UNITED STATESSECURITIES
AND EXCHANGE COMMISSIONWashington, D.C. 20549FORM 10-Q

[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2004

[     ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number
0-556

SUREWEST COMMUNICATIONS

---

(Exact Name of Registrant as Specified in Its Charter)

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

Registrants telephone number, including area code (916) 786-6141

Indicate by check mark whether the
registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.

Yes X  No

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of
the Exchange Act).

Yes X  No

Indicate the number of shares
outstanding of each of the issuers classes of common stock, as of the latest
practicable date.

As of July 31, 2004, 14,579,501
shares of the registrants Common Stock were outstanding.

1



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|TABLE OF CONTENTS
|-----------------
|
|PART I.          
|Item 1.          
|Item 2.          
|Item 3.          
|Item 4.          
|PART II.         
|Item 1.          
|Item 4.          
|Item 6.          
|SIGNATURES       
|CERTIFICATIONS   

2



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SUREWEST COMMUNICATIONSCONDENSED CONSOLIDATED STATEMENTS OF INCOME(Unaudited)
(Amounts in thousands, except per share amounts)

|                                         | Quarter Ended June 30, | Six Months Ended June 30,
|---------------------------------------- | ---------------------- | -------------------------
|
|Operating revenues:                      |                        |                          
|Local service                            |                        |                          
|Network access service                   |                        |                          
|Directory advertising                    |                        |                          
|Long distance service                    |                        |                          
|Wireless service                         |                        |                          
|Internet service                         |                        |                          
|Residential broadband service            |                        |                          
|Business broadband service               |                        |                          
|Other                                    |                        |                          
|                                         |                        |                          
|Total operating revenues                 |                        |                          
|                                        
|Operating expenses:                      |                        |                          
|Cost of services and products            |                        |                          
|Customer operations and selling          |                        |                          
|General and administrative               |                        |                          
|Depreciation and amortization            |                        |                          
|                                         |                        |                          
|Total operating expenses                 |                        |                          
|                                         |                        |                          
|Income from operations                   |                        |                          
|                                        
|Other income (expense):                  |                        |                          
|Interest income                          |                        |                          
|Interest expense                         |                        |                          
|Other, net                               |                        |                          
|                                         |                        |                          
|Total other expense, net                 |                        |                          
|                                         |                        |                          
|                                        
|Income before income taxes               |                        |                          
|                                        
|Income taxes                             |                        |                          
|                                         |                        |                          
|                                        
|Net income                               |                        |                          
|                                         |                        |                          
|                                        
|Basic and diluted earnings per share (1) |                        |                          
|                                         |                        |                          
|                                        
|Cash dividends per share (2)             |                        |                          
|                                         |                        |                          
|Shares of common stock used to calculate |                        |                          
|earnings per share:                      |                        |                          
|Basic                                    |                        |                          
|                                         |                        |                          
|Diluted                                  |                        |                          
|                                         |                        |                          
|                                        

| | (1) | Shares used in the computation of basic earnings per share are based on the
               weighted average number of common shares outstanding, excluding unvested
               restricted common shares. Shares used in the computation of diluted earnings per
               share are based on the weighted average number of common and other potentially
               dilutive securities outstanding in each period.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (2) | Cash dividends per share are based on the actual dividends per share, as
               declared by the Companys Board of Directors.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------

See accompanying notes.

3



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SUREWEST COMMUNICATIONSCONDENSED CONSOLIDATED BALANCE SHEETS(Unaudited)(Amounts in thousands)

|                                                             | June 30,
2004 | December 31,
2003
|------------------------------------------------------------ | ------------- | -----------------
|ASSETS                                                       |               |                  
|Current assets:                                              |               |                  
|Cash and cash equivalents                                    |               |                  
|Short-term investments                                       |               |                  
|Accounts receivable, net                                     |               |                  
|Deferred income tax asset                                    |               |                  
|Inventories                                                  |               |                  
|Deferred directory costs                                     |               |                  
|Prepaid expenses                                             |               |                  
|Other current assets                                         |               |                  
|                                                             |               |                  
|Total current assets                                         |               |                  
|                                                            
|Property, plant and equipment, net                           |               |                  
|                                                            
|Intangible and other assets:                                 |               |                  
|Wireless spectrum licenses, net                              |               |                  
|Goodwill                                                     |               |                  
|Intangible asset relating to pension plans                   |               |                  
|Intangible asset relating to favorable operating leases, net |               |                  
|Deferred charges and other assets                            |               |                  
|                                                             |               |                  
|                                                             |               |                  
|                                                             |               |                  
|                                                             |               |                  
|                                                             |               |                  
|LIABILITIES AND SHAREHOLDERS' EQUITY                         |               |                  
|Current liabilities:                                         |               |                  
|Current portion of long-term debt                            |               |                  
|Current portion of capital lease obligations                 |               |                  
|Accounts payable                                             |               |                  
|Other accrued liabilities                                    |               |                  
|Estimated shareable earnings obligations                     |               |                  
|Advance billings and deferred revenues                       |               |                  
|Accrued income taxes                                         |               |                  
|Accrued compensation                                         |               |                  
|                                                             |               |                  
|Total current liabilities                                    |               |                  
|                                                            
|Long-term debt                                               |               |                  
|Long-term capital lease obligations                          |               |                  
|Deferred income taxes                                        |               |                  
|Other liabilities and deferred revenues                      |               |                  
|Commitments and contingencies                                |               |                  
|                                                            
|Shareholders' equity:                                        |               |                  
|Common stock, without par value; 100,000 shares authorized,  |               |                  
|14,579 and 14,578 shares issued and outstanding at           |               |                  
|June 30, 2004 and December 31, 2003, respectively            |               |                  
|Deferred stock-based compensation                            |               |                  
|Accumulated other comprehensive loss                         |               |                  
|Retained earnings                                            |               |                  
|                                                             |               |                  
|Total shareholders' equity                                   |               |                  
|                                                             |               |                  
|                                                             |               |                  
|                                                             |               |                  

See accompanying notes.

4



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SUREWEST COMMUNICATIONSCONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWSINCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS(Unaudited)(Amounts in thousands)

|                                                                          | Six Months Ended
June 30,
|------------------------------------------------------------------------- | -------------------------
|
|Cash flows from operating activities                                      |                          
|Net income                                                                |                          
|Adjustments to reconcile net income to net cash provided by               |                          
|operating activities:                                                     |                          
|Depreciation and amortization                                             |                          
|Provision for deferred income taxes                                       |                          
|Provision for doubtful accounts                                           |                          
|Stock-based compensation                                                  |                          
|Other, net                                                                |                          
|Net changes in:                                                           |                          
|Receivables                                                               |                          
|Refundable and accrued income taxes, net                                  |                          
|Inventories, prepaid expenses and other current assets                    |                          
|Accounts payable                                                          |                          
|Accrued liabilities and other deferred credits                            |                          
|                                                                          |                          
|Net cash provided by operating activities                                 |                          
|                                                                         
|Capital expenditures for property, plant and equipment, including network |                          
|parts inventory                                                           |                          
|Purchases of held-to-maturity investments                                 |                          
|Increase in deferred charges and other assets                             |                          
|                                                                          |                          
|Net cash used in investing activities                                     |                          
|                                                                         
|Cash flows from financing activities:                                     |                          
|Repayment of short-term borrowings                                        |                          
|Proceeds from long-term debt                                              |                          
|Principal payments of long-term debt and capital lease obligations        |                          
|Debt issuance costs                                                       |                          
|Proceeds from exercise of stock options                                   |                          
|Dividends paid                                                            |                          
|                                                                          |                          
|Net cash (used in) provided by financing activities                       |                          
|                                                                          |                          
|                                                                         
|(Decrease) increase in cash and cash equivalents                          |                          
|                                                                         
|Cash and cash equivalents at beginning of period                          |                          
|                                                                          |                          
|Cash and cash equivalents at end of period                                |                          
|                                                                          |                          

See accompanying notes.

5



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SUREWEST COMMUNICATIONS
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Unaudited)(Amounts
in thousands, except share and per share amounts)

1.    
          SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The condensed consolidated financial
statements of SureWest Communications (the Company) have been prepared in
accordance with accounting principles generally accepted in the U.S. for interim financial
information and pursuant to the rules and regulations of the Securities and Exchange
Commission (SEC). In the opinion of management, all adjustments (consisting
only of normal recurring adjustments) considered necessary for a fair presentation of the
results for the interim periods shown have been included. Certain information and footnote
disclosures normally included in annual financial statements prepared in accordance with
U.S. generally accepted accounting principles have been condensed or omitted pursuant to
such SEC rules and regulations and accounting principles applicable for interim periods.
Management believes that the disclosures made are adequate to make the information
presented not misleading. These condensed consolidated financial statements should be read
in conjunction with the consolidated financial statements and notes thereto included in
the Companys 2003 Annual Report on Form 10-K filed with the SEC.

