, 2009,  respectively |       | 143,696                |       | 146,844               |       |
| Accumulated  other comprehensive loss                                                                                                                                              |       | (15,282                | )          | (15,280               | )          |
| Retained  earnings                                                                                                                                                                 |       | 141,224                |       | 137,619               |       |
| Total  shareholders’ equity                                                                                                                                                   |       | 269,638                |       | 269,183               |       |
|                                                                                                                                                                               |       | $                      | 607,053    |                  | $          | 622,863 |   |

 

Seeaccompanying notes.

 

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**SUREWEST COMMUNICATIONS**

**CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS**

*(Unaudited;Amounts in thousands)*

 
| ** **                                              | ** ** | **Nine Months Ended September 30,** | ** ** |
|---------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                              | ** ** | **2010**                                                | ** ** | **2009** | ** ** |
|                                                    |       |                                                    |       |   |   |
| Net  cash provided by continuing operations             |       | $                                                       | 46,509     |   | $ | 52,571 |   |
| Net  cash used in discontinued operations               |       | —                                                  |       | (514 | ) |
| Net  cash provided by operating activities              |       | 46,509                                                  |       | 52,057 |   |
|                                                    |       |                                                    |       |   |   |
| Cash  flows from investing activities:                  |       |                                                    |       |   |   |
| Proceeds  from sale of discontinued operations          |       | 1,725                                                   |       | 10,947 |   |
| Capital  expenditures for property, plant and equipment |       | (39,271                                                 | )          | (43,363 | ) |
| Proceeds  from sale of property and equipment           |       | —                                                  |       | 850 |   |
| Proceeds  from sale of available-for-sale securities    |       | 3,700                                                   |       | — |   |
| Purchases  of available-for-sale securities             |       | (28                                                     | )          | (25 | ) |
| Net  cash used in investing activities                  |       | (33,874                                                 | )          | (31,591 | ) |
|                                                    |       |                                                    |       |   |   |
| Cash  flows from financing activities:                  |       |                                                    |       |   |   |
| Proceeds  from issuance of long-term debt               |       | 8,069                                                   |       | 10,500 |   |
| Principal  payments on long-term debt                   |       | (22,069                                                 | )          | (25,505 | ) |
| Repurchases  and surrenders of common stock             |       | (2,909                                                  | )          | (1,163 | ) |
| Net  cash used in financing activities                  |       | (16,909                                                 | )          | (16,168 | ) |
|                                                    |       |                                                    |       |   |   |
| Increase  (decrease) in cash and cash equivalents       |       | (4,274                                                  | )          | 4,298 |   |
|                                                    |       |                                                    |       |   |   |
| Cash  and cash equivalents at beginning of period       |       | 7,489                                                   |       | 2,840 |   |
|                                                    |       |                                                    |       |   |   |
| Cash  and cash equivalents at end of period             |       | $                                                       | 3,215      |   | $ | 7,138 |   |

 

Seeaccompanying notes.

 

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**SUREWESTCOMMUNICATIONS**

**NOTESTO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

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

 

**1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**

 

**Businessand Basis of Accounting**

 

SureWest Communications (the“Company”, “we” or “our”) is a holding company with operating subsidiaries thatprovide communications services in Northern California, primarily the greaterSacramento region, and the greater Kansas City, Kansas and Missouri areas (“KansasCity area”). Our operating subsidiaries are SureWest Broadband, SureWestTeleVideo, SureWest Kansas, Inc. (“SureWest Kansas” or the “Kansas Cityoperations”), SureWest Telephone and SureWest Long Distance.

 

As discussed in Note 3, wesold the operating assets of our Wireless business, SureWest Wireless in May 2008and we sold our communication tower assets in February 2009. Accordingly,the financial results of SureWest Wireless and our communication tower assetshave been reported as discontinued operations for all periods presented inaccordance with Financial Accounting Standards Board (“FASB”) AccountingStandards Codification (“ASC”) Topic 360, *Property, Plant andEquipment* (formerly Statement of Financial Accounting Standards (“SFAS”)No. 144, *Accounting for the Impairment or Disposal ofLong-Lived Assets)*. The notes to condensed consolidated financialstatements (“Notes”) reflect historical amounts exclusive of discontinuedoperations, unless otherwise noted.

 

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

 

In the opinion ofmanagement, the accompanying condensed consolidated balance sheets and relatedinterim statements of operations and cash flows include all adjustments,consisting only of normal recurring items, necessary for their fairpresentation in conformity with accounting principles generally accepted in theUnited States (“U.S. GAAP” or “GAAP”) for interim financial information andpursuant to the rules and regulations of the Securities and ExchangeCommission (the “SEC”). Certain information and footnote disclosures normallyincluded in annual financial statements prepared in accordance with U.S. GAAPhave been condensed or omitted pursuant to such SEC rules and regulationsand accounting principles applicable for interim periods. Events subsequent tothe balance sheet date have been evaluated for inclusion in the accompanyingcondensed consolidated financial statements through the date of issuance. Management believes that the disclosures made are adequate to make theinformation presented not misleading. Interim results are not necessarilyindicative of results for a full year. The information presented in this Form 10-Q should be read inconjunction with Management’s Discussion and Analysis of Financial Conditionand Results of Operations and the consolidated financial statements and notesthereto included in our 2009 Annual Report on Form 10-K filed with theSEC.

 

**Reclassifications**

 

Certainamounts in our 2009 condensed consolidated financial statements have beenreclassified to conform to the presentation of our 2010 condensed consolidatedfinancial statements.  Thereclassifications consist of the following:

 

Inventorieshave been reclassified from current assets to property, plant and equipment onthe condensed consolidated balance sheets. Inventories consist primarily of network construction materials andsupplies that when issued are capitalized as part of new customer installationsand the construction of the network. The proportion of the items included ininventories that are capitalized to property, plant and equipment has increasedas a result of the growth in the Broadband business.

 

Operatingexpenses on the condensed consolidated statements of operations have beenreclassified for a change in the classification during the third quarter of2010 of customer technical support costs from customer operations and sellingto cost of services and products. Prior period costs have been reclassified toconform to the current year presentation.

 

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**Property, Plant and Equipment**

 

Property, plant andequipment consisted of the following:

 
| ** **                                      | ** ** | **September 30,  2010** | ** ** | **December 31,  2009** | ** ** | **Estimated  Useful Lives** | ** ** |
|-------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|----------------------------------|------------|
| Land                                            |       | $                            | 2,824      |                        | $          | 2,824                            |       |   |   |
| Buildings                                       |       | 76,526                       |       | 76,363                      |       | 35  years                        |       |
| Central  office equipment                       |       | 328,953                      |       | 312,338                     |       | 3-12  years                      |       |
| Outside  plant equipment                        |       | 491,476                      |       | 481,099                     |       | 5-40  years                      |       |
| Internal-use  software                          |       | 59,431                       |       | 58,714                      |       | 5-7  years                       |       |
| Other                                           |       | 58,558                       |       | 56,974                      |       | 3-25  years                      |       |
| Total  plant in service                         |       | 1,017,768                    |       | 988,312                     |       |                             |       |
| Less  accumulated depreciation and amortization |       | 514,159                      |       | 481,639                     |       |                             |       |
| Plant  in service                               |       | 503,609                      |       | 506,673                     |       |                             |       |
| Plant  under construction                       |       | 8,268                        |       | 10,557                      |       |                             |       |
| Construction  inventory                         |       | 5,046                        |       | 5,263                       |       |                             |       |
| Property,  plant and equipment, net             |       | $                            | 516,923    |                        | $          | 522,493                          |       |   |   |

 

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

 

During the first quarter of2010, we completed our triennial review that evaluated the appropriateness ofthe estimated useful lives of our property, plant and equipment for allsegments.  The evaluation considered ourinvestment and business strategy, reliability and historical performance dataof certain assets, as well as the impacts of competition and anticipatedtechnological change. As a result of this evaluation, effective January 1,2010, we increased the estimated useful lives of general purpose software,general purpose hardware and certain central office equipment. We decreased thelives of certain of our customer premise equipment and outside plantcategories. During the quarter and nine-month period ended September 30,2010, this change in estimate did not have a material effect to consolidateddepreciation expense or net income and is not expected to have a materialimpact for the year ended December 31, 2010.

 

**Intangible Assets**

 

Goodwill and intangibleassets that are not subject to amortization are tested for impairment at leastannually or when events or changes in circumstances indicate that the assetmight be impaired in accordance with FASB ASC Topic 350, *Intangibles-Goodwilland Other*(“ASC 350”)(formerly SFAS No. 142, *Goodwill andother Intangible Assets*). Normally, we perform the annualimpairment test as of November 30. However, as a result of declines in the market price of the Company’scommon stock during the quarter ended June 30, 2010, we concluded thatthis was an indicator of potential impairment of goodwill and for that reasonwe performed an interim goodwill impairment test.

 

We completed the first stepof the interim impairment test, which indicated that the estimated fair value ofthe reporting units was greater than the net carrying value of the reportingunits.  As such, we concluded thatgoodwill was not impaired as of June 30, 2010 and we were not required toperform the second step of the evaluation.

 

At September 30, 2010, wereviewed the various inputs and assumptions applied in our June 30, 2010impairment test to determine if any significant changes had occurred during thethird quarter that would impact the analysis. Based on this review, we concluded that goodwill was not impaired as of September 30,2010.  The Company will perform the required annual goodwill impairmenttest as of November 30, 2010, as mentioned above.

 

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**Stock-based Compensation**

 

***Stock Plan***

 

Our Board of Directors maygrant share-based awards from our shareholder approved Equity Incentive Plan,the 2000 Equity Incentive Plan (the “Stock Plan”), to certain of our employees,outside directors and consultants. The Stock Plan permits issuance of awards inthe form of restricted common stock (“RSAs”), restricted common stock units (“RSUs”),performance shares, stock options and stock appreciation rights. Under the StockPlan, approximately 2.1 million shares of our common stock were authorized forissuance, including those outstanding as of September 30, 2010.

 

***Restricted Common Stock Awardsand 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.

 

Thefollowing table summarizes the grants that occurred under the Stock Plan duringthe quarters and nine-month periods ended September 30, 2010 and 2009:

 
| ** **     | ** ** | **Quarter Ended September 30,** | ** ** | **Nine Months Ended September 30,** | ** ** |
|----------------|------------|------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **     | ** ** | ** **                                     | ** ** | **Grant Date**                                     | ** ** | ** ** | ** ** | **Grant Date** | ** ** | ** ** | ** ** | **Grant Date** | ** ** | ** ** | ** ** | **Grant Date** | ** ** |
| ** **     | ** ** | **2010**                                       | ** ** | **Fair Value**                                     | ** ** | **2009** | ** ** | **Fair Value** | ** ** | **2010** | ** ** | **Fair Value** | ** ** | **2009** | ** ** | **Fair Value** | ** ** |
|           |       |                                           |       |                                                    |       |   |   |   |   |   |   |   |   |   |   |   |   |
| RSAs  Granted  |       | —                                         |       | $                                                       | —     |   | — |   | $ | — |   | 217,575 |   | $ | 9.95 |   | 166,506 |   | $ | 11.56 |   |
| RSUs  Granted  |       | —                                         |       | $                                                       | —     |   | — |   | $ | — |   | 92,709 |   | $ | 9.95 |   | 72,443 |   | $ | 11.56 |   |
| RSU  Dividends |       | —                                         |       | $                                                       | —     |   | 500 |   | $ | 11.86 |   | — |   | $ | — |   | 8,470 |   | $ | 9.79 |   |
| Total          |       | —                                         |       |                                                    |       | 500 |   |   |   | 310,284 |   |   |   | 247,419 |   |   |   |

 

RSUDividends consist of dividends that were previously granted to the holders ofRSUs, which have fully vested and were released during the quarter andnine-month period ended September 30, 2009 (none in the quarter ornine-month period ended September 30, 2010) in accordance with theunderlying award agreement.  Stock-based compensationexpense for both RSAs and RSUs of $267 and $2,211, which included the costs toaccelerate certain RSAs in accordance with the workforce reduction initiativeas described below, was recorded during the quarter and nine-month period endedSeptember 30, 2010, respectively. During the same prior year periods, we recorded stock-based compensationexpense of $443 and $1,515, respectively.

 

The following table summarizes theRSA and RSU activity during the nine-month period ended September 30,2010:

 
| ** **                         | ** ** | ** ** | ** ** | **Weighted Average**                | ** ** |
|------------------------------------|------------|------------|------------|------------------------------------------|------------|
| ** **                         | ** ** | **Shares** | ** ** | **Grant Date Fair Value** | ** ** |
|                               |       |       |       |                                     |       |
| Nonvested-January 1,  2010    |       | 349,916    |       | $                                        | 12.90      |   |
| Granted                            |       | 310,284    |       | $                                        | 9.95       |   |
| Vested                             |       | (152,792   | )          | $                                        | 11.40      |   |
| Forfeited                          |       | (4,813     | )          | $                                        | 11.03      |   |
| Nonvested-September 30,  2010 |       | 502,595    |       | $                                        | 11.55      |   |

 

Asof September 30, 2010, total unrecognized compensation costs related tononvested restricted stock was $4,930 and will be recognized over aweighted-average period of approximately 2.53 years. The total fair value ofRSAs and RSUs vested during the nine-month period ended September 30, 2010was $1,742.

 

***Stock Options***

 

In2003, we ceased granting stock options and have since granted RSAs and RSUs aspart of our equity compensation plan. 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

 

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ofthe grant. The term of any stock option shall not exceed ten years.  There were no stock options granted orexercised during the quarters or nine-month periods ended September 30,2010 and 2009. The aggregate intrinsic value is calculated as the differencebetween the exercise price of the stock options and the quoted price of ourcommon stock.  There were no options thatwere in-the-money as of September 30, 2010 and 2009.

 

Thefollowing table summarizes stock option activity for the nine-month periodended September 30, 2010:

 
| ** **                                         | ** ** | ** ** | ** ** | **Weighted** | ** ** | **Weighted**              | ** ** |
|----------------------------------------------------|------------|------------|------------|--------------|------------|---------------------------|------------|
| ** **                                         | ** ** | ** ** | ** ** | **Average**  | ** ** | **Average**               | ** ** |
| ** **                                         | ** ** | ** ** | ** ** | **Exercise** | ** ** | **Remaining**             | ** ** |
| **Options**                                        | ** ** | **Shares** | ** ** | **Price**    | ** ** | **Contractual Life** | ** ** |
|                                               |       |       |       |         |       |                      |       |
| Outstanding-January 1,  2010                  |       | 318,389    |       | $            | 40.45      |                      |       |   |
| Expired                                            |       | (155,337   | )          | —       |       |                      |       |
| Outstanding-September 30,  2010               |       | 163,052    |       | $            | 40.92      |                      | 1          |   |
| Vested  and Exercisable at September 30, 2010 |       | 163,052    |       | $            | 40.92      |                      | 1          |   |

 

**Earnings Per Share**

 

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

 

**Other****Comprehensive Income**

 

Significant components ofour other comprehensive income are as follows:

 
| ** **                                                                 | ** ** | **Quarter Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|----------------------------------------------------------------------------|------------|--------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                 | ** ** | **2010**                                   | ** ** | **2009**                                            | ** ** | **2010** | ** ** | **2009** | ** ** |
| Net  income (loss)                                                         |       | $                                          | 1,404      |                                                | $          | (211 | ) | $ | 1,404 |   | $ | 3,266 |   |
| Unrealized  gain (loss) on available-for-sale investments, net of tax      |       | 56                                         |       | (5                                                  | )          | (2 | ) | (40 | ) |
| Reclassification  adjustment for losses included in net income, net of tax |       | —                                     |       | —                                              |       | — |   | 16 |   |
| Comprehensive  income (loss)                                               |       | $                                          | 1,460      |                                                | $          | (216 | ) | $ | 1,402 |   | $ | 3,242 |   |

 

Accumulated othercomprehensive loss consists of adjustments, net of tax, related to unrealizedlosses on available-for-sale securities and minimum pension and post-retirementbenefits.