The Company is a holding company with
wholly-owned subsidiaries that provide integrated communications services in Northern
California. The Companys principal operating subsidiary is SureWest Telephone
(formerly known as Roseville Telephone Company). SureWest Directories, SureWest Long
Distance (formerly known as Roseville Long Distance Company), SureWest Broadband and
SureWest Wireless are each subsidiaries of the Company. The Company expects that the
sources of its revenues and its cost structure may be different in future periods, both as
a result of its entry into new communications markets and competitive forces in each of
the markets in which the Company has operations.

Stock-based Compensation

The Company has two stock-based
compensation plans. Effective January 1, 2003, the Company adopted the fair value
recognition provisions of Statement of Financial Accounting Standards (SFAS)
No. 123, Accounting for Stock-Based Compensation. Under the prospective method
of adoption selected by the Company under the provisions of SFAS No. 148, Accounting
for Stock-Based Compensation  Transition and Disclosure, the fair value method
of accounting was applied to all employee awards granted, modified, or settled after
January 1, 2003. The adoption of the fair value recognition provisions of SFAS No.
123 did not have a material effect on the Companys condensed consolidated financial
statements for the quarter and six months ended June 30, 2003. Stock-based compensation
associated with employee stock options is recognized over the vesting periods (which range
from 1 to 5 years) using the graded vesting method.

The fair values of the Companys
employee stock options were estimated at the date of grant using the Black-Scholes
option-pricing model with the following weighted-average assumptions for the quarter and
six months ended June 30, 2004 and 2003:

|                        | Quarter Ended June 30, | Six Months Ended June 30,
|----------------------- | ---------------------- | -------------------------
|
|                        |                        |                          
|Risk-free Interest Rate | --                     | 1.73%                    
|Expected Dividend Yield | --                     | 2.50%                    
|Expected Volatility     | --                     | 42.72%                   
|Expected Lives          | --                     | 4.0 years                
|                       

The Black-Scholes option pricing
model includes assumptions regarding dividend yields, expected volatility, expected lives
and risk-free interest rates. These assumptions reflect managements best estimates,
but these items involve inherent uncertainties based on market conditions generally
outside of the control of the Company. As a result, if other assumptions had been used in
the current period, actual and pro forma stock-based compensation expense could have been
materially different. If management uses different assumptions in future periods,
stock-based compensation expense could be materially impacted in future periods.

6



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SUREWEST COMMUNICATIONSNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

The expense related to stock-based
employee compensation included in the determination of net income is less than that which
would have been recognized if the fair value method had been applied to all awards granted
after the original effective date of SFAS No. 123. If the Company had elected to adopt the
fair value recognition provisions of SFAS No. 123 as of its original effective date, pro
forma net income and earnings per share would be as follows:

|                                         | Quarter Ended June 30, | Six Months Ended June 30,
|---------------------------------------- | ---------------------- | -------------------------
|
|Net income, as reported                  |                        |                          
|                                        
|Add:  Stock-based employee compensation  |                        |                          
|expense included in reported net income, |                        |                          
|net of related tax effects               |                        |                          
|                                        
|Deduct:  Total stock-based employee      |                        |                          
|compensation expense determined using    |                        |                          
|the fair value method for all awards,    |                        |                          
|net of related tax effects               |                        |                          
|                                         |                        |                          
|Pro forma net income                     |                        |                          
|                                         |                        |                          
|Earnings per share:                      |                        |                          
|                                        
|Basic--as reported                       |                        |                          
|Basic--pro forma                         |                        |                          
|                                        
|Diluted--as reported                     |                        |                          
|Diluted--pro forma                       |                        |                          
|                                        

There were no options granted to
employees during the quarter or six months ended June 30, 2004. The weighted-average grant
date fair values of options granted to employees were $8.81 per share and $8.75 per share
during the quarter and six months ended June 30, 2003, respectively.

Other Comprehensive
Income (Loss)

The Companys consolidated net
income equaled its consolidated comprehensive income for the quarters and six-month
periods ended June 30, 2004 and 2003.

As of June 30, 2004 and 2003, the
accumulated other comprehensive loss was $261 and $1,637, respectively, which consisted of
minimum pension and post-retirement benefit liability adjustments, net of income taxes.

Cumulative Effect of
Change in Accounting Principle

The Company adopted SEC Staff
Accounting Bulletin (SAB) No. 101, Revenue Recognition in Financial
Statements, effective January 1, 2000, which requires non-recurring revenues
associated with service and activation charges to be deferred. The cumulative effect of
this change in accounting principle was $3,273, net of tax, ($0.21 per share) in 2000.

7



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SUREWEST COMMUNICATIONSNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

For the three-month periods ended
March 31 and June 30, 2004 and 2003, the Company recognized the following revenues that
were included in the cumulative effect adjustment as of January 1, 2000:

|Three Months Ended: |               
|------------------- | --------------
|                    | March 31, 2004
|                    | June 30, 2004 
|                    | March 31, 2003
|                    | June 30, 2003 

The net effect of these revenues in
2004 was to increase net income in the three-month periods ended March 31 and June 30 by
$32 (no effect on earnings per share) and $23 (no effect on earnings per share),
respectively.

The net effect of these revenues in
2003 was to increase net income in the three-month periods ended March 31 and June 30 by
$75 ($0.01 per share) and $68 (no effect on earnings per share), respectively.

Adjustments and
Reclassifications

During the Companys financial
statement closing process for the quarter ended December 31, 2003, certain matters were
identified related to prior financial reporting periods that necessitated the recording of
adjustments to the Companys condensed consolidated financial statements. Such
adjustments pertained principally to property, plant and equipment, and management
believes that weaknesses in the Companys internal controls caused the errors that
resulted in these adjustments. The Company does not believe any of the aforementioned
amounts are material, individually or in the aggregate, to the respective prior interim
periods based on both quantitative and qualitative factors, including the trend of
operating results. Accordingly, the Company prospectively corrected these errors during
the fourth quarter of 2003. Certain of the aforementioned amounts relating to prior
periods would have reduced the Companys consolidated net income by $119, or $0.01
per basic and diluted share, and $342, or $0.02 per basic and diluted share, during the
quarter and six months ended June 30, 2003, respectively, had such errors been corrected
in the periods in which they originated.

Certain amounts in the Companys
2003 condensed consolidated financial statements have been reclassified to conform to the
presentation of the Companys 2004 condensed consolidated financial statements.

2.    
          CORPORATE TREASURY INVESTIGATION

In December 2003, the Company
discovered certain irregular bank transactions and deposits in a routine investigation
following the abrupt resignation of an employee in the Companys Corporate Finance
Department. Immediately following the Companys initial review that uncovered suspect
transfers, the Company broadened its review of the investment and cash operations, and a
special corporate investigation was launched by the Audit Committee of the Board of
Directors, which engaged outside counsel and forensic auditors. The investigations
revealed concealed illegal transfers in violation of the Companys investment and
cash management policies. The Company believes that the irregularities were limited to the
2003 calendar year. The investigation suggests that as much as $25,000 may have been
involved in the scheme. Nearly all of the funds have been recovered; however, at present,
approximately $1,828 remains outstanding and was reflected as a non-operating loss in the
Companys 2003 consolidated financial statements. The Company has filed an insurance
claim to recover the missing funds. In January 2004, the Federal Bureau of Investigation
(FBI) launched its own probe into the illegal funds transfer. On February 5,
2004, the FBI made three arrests, including the former employee of the Companys
Corporate Finance Department, on charges of mail fraud, conspiracy and money laundering.
The Company has been advised that one of the individuals has entered a plea of guilty. The
Company has filed a civil lawsuit seeking to recover the misappropriated funds and other
costs from five individuals and a private company allegedly associated with the fraudulent
scheme to illegally transfer the Companys funds to outside accounts. The Company
will recognize a recovery of funds, if any, in future periods to the extent of its
insurance and litigation recoveries.

8



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SUREWEST COMMUNICATIONSNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

3.    
          CHANGE IN ESTIMATE

In January 2004, the Company revised
its long-term network operating plan for its Telecommunications (Telecom) and
Wireless segments as a result of the successful adoption of certain new technologies that
enable the Company to maximize the return on existing network facilities and migrate to
other new technologies at the point in time in which the benefit to do so exceeds the cost
of conversion. As a result of this change in strategic direction, which was formally
approved by the Companys Board of Directors in December 2003, the Company has
evaluated the appropriateness of its estimated useful lives of certain property, plant and
equipment at both the Telecom and Wireless segments. Based on this evaluation, the Company
increased the estimated useful lives of Telecoms digital switching, circuit and
cable equipment by one to three years and Wireless base stations, towers and network
software by one to eight years. The Company also decreased the estimated useful lives of
certain other Telecom assets, including certain other switching and voicemail equipment.
These changes were made effective January 1, 2004. The Companys revisions have been
supported by an assessment and report from an independent third party with expertise in
this area that found the revisions to be reasonable in light of the Companys plan
and useful life estimates in comparable businesses.