 

**Severance and Termination Costs**

 

In an effort to improveoperating efficiencies and align operating costs, during the quarter ended June 30,2010 we implemented a workforce reduction initiative in which approximately 60positions were eliminated.  Affectedemployees were provided a range of benefits and resources, including severancepayments and the acceleration of unvested stock awards (collectively “severancecosts”).  As a result, severance costs of$1,428 were recorded to the statements of operations during the nine monthsended September 30, 2010, primarily to general and administrativeexpense.  Severance costs ofapproximately $613 and $815 were recorded to the Broadband andTelecommunications (“Telecom”) segments, respectively. During the quarter andnine months ended September 30, 2010, the liability for accrued severancecosts was reduced by $346 and $1,125, respectively.  As of September 30, 2010, we had anaccrued liability of $19 relating to the severance costs. We anticipate theremaining severance costs will be finalized prior to December 31, 2010.

 

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**2.     FAIR VALUE MEASUREMENTS & FINANCIAL INSTRUMENTS**

 

*Investments*

 

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

 
| ** **         | ** ** | **As of September 30, 2010** | ** ** | **As of December 31, 2009** | ** ** |
|--------------------|------------|--------------------------------------------------|------------|-------------------------------------------------|------------|
| ** **         | ** ** | **Adjusted  Cost**                               | ** ** | **Gross  Unrealized  Gains**                    | ** ** | **Gross  Unrealized  Losses** | ** ** | **Estimated  Fair  Market  Value** | ** ** | **Adjusted  Cost** | ** ** | **Gross  Unrealized  Gains** | ** ** | **Gross  Unrealized  Losses** | ** ** | **Estimated  Fair  Market  Value** | ** ** |
| Equity  securities |       | $                                                | 717        |                                            | $          | — |   | $ | (27 | ) | $ | 690 |   | $ | 654 |   | $ | — |   | $ | (23 | ) | $ | 631 |   |
|                    |            |                                                  |            |                                                 |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Asof September 30, 2010 and December 31, 2009, the decline in the fairvalue of our short-term available-for-sale investments had been in a continuousloss position for more than twelve months. We concluded that the gross unrealized losses of our equity securitieswere temporary and we have the ability and intent to hold the investments untilat least substantially all of the costs of the investment are recovered.  The unrealized losses, net of tax, on ourshort-term available-for-sale investments were recorded as a component of othercomprehensive income. We determined the fair value of our short-term equitysecurity investments by quoted market prices.

 

*CostMethod Investments*

 

Weheld $1,115 and $772 in cost method investments which were included in otherlong-term assets in the condensed consolidated balance sheets as of September 30,2010 and December 31, 2009, respectively. Our cost method investmentsprimarily consist of our investment in CoBank, ACB (“CoBank”) and is related topatronage distributions of restricted equity. Our investment in CoBank is required in accordance with the provisionsof our Credit Agreement (see Note 8) held by CoBank.  We periodically monitor our investments forimpairment and will record reductions in carrying values if and whennecessary.  We did not estimate the fairvalue of the cost method investments as no events or changes in circumstancesthat may have a significant adverse effect on the fair value of the investmentwere identified during the quarter or nine-month period ended September 30,2010. We determined, in accordance with ASC Topic 825, *FinancialInstruments* (formerly SFAS No. 107, *Fair ValueDisclosures About Financial Instruments)*, that it was notpracticable to estimate the fair value of the investments.

 

*Fair Value of Financial Instruments*

 

In accordance with ASC Topic820, *Fair Value Measurements and Disclosures*(“ASC 820”) (formerly SFAS No. 157, *Fair Value Measurements*),we measure our cash equivalents (money market funds) and short-term investments(equity securities, auction rate security (“ARS”) and put option) at fairvalue.  ASC 820 clarifies that fair valueis an exit price, representing the amount that would be received to sell anasset or paid to transfer a liability in an orderly transaction between marketparticipants. As such, fair value is a market-based measurement that should bedetermined based on assumptions that market participants would use in pricingan asset or a liability. A financial asset or liability’s classification withinthe hierarchy is determined based on the lowest level input that is significantto the fair value measurement. As a basis for considering such assumptions, ASC820 establishes a three-tier value hierarchy, which prioritizes the inputs usedin the valuation methodologies in measuring fair value:

 

Level 1— Observable inputs that reflect quoted prices (unadjusted) for identicalassets or liabilities in active markets.

 

Level 2— Inputs that reflect quoted prices in active markets for similar assets orliabilities, quoted prices for identical or similar assets or liabilities ininactive markets and inputs other than quoted prices that are directly orindirectly observable in the marketplace.

 

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

 

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

 
| ** **          | ** ** | **As of September 30, 2010** | ** ** |
|---------------------|------------|--------------------------------------------------|------------|
| ** **          | ** ** | **Total**                                        | ** ** | **Level 1** | ** ** | **Level 2** | ** ** | **Level 3** | ** ** |
| Money  market funds |       | $                                                | 83         |   | $ | 83 |   | $ | — |   | $ | — |   |
| Equity  securities  |       | 690                                              |       | 690 |   | — |   | — |   |
|                |       | $                                                | 773        |   | $ | 773 |   | $ | — |   | $ | — |   |

 
| ** **               | ** ** | **As of December 31, 2009** | ** ** |
|--------------------------|------------|-------------------------------------------------|------------|
| ** **               | ** ** | **Total**                                       | ** ** | **Level 1** | ** ** | **Level 2** | ** ** | **Level 3** | ** ** |
| Money  market funds      |       | $                                               | 5,346      |   | $ | 5,346 |   | $ | — |   | $ | — |   |
| Equity  securities       |       | 631                                             |       | 631 |   | — |   | — |   |
| Auction  rate securities |       | 3,054                                           |       | — |   | — |   | 3,054 |   |
| Put  option (Right)      |       | 621                                             |       | — |   | — |   | 621 |   |
|                     |       | $                                               | 9,652      |   | $ | 5,977 |   | $ | — |   | $ | 3,675 |   |

 

Fairvalues for cash equivalents and equity securities in short-term investmentswere determined by quoted market prices. Fair value of the ARS and put optionwere determined based on discounted cash flow models.  See the discussion below regarding the ARSand put option.

 

Thefollowing table provides a reconciliation of the beginning and ending balancesfor the assets measured at fair value using significant unobservable inputs(Level 3):

 
| ** **                             | ** ** | **2010**            | ** ** | **2009**                          | ** ** |
|----------------------------------------|------------|---------------------|------------|-----------------------------------|------------|
| ** **                             | ** ** | **Put Option** | ** ** | **Auction Rate  Securities** | ** ** | **Put Option** | ** ** | **Auction Rate  Securities** | ** ** |
| Beginning  balance at January 1st |       | $                   | 621        |                              | $          | 3,054 |   | $ | 1,383 |   | $ | 2,125 |   |
| Sale  of auction rate security         |       | —              |       | (3,700                            | )          | — |   | — |   |
| Gains  (losses) included in earnings   |       | (621                | )          | 646                               |       | (745 | ) | 745 |   |
| Balance  at March 31st            |       | $                   | —     |                              | $          | — |   | $ | 638 |   | $ | 2,870 |   |
| Gains  (losses) included in earnings   |       | —              |       | —                            |       | (41 | ) | 162 |   |
| Balance  at June 30th             |       | $                   | —     |                              | $          | — |   | $ | 597 |   | $ | 3,032 |   |
| Gains  (losses) included in earnings   |       | —              |       | —                            |       | 24 |   | 22 |   |
| Balance  at September 30th        |       | $                   | —     |                              | $          | — |   | $ | 621 |   | $ | 3,054 |   |

 

Asof December 31, 2009, we held one $3,700 par value ARS purchased from UBSFinancial Services, Inc., a subsidiary of UBS AG (“UBS”) with an estimatedfair value of $3,054, which was measured using Level 3 inputs. This ARS wascollateralized by student loans that are guaranteed primarily by a monolineinsurance company and partially by the Federal Family Education Loan Program (“FFELP”).As of December 31, 2009, we also held an offer (“Right” or “put option”)entitling us to sell at par our ARS anytime during a two-year period fromJune 30, 2010 through July 2, 2012.

 

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

 

On January 6, 2010, UBSexercised their rights under the Right to purchase our ARS at par of $3,700 andwe recorded a gain of $646 on the ARS to other income (expense), other, net inthe condensed consolidated statements of income during the quarter ended March 31,2010.  The gain was largely offset by aloss of $621 recorded on the Right resulting from the cancellation of our putoption under the Right.

 

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*FairValue of Debt*

 

We had no short-term borrowingsas of September 30, 2010 and December 31, 2009. The fair value of ourlong-term debt was estimated using discounted cash flow analyses based onincremental borrowing rates for similar types of borrowing arrangements.

 
| ** **                                     | ** ** | **As of September 30, 2010** | ** ** | **As of December 31, 2009** | ** ** |
|------------------------------------------------|------------|--------------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                                     | ** ** | **Carrying Value**                          | ** ** | **Fair Value**                             | ** ** | **Carrying Value** | ** ** | **Fair Value** | ** ** |
| Long-term  debt (including current maturities) |       | $                                                | 209,045    |                                            | $          | 213,953 |   | $ | 223,045 |   | $ | 221,323 |   |
|                                                |            |                                                  |            |                                                 |            |  |  |  |  |  |  |  |  |

 

**3.     DIVESTITURES**

 

*SureWestWireless*

 

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.  A portion of the purchase price equal to$3,450 was placed in escrow, half of which was received during the quarterended June 30, 2009 and the balance of which was received during thequarter ended June 30, 2010.  Duringthe quarter ended March 31, 2009, the gain on sale was increased by $43,net of tax, as a result of changes in estimated transaction costs. As part ofthe sale, Verizon acquired the spectrum licenses and operating assets ofSureWest Wireless, excluding our owned communication towers.  See the Communication Tower Assets sectionbelow for further discussion regarding our owned communication towers.  SureWest Wireless was previously reported asa separate reportable segment.

 

*CommunicationTower Assets*

 

In February 2009, wesold 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, resulting in a gain of $2,525,net of tax.

 

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

 

The following tablesummarizes the financial information for the operations of the Tower Assets:

 
| ** **                                                  | ** ** | **Nine Months Ended  September 30, 2009** | ** ** |
|-------------------------------------------------------------|------------|---------------------------------------------------------------|------------|
| Operating  revenues                                         |       | $                                                             | 249        |   |
| Operating  expenses including depreciation and amortization |       | 365                                                           |       |
| Loss  from operations                                       |       | (116                                                          | )          |
| Income  tax benefit                                         |       | (47                                                           | )          |
| Loss  from discontinued operations                          |       | $                                                             | (69        | ) |
|                                                        |       |                                                          |       |
| Gain  on sale of discontinued operations, net of tax        |       | $                                                             | 2,525      |   |

 

*AssetsHeld For Sale*

 

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

 

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The following is thecarrying value of the assets held for sale as of September 30, 2010 and December 31,2009:

 
| ** **        | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|-------------------|------------|------------------------|------------|-----------------------|------------|
| ** **        | ** ** | **2010**               | ** ** | **2009**              | ** ** |
| Undeveloped  land |       | $                      | 1,556      |                  | $          | 1,556 |   |
| Office  building  |       | 4,453                  |       | 4,453                 |       |
|              |       | $                      | 6,009      |                  | $          | 6,009 |   |

 

We expect that the land willsell in the range of $3,000 to $5,000. In connection with the classification toassets held for sale, the carrying value of the office building was reduced toits estimated fair value, less selling costs, based on the current marketconditions and listed selling price. As a result, an impairment charge of$1,199 was recorded against accumulated depreciation during the quarter ended December 31,2009, in accordance with regulated telephone plant and equipment compositegroup remaining life methodology.  Weevaluated the estimated fair value of the assets held for sale as of September 30,2010 and determined there was not a significant change.  Therefore, no additional impairment chargewas recorded during the quarter or nine month period ended September 30,2010.

 

**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 interest income associated with cashand investments held by Corporate Operations is included in the results of theoperations of our segments.

 

The Broadband segmentincreasingly expands its use of optical fiber. As a result, we have expanded our use of fiber-to-the-premise andfiber-to-the-node networks to offer many of our bundled residential andcommercial services that include Internet Protocol-based digital andhigh-definition television, high-speed internet, Voice over Internet Protocoland local and long distance telephone in the greater Sacramento region andKansas City area*.*

 

The Telecom segment, whichoperates only in the Sacramento area, offers a broad selection oftelecommunications services including traditional circuit-switched voiceservices, long distance services and a number of lightly-regulated ornon-regulated services. Customers in the Telecom segment can select individualservices or bundled packages that may include unlimited local calling orunlimited local and domestic long distance calling plans.  Our voice products also include value-addedservices such as voicemail, call waiting, caller identification and many othercalling feature options.  Most longdistance services are offered by our subsidiary SureWest Long Distance, whichis a reseller of long distance services.

 

These segments are strategicbusiness units that offer different products and services. The accountingpolicies of these segments are the same as those described in Note 1 (refer tonotes to the consolidated financial statements included in our 2009 AnnualReport on Form 10-K filed with the SEC for a more detailed discussion ofour accounting policies). We account for intersegment revenues and expenses atprevailing market rates.

 

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Our business segmentinformation is as follows:

 
| ** **                                                   | ** ** | ** **    | ** ** | ** **  | ** ** | **Intercompany** | ** ** | ** **       | ** ** |
|--------------------------------------------------------------|------------|---------------|------------|-------------|------------|------------------|------------|------------------|------------|
| ** **                                                   | ** ** | **Broadband** | ** ** | **Telecom** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| **For the three months ended September 30, 2010:** |       |          |       |        |       |             |       |             |       |
| Operating  revenues from external customers                  |       | $             | 43,861     |        | $          | 17,256           |       | $                | —     |   | $ | 61,117 |   |
| Intersegment  revenues                                       |       | 110           |       | 5,275       |       | (5,385           | )          | —           |       |
| Operating  expenses                                          |       |          |       |        |       |             |       |             |       |
| Cost  of services and products*                              |       | 25,719        |       | 5,677       |       | (4,724           | )          | 26,672           |       |
| Customer  operations and selling                             |       | 4,940         |       | 2,621       |       | (533             | )          | 7,028            |       |
| General  and administrative                                  |       | 3,645         |       | 3,203       |       | (128             | )          | 6,720            |       |
| Depreciation  and amortization                               |       | 12,609        |       | 3,071       |       | —           |       | 15,680           |       |
| Income  (loss) from operations                               |       | (2,942        | )          | 7,959       |       | —           |       | 5,017            |       |
| Income  (loss) from continuing operations                    |       | $             | (3,082     | )           | $          | 4,486            |       | $                | —     |   | $ | 1,404 |   |

 

----

*Exclusive of depreciationand amortization

 
| ** **                                              | ** ** | ** **    | ** ** | ** **  | ** ** | **Intercompany** | ** ** | ** **       | ** ** |
|---------------------------------------------------------|------------|---------------|------------|-------------|------------|------------------|------------|------------------|------------|
| ** **                                              | ** ** | **Broadband** | ** ** | **Telecom** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| **For the three months ended September 30, 2009:** |       |          |       |        |       |             |       |             |       |
| Operating  revenues from external customers             |       | $             | 40,175     |        | $          | 19,354           |       | $                | —     |   | $ | 59,529 |   |
| Intersegment  revenues                                  |       | 93            |       | 5,043       |       | (5,136           | )          | —           |       |
| Operating  expenses                                     |       |          |       |        |       |             |       |             |       |
| Cost  of services and products*                         |       | 23,320        |       | 6,478       |       | (4,348           | )          | 25,450           |       |
| Customer  operations and selling                        |       | 6,532         |       | 2,240       |       | (642             | )          | 8,130            |       |
| General  and administrative                             |       | 4,763         |       | 3,456       |       | (146             | )          | 8,073            |       |
| Depreciation  and amortization                          |       | 12,199        |       | 3,061       |       | —           |       | 15,260           |       |
| Income  (loss) from operations                          |       | (6,546        | )          | 9,162       |       | —           |       | 2,616            |       |
| Income  (loss) from continuing operations               |       | $             | (5,619     | )           | $          | 5,408            |       | $                | —     |   | $ | (211 | ) |

 

----

*Exclusive of depreciationand amortization

 
| ** **                                             | ** ** | ** **    | ** ** | ** **  | ** ** | **Intercompany** | ** ** | ** **       | ** ** |
|--------------------------------------------------------|------------|---------------|------------|-------------|------------|------------------|------------|------------------|------------|
| ** **                                             | ** ** | **Broadband** | ** ** | **Telecom** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| **For the nine months ended September 30, 2010:** |       |          |       |        |       |             |       |             |       |
| Operating  revenues from external customers            |       | $             | 129,514    |        | $          | 52,339           |       | $                | —     |   | $ | 181,853 |   |
| Intersegment  revenues                                 |       | 423           |       | 15,285      |       | (15,708          | )          | —           |       |
| Operating  expenses                                    |       |          |       |        |       |             |       |             |       |
| Cost  of services and products*                        |       | 75,008        |       | 17,407      |       | (13,644          | )          | 78,771           |       |
| Customer  operations and selling                       |       | 16,886        |       | 7,320       |       | (1,664           | )          | 22,542           |       |
| General  and administrative                            |       | 13,550        |       | 11,146      |       | (400             | )          | 24,296           |       |
| Depreciation  and amortization                         |       | 36,929        |       | 9,119       |       | —           |       | 46,048           |       |
| Income  (loss) from operations                         |       | (12,436       | )          | 22,632      |       | —           |       | 10,196           |       |
| Income  (loss) from continuing operations              |       | $             | (11,071    | )           | $          | 12,475           |       | $                | —     |   | $ | 1,404 |   |

 

----

*Exclusive of depreciation and amortization

 

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| ** **                                             | ** ** | ** **    | ** ** | ** **  | ** ** | **Intercompany** | ** ** | ** **       | ** ** |
|--------------------------------------------------------|------------|---------------|------------|-------------|------------|------------------|------------|------------------|------------|
| ** **                                             | ** ** | **Broadband** | ** ** | **Telecom** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| **For the nine months ended September 30, 2009:** |       |          |       |        |       |             |       |             |       |
| Operating  revenues from external customers            |       | $             | 119,656    |        | $          | 61,745           |       | $                | —     |   | $ | 181,401 |   |
| Intersegment  revenues                                 |       | 278           |       | 14,898      |       | (15,176          | )          | —           |       |
| Operating  expenses                                    |       |          |       |        |       |             |       |             |       |
| Cost  of services and products*                        |       | 70,074        |       | 19,963      |       | (12,773          | )          | 77,264           |       |
| Customer  operations and selling                       |       | 18,229        |       | 6,765       |       | (1,966           | )          | 23,028           |       |
| General  and administrative                            |       | 15,301        |       | 11,396      |       | (437             | )          | 26,260           |       |
| Depreciation  and amortization                         |       | 35,102        |       | 9,196       |       | —           |       | 44,298           |       |
| Income  (loss) from operations                         |       | (18,772       | )          | 29,323      |       | —           |       | 10,551           |       |
| Income  (loss) from continuing operations              |       | $             | (15,901    | )           | $          | 16,668           |       | $                | —     |   | $ | 767 |   |

 

----

*Exclusive of depreciationand amortization

 

**5.     REGULATORY MATTERS**

 

Certainof our interstate telecommunications service rates are subject to regulation bythe Federal Communications Commission (“FCC”). Interstate switched and specialaccess rates are established through a SureWest Telephone tariff filed with theFCC.  For interstate common line (“CL”)charges, SureWest Telephone concurs with tariffs filed by the National ExchangeCarrier Association (“NECA”).  Intrastateservice rates are subject to regulation by state commissions.  Prices for intrastate telecommunicationsservices are established through tariffs or through other regulatorymechanisms, including, in California, service guides.  Pending and future regulatory actions mayhave a material impact on our consolidated financial position and results ofoperations.

 

*FCC Matters*

 

Undercurrent FCC rules governing rate making, SureWest Telephone is required toestablish rates for its interstate telecommunications services based onprojected demand usage for the various services.  SureWest Telephone projects its earningsthrough the use of annual cost separation studies, which utilize estimatedtotal cost information and projected demand usage. Carriers are required tofollow FCC rules in the preparation of these annual studies.  SureWest Telephone determines actual earningsfrom its interstate rates as actual volumes and costs become known.  The FCC monitors SureWest Telephone’sinterstate earnings.

 

Asa result of periodic cost separation studies required by the FCC, SureWestTelephone changed its estimates for certain NECA CL accounts receivablebalances related to the current and prior year monitoring periods.  During the quarter and nine-month period endedSeptember 30, 2009, these changes in estimates decreased our consolidatedrevenues and income from continuing operations by $583 and $562 and net incomeby $335 ($0.02 per share) and $323 ($0.02 per share), respectively.  We did not record any significant changes inestimates during the quarter and nine-month period ended September 30,2010.

 

*California Public Utility Commission (“CPUC”) Matters*

 

In 2004, we entered into asettlement agreement (the “Settlement Agreement”), which was ultimatelyapproved by the CPUC, to resolve an ongoing regulatory proceeding with variousparties.  The Settlement Agreementresolved past sharing liabilities and suspended future sharing requirements inthe intrastate jurisdiction.  In accordancewith the Settlement Agreement, SureWest Telephone returned approximately$6,500, plus interest, to its end-users through a consumer dividend.  The surcredit was recorded as a reduction ofour contractual shareable earnings obligations over a period of approximatelyfour years, which began January 1, 2005. During the first quarter of 2009 and prior to the cessation of thesurcredit on February 9, 2009, we returned approximately $165.

 

As part of the SettlementAgreement, SureWest Telephone was required to implement an additional annualconsumer dividend of $1,300 on January 1, 2007 to end-users receivingSureWest Telephone services subject to sharing on or after that date.  In December 2006, the CPUC authorized usto offset our annual $11,500 interim draw from the California High Cost Fund (“CHCF”)with the aforementioned $1,300 consumer dividend Settlement Agreement.  The CHCF was previously authorized by theCPUC on an interim basis to offset certain of SureWest Telephone’s intrastateregulated operating expenses that previously had been recovered through directcarrier payments.  In September 2007,the CPUC issued Decision 07-09-002 which provides for SureWest Telephone tophase-down its

 

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annual CHCF interim drawover a five-year period, to end on January 1, 2012.  In 2009, our interim CHCF draw was $6,120 andis being incrementally reduced by $2,040 annually.

 

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 limits increases to $3.25 peryear during 2009 and 2010, (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.  Beginning January 1,2011, the URF Incumbent Local Exchange Carriers will be allowed full pricingflexibility for the basic residential rate.

 

**6.     INCOME TAXES**

 

Our effective federal incometax rates for continuing operations were 62.5% and 66.4% for the nine-monthperiods ended September 30, 2010 and 2009, respectively. For thenine-month period ended September 30, 2010, our actual tax expensediffered from the federal statutory rate primarily due to state taxes,permanent differences resulting from the decrease between the grant and vestingprices of RSAs and RSUs that vested during the period and a change to statedeferred tax expense attributable to apportionment changes.

 

Our policy is to recognizeinterest and penalties related to uncertain tax positions as additional incometax expense.  We did not accruesignificant amounts of interest and penalties related to unrecognized taxbenefits during the nine-month periods ended September 30, 2010 and2009.  As of September 30, 2010, wehad approximately $133 of accrued interest and approximately $28 of penaltiesin the amount disclosed below for unrecognized tax benefits.

 

We had a liability forunrecognized tax benefits of approximately $261 and $203 at September 30,2010 and December 31, 2009, respectively. The following table provides a reconciliation of the beginning andending amount of unrecognized tax benefits during the nine-month period ended September 30,2010:

 
| Balance  at December 31, 2009           |   | $  | 203    |   |
|----------------------------------------------|--------|----|--------|--------|
| Additions  based on prior year tax positions |   | 58 |   |
| Balance  at September 30, 2010          |   | $  | 261    |   |

 

The total amount ofunrecognized tax benefits that, if recognized, would affect the effective taxrate were $187 and $129 at September 30, 2010 and December 31, 2009,respectively.

 

As of September 30,2010, the following tax years and related taxing jurisdictions were open:

 
| **Tax Year** | ** ** | **Taxing Jurisdiction** | ** ** |
|-------------------|------------|------------------------------|------------|
| 2002 - 2009       |       | Federal                      |       |
| 2004 - 2009       |       | California                   |       |
| 2006 - 2009       |       | Kansas and Missouri          |       |

 

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

 

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

 

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

 

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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.

 

Weamended our Pension Plan, SERP and Other Benefits Plan (collectively the “Plans”),effective April 1, 2007, which froze the Plans so that no person iseligible to become a new participant on or following that date and all futurebenefit accruals for existing participants under the Plans cease.

 

Weaccount for our Pension Plan in accordance with ASC Topic 715, *Compensation — Retirement Benefits* (“ASC 715”) (formerlySFAS No. 158, *Employers’ Accounting forDefined Benefit Pension and Other Post-retirement Plans, an Amendment of FASBStatements No. 87, 88, 106 and 132(R)*).  ASC 715 requires an employer to recognize theoverfunded or underfunded status of a defined benefit post-retirement plan asan asset or liability in its statement of financial position, to recognizechanges in that funded status in the year in which the changes occur throughcomprehensive income and to measure the funded status of a plan as of the dateof its year-end statement of financial position.

 

**Components of Net PeriodicPension Cost**

 

The following tablesummarizes the benefit costs related to our Pension and SERP Plans:

 
| **Quarter ended September 30,** | ** ** | **2010** | ** ** | **2009** | ** ** |
|------------------------------------------------|------------|----------|------------|----------|------------|
| Interest  cost on projected benefit obligation |       | $        | 1,792      |     | $          | 1,809 |   |
| Expected  return on plan assets                |       | (1,820   | )          | (1,672   | )          |
| Amortization  of:                              |       |     |       |     |       |
| Prior  Service Cost                            |       | 1        |       | 1        |       |
| Net  actuarial loss                            |       | 543      |       | 648      |       |
| Net  periodic pension expense                  |       | $        | 516        |     | $          | 786 |   |

 
| **Nine months ended September 30,** | ** ** | **2010** | ** ** | **2009** | ** ** |
|---------------------------------------------------------|------------|----------|------------|----------|------------|
| Interest  cost on projected benefit obligation          |       | $        | 5,376      |     | $          | 5,426 |   |
| Expected  return on plan assets                         |       | (5,460   | )          | (5,014   | )          |
| Amortization  of:                                       |       |     |       |     |       |
| Prior  service cost                                     |       | 2        |       | 2        |       |
| Net  actuarial loss                                     |       | 1,630    |       | 1,944    |       |
| Net  periodic pension expense                           |       | $        | 1,548      |     | $          | 2,358 |   |

 

Net periodic benefit costsrelated to the Other Benefits Plan were not significant to our condensedconsolidated financial statements for the quarters or nine-month periods ended September 30,2010 and 2009.

 

**8.     CREDIT ARRANGEMENTS**

 

A summary of our long-termdebt is as follows:

 
| ** **                            | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|---------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                            | ** ** | **2010**               | ** ** | **2009**              | ** ** |
| Series A  Senior Notes           |       | $                      | 14,545     |                  | $          | 14,545 |   |
| Series B  Senior Notes           |       | 36,000                 |       | 48,000                |       |
| Term  Loan A credit facility          |       | 120,000                |       | 120,000               |       |
| Term  Loan B credit facility          |       | 30,000                 |       | 30,000                |       |
| Revolving  Loan credit facility       |       | 8,500                  |       | 10,500                |       |
| Total  long-term debt                 |       | 209,045                |       | 223,045               |       |
| Less  current portion                 |       | 15,636                 |       | 15,636                |       |
| Total  long-term debt, net of current |       | $                      | 193,409    |                  | $          | 207,409 |   |

 

Our long-term debt consistsof unsecured Senior Notes and an unsecured Third Amended and Restated CreditAgreement (“Credit Agreement”) with CoBank. The Credit Agreement includes termand revolving loan facilities.

 

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On January 29, 2010, weentered into a letter agreement with CoBank amending certain terms of theCredit Agreement. The Credit Agreement included a provision which requiredpermanent reductions of the Revolving Loan facility of $7,500 at December 31,2009 and 2010. The letter agreement amended those provisions and included (i) anincrease in the total Revolving Loan facility of $7,500, (ii) CoBank’s share ofthe Revolving Loan facility will be permanently reduced by $5,000 (rather than$7,500) on December 31, 2010 and (iii) the total Revolving Loan facilitywill be $57,500.  As a result of thisletter agreement, our combined revolving commitment balance on our RevolvingLoan and Swingline Loan facilities is $60,000 and our available balance as of September 30,2010, which was less our outstanding balance of $8,500, was approximately$51,500.

 

Our Series A and Series BSenior Notes and the Credit Agreement contain financial and operating covenantsthat may restrict, among other things, the repurchase of the Company’s commonstock, the payment of dividends, the making of certain other restrictedpayments and the incurrence of additional indebtedness. The covenants alsorequire us to maintain certain financial ratios and minimum levels of tangiblenet worth. If we fail to comply with the covenants and other restrictions, suchas making timely interest or principal payments, it could lead to an event ofdefault and the acceleration of our obligations under those agreements. As of September 30,2010, we were in compliance with all of our debt covenants.

 

Our financial covenants asdefined in the Series A and Series B Senior Notes and the CreditAgreement, measured quarterly, are as follows:

 
| **Financial Covenant** | ** ** | **Required Ratio Level** | ** ** | **Actual Performance at  September 30, 2010** | ** ** |
|-----------------------------|------------|------------------------------------|------------|-------------------------------------------------------------------|------------|
| Leverage  ratio             |       | Not  more than 3.75                |       | 2.7                                                               |       |
| Interest  coverage ratio    |       | Not  less than 3.00                |       | 8.5                                                               |       |
| Consolidated  net worth     |       | Not  less than $160,000            |       | $269,638                                                          |       |
| Debt  to capitalization     |       | Not  more than 0.55                |       | 0.44                                                              |       |

 

At September 30, 2010and December 31, 2009, retained earnings of $109,638 and $109,183,respectively, were available for the payments described above.

 

**9.     COMMITMENTS AND CONTINGENCIES**

 

**Litigation, RegulatoryProceedings and Other Contingencies**

 

Weare subject to certain legal proceedings, Internal Revenue Serviceexaminations and other income tax exposures and other claims arising in theordinary course of our business. In the opinion of management, the ultimateoutcome of these matters will not materially affect our consolidated financialposition, results of operations or cash flows.

 

We are also subject to anumber of regulatory proceedings at the federal and state levels that may havea material impact on our operations. The FCC and state commissions haveauthority to issue rules and regulations related to our business.  A number of proceedings are pending oranticipated that are related to such telecommunications issues as competition,interconnection, access charges, intercarrier compensation, broadbanddeployment, consumer protection and universal service reform.  Proceedings that relate to our cabletelevision operations include rulemakings on set top boxes, access to andcarriage of programming, industry consolidation and ways to promote additionalcompetition.  The FCC has also initiatedproceedings related to the terms and conditions under which Internet access isoffered.  Some FCC proceedings mayauthorize new services to compete with one or more of our services.  There are various on-going legal challengesto the scope or validity of regulatory orders that have been issued.  As a result, it is not yet possible todetermine fully the impact of the related FCC and state rules andregulations on our operations.

 

**10.****      ****RECENT ACCOUNTING PRONOUNCEMENTS**

 

**Recently Issued Accounting Pronouncements**

 

InJuly 2010, the FASB issued Accounting Standards Update (“ASU”) No. 2010-20,*Receivables (Topic 310) -**Disclosures about the Credit Quality of Financing Receivables and theAllowance for Credit Losses* (“ASU 2010-20”). ASU 2010-20 requiresentities to provide additional disclosures concerning financing receivables andallowance for credit losses. Specifically, the new disclosures include (i) the nature of creditrisk inherent in the entity’s portfolio of financing receivables, (ii) thefactors considered in analyzing such risk in arriving at the allowance forcredit losses and (iii) the changes and reasons for those changes in theallowance for credit losses. Public entities are required to adopt theprovisions of ASU 2010-20 related to disclosures of financing receivables as ofthe end of a reporting

 

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periodfor interim or annual reporting periods ending on or after December 15,2010.  The financing receivablesdisclosures related to activity that occurs during a reporting period areeffective for interim or annual reporting periods beginning on or after December 15,2010.  We are currently evaluating theimpact this update will have on our condensed consolidated financialstatements.