During the quarter and six months
ended June 30, 2004, this change in estimate decreased consolidated depreciation expense
by $2,679 and $5,956, respectively, and increased consolidated net income by $1,575 ($0.11
per share) and $3,490 ($0.24 per share), respectively. This change in accounting estimate
decreased Telecom depreciation expense and increased Telecom income from operations by
$1,319 and $3,288 for the quarter and six months ended June 30, 2004, respectively. In
addition, Wireless depreciation expense and loss from operations decreased by
approximately $1,360 and $2,668, respectively, for the quarter and six months ended June
30, 2004 as a result of this change in accounting estimate.

4.    
          BUSINESS SEGMENTS

The Company has three reportable
business segments: Telecom, Broadband and Wireless. The Telecom segment includes SureWest
Telephone, SureWest Directories and SureWest Long Distance, which provide landline
telecommunications services, directory advertising, Digital Subscriber Line
(DSL) service, long distance services and certain non-regulated services.
SureWest Telephone, which is the principal operating subsidiary of the Telecom segment,
provides local and toll telephone services, network access services and certain
non-regulated services. SureWest Directories publishes and distributes SureWest
Telephones directory, including the sale of yellow pages advertising. SureWest
Directories is also engaged in the business of producing, publishing and distributing
directories in other Northern California communities outside of SureWest Telephones
service area. SureWest Long Distance is a reseller of long distance services.

The Broadband segment includes the
Companys subsidiaries SureWest Broadband and SureWest Broadband Business Services.
SureWest Broadband Business Services is comprised of a division of SureWest Telephone
operating as a Competitive Local Exchange Carrier. The Broadband segment provides various
services, including high-speed and dial-up Internet, digital video, local, network access,
toll telephone and managed services in the greater Sacramento area, principally to
customers residing outside of SureWest Telephones service area. The Company offers
high-speed Internet, digital video and local and long distance phone service as a bundled
package referred to as fiber-to-the-premise (FTTP) (previously referred to as
Triple Play). In December 2003, SureWest Broadband began offering digital
video services to customers inside SureWest Telephones service area.

The Wireless segment consists of the
Companys subsidiary SureWest Wireless, which provides wireless services. SureWest
Wireless derives its revenue from the provision of wireless voice services, sales of
handsets and related communication equipment, long distance, handset insurance, roaming
service and custom calling features. Wireless services are provided on a month-to-month
basis and are generally billed in advance for non-contract subscribers and in arrears for
contract subscribers.

Corporate Operations are allocated to
the appropriate segments, except for cash, investments, certain property, plant, and
equipment and miscellaneous other assets. However, the investment income associated with
cash and investments held by Corporate Operations is included in the results of the
operations of the Companys segments. The Company evaluates the performance of its
segments based on income (loss) from operations.

9



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SUREWEST COMMUNICATIONSNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

These segments are strategic business
units that offer different products and services. The Company accounts for intersegment
revenues and expenses at prevailing market rates. The Companys business segment
information is as follows:

|                                | Telecom | Broadband | Wireless | Corporate
Operations | Intercompany
Eliminations | Consolidated
|------------------------------- | ------- | --------- | -------- | -------------------- | ------------------------- | ------------
|For the three months ended June |         |           |          |                      |                           |             
|30, 2004:                       |         |          
|Operating revenues from         |         |          
|external customers              |         |           | $        | 34,772               |                           | $           
|Intersegment revenues           |         |           |          | 6,489                |                           |             
|Operating expenses              |         |           |          | 20,320               |                           |             
|Depreciation and amortization   |         |           |          | 6,348                |                           |             
|Income (loss) from operations   |         |           | $        | 14,593               |                           | $           
|                               
|For the three months ended June |         |          
|30, 2003:                       |         |          
|Operating revenues from         |         |          
|external customers              |         |           | $        | 36,453               |                           | $           
|Intersegment revenues           |         |           |          | 5,867                |                           |             
|Operating expenses              |         |           |          | 19,996               |                           |             
|Depreciation and amortization   |         |           |          | 7,691                |                           |             
|Income (loss) from operations   |         |           | $        | 14,633               |                           | $           
|                               
|As of and for the six months    |         |          
|ended June 30, 2004:            |         |          
|Operating revenues from         |         |          
|external customers              |         |           | $        | 69,966               |                           | $           
|Intersegment revenues           |         |           |          | 12,704               |                           |             
|Operating expenses              |         |           |          | 43,137               |                           |             
|Depreciation and amortization   |         |           |          | 12,527               |                           |             
|Income (loss) from operations   |         |           |          | 27,006               |                           |             
|Total assets                    |         |           | $        | 590,743              |                           | $           
|                               
|As of and for the six months    |         |          
|ended June 30, 2003:            |         |          
|Operating revenues from         |         |          
|external customers              |         |           | $        | 71,048               |                           | $           
|Intersegment revenues           |         |           |          | 11,390               |                           |             
|Operating expenses              |         |           |          | 41,471               |                           |             
|Depreciation and amortization   |         |           |          | 15,450               |                           |             
|Income (loss) from operations   |         |           |          | 25,517               |                           |             
|Total assets                    |         |           | $        | 561,194              |                           | $           
|                               

10



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SUREWEST COMMUNICATIONSNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

5.    
          ESTIMATED SHAREABLE EARNINGS OBLIGATIONS AND OTHER REGULATORY MATTERS

Certain of the Companys rates
are subject to regulation by the Federal Communications Commission (FCC) and
the California Public Utilities Commission (CPUC). Pending and future
regulatory actions may have a material impact on the Companys consolidated financial
position and results of operations.

Revenues from certain telephone
services are affected by rates authorized by various regulatory agencies. Intrastate
service rates are subject to regulation by the CPUC. With respect to toll calls initiated
by interexchange carriers customers, the interexchange carriers are assessed access
charges based on tariffs filed by SureWest Telephone. Interstate access rates and
resulting earnings are subject to regulation by the FCC. With respect to interstate
services, SureWest Telephone has filed its own tariff with the FCC for all elements of
access services except carrier common line charges, for which SureWest Telephone concurs
with tariffs filed by the National Exchange Carrier Association (NECA).

Prior to January 1, 2002, SureWest
Telephone billed SBC Communications (SBC) various charges for certain local
service and network access service revenues in accordance with certain agreements as
described below. In 1999, SBC expressed interest in withdrawing from the designated
carrier plan (DCP) for SureWest Telephones toll traffic. The DCP was a
compensation arrangement between SureWest Telephone and SBC for certain intrastate toll
services. SureWest Telephone and SBC agreed to allow the DCP arrangement to expire in
December 2001. The termination of the DCP did not have a material impact on the
Companys consolidated financial position as of June 30, 2004 and 2003 or results of
operations for the quarter and six months then ended.

In 1999, SBC also expressed interest
in entering into a new, permanent compensation arrangement for extended area service
(EAS). At that time, SBC had been paying SureWest Telephone approximately
$11,500 per year for EAS pursuant to a Settlement Transition Agreement. In November 2000,
the CPUC authorized SBC to terminate its annual EAS payments to SureWest Telephone
effective November 30, 2000. The CPUC authorized replacement funding to SureWest Telephone
on an interim basis using funds from the California High Cost Fund (CHCF). The
CHCF is a program designed by the CPUC to establish a fair and equitable local rate
structure and to reduce any disparity in the rates charged by telephone companies serving
high-cost areas. This interim funding is currently due to expire on January 1, 2005.
However, there is an amendment pending, SB1276, to the existing legislation, which would
extend the expiration date to January 1, 2009. This bill has passed the California Senate
and awaits action by the Assembly. Action on this matter is expected during 2004. In the
event this pending bill is not enacted, the Company would file for emergent relief under
its existing New Regulatory Framework (NRF) mechanism or other regulatory
mechanisms. In addition, the CPUC opened an Order Instituting Investigation
(OII) for the purpose of determining whether future recovery of all, none, or
a portion of the approximate $11,500 annual payments previously received from SBC should
come from SureWest Telephones ratepayers or other regulatory recovery mechanisms.
This proceeding began in 2001, evidentiary hearings were held during 2002, and briefing
was completed in February 2003. In this proceeding, the Office of Ratepayer Advocates
(ORA) recommended that the CPUC discontinue SureWest Telephones present
interim EAS funding from the CHCF without replacement revenues from ratepayers. The
CPUCs decision in this matter is expected during 2004. The CPUC has made no
indication as to what, if any, changes will be forthcoming relating to EAS revenues. The
results of these proceedings and their potential effects on SureWest Telephone cannot yet
be determined.