 

In October 2009, theFASB issued ASU No. 2009-13, *Revenue Recognition (Topic605): Multiple-Deliverable Revenue Arrangements—a consensus of the FASBEmerging Issues Task Force*(“ASU 2009-13”).  ASU 2009-13 addresses the accounting formultiple-deliverable arrangements to enable vendors to account for products orservices separately rather than as a combined unit and modifies the manner inwhich the transaction consideration is allocated across the separatelyidentified deliverables.  ASU 2009-13significantly expands the disclosure requirements for multiple-deliverablerevenue arrangements.  ASU 2009-13 willbe effective for the first annual reporting period beginning on or after June 15,2010, and may be applied retrospectively for all periods presented orprospectively to arrangements entered into or materially modified after theadoption date.  Early adoption ispermitted, provided that the guidance is retroactively applied to the beginningof the year of adoption. We are currently evaluating the impact this updatewill have on our condensed consolidated financial statements.

 

**Recently Adopted Accounting Pronouncements**

 

In February 2010, theFASB issued ASU No. 2010-09, *Subsequent Events**(Topic 855) — Amendments to Certain Recognition andDisclosure Requirements* (“ASU 2010-09”). ASU 2010-09 amends ASCTopic 855 to remove the requirement for an SEC filer to disclose the datethrough which subsequent events have been evaluated both in issued and revisedfinancial statements.  ASU 2010-09 waseffective immediately.  Our adoption ofthis guidance had no impact on our condensed consolidated financial positionand results of operations.

 

In January 2010, theFASB issued ASU No. 2010-06, *Fair Value Measurementsand Disclosures (Topic 820) — Improving Disclosures about Fair ValueMeasurements* (“ASU 2010-06”). ASU 2010-06 amends ASC 820 to require additional disclosures regardingfair value measurements. Specifically, ASU 2010-06 requires entities todisclose additional information regarding (i) the reconciliation ofrecurring Level 3 measurements about purchases, sales, issuances andsettlements on a gross basis, (ii) the amounts of significant transfersbetween Level 1 and Level 2 of the fair value hierarchy and the reasons forthese transfers and (iii) the reasons for any transfers in or out of Level3. In addition to these new disclosure requirements, ASU 2010-06 also amendsASC 820 to further clarify existing guidance pertaining to the level ofdisaggregation at which fair value disclosures should be made and therequirements to disclose information about the valuation techniques and inputsused in estimating Level 2 and Level 3 fair value measurements. Our adoption ofthe requirements of this guidance on January 1, 2010, except for therequirement to separately disclose information about purchases, sales,issuances, and settlements in the reconciliation of recurring Level 3measurements on a gross basis which becomes effective for fiscal years (andinterim periods within those fiscal years) beginning after December 15,2010, did not have a material impact on our condensed consolidated financialposition or results of operations.

 

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

 

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

 

Certain statements includedin this report, including that which relates to the impact on future revenuesources and potential sharing obligations of pending and future regulatoryorders, continued expansion of the telecommunications network and expectedchanges in the sources of our revenue and cost structure resulting from ourentrance into new communications markets, are forward-looking statements andare made pursuant to the safe harbor provisions of the Securities LitigationReform Act of 1995. These forward looking statements generally are identifiedby the words “believe”, “expect”, “anticipate”, “estimate”, “intend”, “should”,“may”, “will”, “would”, “will be”, “will continue” or similar expressions. Suchforward looking statements involve known and unknown risks, the impact ofcurrent economic conditions, uncertainties and other factors that may causeactual results, performance or achievements of SureWest Communications (the “Company”,“we” or “our”) to be different from those expressed or implied in theforward-looking statements. A detailed discussion of these and other risks anduncertainties that could cause actual results and events to differ materiallyfrom such forward—looking statements is included in our 2009 Annual Report on Form 10-Kfiled with the Securities and Exchange Commission (“SEC”). We disclaim anyintention or obligation to update or revise publicly any forward-lookingstatements. Management’s Discussion and Analysis should be read in conjunctionwith our unaudited condensed consolidated financial statements and accompanyingnotes to the financial statements (“Notes”) as of and for the nine months endedSeptember 30, 2010 included in Item 1 of this Quarterly Report onForm 10-Q.

 

**Overview**

 

Weare one of the leading integrated communications providers and are thebandwidth leader in the markets we serve.  We provide voice, video anddata services, either individually or as a part of bundled services toresidential and business customers in the greater Sacramento, California andgreater Kansas City, Kansas and Missouri areas (“Kansas City area”). Wecontinue to expand the use of optical fiber in our networks.  We increasingly deploy our services bycombining fiber-to-the-home (“FTTH”) and fiber-to-the-node (“FTTN”) facilitieswith the use of Internet Protocol (“IP”) based communications protocol. Our advanced telecommunications networks give us a competitive edge thatenables us to provide our customers with higher data speeds for Internetservice and deploy multiple services at superior quality through our highbandwidth capacity.  Our IP based communication protocol enables us to providededicated bandwidth at symmetrical data speeds to each of our customers in thegreater Sacramento, California area.  Weclassify our operations in two reportable segments: Broadband andTelecommunications (“Telecom”).

 

Our Broadband segment earnsrevenues primarily through subscriptions to our video, high-speed Internet andphone services.  Our video services rangefrom a limited basic service to our newest product offering Advanced Digital TV(“ADTV”), powered by Microsoft® MediaroomTM.  Many of our services are delivered utilizingFTTH and FTTN networks, which allow us to offer a high quality experience withour digital TV Packages. ADTV was launched in the Sacramento region in January 2010and enhancements were completed on existing copper network marketable homes toprovide this new video service, resulting in an increase of 26,600 videomarketable homes as of September 30, 2010. This enhanced video product includes a Whole Home digital video recorder(“DVR”) (which allows subscribers to watch and record up to four programs atthe same time and pause, replay and rewind “live” television), instant channelchanges and an intuitive, user-friendly guide. Our ADTV product provides accessto approximately 330 channels in our California market.  Our full digital cable service in the KansasCity area provides access to approximately 315 channels and additional digitalcable services, including a DVR.  Ourvideo product offerings include access to high-definition (“HD”) television (“HDTV”),which provides multiple channels in high definition, premium and pay-per-viewchannels (which include concerts, wrestling, boxing, sporting events andmovies); video on demand (“VOD”) service (which allows access to a library ofmovies and the ability to start a selection at any time and to pause, rewindand fast-forward and replay); premium VOD channels, music channels and aninteractive, on-screen program guide (which allows the subscriber to navigatethe channel lineup and the VOD library). As of September 30, 2010, approximately 23% of the homes in theareas we serve subscribed to one of our video services.

 

Ourhigh-speed Internet service can provide Internet access at symmetrical speedsof up to 50 Mbps, depending on the nature of the network facilities that areavailable, the level of service selected and the location.  As of September 30, 2010, approximately32% of the homes in the areas we serve subscribed to one of our high-speedInternet services.  Our Voice overInternet Protocol (“VoIP”) digital phone product is available in the Sacramentomarket in packages ranging from basic service to unlimited local and domesticlong distance calling plans.  Nearly allof our VoIP phone

 

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serviceplans include an extensive array of calling features including calleridentification and call waiting, Find Me/Follow Me, sequential ringing andselective call acceptance and rejection. As of September 30, 2010, approximately 17% of the homes in ourSacramento market have subscribed to our VoIP phone service. We also offertraditional circuit-switched voice services in some of the areas we serve.  The total voice penetration in the markets weserve was approximately 24% as of September 30, 2010.

 

Our Telecom segment, whichoperates only in the Sacramento area, offers a broad selection oftelecommunications services including traditional circuit-switched voiceservices, long distance services and a number of lightly-regulated ornon-regulated services. Customers in the Telecom segment can select individualservices or bundled packages that may include unlimited local calling orunlimited local and domestic long distance calling plans.  Our voice products also include value-addedservices such as voicemail, call waiting, caller identification and many othercalling feature options.  Most longdistance services are offered by our subsidiary SureWest Long Distance, whichis a reseller of long distance services.

 

**Current Business Developments**

 

In connection with ourefforts to evaluate and potentially monetize excess assets, during 2009 weidentified and began to actively market for sale certain of our real estateassets.  These regulated assets, which areincluded in the Telecom Segment, include 21 acres of undeveloped land and anoffice building.  During the quarterended December 31, 2009, we completed our plan to sell these assets and asa result they were classified as assets held for sale.  We expect the land will sell in the range of$3,000 to $5,000. In connection with the classification to assets held forsale, the carrying value of the office building was reduced to its estimatedfair value, less selling costs, based on the current market conditions andlisted selling price. As a result, an impairment charge of $1,199 was recordedagainst accumulated depreciation during the quarter ended December 31,2009, in accordance with regulated telephone plant and equipment compositegroup remaining life methodology.  Weevaluated the estimated fair value of the assets held for sale as of September 30,2010 and determined there was not a significant change.  Therefore, no additional impairment chargewas recorded during the quarter or nine-month period ended September 30,2010.

 

In February 2009, wesold 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, resulting in a gain of $2,525,net of tax. Proceeds from the sale of the Tower Assets were used to repay aportion of outstanding long-term debt.

 

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**Results of Operations**

 

The tables below reflectcertain financial data (on a consolidated and segment basis) and selectoperating metrics for each of our reportable segments as of and for thequarters and nine months ended September 30, 2010 and 2009.

 

**FinancialData**

 
| ** **                                   | ** ** | **Quarter Ended September 30,** | ** ** | **Nine Months Ended September 30,** | ** ** |
|----------------------------------------------|------------|------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                   | ** ** | ** **                                     | ** ** | ** **                                              | ** ** | **$** | ** ** | **%** | ** ** | ** ** | ** ** | ** ** | ** ** | **$** | ** ** | **%** | ** ** |
| ** **                                   | ** ** | **2010**                                       | ** ** | **2009**                                                | ** ** | **Change** | ** ** | **Change** | ** ** | **2010** | ** ** | **2009** | ** ** | **Change** | ** ** | **Change** | ** ** |
| **Operating revenues****(1)**                |       |                                           |       |                                                    |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Broadband                                    |       | $                                              | 43,861     |                                                    | $          | 40,175 |   | $ | 3,686 |   | 9 | % | $ | 129,514 |   | $ | 119,656 |   | $ | 9,858 |   | 8 | % |
| Telecom                                      |       | 17,256                                         |       | 19,354                                                  |       | (2,098 | ) | (11 | ) | 52,339 |   | 61,745 |   | (9,406 | ) | (15 | ) |
| Operating  revenues                          |       | 61,117                                         |       | 59,529                                                  |       | 1,588 |   | 3 |   | 181,853 |   | 181,401 |   | 452 |   | 0 |   |
|                                         |       |                                           |       |                                                    |       |   |   |   |   |   |   |   |   |   |   |   |   |
| **Income (loss) from operations**            |       |                                           |       |                                                    |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Broadband                                    |       | (2,942                                         | )          | (6,546                                                  | )          | 3,604 |   | 55 |   | (12,436 | ) | (18,772 | ) | 6,336 |   | 34 |   |
| Telecom                                      |       | 7,959                                          |       | 9,162                                                   |       | (1,203 | ) | (13 | ) | 22,632 |   | 29,323 |   | (6,691 | ) | (23 | ) |
| Income  from operations                      |       | 5,017                                          |       | 2,616                                                   |       | 2,401 |   | 92 |   | 10,196 |   | 10,551 |   | (355 | ) | (3 | ) |
|                                         |       |                                           |       |                                                    |       |   |   |   |   |   |   |   |   |   |   |   |   |
| **Income (loss) from continuing operations** |       |                                           |       |                                                    |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Broadband                                    |       | (3,082                                         | )          | (5,619                                                  | )          | 2,537 |   | 45 |   | (11,071 | ) | (15,901 | ) | 4,830 |   | 30 |   |
| Telecom                                      |       | 4,486                                          |       | 5,408                                                   |       | (922 | ) | (17 | ) | 12,475 |   | 16,668 |   | (4,193 | ) | (25 | ) |
| Income  (loss) from continuing operations    |       | 1,404                                          |       | (211                                                    | )          | 1,615 |   | 765 |   | 1,404 |   | 767 |   | 637 |   | 83 |   |
|                                         |       |                                           |       |                                                    |       |   |   |   |   |   |   |   |   |   |   |   |   |
| **Adjusted EBITDA****(2)**                   |       |                                           |       |                                                    |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Broadband                                    |       | 10,008                                         |       | 6,071                                                   |       | 3,937 |   | 65 |   | 26,616 |   | 17,666 |   | 8,950 |   | 51 |   |
| Telecom                                      |       | 11,327                                         |       | 12,890                                                  |       | (1,563 | ) | (12 | ) | 34,115 |   | 40,647 |   | (6,532 | ) | (16 | ) |
| Adjusted  EBITDA                             |       | 21,335                                         |       | 18,961                                                  |       | 2,374 |   | 13 |   | 60,731 |   | 58,313 |   | 2,418 |   | 4 |   |
|                                              |            |                                                |            |                                                         |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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(1)    External customers only.

(2)             Adjusted EBITDArepresents net income (loss) from continuing operations excluding amounts forincome taxes; depreciation and amortization; non-cash pension and certainpost-retirement benefits; non-cash stock compensation; severance and otherrelated termination costs; and all other non-operating income andexpenses.  Adjusted EBITDA is a commonmeasure of operating performance in the telecommunications industry. AdjustedEBITDA helps us evaluate our performance by removing from our operating resultsnon-cash items and items which do not relate to our core operatingperformance.  The presentation ofAdjusted EBITDA is not a measure of financial performance under United Statesgenerally accepted accounting principles (“U.S. GAAP” or “GAAP”) and should notbe considered in isolation or as a substitute for consolidated net income(loss) as a measure of performance and may not be comparable to similarlytitled measures used by other companies. The following tables are a reconciliation of our income (loss) fromcontinuing operations to Adjusted EBITDA on a consolidated and segment basisfor the quarters and nine-month periods ended September 30, 2010 and 2009:

 
| ** **                                    | ** ** | **Quarter Ended September 30, 2010** | ** ** |
|-----------------------------------------------|------------|----------------------------------------------------------|------------|
| ** **                                    | ** ** | **Broadband**                                            | ** ** | **Telecom** | ** ** | **Consolidated** | ** ** |
| Income  (loss) from continuing operations     |       | $                                                        | (3,082     | ) | $ | 4,486 |   | $ | 1,404 |   |
| Add  (subtract):                              |       |                                                     |       |   |   |   |   |
| Income  tax expense (benefit)                 |       | (2,066                                                   | )          | 3,394 |   | 1,328 |   |
| Other  (income) expense                       |       | 2,206                                                    |       | 79 |   | 2,285 |   |
| Depreciation  and amortization                |       | 12,609                                                   |       | 3,071 |   | 15,680 |   |
| Non-cash  pension and post-retirement expense |       | 181                                                      |       | 190 |   | 371 |   |
| Non-cash  stock compensation expense          |       | 160                                                      |       | 107 |   | 267 |   |
| Adjusted  EBITDA                              |       | $                                                        | 10,008     |   | $ | 11,327 |   | $ | 21,335 |   |

 

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| ** **                                         | ** ** | **Nine Months Ended September 30, 2010** | ** **                                        |
|----------------------------------------------------|------------|-------------------------------------------------------------------|---------------------------------------------------|
| ** **                                         | ** ** | **Broadband**                                                     | ** **                                        | **Telecom** | ** ** | **Consolidated** | ** ** |
| Income  (loss) from continuing operations          |       | $                                                                 |       (11,071            | ) | $ |         12,475 |   | $ |           1,404 |   |
| Add  (subtract):                                   |       |                                                              |                                              |   |   |   |   |
| Income  tax expense (benefit)                      |       | (7,437                                                            | )                                                 | 9,779 |   | 2,342 |   |
| Other  (income) expense                            |       | 6,072                                                             |                                              | 378 |   | 6,450 |   |
| Depreciation  and amortization                     |       | 36,929                                                            |                                              | 9,119 |   | 46,048 |   |
| Non-cash  pension and post-retirement expense      |       | 548                                                               |                                              | 584 |   | 1,132 |   |
| Non-cash  stock compensation expense               |       | 1,106                                                             |                                              | 1,105 |   | 2,211 |   |
| Severance  and other related termination costs (a) |       | 469                                                               |                                              | 675 |   | 1,144 |   |
| Adjusted  EBITDA                                   |       | $                                                                 |         26,616 |   | $ |         34,115 |   | $ |         60,731 |   |

 

----

(a)              As discussed inthe Consolidated Overview section below, severance and other relatedtermination costs were incurred as a result of the workforce reductioninitiative implemented during the quarter ended June 30, 2010 in whichapproximately 60 positions were eliminated. Amounts exclude the termination costsrelated to stock compensation expense, which are included in non-cash stockcompensation expense of the Adjusted EBITDA reconciliation.