In 1996, the CPUC issued a decision
in connection with SureWest Telephones general rate proceeding, which authorized
SureWest Telephone to implement a NRF for services furnished within SureWest
Telephones service area in order to accommodate market and regulatory movement
toward competition and greater pricing flexibility. Under the NRF, SureWest Telephone is
subject to ongoing monitoring and reporting requirements, including a sharing mechanism,
whereby SureWest Telephone is required to share earnings with customers through reductions
of revenues if its earned annual rate-of-return exceeds that authorized by the CPUC.

In accordance with the requirements
of its general rate case order, SureWest Telephone filed an application for review of its
NRF in 1999. In connection with this proceeding, the CPUCs ORA undertook a
verification audit of SureWest Telephones non-regulated and affiliated transactions
pursuant to the general rate case and other CPUC orders. In June 2001, the CPUC adopted
its decision in this matter (the Decision). The Decision did not suspend the
sharing mechanism as SureWest Telephone had requested, and the CPUC ruled that SureWest
Telephone must change the method used to allocate costs for services provided by SureWest
Telephone to its affiliates, the treatment of certain directory revenues and the treatment
of internal-use software costs.

11



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SUREWEST COMMUNICATIONSNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

The Company has been involved in a
proceeding at the CPUC that has considered the continued need for certain sharing
requirements in the intrastate jurisdiction and, in connection with that review, has also
considered the issue of whether the Company overearned in the intrastate jurisdiction in
recent monitoring periods and, if so, the amount of such overearnings that should be
shared with customers. On July 27, 2004, the Company entered into a settlement agreement
with the other parties in the proceeding, the ORA and The Utility Reform Network
(TURN), which is intended to resolve all issues in the proceeding. Among other
things, the settlement agreement addresses and resolves all earnings issues for the
monitoring periods 2000 through 2004, puts into place a surcredit mechanism for the amount
of the settlement, and suspends the requirement for any intrastate sharing for monitoring
periods from January 1, 2005 through at least December 31, 2010. The settlement agreement
is subject to approval by the CPUC. When the settlement agreement is approved by the CPUC,
the Company will reassess its estimated intrastate shareable earnings
obligations.

The FCC monitors SureWest
Telephones interstate earnings through the use of annual cost separation studies
prepared by SureWest Telephone, which utilize estimated cost information and projected
demand usage. The FCC establishes rules that carriers must follow in the preparation of
the annual studies. Additionally, under current FCC rules governing rate making, SureWest
Telephone is required to establish interstate rates based on projected demand usage for
its various services and determine the actual earnings from these rates once actual
volumes and costs are known.

During the quarter ended March 31,
2004, SureWest Telephone changed its estimates for a portion of its interstate and
intrastate shareable earnings obligations as a result of periodic cost separation studies.
These changes in accounting estimates increased the Companys consolidated revenues
by $539 and net income by $310 ($0.02 per share) for the six months ended June 30, 2004.

During the quarter ended March 31,
2003, SureWest Telephone changed its estimates for a portion of its interstate and
intrastate shareable earnings obligations and certain NECA Carrier Common Line
(CCL) accounts receivable balances as a result of periodic cost separation
studies. These changes in accounting estimates decreased the Companys consolidated
revenues by $277 and net income by $166 ($0.01 per share) for the six months ended June
30, 2003.

During the year ended December 31,
2001, SureWest Telephone made payments to certain telecommunications companies aggregating
$6,800 related to interstate shareable earnings obligations for the monitoring period
1999-2000. No similar payments were made during the quarter or six-month periods ended
June 30, 2004 or 2003. On June 26, 2003, the Company entered into an agreement to recover
$1,950 of the amount paid to a telecommunications company in 2001. Therefore, the Company
recognized a receivable from this telecommunications company in the amount of $1,950 as of
June 30, 2003 through a credit to network access service revenues for the three months
ended June 30, 2003. The Company received the funds on July 8, 2003. The Company is
currently seeking a similar refund from another telecommunications company. However, the
recoverability of the remaining funds cannot presently be determined because the
bankruptcy proceeding relating to the telecommunications company from which the Company is
seeking a refund has not been completed.

Beginning in January 2002, SureWest
Telephone began paying a customer refund for intrastate overearnings relating to the years
1998 and 1999. A portion of the consumers intrastate service charges was returned in
the form of a surcredit beginning in January 2002 and ending in January 2003, totaling
approximately $4,605 (of which $294 was returned during January 2003). Such refunds were
recorded as a reduction of the Companys estimated intrastate shareable earnings
obligations.

Beginning in November 2003, SureWest
Telephone began paying a customer refund for intrastate overearnings relating to the year
2002. A portion of the consumers intrastate service charges was returned to the
consumers in the form of a surcredit beginning in November 2003 and ending in February
2004, totaling $483 (of which $208 was returned during the first quarter of 2004). Such
refunds were recorded as a reduction of the Companys estimated intrastate shareable
earnings obligations.

As of June 30, 2004, the
Companys condensed consolidated balance sheet reflected aggregate liabilities of
$12,642 relating to SureWest Telephones estimated interstate and intrastate
shareable earnings obligations. The calculations supporting these liabilities are very
complex and involve a variety of estimates prior to the ultimate settlement of such
obligations. In addition, SureWest Telephones interstate shareable earnings
obligations lapse over time if SureWest Telephones interexchange carrier and other
customers do not claim the amounts ascribed to them. Further, a final decision from the
CPUC that adopts the settlement agreement, described above, would settle the
Companys existing estimated intrastate shareable earnings obligations and eliminate
the exposure of the Company to sharing of any intrastate overearnings for the immediate
future and promote decision making that is focused more on competitive market needs rather
than these regulatory considerations. Accordingly, it is reasonably possible that
managements estimates of the Companys liabilities for interstate and
intrastate shareable earnings obligations could change in the near term, and the amounts
involved could be material.

12



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SUREWEST COMMUNICATIONSNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

6.    
          PENSION AND OTHER POST-RETIREMENT BENEFITS

Components of Net
Periodic Benefit Cost

Net periodic pension costs recognized
in the condensed consolidated statements of income for the quarters and six-month periods
ended June 30, 2004 and 2003 under the defined benefit pension plan (Pension
Plan), Supplemental Executive Retirement Plan (SERP) and post-retirement
benefits other than pensions (Other Benefits) plan included the following
components:

|                                        | Pension Plan and SERP | Other Benefits
|--------------------------------------- | --------------------- | --------------
|
|Quarter ended June 30,                  |                       |               
|Service cost-benefits earned during the |                       |               
|period                                  |                       |               
|Interest cost on projected benefit      |                       |               
|obligation                              |                       |               
|Expected return on plan assets          |                       |               
|Amortization of prior service cost      |                       |               
|Recognized net actuarial loss           |                       |               
|                                        |                       |               
|Net pension cost                        |                       |               
|                                        |                       |               
|Six months ended June 30,               |                       |               
|Service cost-benefits earned during the |                       |               
|period                                  |                       |               
|Interest cost on projected benefit      |                       |               
|obligation                              |                       |               
|Expected return on plan assets          |                       |               
|Amortization of prior service cost      |                       |               
|Recognized net actuarial loss           |                       |               
|                                        |                       |               
|Net pension cost                        |                       |               
|                                        |                       |               

Employer Contributions

The Company expects to contribute
$5,500 and $460 to the Pension Plan and Other Benefits plan, respectively, in 2004. As of
June 30, 2004, the Company has contributed $3,200 to the Pension Plan (no contributions
have been made during 2004 to the Other Benefits plan).

7.    
          LINE OF CREDIT

In March 2000, the Company entered
into a business loan agreement with a bank for a $30,000 line of credit with a term of
three years. In July 2002, the bank amended the credit facility increasing the borrowing
capacity from $30,000 to $50,000. In March 2004, the bank further amended the credit
facility extending the expiration date until June 1, 2005 and revising certain covenants.
Interest on this credit facility is based on a LIBOR-based pricing formula. While the
Company has borrowed previously under this credit facility, there were no amounts
outstanding under this credit facility as of June 30, 2004, nor since the issuance of the
Companys Series B Notes in March 2003. The Company obtained a waiver as of June 30,
2004 with respect to a technical violation of the business loan agreement; however, the
Company does not believe the violation to be of any consequence since there were no
amounts outstanding as of the time of the technical violation.

13



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SUREWEST COMMUNICATIONSNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

8.    
          COMMITMENTS AND CONTINGENCIES

The
Company has entered into various cable television franchise agreements with associated
letters of credit totaling $150 in the aggregate as of June 30, 2004.

The
Company is subject to certain legal and regulatory proceedings and examinations, Internal
Revenue Service examinations and other tax exposures, and other claims arising in the
ordinary course of its business. In the opinion of management, the ultimate outcome of
these matters will not materially affect the consolidated financial position or results of
operations of the Company.