 
| ** **                                    | ** ** | **Quarter Ended September 30, 2009** | ** **                                                   |
|-----------------------------------------------|------------|----------------------------------------------------------|--------------------------------------------------------------|
| ** **                                    | ** ** | **Broadband**                                            | ** **                                                   | **Telecom** | ** ** | **Consolidated** | ** ** |
| Income  (loss) from continuing operations     |       | $                                                        |         (5,619            | ) | $ |           5,408 |   | $ |            (211 | ) |
| Add  (subtract):                              |       |                                                     |                                                         |   |   |   |   |
| Income  tax expense (benefit)                 |       | (3,810                                                   | )                                                            | 3,824 |   | 14 |   |
| Other  (income) expense                       |       | 2,883                                                    |                                                         | (70 | ) | 2,813 |   |
| Depreciation  and amortization                |       | 12,199                                                   |                                                         | 3,061 |   | 15,260 |   |
| Non-cash  pension and post-retirement expense |       | 197                                                      |                                                         | 445 |   | 642 |   |
| Non-cash  stock compensation expense          |       | 221                                                      |                                                         | 222 |   | 443 |   |
| Adjusted  EBITDA                              |       | $                                                        |           6,071 |   | $ |         12,890 |   | $ |         18,961 |   |

 
| ** **                                    | ** ** | **Nine Months Ended September 30, 2009** | ** **                                        |
|-----------------------------------------------|------------|-------------------------------------------------------------------|---------------------------------------------------|
| ** **                                    | ** ** | **Broadband**                                                     | ** **                                        | **Telecom** | ** ** | **Consolidated** | ** ** |
| Income  (loss) from continuing operations     |       | $                                                                 |       (15,901            | ) | $ |         16,668 |   | $ |              767 |   |
| Add  (subtract):                              |       |                                                              |                                              |   |   |   |   |
| Income  tax expense (benefit)                 |       | (10,778                                                           | )                                                 | 12,292 |   | 1,514 |   |
| Other  (income) expense                       |       | 7,907                                                             |                                              | 363 |   | 8,270 |   |
| Depreciation  and amortization                |       | 35,102                                                            |                                              | 9,196 |   | 44,298 |   |
| Non-cash  pension and post-retirement expense |       | 580                                                               |                                              | 1,369 |   | 1,949 |   |
| Non-cash  stock compensation expense          |       | 756                                                               |                                              | 759 |   | 1,515 |   |
| Adjusted  EBITDA                              |       | $                                                                 |         17,666 |   | $ |         40,647 |   | $ |         58,313 |   |

 

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** **

**SelectOperating Metrics**

 
| ** **                                          | ** ** | **As of September 30,** | ** ** |
|-----------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                          | ** ** | **2010**                               | ** ** | **2009** | ** ** | **Change** | ** ** | **% Change** | ** ** |
| **Broadband**                                       | ** ** |                                   |       |   |   |   |   |   |   |
| Total  residential subscribers (1)                  |       | 104,000                                |       | 103,000 | (5) | 1,000 |   | 1 | % |
| Broadband  residential revenue-generating units (2) |       | 235,300                                |       | 226,600 | (5) | 8,700 |   | 4 |   |
| Data                                                |       | 99,200                                 |       | 97,600 | (5) | 1,600 |   | 2 |   |
| Video                                               |       | 61,200                                 |       | 59,000 | (5) | 2,200 |   | 4 |   |
| Voice                                               |       | 74,900                                 |       | 70,000 | (5) | 4,900 |   | 7 |   |
| Total  business customers (3)                       |       | 7,700                                  |       | 7,200 | (5) | 500 |   | 7 |   |
| ** **                                          | ** ** | ** **                             | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Telecom**                                         | ** ** |                                   |       |   |   |   |   |   |   |
| Voice  revenue-generating units (4)                 |       | 30,700                                 |       | 41,300 |   | (10,600 | ) | (26 | ) |
| Total  business customers (3)                       |       | 8,000                                  |       | 8,700 |   | (700 | ) | (8 | ) |

 

----

(1)             Total residentialsubscribers are customers who receive one or more residential data, video orvoice services from one of our subsidiaries in the Broadband segment.

(2)             We can deliver multipleservices to a customer. Accordingly, we maintain statistical data regardingRevenue-generating units (“RGUs”) for video, voice and data, in addition to thenumber of subscribers. For example, a single customer who purchases video,voice and data services would be reflected as three RGUs.

(3)             Total business customers arecustomers who receive business data, voice or video services and represent adistinct customer account.

(4)             Voice RGUs are residentialcustomers who subscribe to one or more voice access lines.

(5)             During the third quarter of2010, we revised our methodology of counting Broadband residential subscribers,RGUs and business customer counts.  Therevised methodology facilitates the consistent application of customer countswithin the Broadband segment. Accordingly, the Broadband segment metrics previously reported for 2009have been revised to conform to current practice.

 

**Consolidated Overview**

 

*Operating Revenues*

 

Operating revenues in theBroadband segment increased $3,686 and $9,858 during the quarter and nine-monthperiod ended September 30, 2010, respectively, compared to the sameperiods in 2009. Broadband residential revenues increased $1,566 and $4,827during the quarter and nine-month period ended September 30, 2010,respectively, compared to the same periods in 2009 due in part to a 4% growthin RGUs. Broadband residential revenues also increased as a result of higherpricing for video and data services in 2010, which were effective in November 2009and September 2010.

 

We offer a broadband VoIPphone service in the Sacramento market, including in the Telecom segmentservice territory.  The VoIP phoneservice provides us with a competitive triple-play offering and has mitigatedpast declines in consolidated operating revenue and voice RGUs by allowing usto migrate those customers to voice RGUs in the Broadband segment rather thanlosing those customers to competitors. Broadband voice RGUs in the Sacramento market increased 16% as of September 30,2010 compared to the same prior year period.

 

Broadband business revenuesincreased $1,961 and $4,584 during the quarter and nine-month period ended September 30,2010, respectively, compared to the same periods in 2009. Business customersincreased 7% as of September 30, 2010 compared to the same period in 2009as a result of growth primarily in the Kansas City market.  The variety of our product offerings and ourability to offer customized service packages to businesses of all sizes as wellas superior business customer satisfaction levels contributed to the currentyear growth in business revenue and will continue to provide us with newopportunities in the commercial market.

 

We will continue to investin new opportunities as they emerge in order to develop and enhance thebroadband infrastructure and the services we offer, such as wireless carrierbackhaul and data center services, while focusing on the generation of newcustomers and increasing residential penetration on existing marketable homes.

 

Operating revenues in theTelecom segment decreased $2,098 and $9,406 during the quarter and nine-monthperiod 

 

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ended September 30,2010, respectively, compared to the same periods in 2009. Residential servicesdecreased $1,771 and $5,693 during the quarter and nine-month period ended September 30,2010, respectively, compared to the same periods in 2009 and were largelyimpacted by our customer’s migration toward alternative communication services,including those offered by our Broadband segment, as discussed above, whichcontributed to a 26% decline in the Telecom segment voice RGUs as of September 30,2010 compared to 2009.  Business revenuesincreased $63 and decreased $1,256 during the quarter and nine-month periodended September 30, 2010, respectively, compared to the same periods in2009 as a result of an 8% decline in business customers due to the economicimpact on small and medium sized businesses in the California market. However,the decline was mitigated by higher pricing for data services in 2010, whichwere implemented during the current quarter. The decrease in operating revenueswas also impacted by the scheduled reduction in support received from theCalifornia High Cost Fund (“CHCF”) of $510 and $1,530 during the quarter andnine-month period ended September 30, 2010, respectively, compared to thesame periods in 2009.  See the RegulatoryMatters section below for a further discussion regarding the regulatorysubsidies we receive.

 

The Telecom segment provideswholesale access and Digital Subscriber Line (“DSL”) services through the use ofits network to the Broadband segment, which enables the Broadband segment tooffer high-speed Internet, VoIP, video and wireless backhaul services to thosecustomers within SureWest Telephone’s service area. These wholesale servicesare included as intersegment revenues and expenses in each of the respectivesegments and eliminated in the consolidated statements of income.

 

*Operating Expenses*

 

Consolidated operatingexpenses, excluding depreciation and amortization, decreased $1,233 and $943during the quarter and nine-month period ended September 30, 2010,respectively, compared to the same periods in 2009. During the quarter ended June 30,2010, we implemented a workforce reduction initiative in which approximately 60positions were eliminated as we continue to improve operating efficiencies andalign operating costs with the decline in Telecom revenues, while enhancing ourfocus on the growth of our broadband services. Affected employees were provided a range of benefits and resources,including severance. As a result, severance and other related termination costsof $1,428 were incurred during the nine months ended September 30, 2010.

 

The change in consolidatedoperating expenses was also impacted by a decrease in the costs associated withour defined benefit pension plan (the “Pension Plan”) of $205 and $614 duringthe quarter and nine-month period ended September 30, 2010, respectively,compared to the same periods in 2009. The decrease in net periodic pension costs for 2010 compared to 2009 waspredominately due to an actual higher rate of return on pension plan assets for2009 than what was anticipated.

 

Cost of services andproducts expense increased $1,222 and $1,507 during the quarter and nine-monthperiod ended September 30, 2010, respectively, compared to the sameperiods in 2009.  The increase inexpenses in the current year periods was largely due to increases inprogramming and network costs related to providing video and data services.  These costs result from an increase inprogramming fees per subscriber and the growth in business services. However,labor costs have declined as a result of a reduction in headcount through theworkforce reduction initiative and the outsourcing of certain network andproperty maintenance services in 2010.

 

Customer operations andselling expense decreased $1,102 and $486 during the quarter and nine-monthperiod ended September 30, 2010, respectively, compared to the sameperiods in 2009.  The decrease inexpenses in the current year periods was largely due to a decline in sales andadvertising costs as result of a reduction in radio advertising in the currentyear periods. However, selling costs, primarily sales labor and commissions,increased related to the launch and promotion of our new ADTV product duringthe first and second quarters of 2010.

 

General and administrativeexpenses decreased $1,353 and $1,964 during the quarter and nine-month periodended September 30, 2010, respectively, compared to the same periods in2009. Labor costs decreased resulting from a decline in pension expense and areduction in headcount, but was offset in part by employee severance costs of$934 incurred during the nine months ended September 30, 2010 related tothe workforce reduction initiative. Professional fees also decreased as aresult of lower annual rates and a reduction in information technology projectsupport costs in the current year.

 

Our consolidateddepreciation and amortization expense increased $420 and $1,750 during thequarter and nine-month period ended September 30, 2010, respectively,compared to the same periods in 2009. The increase in depreciation and amortization expense was primarily dueto the continued expansion of the network and success-based capital projectsundertaken within the residential and business broadband service territories.

 

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*Reclassifications*

 

Certainamounts in our 2009 condensed consolidated financial statements have beenreclassified to conform to the presentation of our 2010 condensed consolidatedfinancial statements. Operating expenses have been reclassified for a changeduring the third quarter of 2010 in the classification of customer technicalsupport costs from customer operations and selling to cost of services andproducts. Prior period costs have been reclassified to conform to the currentyear presentation.

 

In addition, the calculationof certain select operating metrics has been revised to reflect the consistentapplication of customer counts within the Broadband segment. Accordingly, wherenecessary, prior period metric calculations have been revised to conform tocurrent practice.

 

**Segment Results of Operations**

 

**Broadband**

 
| ** **                                        | ** ** | **Quarter Ended September 30,** | ** ** | **Nine Months Ended September 30,** | ** ** |
|---------------------------------------------------|------------|------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                        | ** ** | ** **                                     | ** ** | ** **                                              | ** ** | **$** | ** ** | **%** | ** ** | ** ** | ** ** | ** ** | ** ** | **$** | ** ** | **%** | ** ** |
| ** **                                        | ** ** | **2010**                                       | ** ** | **2009**                                                | ** ** | **Change** | ** ** | **Change** | ** ** | **2010** | ** ** | **2009** | ** ** | **Change** | ** ** | **Change** | ** ** |
|                                              |       |                                           |       |                                                    |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Data                                              |       | $                                              | 12,100     |                                                    | $          | 11,236 |   | $ | 864 |   | 8 | % | $ | 36,493 |   | $ | 33,183 |   | $ | 3,310 |   | 10 | % |
| Video                                             |       | 12,151                                         |       | 11,711                                                  |       | 440 |   | 4 |   | 36,536 |   | 35,395 |   | 1,141 |   | 3 |   |
| Voice                                             |       | 6,704                                          |       | 6,442                                                   |       | 262 |   | 4 |   | 19,811 |   | 19,435 |   | 376 |   | 2 |   |
| Total  residential revenues                       |       | 30,955                                         |       | 29,389                                                  |       | 1,566 |   | 5 |   | 92,840 |   | 88,013 |   | 4,827 |   | 5 |   |
| Business                                          |       | 11,979                                         |       | 10,018                                                  |       | 1,961 |   | 20 |   | 33,802 |   | 29,218 |   | 4,584 |   | 16 |   |
| Access                                            |       | 481                                            |       | 427                                                     |       | 54 |   | 13 |   | 1,749 |   | 1,209 |   | 540 |   | 45 |   |
| Other                                             |       | 446                                            |       | 341                                                     |       | 105 |   | 31 |   | 1,123 |   | 1,216 |   | (93 | ) | (8 | ) |
| Total  operating revenues from external customers |       | 43,861                                         |       | 40,175                                                  |       | 3,686 |   | 9 |   | 129,514 |   | 119,656 |   | 9,858 |   | 8 |   |
| Intersegment  revenues                            |       | 110                                            |       | 93                                                      |       | 17 |   | 18 |   | 423 |   | 278 |   | 145 |   | 52 |   |
| Operating  expenses                               |       |                                           |       |                                                    |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Cost  of services and products*                   |       | 25,719                                         |       | 23,320                                                  |       | 2,399 |   | 10 |   | 75,008 |   | 70,074 |   | 4,934 |   | 7 |   |
| Customer  operations and selling                  |       | 4,940                                          |       | 6,532                                                   |       | (1,592 | ) | (24 | ) | 16,886 |   | 18,229 |   | (1,343 | ) | (7 | ) |
| General  and administrative                       |       | 3,645                                          |       | 4,763                                                   |       | (1,118 | ) | (23 | ) | 13,550 |   | 15,301 |   | (1,751 | ) | (11 | ) |
| Depreciation  and amortization                    |       | 12,609                                         |       | 12,199                                                  |       | 410 |   | 3 |   | 36,929 |   | 35,102 |   | 1,827 |   | 5 |   |
| Loss  from operations                             |       | (2,942                                         | )          | (6,546                                                  | )          | 3,604 |   | 55 |   | (12,436 | ) | (18,772 | ) | 6,336 |   | 34 |   |
| Loss  from continuing operations                  |       | (3,082                                         | )          | (5,619                                                  | )          | 2,537 |   | 45 |   | (11,071 | ) | (15,901 | ) | 4,830 |   | 30 |   |
|                                                   |            |                                                |            |                                                         |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

----

*Exclusiveof depreciation and amortization

 

**Broadband Segment Operating Revenues**

 

Operating revenues fromexternal customers in the Broadband segment increased $3,686 and $9,858 duringthe quarter and nine-month period ended September 30, 2010, respectively,compared to the same periods in 2009. The increase in operating revenues was due in part to the growth inresidential RGUs and business customers.

 

**Residential Revenues**

 

Broadband residentialrevenues increased $1,566 and $4,827 during the quarter and nine-month periodended September 30, 2010, respectively, compared to the same periods in2009.  The increase in Broadbandoperating revenues in the current year periods was due in part to the growth ofBroadband residential RGUs of 4% as of September 30, 2010 compared to thesame period in 2009.  Broadbandresidential revenues also increased as a result of higher pricing for video anddata services in 2010, which were effective in November 2009 and September 2010.  We anticipate continued growth in residentialbroadband RGUs and average revenue per user resulting from our HD DVR, VoIPphone service and the launch in January 2010 of our ADTV product poweredby Microsoft® MediaroomTM.

 

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*Data*

 

We offer high speed Internetaccess at symmetrical speeds of up to 50 Mbps, depending on the nature of thenetwork facilities that are available, the level of service selected and thelocation.  The reliability and highspeeds of the data service in both the Sacramento and Kansas City marketsenhance other services such as VoIP and Digital Phone, where customers managephone services through the online SureWest portal.  Through the SureWest portal, customers canmanage their VoIP or 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 $864 and $3,310 during the quarter and nine-month periodended September 30, 2010, respectively, compared to the same periods in2009 primarily as a result of higher price points on our data services, asdiscussed above.

 

*Video*

 

Ourvideo services range from limited basic cable service to our newest productoffering ADTV.  ADTV is currentlydeployed through our copper and fiber networks in the greater Sacramento area.  The integration of the new MediaroomTMplatform includes a Whole Home DVR, which allows customers the ability to watchrecorded shows on any television in the house, record multiple shows at onetime and utilize an intuitive on-screen guide and user interface.  Our services primarily are delivered utilizingFTTH and FTTN networks, which allow us to offer a high quality experience withdigital TV Packages.  Our full digitalcable service provides access to approximately 330 and 315 channels in ourCalifornia and Kansas City markets, respectively, including premium andpay-per-view channels, VOD service, premium VOD channels, music channels and aninteractive, on-screen program guide. Digital cable subscribers can alsosubscribe to additional digital cable services, including a DVR and HDTV.

 

Residential video revenuesincreased $440 and $1,141 during the quarter and nine-month period ended September 30,2010, respectively, compared to the same periods in 2009.  Revenues increased as a result of both higherpricing on many of our video service offerings, as discussed above, and newdemand for enhanced video offerings such as VOD, DVR and HDTV.

 

*Voice*

 

We offer phone services thatprovide local and long-distance calling and include features such as caller IDand call waiting. As of September 30, 2010, approximately 24% of the homesin the areas we serve subscribed to one of our phone services.

 

Our VoIP phone service isoffered in the Sacramento market and is available in packages ranging frombasic telephone service to unlimited local and domestic long distance callingplans.  Nearly all of our VoIP phoneservice plans include enhanced calling features such as Find Me/Follow Me,sequential ringing and selective call acceptance and rejection.  Voice RGUs in the Sacramento market increased16% as of September 30, 2010 compared to the same period in 2009.  As of September 30, 2010, approximately17% of the homes in our Sacramento market have subscribed to our VoIP phoneservice.  Our VoIP phone service in theSacramento market offers our customers, including those in the Telecom serviceterritory, an alternative to traditional circuit switched land line service andpresents our customers with a more competitive triple-play offering withincreased options and multiple packages.

 

Residential voice revenuesincreased $262 and $376 during the quarter and nine-month period ended September 30,2010, respectively, compared to the same periods in 2009 primarily as a resultof growth in voice RGUs of 7% in that same time period.  Average revenue per voice user declined toapproximately $19.84 as of September 30, 2010 from approximately $31.01compared to the same period in 2009, due to customers receiving service as apart of a promotional offer or in a bundled service offering.

 

**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, wireless backhaul anddigital TV.

 

Business revenues increased$1,961 and $4,584 during the quarter and nine-month period ended September 30,2010, respectively, compared to the same periods in 2009.  This increase was due primarily to a 7%increase in business customers as of September 30, 2010 compared to thesame period in 2009.  Our Kansas Cityoperations contributed a significant portion of the business revenue growth.

 

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Wireless backhaul revenuealso contributed to the growth in the business revenue during the quarter andnine-month period ended September 30, 2010.  We anticipate backhaul revenue will growduring the remainder of 2010 as wireless carriers, faced with escalatingconsumer and business demand for mobile broadband traffic, are forced toincrease backhaul capacity.

 

**Access Revenues**

 

Access revenues increased$54 and $540 during the quarter and nine-month period ended September 30,2010, respectively, compared to the same periods in 2009.  The increase was mostly attributable to cashsettlements received during the quarter ended March 31, 2010 from certaintelecommunications carriers relating to disputed carrier access charges whichwere fully reserved in prior year periods.

 

**Broadband Segment Operating Expenses**

 

Total operating expenses inthe Broadband segment decreased $311 and increased $1,840 during the quarterand nine-month period ended September 30, 2010, respectively, compared tothe same periods in 2009.

 

Cost of services andproducts (exclusive of depreciation and amortization) increased $2,399 and$4,934 during the quarter and nine-month period ended September 30, 2010,respectively, compared to the same periods in 2009.  The increase in costs in the current yearperiods was largely due to direct costs incurred to provide our voice, videoand data services.

 

Video programming fees arepaid to programming networks to license the programming we distribute to ourvideo customers.  Video programming costshave been increasing over the last several years primarily due to the expansionof channels and an increase in costs on a per subscriber basis and per programchannel, particularly for local television broadcast stations, sports and HDchannels.

 

We incur network access andtransport costs to provide data and voice services to our customers.  Due to the rising demand for our VoIP productin the Sacramento market and the additional capacity required to handle theincreasing volume of data usage, costs have increased in the current yearperiods.  Network access costs includecosts paid to external vendors as well as our Telecom segment, in accordancewith the provisions of a wholesale access agreement. The wholesale accessagreement enables the Broadband segment to offer high-speed Internet, VoIP,video and wireless backhaul services to its customers within the Telecomsegment territory.

 

Customer operations expensedecreased $1,592 and $1,343 during the quarter and nine-month period ended September 30,2010, respectively, compared to the same periods in 2009.  The decrease in the current year periods wasmostly attributable to a decline in product marketing and advertising costs asa result of a reduction in headcount and reduced expenditures on radioadvertising in the current year periods. The decrease was offset in part by an increase in selling expenses,primarily salaries and wages, commissions and customer events to promote thelaunch of our new ADTV product in the current year periods.

 

General and administrativeexpense decreased $1,118 and $1,751 during the quarter and nine-month periodended September 30, 2010, respectively, compared to the same periods in2009.  The decrease in costs wereprimarily due to (i) a decline in labor costs resulting from improvedoperating efficiencies in the current year period, (ii) a decrease inprofessional fees and (iii) the incurrence in the prior year period ofinformation technology costs related to system maintenance and development andincreased production support projects. The decrease in costs was offset in part by severance costs ofapproximately $451 incurred during the nine months ended September 30,2010 related to the workforce reduction initiative, as discussed in theconsolidated overview section above.

 

Depreciation andamortization increased $410 and $1,827 during the quarter and nine-month periodended September 30, 2010, respectively, compared to the same periods in2009 due primarily to the continued expansion of the broadband network andsuccess-based capital projects.

 

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**Telecom**

 
| ** **                                        | ** ** | **Quarter Ended September 30,** | ** ** | **Nine Months Ended September 30,** | ** ** |
|---------------------------------------------------|------------|------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                        | ** ** | ** **                                     | ** ** | ** **                                              | ** ** | **$** | ** ** | **%** | ** ** | ** ** | ** ** | ** ** | ** ** | **$** | ** ** | **%** | ** ** |
| ** **                                        | ** ** | **2010**                                       | ** ** | **2009**                                                | ** ** | **Change** | ** ** | **Change** | ** ** | **2010** | ** ** | **2009** | ** ** | **Change** | ** ** | **Change** | ** ** |
|                                              |       |                                           |       |                                                    |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Residential                                       |       | $                                              | 4,086      |                                                    | $          | 5,857 |   | $ | (1,771 | ) | (30 | )% | $ | 13,433 |   | $ | 19,126 |   | $ | (5,693 | ) | (30 | )% |
| Business                                          |       | 8,750                                          |       | 8,687                                                   |       | 63 |   | 1 |   | 25,568 |   | 26,824 |   | (1,256 | ) | (5 | ) |
| Access                                            |       | 4,274                                          |       | 4,604                                                   |       | (330 | ) | (7 | ) | 12,842 |   | 15,204 |   | (2,362 | ) | (16 | ) |
| Other                                             |       | 146                                            |       | 206                                                     |       | (60 | ) | (29 | ) | 496 |   | 591 |   | (95 | ) | (16 | ) |
| Total  operating revenues from external customers |       | 17,256                                         |       | 19,354                                                  |       | (2,098 | ) | (11 | ) | 52,339 |   | 61,745 |   | (9,406 | ) | (15 | ) |
| Intersegment  revenues                            |       | 5,275                                          |       | 5,043                                                   |       | 232 |   | 5 |   | 15,285 |   | 14,898 |   | 387 |   | 3 |   |
| Operating  expenses                               |       |                                           |       |                                                    |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Cost  of services and products*                   |       | 5,677                                          |       | 6,478                                                   |       | (801 | ) | (12 | ) | 17,407 |   | 19,963 |   | (2,556 | ) | (13 | ) |
| Customer  operations and selling                  |       | 2,621                                          |       | 2,240                                                   |       | 381 |   | 17 |   | 7,320 |   | 6,765 |   | 555 |   | 8 |   |
| General  and administrative                       |       | 3,203                                          |       | 3,456                                                   |       | (253 | ) | (7 | ) | 11,146 |   | 11,396 |   | (250 | ) | (2 | ) |
| Depreciation  and amortization                    |       | 3,071                                          |       | 3,061                                                   |       | 10 |   | 0 |   | 9,119 |   | 9,196 |   | (77 | ) | (1 | ) |
| Income  from operations                           |       | 7,959                                          |       | 9,162                                                   |       | (1,203 | ) | (13 | ) | 22,632 |   | 29,323 |   | (6,691 | ) | (23 | ) |
| Income  from continuing operations                |       | 4,486                                          |       | 5,408                                                   |       | (922 | ) | (17 | ) | 12,475 |   | 16,668 |   | (4,193 | ) | (25 | ) |
|                                                   |            |                                                |            |                                                         |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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*Exclusive of depreciationand amortization

 

**Telecom Segment Operating Revenues**

 

Operating revenues fromexternal customers in the Telecom segment decreased $2,098 and $9,406 duringthe quarter and nine-month period ended September 30, 2010, respectively,compared to the same periods in 2009. The decrease in operating revenues wasdue in part to the decline in voice RGUs, business customers and regulatorysubsidies.

 

**Residential Revenues**

 

SureWest Telephone offersseveral different phone service options, from basic local service packages tounlimited California and nationwide flat-rate plans.  All of the plans include options forvoicemail and other calling features such as caller ID and call forwarding.* *SureWest Telephoneresidential revenues decreased $1,771 and $5,693 during the quarter andnine-month period ended September 30, 2010, respectively, compared to thesame periods in 2009 as we continue to experience decreases in revenue due tocompetition from wireless, wireline, and digital phone competitors (includingSureWest Broadband).  Residentialsubscribers and voice RGUs declined approximately 26% as of September 30,2010 compared to the same period in 2009. We continue to mitigate additional voice access line and operatingrevenue losses through our VoIP phone service now offered to customers withinthe Telecom service area through our Broadband segment.  As a result, we expect a portion of theTelecom segment’s voice revenue will continue to shift to the VoIP servicebeing offered by our Broadband segment. As of September 30, 2010, approximately 40% of the decline inTelecom voice RGUs in 2010 was due to customers who have transferred toSureWest Broadband’s VoIP phone service rather than being lost tocompetitors.  See the Broadband segmentresidential revenue section above for a more detailed discussion regarding VoIPand other services offered by SureWest Broadband.

 

**Business Revenues**

 

We provide a variety ofbusiness service offerings to small, medium and large business customers,including many services over our advanced fiber network.  The services we offer to our businesscustomers include, but are not limited to fiber-optics-based high-speedInternet, customized data and Ethernet transport services, data center anddisaster recovery solutions, traditional landline and scalable IP communicationsystems.

 

SureWest Telephone businessrevenues increased $63 and decreased $1,256 during the quarter and nine-monthperiod ended September 30, 2010, respectively, compared to the sameperiods in 2009.  The decrease in revenuewas mostly due to the 8% decline in business customers which resulted from thestrained economic conditions for small and medium sized businesses andcontinued strong competitive pressures, as discussed above. The decrease inbusiness revenue was offset in part by a rate increase for data serviceseffective during the quarter ended September 30, 2010 resulting in anincrease to average monthly revenue per user (“ARPU”) of 3% and 9% for thequarter and nine-month period ended September 30, 2010, respectively,compared to the same periods in 2009.

 

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**Access Revenues**

 

Accessrevenues, which include interstate and intrastate switched and special accessrevenue, interstate common line (“CL”) revenue and support payments from theCHCF, decreased $330 and $2,362 during the quarter and nine-month period ended September 30,2010, respectively, compared to the same periods in 2009. As anticipated, CHCFsupport received during the quarter and nine-month period ended September 30,2010 decreased $510 and $1,530, respectively, compared to the same periods in2009. The decrease in access revenue was offset in part by an a increase in InterstateCL settlements received from the National Exchange Carrier Association (“NECA”)of $473 and $109 during the quarter and nine-month period ended September 30,2010, respectively, compared to the same periods in 2009. Revenue recovery fromthe NECA pool increased during 2010 as a result of a higher rate baseattributable to (i) plant additions for digital VoIP service customers and(ii) enhancements to the existing copper network marketable homes tosupport the ADTV product offered by the Broadband segment. See the RegulatoryMatters**section below for a more detaileddiscussion regarding SureWest Telephone’s regulated revenues.

 

**Intersegment Revenues**

 

Intersegment revenuesconsist predominately of revenues earned through a wholesale access agreementbetween the Telecom and Broadband segments. The Telecom segment supplies wholesale access and DSL services throughits network to the Broadband segment, which enables the Broadband segment tooffer high-speed internet, VoIP, video and wireless backhaul services tocustomers residing within the Telecom service territory.  Wholesale access and DSL intersegment revenueincreased in the current year periods compared to the same periods in 2009 andis anticipated to continue to increase with heightened demand for the Broadbandsegment’s VoIP and ADTV products offered in the Telecom segment serviceterritory.  See the Broadband operatingrevenue section above for more detailed discussion of the Broadband revenuesand product offerings.

 

**TelecomSegment Operating Expenses**

 

Total operating expenses forthe Telecom segment decreased $673 and $2,251 during the quarter and nine-monthperiod ended September 30, 2010, respectively, compared to the sameperiods in 2009.  As discussed in the Residential Revenue section above,during 2010 we experienced a decline in voice RGUs due in part to subscribersopting to initiate VoIP phone service offered by our Broadband segment.  As a result, certain of the operating costsassociated with these subscribers are now included in the Broadbandsegment.  In addition, costs related toour Pension Plan decreased approximately $203 and $660 during the quarter andnine-month period ended September 30, 2010, respectively, compared to thesame periods in 2009, as discussed in the consolidated overview section above.

 

Cost of services andproducts (exclusive of depreciation and amortization) decreased $801 and $2,556during the quarter and nine-month period ended September 30, 2010,respectively, compared to the same periods in 2009.  Costs to support local and long distanceservices declined as a result of decreases in residential voice RGUs andbusiness customers.  Additionally, in thecurrent year periods, rent and utility costs have declined due to aconsolidation of office space.  The decreasewas offset in part by severance costs of approximately $299 incurred during thenine months ended September 30, 2010 related to the workforce reductioninitiative, as discussed in the consolidated overview section above.

 

Customer operations expense increased$381 and $555 during the quarter and nine-month period ended September 30,2010, respectively, compared to the same periods in 2009.  The increase in the current year period wasmostly attributable to an increase in advertising and promotion costs tosupport product offerings in the Telecom segment service territory.

 

General and administrativeexpense decreased $253 and $250 during the quarter and nine-month period ended September 30,2010, respectively, compared to the same periods in 2009.  The decrease in costs was due primarily to (i) areduction in professional fees as a result of lower annual rates, (ii) thedecline in pension plan costs discussed previously and (iii) lowerinformation project support costs in the current year.  The decrease was offset in part by employeeseverance costs of approximately $483 incurred during the nine months ended September 30,2010 related to the workforce reduction initiative, as discussed in theconsolidated overview section above.

 

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**Regulatory Matters**

 

Revenues subject toregulation, which include such telecommunications services as local telephoneservice, network access service and toll service, are derived from varioussources, including:

 

·                  business andresidential subscribers of basic exchange services;

·                  surchargesmandated by state commissions;

·                  long distancecarriers, for network access service;

·                  competitiveaccess providers and commercial enterprises for network access service;

·                  interstate poolsettlements from NECA;

·                  supportpayments from federal or state programs; and

·                  supportpayments from the CHCF, recovering costs of services including extended areaservice.