14



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PART I

|ITEM 2. | MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
|------- | --------------------------------------------------------------------------------------

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

Certain information included in the
Companys quarterly report on Form 10-Q, including that which relates to the impact
on future revenue sources and potential sharing obligations of pending and future
regulatory orders, continued expansion of the telecommunications network and expected
changes in the sources of the Companys revenue and its cost structure resulting from
its entrance into new communications markets, are forward looking statements and are made
pursuant to the safe harbor provisions of the Securities Litigation Reform Act of 1995.
Such forward looking statements are subject to a number of risks, assumptions and
uncertainties that could cause the Companys actual results to differ from those
projected in such forward looking statements.

Important factors that could cause
actual results to differ from those set forth in the forward looking statements include,
but are not limited to: advances in telecommunications technology, changes in the
telecommunications regulatory environment, changes in the financial stability of other
telecommunications providers who are customers of the Company, changes in competition in
markets in which the Company operates, adverse circumstances affecting the economy in
California in general, and in the Sacramento, California Metropolitan area in particular,
the availability of future financing, changes in the demand for services and products, new
product and service development and introductions, pending and future litigation, internal
control weaknesses and unanticipated changes in the growth of the Companys emerging
businesses including the wireless, Internet, digital video and Competitive Local Exchange
Carrier operating entities.

Corporate Structure

SureWest Communications (the
Company) is a holding company with wholly-owned subsidiaries operating in the
Telecommunications (Telecom), Broadband and Wireless segments.

The Telecom segment includes SureWest
Telephone (formerly known as Roseville Telephone Company), SureWest Directories, and
SureWest Long Distance (formerly known as Roseville Long Distance Company), which provide
landline telecommunications services, directory advertising, Digital Subscriber Line
(DSL) service, long distance services and certain non-regulated services.
SureWest Telephone, which is the principal operating subsidiary of the Telecom segment,
provides local and toll telephone services, network access services and certain
non-regulated services. SureWest Directories publishes and distributes SureWest
Telephones directory, including the sale of yellow pages advertising. SureWest
Directories is also engaged in the business of producing, publishing and distributing
directories in other Northern California communities outside of SureWest Telephones
service area. SureWest Long Distance is a reseller of long distance services.

The Broadband segment includes the
Companys subsidiaries SureWest Broadband and SureWest Broadband Business Services.
SureWest Broadband Business Services is comprised of a division of SureWest Telephone
operating as a Competitive Local Exchange Carrier. The Broadband segment provides various
services including: high-speed and dial-up Internet, digital video, local and network
access, toll telephone and managed services in the greater Sacramento area, principally to
customers residing outside of SureWest Telephones service area. The Company offers
high-speed Internet, digital video and local and long distance phone service as a bundled
package referred to as fiber-to-the-premise (FTTP) (previously referred to as
Triple Play). In December 2003, SureWest Broadband began offering digital
video services to customers inside SureWest Telephones service area.

The Wireless segment consists of the
Companys subsidiary SureWest Wireless, which provides wireless services. SureWest
Wireless derives its revenue from the provision of wireless voice services, sales of
handsets and related communication equipment, long distance, handset insurance, roaming
service and custom calling features. Wireless services are provided on a month-to-month
basis and are generally billed in advance for non-contract subscribers and in arrears for
contract subscribers.

15



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The Company expects that the sources
of its revenues and its cost structure may be different in future periods, both as a
result of its entry into new communications markets and competitive forces in each of the
markets in which the Company has operations.

Treasury Investigation
and Internal Control Matters

In January 2004, the Audit Committee
of the Board of Directors launched a formal investigation and retained independent legal
counsel to conduct the investigation with the assistance of forensic accountants. The
investigation resulted from a preliminary investigation by Company management, triggered
by the abrupt resignation in December 2003 of an employee in the Companys Corporate
Finance Department. The investigation indicated irregularities by the former employee in
the Companys cash management and investment functions, and violations of the
Companys investment policies. At the time of the commencement of the special
investigation, approximately $1,828 of Company funds were outstanding without proper
documentation, and such funds remain outstanding, and were reflected as a non-operating
loss in the Companys 2003 consolidated financial statements.

The independent legal counsel, with
the assistance of the forensic accountants, undertook an extensive process to (i)
investigate the facts and circumstances giving rise to the misappropriation of Company
funds, (ii) determine whether there were any similar or related transactions, and any
Company employees involved in the previously-identified transactions other than those
known to the Company at the commencement of the investigation, (iii) determine the
underlying mechanics in the origination of the transactions and the circumstances under
which detection failed to occur and (iv) evaluate internal controls relating to the
affected portion of the Companys business.

The Audit Committee of the Board of
Directors has been advised by independent legal counsel that:

| | o | All of the unauthorized transactions occurred in 2003 and remained undetected until December 2003;                                                                                     
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | o | The unauthorized  transactions  were actively  concealed by
the Company's former employee in the Company's books and records; and                                                      
|
| | o | Independent legal counsel did not uncover any other similar transactions nor any evidence
that any other Company employees intentionally participated in the unauthorized
transactions.

The independent legal counsel further
reported to the Audit Committee (i) its view that existing Company control procedures
prior to the discovery of the unauthorized transactions were either circumvented or
ignored, and the control procedures existing at the time of the unauthorized transactions
were not adequate and (ii) the Company, subsequent to the discovery of the unauthorized
transactions, had developed and implemented a number of key internal controls. In
addition, the independent legal counsel provided additional control recommendations to the
Audit Committee for review and consideration.

In connection with the audit of the
Companys consolidated financial statements for the year ended December 31, 2003,
Ernst & Young LLP, the Companys independent auditors, advised the Company that
it had concluded that material weaknesses in the Companys internal control existed,
including with respect to certain of the issues identified as a result of the Audit
Committees special investigation. The Company has performed substantial additional
procedures designed to ensure that the internal control deficiencies did not lead to
material misstatements in its consolidated financial statements, notwithstanding the
presence of the noted internal control weaknesses.

During 2004, the Company instituted
additional processes and procedures to improve internal control. Subsequent to the
discovery of the unauthorized wire transactions, the Company implemented a number of
internal controls with respect to cash and investment activities.

The Audit Committee made a number of
additional recommendations to the Companys Board of Directors for further review and
consideration, which were formally acted upon beginning early in the second quarter of
2004, and contemplate additional actions in 2004. Such initiatives relate to:

| | o | An assessment to be conducted with respect to the Companys Corporate Finance
Department, which encompasses the Companys accounting and finance personnel,
including specifically relating to the number of personnel, and the collective mix and
technical skills of such personnel, and the addition of new personnel if necessary. During
the second quarter, the Companys Board of Directors approved the addition of six
personnel in the Corporate Finance Department. As of August 6, 2004, the Company has hired
three of the six additional personnel and is actively recruiting the remaining three.
Further evaluation will be conducted by the
Chief Financial Officer and, if deemed appropriate, with the assistance of a third party,
in continuing consultation with the Board;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

16



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| | o | An internal audit process, with tasks to be performed either by Company personnel or a
third party, with reporting duties to the Chairman of the Companys Audit Committee
(implemented in part by the Companys hiring of a Senior Internal Auditor in July
2004);
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | o | A more significant effort devoted to internal controls training for all affected
personnel, and an increased emphasis on the completion of internal controls documentation,
including as required by Section 404 of the Sarbanes-Oxley Act of 2002 (including the
retention in May 2004 of third-parties to assist in performing internal control reviews of
all of the Companys accounting systems, and to assist in expediting the completion
of the internal controls documentation); and
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | o | The preparation and implementation of a formal accounting policies and procedures manual
or electronic database to serve as a reference tool for Company personnel and to establish
uniformity and consistency throughout the Company.  The preparation of the accounting policies
and procedures manual is in process and the Company expects that it will be completed by the end
of the third quarter.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The Company has previously taken
actions that it believes have improved internal controls, including:

| | o | The establishment of a Disclosure Committee comprised of Management personnel and senior
representatives of the Companys Corporate Finance Department, which undertakes
reviews prior to significant filings with the Securities and Exchange Commission
(SEC);
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | o | The modification of written ethics and compliance materials provided to Company employees,
and the formal adoption of a Code of Ethics and Business Conduct, and the related
establishment of confidential procedures which permit Company employees to communicate
anonymously in the event of suspected violations of laws or Company standards (together
with mandatory classes in 2004 for all Company employees to review the Code of Ethics and
Business Conduct); and
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | o | The implementation in 2003 of new enterprise resource planning and accounting software,
which likely assisted in identifying certain of the accounting deficiencies noted above
relating to property, plant and equipment. (The Company also anticipates completing enhancements to
certain modules of its new enterprise resource planning system relating to property, plant and equipment
by September 30, 2004 and undertaking revised physical verification and other procedures to improve
its accounting for property, plant and equipment).
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

On April 15, 2004, Michael D.
Campbell, the Companys Executive Vice President and Chief Financial Officer retired
from the Company. Brian H. Strom, President and Chief Executive Officer of the Company, is
serving as interim Chief Financial Officer, while the Company undertakes the search for a
new Chief Financial Officer, which the Company intends to complete in the third quarter of
2004.

The Company has filed an insurance
claim to recover the missing funds and has filed a civil lawsuit seeking to recover $1,828
and other costs from five individuals and a private company allegedly associated with the
fraudulent scheme to illegally transfer the Companys funds to outside accounts. The
Company has been advised that one of the individuals has pleaded guilty. The Company will
recognize a recovery of funds, if any, in future periods to the extent of its insurance
and litigation recoveries.

17



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The Company, in early 2004, has
engaged in informal discussion with the SEC, which has possession of certain background
information, regarding the facts and circumstances of the unauthorized funds transfers.
The Company provided supplemental information to the SEC regarding the results of the
investigation, including with respect to the report by independent legal counsel to the
Audit Committee, and it will provide additional information in response to any future
requests.

18



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Results of Operations

Consolidated Overview

The tables below reflect certain
financial data (on a consolidated and segment basis) and selected operating metrics for
each reportable segment as of and for the quarter and six months ended June 30, 2004 and
2003. Both the financial data and the selected operating metrics demonstrate the
increasing importance of the Companys Broadband and Wireless segments.

Financial Data

|                        | Quarter Ended June 30, | Six Months Ended June 30,
|----------------------- | ---------------------- | -------------------------
|
|Operating revenues (1)  |                        |                          
|Telecom                 |                        |                          
|Broadband               |                        |                          
|Wireless                |                        |                          
|Total operating         |                        |                          
|revenues                |                        |                          
|                       
|Operating income (loss) |                        |                          
|Telecom                 |                        |                          
|Broadband               |                        |                          
|Wireless                |                        |                          
|Total operating income  |                        |                          
|                       
|Net income (loss)       |                        |                          
|Telecom                 |                        |                          
|Broadband               |                        |                          
|Wireless                |                        |                          
|Total net income        |                        |                          

(1) External customers
only

Selected Operating
Metrics

|                             | As of June 30,
|---------------------------- | --------------
|
|Telecom                      |               
|ILEC access lines            |               
|Long distance lines          |               
|                            
|Broadband                    |               
|DSL subscribers (1)          |               
|FTTP subscribers (2)         |               
|Revenue-generating units (3) |               
|                            
|Wireless                     |               
|Subscribers                  |               
|                            

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

19



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The Companys consolidated
operating revenues increased $1,863 and $6,076 for the quarter and six months ended June
30, 2004, respectively, compared to the same periods in 2003 primarily due to an increase
in the number of subscribers and services within the Broadband and Wireless segments.

Broadband segment operating revenues
increased $2,601 and $5,298 during the quarter and six months ended June 30, 2004,
respectively, compared to the same periods in 2003. This segment experienced a 15%
increase in the aggregate number of DSL subscribers at June 30, 2004, as compared to June
30, 2003. More significantly, this segment reported 13,739 FTTP subscribers and 32,101
Revenue-generating units, representing increases of 80% and 81%, respectively, at June 30,
2004 as compared to June 30, 2003, within broadband residential services business. While
continuing to produce significant revenue increases, the expansion of the broadband
residential services has and will continue to require significant capital and expense
commitments. Accordingly, the Broadband segment incurred larger quarter-over-quarter and
year-over-year operating and net losses.

The Wireless segment reported
increases in operating revenues of $943 and $1,860 during the quarter and six months ended
June 30, 2004, respectively, compared to the same periods in 2003. The number of wireless
subscribers increased to 48,531 at June 30, 2004, representing a 9% increase from June 30,
2003. SureWest Wireless established its market share in the Sacramento market in large
part by promoting an unlimited flat rate regional calling plan. Throughout 2003 and during
the first six months of 2004, SureWest Wireless initiated a number of new service options
for customers, including additional regional plans, an unlimited national plan and a
family plan, which have attracted new customers. In addition, during 2004, SureWest
Wireless also plans to launch new vertical services, such as wireless data capabilities.
Evolution of the marketplace has prompted SureWest Wireless to open four retail stores in
its service area, and a fifth is planned for late 2004. It is also seeking to expand its
service penetration among major accounts in 2004, while seeking to reduce customer
turnover (churn) and increase revenues from its existing customer base.

Operating revenues in the Telecom
segment decreased $1,681 and $1,082 for the quarter and six months ended June 30, 2004,
respectively, compared to the same periods in 2003. While the Company continues to
experience growth from the Broadband and Wireless segments, the Telecom segment continues
to be subject to the competitive and regulatory challenges faced by incumbent local
exchange carriers (ILECs) both nationally and in California. As a result of
competitive pressures, this segment experienced decreases in local and network access
revenues due to decreases in (i) access lines of approximately 2%, resulting from
increased competition from wireless and wireline competitors, (ii) zone and toll calls and
(iii) switched and special access rates.

While the Telecom operating revenues
continue to generate a majority of the Companys revenues and yield significant cash
flows and net income, the Company believes that the results of the Telecom segment in
recent years support the Companys decision to enter and commit significant resources
to newer businesses, particularly in the Broadband segment.

The Companys consolidated
operating expenses increased $3,659 and $8,019 during the quarter and six months ended
June 30, 2004, respectively, compared to the same periods in 2003 due to an increase in
cost of services and products expense associated with a larger number of subscribers and
services within the Broadband and Wireless segments. Customer operations and selling
expenses increased due to additional advertising activity in the current year in the
Broadband segment offset in part from internal efficiencies resulting from integrated
customer support systems and productivity gains. General and administrative expenses
increased as a result of increases in (i) consulting and legal fees due to the treasury
investigation, audit services and Sarbanes-Oxley implementation and compliance and (ii)
the size of the Companys workforce, resulting in an increase to salaries and wages
and medical insurance costs.

The Companys consolidated
depreciation and amortization expense decreased $936 and $2,029 during the quarter and six
months ended June 30, 2004, respectively, compared to the same periods in the 2003. This
decrease is due primarily to a change in accounting estimate during the first quarter of
2004, resulting from the successful adoption of certain new technologies that enable the
Company to maximize the return on existing network facilities and migrate to other new
technologies at the point in time in which the benefit to do so exceeds the cost of
conversion. As a result of this change in strategic direction, which was formally approved
by the Companys Board of Directors in December 2003, the Company has evaluated the
appropriateness of its estimated useful lives of certain property, plant and equipment at
both the Telecom and Wireless segments. Based on this evaluation, the Company increased
the estimated useful lives of Telecoms digital switching, circuit and cable
equipment by one to three years and Wireless base stations, towers and network
software by one to eight years. The Company also decreased the estimated useful lives of
certain other Telecom assets, including certain other switching and voicemail equipment.
The changes were made effective January 1, 2004. The Companys revisions have been
supported by an assessment and report from an independent third party with expertise in
this area that found the revisions to be reasonable in light of the Companys plan
and useful life estimates in comparable businesses.

20



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During the quarter and six months
ended June 30, 2004, this change in estimate decreased consolidated depreciation expense
by $2,679 and $5,956, respectively, and increased consolidated net income by $1,575 ($0.11
per share) and $3,490 ($0.24 per share), respectively. This change in accounting estimate
decreased Telecom depreciation expense and increased Telecom income from operations by
$1,319 and $3,288 for the quarter and six months ended June 30, 2004, respectively. In
addition, Wireless depreciation expense and loss from operations decreased by
approximately $1,360 and $2,668, respectively, for the quarter and six months ended June
30, 2004 as a result of this change in accounting estimate.

Adjustments and
Reclassifications

During the Companys financial
statement closing process for the quarter ended December 31, 2003, certain matters were
identified related to prior financial reporting periods that necessitated the recording of
adjustments to the Companys condensed consolidated financial statements. Such
adjustments pertained principally to property, plant and equipment, and management
believes that weaknesses in the Companys internal controls caused the errors that
resulted in these adjustments. The Company does not believe any of the aforementioned
amounts are material, individually or in the aggregate, to the respective prior interim
periods based on both quantitative and qualitative factors, including the trend of
operating results. Accordingly, the Company prospectively corrected these errors during
the fourth quarter of 2003. Certain of the aforementioned amounts relating to prior
periods would have reduced the Companys consolidated net income by $119, or $0.01
per basic and diluted share, and $342, or $0.02 per basic and diluted share, during the
quarter and six months ended June 30, 2003, respectively, had such errors been corrected
in the periods in which they originated.

Certain amounts in the Companys
2003 condensed consolidated financial statements have been reclassified to conform to the
presentation of the Companys 2004 condensed consolidated financial statements.