 

Certainof our interstate telecommunications service rates are subject to regulation bythe Federal Communications Commission (“FCC”). Interstate switched and specialaccess rates are established through a SureWest Telephone tariff filed with theFCC.  For interstate CL charges, SureWestTelephone concurs with tariffs filed by NECA. Intrastate service rates are subject to regulation by statecommissions.  Prices for intrastatetelecommunications services are established through tariffs or through otherregulatory mechanisms, including, in California, service guides.  Pending and future regulatory actions mayhave a material impact on our consolidated financial position and results ofoperations.

 

*FCC Matters*

 

Undercurrent FCC rules governing rate making, SureWest Telephone is required toestablish rates for its interstate telecommunications services based onprojected demand usage for the various services.  SureWest Telephone projects its earningsthrough the use of annual cost separation studies, which utilize estimatedtotal cost information and projected demand usage. Carriers are required tofollow FCC rules in the preparation of these annual studies.  SureWest Telephone determines actual earningsfrom its interstate rates as actual volumes and costs become known.  The FCC monitors SureWest Telephone’sinterstate earnings.

 

Asa result of periodic cost separation studies required by the FCC, SureWestTelephone changed its estimates for certain NECA CL accounts receivablebalances related to the current and prior year monitoring periods.  During the quarter and nine-month periodended September 30, 2009, these changes in estimates decreased ourconsolidated revenues and income from continuing operations by $583 and $562and net income by $335 ($0.02 per share) and $323 ($0.02 per share),respectively.  We did not record anysignificant changes in estimates during the quarter and nine-month period endedSeptember 30, 2010.

 

TheFCC was directed by Congress to develop a National Broadband Plan (“NBP”) aspart of the American Recovery and Reinvestment Act of 2009.  In March 2010, after taking extensivepublic comment, the FCC released the full text of its NBP, which containspolicy recommendations on a variety of issues that the FCC has linked toexpanded broadband deployment.  The policy recommendations include guidingprinciples to foster competition in broadband, telephone, wireless and cableservices over the next decade, including recommendations related to universalservice fund (“USF”) reform, intercarrier compensation, cable set-top boxes andspectrum reallocation, among others.  The NBP recommendations mostrelevant to the Company include shifting the current USF mechanisms thatsupport universal voice telephone services to support of universal broadbanddeployment and the phased reduction of intercarrier access compensation levelsto local reciprocal compensation levels, with a potential phase-out of all suchcompensation within ten years.  Some of these recommendations only restatepre-existing FCC proposals in current rulemakings while others raise newissues.  The FCC did not actually take action on any issue in the NBPitself. Approximately half of these issues will require separate FCC rulemakingaction and the remainder consists of policy recommendations for action byCongress or other governmental entities.  The FCC is already beginningsome separate proceedings.  Most recently, in response to a recent FederalAppeals Court decision which found that the FCC lacked authority over certainInternet-related practices of Comcast, the FCC opened proceedings to reassessthe nature of Internet-related activities of Internet providers and to considerrules related to such activities. Among other things, the FCC indicated it will consider possibleredefinition of some forms of Internet “connectivity” which could make theseactivities subject to new regulation under Title II of the Act.  The FCC’s actions in these proceedings couldlead to new rules and a significant increase in governmentregulation.  These proceedings are alsocreating significant new regulatory uncertainties for participants across theInternet sector. Action to deal with this and other issues addressed by the NBPmay have a material impact on us.  We will continue to monitor thesematters and their potential impact on our consolidated financial position and resultsof operations.

 

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*California Public UtilityCommission (“CPUC”) Matters*

 

In 2004, we entered into asettlement agreement (the “Settlement Agreement”), which was ultimatelyapproved by the CPUC, to resolve an ongoing regulatory proceeding with variousparties.  The Settlement Agreementresolved past sharing liabilities and suspended future sharing requirements inthe intrastate jurisdiction.  Inaccordance with the Settlement Agreement, SureWest Telephone returnedapproximately $6,500, plus interest, to its end-users through a consumerdividend.  The surcredit was recorded asa reduction of our contractual shareable earnings obligations over a period ofapproximately four years, which began January 1, 2005.  During the first quarter of 2009 and prior tothe cessation of the surcredit on February 9, 2009, we returnedapproximately $165.

 

As part of the Settlement Agreement,SureWest Telephone was required to implement an additional annual consumerdividend 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 CHCF with the aforementioned$1,300 consumer dividend Settlement Agreement. The CHCF was previously authorized by the CPUC on an interim basis tooffset certain of SureWest Telephone’s intrastate regulated operating expensesthat previously had been recovered through direct carrier payments. In September 2007,the CPUC issued Decision 07-09-002 which provides for SureWest Telephone tophase-down its annual CHCF interim draw over a five-year period, to end on January 1,2012.  In 2009, our interim CHCF draw was$6,120 and is being incrementally reduced by $2,040 annually.  We anticipate our 2010 interim CHCF draw willbe $4,080, of which through September 30 we have received $3,060.

 

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 limits increases to $3.25 peryear during 2009 and 2010, (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.  Beginning January 1,2011, the URF Incumbent Local Exchange Carriers will be allowed full pricingflexibility for the basic residential rate.

 

*Other Regulatory Matters*

 

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

 

**Non-Operating Items**

 

*Other Income and Expense, Net*

 

Consolidated interestexpense decreased $735 and $2,213 during the quarter and nine-month periodended September 30, 2010, respectively, compared to the same periods in2009, primarily due to a decrease in long-term debt.  A decline in interest rates on ouroutstanding debt subject to London Interbank Offered Rates also contributed tothe reduction in interest expense.

 

We received a patronagedividend of $979 and $963 during the quarters ended March 31, 2010 and2009, respectively. We earn patronage dividends from CoBank, ACB (“CoBank”)based on our share of the net income earned by CoBank.  We record the receipt of the patronagedividends against interest expense.

 

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*Income Taxes*

 

Income taxes increased$1,314 and $828 during the quarter and nine-month period ended September 30,2010, respectively, compared to the same periods in 2009.  The increase in income taxes in the currentyear periods was due primarily to an increase in income before incometaxes.  The effective federal income taxrates for continuing operations were 62.5% and 66.4% for the nine-month periodsended September 30, 2010 and 2009, respectively.  The decrease in the effective tax rate in thecurrent year compared to the same period in 2009 was due primarily to deferredpermanent differences resulting from the decrease between the grant and vestingprices of restricted common stock and restricted common stock units that vestedand state income tax related to apportionment changes.  Changes in state apportionment factors, basedon operational results, may affect our future effective tax rates.

 

**Liquidity and Capital Resources**

 

**Overview**

 

We generate significant cashflows from operating activities.  Webelieve that we will be able to meet our current and long-term liquidity andcapital requirements through our cash flow from operating activities, existingcash, cash equivalents and investments; through available borrowings under ourexisting credit facilities; and through our ability to obtain future externalfinancing.  Our primary use of cash in2010 has been for capital expenditures and scheduled payments of long-term debt(including interest). We anticipate continuing to use a substantial portion ofour cash flow to fund our capital expenditures, invest in new businessopportunities, fund network expansion, meet scheduled payments of long-termdebt and fund the share repurchase plan.

 

The following tablesummarizes our cash flows:

 
| ** **                                        | ** ** | **Nine Months Ended September 30,** | ** ** |
|---------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                        | ** ** | **2010**                                                | ** ** | **2009** | ** ** | **$ Change** | ** ** |
| Cash  Flows Provided By (Used In)                 |       |                                                    |       |   |   |   |   |
| Operating  Activities:                            |       |                                                    |       |   |   |   |   |
| Continuing  operations                            |       | $                                                       | 46,509     |   | $ | 52,571 |   | $ | (6,062 | ) |
| Discontinued  operations                          |       | —                                                  |       | (514 | ) | 514 |   |
|                                              |       |                                                    |       |   |   |   |   |
| Investing  Activities:                            |       |                                                    |       |   |   |   |   |
| Continuing  operations                            |       | (33,874                                                 | )          | (31,591 | ) | (2,283 | ) |
|                                              |       |                                                    |       |   |   |   |   |
| Financing  Activities:                            |       |                                                    |       |   |   |   |   |
| Continuing  operations                            |       | (16,909                                                 | )          | (16,168 | ) | (741 | ) |
| Increase  (Decrease) in Cash and Cash Equivalents |       | $                                                       | (4,274     | ) | $ | 4,298 |   | $ | (8,572 | ) |

 

**Cash Flows Provided By OperatingActivities**

 

Net cash provided bycontinuing operating activities was $46,509 during the nine-month period ended September 30,2010.  Significant adjustments to netincome to arrive at cash provided by operating activities primarily includenon-cash charges of $48,259 consisting primarily of (i) depreciation andamortization of $46,048 due to capital investments principally in the Broadbandsegment and (ii) stock compensation expense of $2,211. Cash provided byoperating activities was offset in part by a decrease in (i) accruedcompensation of $1,702 related in part to the payment in the current year of2009 incentive compensation and (ii) accrued liabilities of $2,546 relatedto the timing of various expenditures in the current year.

 

**Cash Flows Used InInvesting Activities**

 

Net cash used in continuinginvesting activities was $33,874 during the nine-month period ended September 30,2010 and was primarily related to capital expenditures that were partiallyoffset by proceeds from the sale of our auction rate security (“ARS”).

 

*Capital Expenditures*

 

Capital expenditures of$39,271 continue to be our primary recurring investing activity in thenine-month period ended September 30, 2010. A significant portion of ourcapital spending has been invested into success based capital projects withinour Broadband segment in an effort to increase our residential RGUs andbusiness customers.

 

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*Proceeds from Sale ofDiscontinued Operations*

 

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

 

*Auction Rate Security*

 

Asof December 31, 2009, we held one $3,700 par value ARS purchased from UBSFinancial Services, Inc., a subsidiary of UBS AG (“UBS”) with an estimatedfair value of $3,054, which was measured using Level 3 inputs. This ARS wascollateralized by student loans that are guaranteed primarily by a monolineinsurance company and partially by the Federal Family Education Loan Program (“FFELP”).As of December 31, 2009, we also held an offer (“Right” or “put option”)entitling us to sell at par our ARS anytime during a two-year period fromJune 30, 2010 through July 2, 2012.

 

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

 

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

 

**Cash Flows Provided By FinancingActivities**

 

Net cash used in financingactivities consists primarily of our proceeds and principal payments onlong-term borrowings and planned repurchases of our common stock.

 

*Long-term Debt*

 

On January 29, 2010, weentered into a letter agreement with CoBank amending certain terms of the ThirdAmended and Restated Credit Agreement (“Credit Agreement”). The CreditAgreement included a provision which required permanent reductions of theRevolving Loan facility of $7,500 at December 31, 2009 and 2010. Theletter agreement amended those provisions and included (i) an increase inthe total Revolving Loan facility of $7,500, (ii) CoBank’s share of theRevolving Loan facility will be permanently reduced by $5,000 (rather than$7,500) on December 31, 2010 and (iii) the total Revolving Loanfacility will be $57,500.  As a result ofthis letter agreement, our combined revolving commitment balance on ourRevolving Loan and Swingline Loan facilities was $60,000 and our available balanceas of September 30, 2010, which is less our outstanding balance of $8,500,was approximately $51,500.

 

As of September 30,2010, $14,545 and $36,000 were outstanding on the Series A and Series BSenior Notes, respectively. As of September 30, 2010, $120,000, $30,000,$8,500 and zero were outstanding on the CoBank Term Loan A, Term Loan B,Revolving Loan and Swingline Loan facilities, respectively. We had noshort-term borrowings as of September 30, 2010.

 

*Debt Covenants*

 

Our Series A and Series BSenior Notes and the Credit Agreement contain financial and operating covenantsthat may restrict, among other things, the repurchase of the Company’s commonstock, the payment of dividends, the making of certain other restrictedpayments and the incurrence of additional indebtedness. The covenants alsorequire us to maintain certain financial ratios and minimum levels of tangiblenet worth. If we fail to comply with the covenants and other restrictions, suchas making timely interest or principal payments, it could lead to an event ofdefault and the acceleration of our obligations under those agreements. As of September 30,2010, we were in compliance with all of our debt covenants.

 

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Our financial covenants asdefined in the Series A and Series B Senior Notes and the CreditAgreement, measured quarterly, are as follows:

 
| **Financial Covenant** | ** ** | **Required Ratio Level** | ** ** | **Actual Performance at   September 30, 2010** | ** ** |
|-----------------------------|------------|------------------------------------|------------|-------------------------------------------------------------------------|------------|
| Leverage  ratio             |       | Not  more than 3.75                |       | 2.7                                                                     |       |
| Interest  coverage ratio    |       | Not  less than 3.00                |       | 8.5                                                                     |       |
| Consolidated  net worth     |       | Not  less than $160,000            |       | $269,638                                                                |       |
| Debt  to capitalization     |       | Not  more than 0.55                |       | 0.44                                                                    |       |

 

At September 30, 2010and December 31, 2009, retained earnings of $109,638 and $109,183,respectively, were available for the payments described above.

 

*Share Repurchase Program*

 

In September 2010, ourBoard of Directors authorized the repurchase of up to an additional 1 millionshares of our common stock, supplementing the previously authorized sharerepurchase program.  The share repurchaseprogram was originally approved in February 2000, and expanded in June 2002and November 2006.  This additionalauthorization increases the total number of shares available for repurchaseunder the program to 3.5 million.  Sharesare purchased from time to time in the open market or through privatelynegotiated transactions, subject to overall financial and market conditions. Asof September 30, 2010, under the share repurchase program approximately2.3 million shares of common stock have been repurchased and approximately 1.2million additional outstanding shares remain authorized for repurchase by theBoard of Directors.

 

We repurchased approximately55 thousand and 413 thousand shares during the quarter and nine-month periodended September 30, 2010, respectively, and 108 thousand shares during thenine months ended September 30, 2009 (none during the quarter ended September 30,2009).  Approximately 42 thousand sharesof our shares repurchased in September 2010 did not settle until October 2010.  The purchase of common shares did not have asubstantive effect on the average number of common shares outstanding or thecalculation of basic and diluted earnings per share for the quarters ornine-month periods ended September 30, 2010 or 2009.

 

**Sufficiency of Cash Resources**

 

We had cash, cashequivalents and short-term investments at September 30, 2010 of$3,905.  As discussed in the Long-termdebt section above, we have additional long-term borrowing capacity ofapproximately $60,000 available to us through our Revolving Loan facility; ofwhich, $8,500 was outstanding as of September 30, 2010.  We believe our operating cash flows and ourborrowing capacity are sufficient to satisfy our liquidity requirements for thenext twelve months, while maintaining adequate cash and cash equivalents.

 

Our most significant use offunds in the remainder of 2010 is expected to be for (i) budgeted capitalexpenditures of up to approximately $15,000, (ii) scheduled payments oflong-term debt of $3,636 and (iii) anticipated interest payments of$2,609. As discussed above, throughout the year we may repurchase shares of theCompany’s common stock in the open market at the prevailing market price up toan amount authorized by the Board of Directors.

 

A portion of the 2010budgeted capital expenditures is at our discretion and dependent upon ourworking capital position, operating cash flows and ability to borrow. We canmodify our planned construction and commitments if the results of operations oravailable capital so require. A significant portion of our 2010 budgetedcapital expenditures are success based and is partially dependent on ourability to manage our growth and expansion. We are required to comply with ourcable franchise agreements to continue our build-out in the franchise areas.

 

*Defined Benefit Pension Plan*

 

As required, we contributeto the Pension Plan, Supplemental Executive Retirement Plan and certainpost-retirement benefits other than pensions (“Other Benefits Plan”)(collectively the “Plans”), which provide retirement benefits to certaineligible employees. Contributions are intended to provide for benefitsattributed to service to date. Our funding policy is to contribute annually anactuarially determined amount consistent with applicable federal income taxregulations. We stopped accruing benefits for active participants effectiveApril 1, 2007 and we anticipate that future funding requirements willdecrease significantly as a result of the freeze of the Plans.  However, the significant decline in theequity markets precipitated by the recent credit crisis and financial systeminstability has negatively affected the value of our Pension Plan assets.  Our minimum funding requirement for 2010related to the Pension Plan 

 

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is $2,620; however, due to acarryover credit balance of $4,461, no cash contribution will be required.  We will continue to evaluate the futurefunding requirements of the Plans and fund them as necessary. See Note 7for a more detailed discussion regarding our Pension Plan and Other BenefitsPlan.

 

*Income Taxes*

 

The timing of cash paymentsfor income taxes, which is governed by the Internal Revenue Service and othertaxing jurisdictions, will differ from the timing of recording tax expense anddeferred income taxes, which are reported in accordance with GAAP. For example,tax laws currently in effect for 2010 regarding accelerated or “bonus”depreciation for tax reporting may result in less cash payments than the GAAPtax expense on continuing and discontinued operations. Acceleration of taxdeductions could eventually result in situations where cash payments willexceed GAAP tax expense. Changes in tax laws create uncertainty as to when orif this situation will occur within the next three years.

 

Our deferred tax assets areexpected to be realized through the reversal of deferred tax liabilities andthrough the generation of future taxable income from ordinary and recurringoperations. Deferred tax assets that are dependent on specific businesssegments generating future taxable income were determined to be more likelythan not to be realized since those segments have at least 10 years in which togenerate the estimated required taxable income. Approximately $1,500 of futuretaxable income is estimated to be required to realize these deferred taxassets.

 

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

 

**Regulatory Matters**

 

As discussed more fully inthe Regulatory Matters section above, the CPUC issued a final decision whichwill phase down our annual CHCF interim draw by approximately $2,040 annually,over a 5-year period ending on January 1, 2012.  In addition, SureWest Telephone’s intrastateaccess element, the transport interconnection charge (“TIC”), will beeliminated effective January 1, 2011 in accordance with previous CPUCfinal decisions.  We anticipate a reduction in our 2011 intrastate accessrevenues of approximately $2,025 when the TIC is eliminated. SureWest Telephonewill have an opportunity to recover all or part of the lost TIC revenueelsewhere, including residential rate adjustments.

 

**CriticalAccounting Estimates**

 

Our condensed consolidatedfinancial statements and accompanying notes are prepared in accordance withGAAP. Preparing financial statements requires management to make estimates andassumptions that affect the reported amounts of assets, liabilities, revenue,and expenses. These estimates and assumptions are affected by management’sapplication of accounting policies. Our judgments are based on historicalexperience and on various other assumptions that are believed to be reasonableunder the circumstances, the results of which form the basis for makingestimates about the carrying values of assets and liabilities that are notreadily apparent from other sources. For a full discussion of our accountingestimates and assumptions that we have identified as critical in thepreparation of our condensed consolidated financial statements, refer to our2009 Annual Report on Form 10-K.

 

Asdiscussed more fully in Note 1 of the condensed consolidated financialstatements, in accordance with Financial Accounting Standards Board (“FASB”)Accounting Standards Codification (“ASC”) Topic 350, *Intangibles-Goodwill and Other*(“ASC 350”) (formerly Statement ofFinancial Accounting Standards No. 142,*Goodwill and other Intangible Assets*)*,* goodwill is reviewed forimpairment annually or more frequently if an event occurs or circumstanceschange that would reduce the fair value below its carrying value.

 

Theimpairment test for goodwill requires us to estimate the fair value at thereporting unit level. Our goodwill is allocated to the Telephone reporting unitand the Kansas City operations reporting unit. The Telecom segment includes theTelephone reporting unit.  The Broadbandsegment includes the Kansas City operations reporting unit. At June 30,2010 and September 30, 2010, the goodwill allocated to the Telephonereporting unit and the Kansas City operations reporting unit was $2,171 and$43,643, respectively. As a result of declines in the market price of theCompany’s common stock during the quarter ended June 30, 2010, we concludedthat this was an indicator of potential impairment of goodwill and performed aninterim goodwill impairment test as of June 30, 2010 on the goodwillrecorded at the Kansas City operations reporting unit.

 

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AtJune 30, 2010 and September 30 2010, the carrying value of the KansasCity operations reporting unit included $43,643 of goodwill.  For the Kansas City operations reportingunit, the estimated fair value of the reporting unit is determined using acombination of a discounted cash flow (“DCF”) model and a market basedapproach. The assumptions used in the estimate of fair value are based upon acombination of historical results and trends, new industry developments, futurecash flow projections, as well as relevant comparable company earningsmultiples for the market based approach. Such assumptions are subject to changeas a result of changing economic and competitive conditions.  We use a weighted average of the variousmodels to estimate the fair value of the Kansas City operating reportingunit.  At June 30, 2010, weperformed a valuation to determine the fair value of our goodwill using a DCFmodel. Assumptions used in this model include the following:

 

·      cash flowassumptions regarding investment in network facilities, distribution channelsand customer base (the assumptions underlying these inputs are based upon acombination of historical results and trends, new industry developments and theCompany’s business plans);

·      a 14% weightedaverage cost of capital based on industry weighted averaged cost of capital;and

·      a 4% terminalgrowth rate.

 

Whendetermining the fair value of the reporting units, the use of differentestimates or assumptions within the DCF model or other market based approachescould result in a different fair value. For example, in our DCF model we used adiscount rate of 14% and a terminal growth rate of 4% in our assessment of fairvalue in 2010.  At June 30, 2010,the fair value of the Kansas City operating unit was $225,000 and theassociated carrying value was $200,000. If the discount rate in our DCF modelwere to increase 2%, the fair value of $225,000 would decrease by approximately$19,000, which would not result in an impairment of goodwill recorded at theKansas City operations reporting unit, assuming there are no changes to themarket-based approaches used in the valuation. Assuming the discount rate inour DCF model was to increase 2% and the market-based valuation approachesdecreased by 5%, the fair value of $225,000 would decrease by approximately$25,000, and would equal the June 30, 2010 carrying value. As discussedabove, the other market-based approaches are subject to change as a result ofchanging economic and competitive conditions. Negative changes relating to theKansas City operations could result in a potential impairment of goodwillrecorded at the Kansas City operations reporting unit.

 

AtSeptember 30, 2010, we reviewed the various inputs and assumptions appliedin our June 30, 2010 interim impairment test of the goodwill recorded atthe Kansas City operations reporting unit to determine if any significantchanges occurred during the quarter ended September 30, 2010 that wouldimpact the June 30, 2010 results. Based on this review, we have concluded that the goodwill was notimpaired as of September 30, 2010. We will perform our annual goodwill impairment test as of November 30,2010.

 

**RecentAccounting Pronouncements**

 

**Recently Issued Accounting Pronouncements**

 

InJuly 2010, the FASB issued Accounting Standards Update (“ASU”) No. 2010-20,*Receivables (Topic 310) -**Disclosures about the Credit Quality of Financing Receivables and theAllowance for Credit Losses* (“ASU 2010-20”). ASU 2010-20 requiresentities to provide additional disclosures concerning financing receivables andallowance for credit losses. Specifically, the new disclosures include (i) the nature of creditrisk inherent in the entity’s portfolio of financing receivables, (ii) thefactors considered in analyzing such risk in arriving at the allowance forcredit losses and (iii) the changes and reasons for those changes in theallowance for credit losses. Public entities are required to adopt theprovisions of ASU 2010-20 related to disclosures of financing receivables as ofthe end of a reporting period for interim or annual reporting periods ending onor after December 15, 2010.  Thefinancing receivables disclosures related to activity that occurs during areporting period are effective for interim or annual reporting periodsbeginning on or after December 15, 2010. We are currently evaluating the impact this update will have on ourcondensed consolidated financial statements.

 

In October 2009, theFASB issued ASU No. 2009-13, *Revenue Recognition (Topic605): Multiple-Deliverable Revenue Arrangements—a consensus of the FASBEmerging Issues Task Force*(“ASU 2009-13”).  ASU 2009-13 addresses the accounting formultiple-deliverable arrangements to enable vendors to account for products orservices separately rather than as a combined unit and modifies the manner inwhich the transaction consideration is allocated across the separatelyidentified deliverables.  ASU 2009-13significantly expands the disclosure requirements for multiple-deliverablerevenue arrangements.  ASU 2009-13 willbe effective for the first annual reporting period beginning on or after June 15,2010, and may be applied retrospectively for all periods presented orprospectively to 

 

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arrangements entered into ormaterially modified after the adoption date. Early adoption is permitted, provided that the guidance is retroactivelyapplied to the beginning of the year of adoption. We are currently evaluatingthe impact this update will have on our condensed consolidated financialstatements.

 

**Recently Adopted Accounting Pronouncements**

 

In February 2010, theFASB issued ASU No. 2010-09, *Subsequent Events**(Topic 855) — Amendments to Certain Recognition andDisclosure Requirements* (“ASU 2010-09”). ASU 2010-09 amends ASCTopic 855 to remove the requirement for an SEC filer to disclose the datethrough which subsequent events have been evaluated both in issued and revisedfinancial statements.  ASU 2010-09 waseffective immediately.  Our adoption ofthis guidance had no impact on our condensed consolidated financial position andresults of operations.

 

In January 2010, theFASB issued ASU No. 2010-06, *Fair Value Measurementsand Disclosures (Topic 820) — Improving Disclosures about Fair ValueMeasurements* (“ASU 2010-06”). ASU 2010-06 amends ASC Topic 820, *Fair Value Measurementsand Disclosures*(“ASC 820”) to require additional disclosuresregarding fair value measurements. Specifically, ASU 2010-06 requires entitiesto disclose additional information regarding (i) the reconciliation ofrecurring Level 3 measurements about purchases, sales, issuances andsettlements on a gross basis, (ii) the amounts of significant transfersbetween Level 1 and Level 2 of the fair value hierarchy and the reasons forthese transfers and (iii) the reasons for any transfers in or out of Level3. In addition to these new disclosure requirements, ASU 2010-06 also amendsASC 820 to further clarify existing guidance pertaining to the level ofdisaggregation at which fair value disclosures should be made and therequirements to disclose information about the valuation techniques and inputsused in estimating Level 2 and Level 3 fair value measurements. Our adoption ofthe requirements of this guidance on January 1, 2010, except for therequirement to separately disclose information about purchases, sales,issuances, and settlements in the reconciliation of recurring Level 3 measurementson a gross basis which becomes effective for fiscal years (and interim periodswithin those fiscal years) beginning after December 15, 2010, did not havea material impact on our condensed consolidated financial position or resultsof operations.

 

**Regulatory and Legal Matters**

 

Significant portions of ourtelecommunication rates and charges are subject to regulation by the FCC andstate commissions.  Many of these ratesand charges are based on various tariffs or service guides filed by SureWestand 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 financialcondition and results of operations have been and will be affected by recentand future proceedings before the state commissions and FCC. Pending before theFCC and state commissions are proceedings that, among other things, areconsidering:

 

·                              additionalrules governing the opening of markets to competition and the regulationof the competing telecommunications providers;

·                              the nature andextent of the compensation, if any, to be paid by carriers and other providersto one another for network use, and the sums to be recovered through end usersand other sources;

·                              the goals anddefinition of universal telephone service in a changing environment, includingexamination of subsidy support mechanisms for subscribers of different carriers(including incumbent carriers) and in various geographic areas;

·                              rules thatwill provide non-discriminatory access by competing service providers to thenetwork capabilities of local exchange carriers; and

·                              the regulatedrates and earnings of SureWest Telephone.

 

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

 

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

 

Our 2009 Annual Report on Form 10-Kcontains certain disclosures about our limited exposure to market risk forchanges in interest rates.  There have been no material changes to theinformation provided which would require additional disclosures as of the dateof this filing.

 

**ITEM 4.  CONTROLS ANDPROCEDURES.**

 

**Evaluation of disclosure controlsand procedures**

 

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

 

Inthe second quarter of 2010, we reduced our workforce by approximately 60positions, including open and unfilled positions.  The affected positions were comprised of arange of levels across the Company, including Bill M. DeMuth, Senior VicePresident and Chief Technology Officer, who left the Company on June 30,2010 pursuant to a Severance Agreement. The responsibilities of the affected employees were assumed by remainingemployees and management, as deemed necessary. Based on our interim control testing and management’s continualassessment of our internal control environment to date, the changes to ouremployee base and management team have not adversely impacted our internalcontrols or control environment, however we will continue to monitor ourinternal controls for any adverse impacts.

 

Therehas been no change in our internal control over financial reporting during thequarter and nine-month period ended September 30, 2010 that has materiallyaffected, or is reasonably likely to materially affect, our control overfinancial reporting.  However, beginningin the second quarter of 2010, we commenced certain strategic projects to moveour cash management services from our existing financial institutions to twonew financial institutions. The movement of these services will likely becompleted in 2010.  As part of these projects,management will be evaluating our internal controls over financial reportingafter the completion of all of the cash management changes.

 

**Limitations on the effectivenessof controls**

 

Ourmanagement is responsible for establishing and maintaining adequate internalcontrol over financial reporting. Our internal control system was designed toprovide reasonable assurance to our management, Board of Directors and AuditCommittee regarding the reliability of financial reporting and the preparationof published financial statements in accordance with generally acceptedaccounting principles.

 

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**PART II —OTHER INFORMATION**

 

**ITEM 1.  LEGAL PROCEEDINGS.**

 

Refer to Notes 5 and 9 toour condensed consolidated financial statements of the Quarterly Report on Form 10-Qfor a discussion of recent developments related to our regulatory and legalproceedings.

 

**ITEM 2.  UNREGISTERED SALESOF EQUITY SECURITIES AND USE OF PROCEEDS.**

 
| **Period**                                                     | ** ** | **(a) Total   Number of   Shares   Purchased** | ** ** | **(b) Average   Price Paid   per Share** | ** ** | **(c) Total Number of   Shares Purchased   as Part of Publicly   Announced Plan** | ** ** | **(d) Shares   Available for   Repurchase under  the Plan** | ** ** |
|----------------------------------------------------------------|------------|-------------------------------------------------------------------------|------------|-------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------|------------|
| July 1,  2010 - July 31, 2010                        |       | —                                                                  |       | $                                                                 | —     |                                                                                                                                     | 2,246,863  |                                                                                      | 253,137    |   |
| August 1,  2010 - August 31, 2010                    |       | —                                                                  |       | $                                                                 | —     |                                                                                                                                     | 2,246,863  |                                                                                      | 253,137    |   |
| September 1,  2010 - September 30, 2010 (1) (2) |       | 54,870                                                                  |       | $                                                                 | 7.07       |                                                                                                                                     | 2,301,733  |                                                                                      | 1,198,267  |   |

 

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(1)        As discussed inPart 1, Item 2 “Management’s Discussion and Analysis of FinancialCondition and Results of Operations”, in September 2010 the Company’sBoard of Directors authorized the repurchase of up to an additional one millionshares, supplementing the previously authorized share repurchase program.

(2)        Approximately42 thousand shares repurchased in September 2010 did not settle until October 2010.

 

**ITEM 6****. ****EXHIBITS.**

 

(a)          Index to Exhibits.

 
| **Exhibit  No.** | ** ** | **Description**                                                                                                                                                                                   | ** ** | **Method  of Filing** |
|------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------|
| 31.1             |       | Certification  of Steven C. Oldham, President and Chief Executive Officer, as adopted  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                             |       | Filed herewith             |
|             |       |                                                                                                                                                                                              |       |                       |
| 31.2             |       | Certification  of Dan T. Bessey, Vice President and Chief Financial Officer, as adopted  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                           |       | Filed herewith             |
|             |       |                                                                                                                                                                                              |       |                       |
| 32.1             |       | Certification  of Steven C. Oldham, President and Chief Executive Officer, pursuant to 18  U.S.C. Section 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002   |       | Filed herewith             |
|             |       |                                                                                                                                                                                              |       |                       |
| 32.2             |       | Certification  of Dan T. Bessey, Vice President and Chief Financial Officer, pursuant to 18  U.S.C. Section 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002 |       | Filed herewith             |

 

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**SIGNATURES**

 

Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned,thereunto duly authorized.

 
|                         | SUREWEST COMMUNICATIONS |
|------------------------------|-------------------------|
|                         | (Registrant)            |
|                         |                    |
|                         |                    |
|                         | By:                     | /s/  STEVEN C. OLDHAM |
|                         |                    | Steven  C. Oldham, |
|                         |                    | President  and Chief |
|                         |                    | Executive  Officer |
|                         |                    |   |
|                         |                    |   |
|                         | By:                     | /s/  DAN T. BESSEY |
|                         |                    | Dan  T. Bessey, |
|                         |                    | Vice  President and |
|                         |                    | Chief  Financial Officer |
|                         |                    |   |
| Date:  October 28, 2010 |                    |   |

 

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