Segment Results of
Operations

Telecom

|                              | Quarter Ended June 30, | Six Months Ended June 30,
|----------------------------- | ---------------------- | -------------------------
|
|Local service                 |                        |                          
|Network access service        |                        |                          
|Directory advertising         |                        |                          
|Long distance service         |                        |                          
|Other                         |                        |                          
|Total operating revenues from |                        |                          
|external customers            |                        |                          
|Intersegment revenues         |                        |                          
|Operating expenses            |                        |                          
|Depreciation and amortization |                        |                          
|Operating income              |                        |                          
|Net income                    |                        |                          

21



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Operating
Revenues

Operating revenues from external
customers in the Telecom segment decreased $1,681 and $1,082 for the quarter and six
months ended June 30, 2004, respectively, compared to the same periods in 2003. The
Telecom segment is encountering the competitive and regulatory challenges faced by ILECs
both nationally and in California. As a result of competitive pressures, the Telecom
segment experienced decreases in local and network access revenues due to decreases in (i)
access lines of approximately 2%, resulting from increased competition from wireless and
wireline competitors, (ii) zone and toll calls and (iii) switched and special access
rates.

Revenues within the Telecom segment
are also affected by SureWest Telephones shareable earnings obligations. As a result
of a decrease in revenues subject to regulation and increased operating expenses during
2004, as described below, SureWest Telephones provision related to its estimated
interstate and intrastate shareable earnings obligations decreased, which resulted in
increased revenues of $963 and $1,846 during the quarter and six months ended
June 30, 2004, respectively, compared to the same periods in 2003. In addition, SureWest
Telephone had changes in estimates for shareable earnings obligations as a result of
periodic cost separation studies. For the six months ended June 30, 2004, changes in
estimates, which were recorded during the quarter ended March 31, 2004, pertaining to the
Companys estimated interstate and intrastate shareable earnings obligations
increased the Telecom segments revenues and net income by $539 and $310 ($0.02 per
share), respectively. For the six months ended June 30, 2003, changes in estimates, which
were recorded during the quarter ended March 31, 2003, pertaining to the Companys
estimated interstate and intrastate shareable earnings obligations and certain National
Exchange Carrier Association (NECA) Carrier Common Line (CCL)
accounts receivable balances decreased the Telecom segments revenues and net income
by $277 and $166 ($0.01 per share), respectively. In addition, the decrease in operating
revenues in the Telecom segment was due to an agreement SureWest Telephone entered into
during 2003. As discussed in greater detail in the Regulatory Matterssection, the
agreement provided for a $1,950 refund from another telecommunications company for a
payment made by SureWest Telephone in 2001 related to interstate shareable earnings
obligations.

The Company adopted SEC Staff
Accounting Bulletin (SAB) No. 101, Revenue Recognition in Financial
Statements, effective January 1, 2000, which requires non-recurring revenues
associated with service and activation charges to be deferred. The cumulative effect of
this change in accounting principle was $3,273, net of tax, ($0.21 per share) in 2000.

For the three-month periods ended
March 31 and June 30, 2004 and 2003, the Company recognized the following revenues that
were included in the cumulative effect adjustment as of January 1, 2000:

|Three Months Ended: |               
|------------------- | --------------
|                    | March 31, 2004
|                    | June 30, 2004 
|                    | March 31, 2003
|                    | June 30, 2003 

The net effect of these revenues in
2004 was to increase net income in the three-month periods ended March 31 and June 30 by
$32 (no effect on earnings per share) and $23 (no effect on earnings per share),
respectively.

The net effect of these revenues in
2003 was to increase net income in the three-month periods ended March 31 and June 30 by
$75 ($0.01 per share) and $68 (no effect on earnings per share), respectively.

Directory advertising revenues
increased $234 and $498 for the quarter and six months ended June 30, 2004, respectively,
compared to the same periods in 2003 due to an increase in advertising sales.

Operating
Expenses

Operating expenses for the Telecom
segment increased $324 and $1,666 for the quarter and six months ended June 30, 2004,
respectively, compared to the same periods in 2003. Cost of services and products
increased $591 and $777 for the quarter and six months ended June 30, 2004, respectively,
compared to the same periods in 2003. This increase was primarily due to an increase in
SureWest Directories outside sales and advertisers as well as a two-month delay in the
release of the 2003 Sacramento Directory. Customer operations and selling expense
decreased $81 and $228 for the quarter and six months ended June 30, 2004, respectively,
compared to the same periods in 2003 due primarily to an increase in the allocation of
Telecom resources provided to other segments. General and administrative expenses
decreased $186 and increased $1,117 for the quarter and six months ended June 30, 2004,
respectively, compared to the same periods in 2003. This increase was due primarily to
increases in (i) consulting and legal fees due to the treasury investigation, audit
services and Sarbanes-Oxley implementation and compliance and (ii) the size of the
Companys workforce, resulting in an increase to salaries and wages and medical
insurance costs.

22



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Depreciation and amortization
decreased $1,343 and $2,923 for the quarter and six months ended June 30, 2004,
respectively, compared to the same periods in 2003. This decrease is due primarily to a
change in accounting estimate during the first quarter of 2004, resulting from the
adoption of certain new technologies which increased the estimated useful lives of
Telecoms switching, circuit and cable equipment by one to three years and decreased
the estimated useful lives of certain other Telecom assets, including certain switching
and voicemail equipment. This change in accounting estimate decreased depreciation expense
by $1,319 and $3,288 for the quarter and six months ended June 30, 2004, respectively.
This decrease was partially offset by the effects of continuing additions of circuit
equipment, cable and wire facilities and internal-use software.

Certain of the Companys
customers filed for bankruptcy protection in 2002, the most notable of which was WorldCom,
Inc. (WorldCom), which, together with its affiliates, filed for bankruptcy
protection on July 21, 2002. With respect to post-petition obligations, WorldCom had
proposed, pursuant to a provision of the Bankruptcy Code, and the Bankruptcy Court has
agreed, that utilities are entitled to adequate assurances that WorldCom will
satisfy its obligations for post-petition services. In its original filings, WorldCom
proposed its own set of assurances to utilities, but such assurances did not include
either deposits or advance payments. Although the Bankruptcy Court did not require
WorldCom to provide any deposits or advance payments as adequate assurance of payment, it
did provide, with respect to any post-petition services provided after August 14, 2002,
that all utilities will have a junior superiority administrative claim senior to other
administrative claims and junior only to the claims of WorldComs post-petition
lenders. If WorldCom fails to pay for post-petition services, a utility can either take
appropriate action under any applicable tariff or regulation, or seek, on an expedited
basis, an order from the Bankruptcy Court requiring immediate payment or other relief. On
April 20, 2004, WorldCom emerged from federal bankruptcy. Settlement(s) of the
Companys pending pre-bankruptcy claims against WorldCom will remain subject to the
distribution terms, applicable to creditors, contained in WorldComs plan of
reorganization. As of June 30, 2004 the amount of any settled pre-bankruptcy claims cannot
be determined. Through June 30, 2004, obligations owed by WorldCom to the Company for
post-petition services have been paid on a timely basis.

Regulatory
Matters

Revenues from services subject to
regulation, which include local and network access services constituted approximately 55%
of the Companys total operating revenues for the quarter and six-month period ended
June 30, 2004. In the same periods in 2003, revenues from services subject to regulation
constituted approximately 60% of the Companys total operating revenues. Such
revenues are derived from various sources, including:

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

Revenues from certain telephone
services are affected by rates authorized by various regulatory agencies. Intrastate
service rates are subject to regulation by the CPUC. With respect to toll calls initiated
by interexchange carriers customers, the interexchange carriers are assessed access
charges based on tariffs filed by SureWest Telephone. Interstate access rates and
resulting earnings are subject to regulation by the Federal Communications Commission
(FCC). With respect to interstate services, SureWest Telephone has filed its
own tariff with the FCC for all elements of access services except carrier common line
charges, for which SureWest Telephone concurs with tariffs filed by NECA.

23



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The FCC monitors SureWest
Telephones interstate earnings through the use of annual cost separation studies
prepared by SureWest Telephone, which utilize estimated cost information and projected
demand usage. The FCC establishes rules that carriers must follow in the preparation of
the annual studies. Additionally, under current FCC rules governing rate making, SureWest
Telephone is required to establish interstate rates based on projected demand usage for
its various services and determine the actual earnings from these rates once actual
volumes and costs are known.

In January 2001, the FCC issued a
Memorandum Opinion and Order to another telephone company in which it clarified how
Internet traffic, which the FCC had prior to that date characterized as largely interstate
in nature, should be treated. During 2000 and 2001, Internet traffic and DSL service grew
substantially, far exceeding SureWest Telephones estimates, which resulted in actual
earnings exceeding the levels allowed by the FCC. Based on preliminary cost studies, the
Company recognized liabilities relating to SureWest Telephones estimated interstate
shareable earnings obligations of $86 and $172, respectively, for the quarter and six
months ended June 30, 2003 through reductions of revenues. The Company did not identify
any interstate shareable earnings obligations at SureWest Telephone during the quarter and
six months ended June 30, 2004.

During the year ended December 31,
2001, SureWest Telephone made payments to certain telecommunications companies aggregating
$6,800 related to interstate shareable earnings obligations for the monitoring period
1999-2000. No similar payments were made during the quarter or six-month periods ended
June 30, 2004 or 2003. On June 26, 2003, the Company entered into an agreement to recover
$1,950 of the amount paid to a telecommunications company in 2001. Therefore, the Company
recognized a receivable from this telecommunications company in the amount of $1,950 as of
June 30, 2003 through a credit to network access service revenues for the three months
ended June 30, 2003. The Company received the funds on July 8, 2003. The Company is
currently seeking a similar refund from another telecommunications company. However, the
recoverability of the remaining funds cannot presently be determined because the
bankruptcy proceeding relating to the telecommunications company from which the Company is
seeking a refund has not been completed.

Prior to January 1, 2002, SureWest
Telephone billed SBC Communications (SBC) various charges for certain local
service and network access service revenues in accordance with certain agreements as
described below. In 1999, SBC expressed interest in withdrawing from the designated
carrier plan (DCP) for SureWest Telephones toll traffic. The DCP was a
compensation arrangement between SureWest Telephone and SBC for certain intrastate toll
services. SureWest Telephone and SBC agreed to allow the DCP arrangement to expire in
December 2001. The termination of the DCP did not have a material impact on the
Companys consolidated financial position as of June 30, 2004 and 2003 or results of
operations for the quarter and six months then ended.

In 1999, SBC also expressed interest
in entering into a new, permanent compensation arrangement for extended area service
(EAS). At that time, SBC had been paying SureWest Telephone approximately
$11,500 per year for EAS pursuant to a Settlement Transition Agreement. In November 2000,
the CPUC authorized SBC to terminate its annual EAS payments to SureWest Telephone
effective November 30, 2000. The CPUC authorized replacement funding to SureWest Telephone
on an interim basis using funds from the CHCF. The CHCF is a program designed by the CPUC
to establish a fair and equitable local rate structure and to reduce any disparity in the
rates charged by telephone companies serving high-cost areas. This interim funding is
currently due to expire on January 1, 2005. However, there is an amendment pending,
SB1276, to the existing legislation, which would extend the expiration date to January 1,
2009. This bill has passed the California Senate and awaits action by the Assembly. Action
on this matter is expected during 2004. In the event this pending bill is not enacted, the
Company would file for emergent relief under its existing New Regulatory Framework
(NRF) mechanism or other regulatory mechanisms. In addition, the CPUC opened
an Order Instituting Investigation (OII) for the purpose of determining
whether future recovery of all, none, or a portion of the approximate $11,500 annual
payments previously received from SBC should come from SureWest Telephones
ratepayers or other regulatory recovery mechanisms. This proceeding began in 2001,
evidentiary hearings were held during 2002, and briefing was completed in February 2003.
In this proceeding, the Office of Ratepayer Advocates (ORA) recommended that
the CPUC discontinue SureWest Telephones present interim EAS funding from the CHCF
without replacement revenues from ratepayers. The CPUCs decision in this matter is
expected during 2004. The CPUC has made no indication as to what, if any, changes will be
forthcoming relating to EAS revenues. The results of these proceedings and their potential
effects on SureWest Telephone cannot yet be determined.

24



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In 1996, the CPUC issued a decision
in connection with SureWest Telephones general rate proceeding, which authorized
SureWest Telephone to implement a NRF for services furnished within SureWest
Telephones service area in order to accommodate market and regulatory movement
toward competition and greater pricing flexibility. Under the NRF, SureWest Telephone is
subject to ongoing monitoring and reporting requirements, including a sharing mechanism,
whereby SureWest Telephone is required to share earnings with customers through reductions
of revenues if its earned annual rate-of-return exceeds that authorized by the CPUC.

In accordance with the requirements
of its general rate case order, SureWest Telephone filed an application for review of its
NRF in 1999. In connection with this proceeding, the CPUCs ORA undertook a
verification audit of SureWest Telephones non-regulated and affiliated transactions
pursuant to the general rate case and other CPUC orders. In June 2001, the CPUC adopted
its decision in this matter (the Decision). The Decision did not suspend the
sharing mechanism as SureWest Telephone had requested, and the CPUC ruled that SureWest
Telephone must change the method used to allocate costs for services provided by SureWest
Telephone to its affiliates, the treatment of certain directory revenues and the treatment
of internal-use software costs. In accordance with the provisions of the Decision, the
Company recorded liabilities and reductions of revenues of $807 and $1,675, respectively,
relating to its estimated intrastate shareable earnings obligations during the quarter and
six months ended June 30, 2003. The Company did not identify any interstate shareable
earnings obligations at SureWest Telephone for the quarter and six months ended June 30,
2004. The decrease in the provision for its estimated intrastate shareable earnings
obligation is primarily due to decreased revenues subject to regulation and increased
expenses.

The Company has been involved in a
proceeding at the CPUC that has considered the continued need for certain sharing
requirements in the intrastate jurisdiction and, in connection with that review, has also
considered the issue of whether the Company overearned in the intrastate jurisdiction in
recent monitoring periods and, if so, the amount of such overearnings that should be
shared with customers. On July 27, 2004, the Company entered into a settlement agreement
with the other parties in the proceeding, the ORA and The Utility Reform Network
(TURN), which is intended to resolve all issues in the proceeding. Among other
things, the settlement agreement addresses and resolves all earnings issues for the
monitoring periods 2000 through 2004, puts into place a surcredit mechanism for the amount
of the settlement, and suspends the requirement for any intrastate sharing for monitoring
periods from January 1, 2005 through at least December 31, 2010. The settlement agreement
is subject to approval by the CPUC. When the settlement agreement is approved by the CPUC,
the Company will reassess its estimated intrastate shareable earnings
obligations.

Beginning in January 2002, SureWest
Telephone began paying a customer refund for intrastate overearnings relating to the years
1998 and 1999. A portion of the customers intrastate service charges was returned in
the form of a surcredit beginning in January 2002 and ending in January 2003, totaling
approximately $4,605 (of which $294 was returned during 2003). Such refunds were recorded
as a reduction of the Companys estimated intrastate shareable earnings obligations.

Beginning in November 2003, SureWest
Telephone began paying a customer refund for intrastate overearnings relating to the year
2002. A portion of the consumers intrastate service charges was returned to the
consumers in the form of a surcredit beginning in November 2003 and ending in February
2004, totaling $483 (of which $208 was returned during the first quarter of 2004). Such
refunds were recorded as a reduction of the Companys estimated intrastate shareable
earnings obligations.

During the quarter ended March 31,
2004, SureWest Telephone changed its estimates for a portion of its interstate and
intrastate shareable earnings obligations as a result of periodic cost separations
studies. These changes in accounting estimates increased the Companys consolidated
revenues by $539 and net income by $310 ($0.02 per share) for the six months ended June
30, 2004.

During the quarter ended March 31,
2003, SureWest Telephone changed its estimates for a portion of its interstate and
intrastate shareable earnings obligations and certain NECA CCL accounts receivable
balances as a result of periodic cost separation studies. These changes in accounting
estimates decreased the Companys consolidated revenues by $277 and net income by
$166 ($0.01 per share) for the six months ended June 30, 2003.

25



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As of June 30, 2004, the
Companys condensed consolidated balance sheet reflected aggregate liabilities of
$12,642 relating to SureWest Telephones estimated interstate and intrastate
shareable earnings obligations. The calculations supporting these liabilities are very
complex and involve a variety of estimates prior to the ultimate settlement of such
obligations. In addition, SureWest Telephones interstate shareable earnings
obligations lapse over time if SureWest Telephones interexchange carrier and other
customers do not claim the amounts ascribed to them. Further, a final decision from the
CPUC that adopts the settlement agreement, described above, would settle the
Companys existing estimated intrastate shareable earnings obligations and eliminate
the exposure of the Company to sharing of any intrastate overearnings for the immediate
future and promote decision making that is focused more on competitive market needs rather
than these regulatory considerations. Accordingly, it is reasonably possible that
managements estimates of the Companys liabilities for interstate and
intrastate shareable earnings obligations could change in the near term, and the amounts
involved could be material.

Broadband

|                           | Quarter Ended June 30, | Six Months Ended June 30,
|-------------------------- | ---------------------- | -------------------------
|
|Internet service           |                        |                          
|Residential Broadband      |                        |                          
|service                    |                        |                          
|Business Broadband service |                        |                          
|Total operating revenues   |                        |                          
|from external customers    |                        |                          
|Intersegment revenues      |                        |                          
|Operating expenses         |                        |                          
|Depreciation and           |                        |                          
|amortization               |                        |                          
|Operating loss             |                        |                          
|Net loss                   |                        |                          

Operating
Revenues

Operating revenues from external
customers in the Broadband segment increased $2,601 and $5,298 for the quarter and six
months ended June 30, 2004, respectively, compared to the same periods in 2003. The
increase in Broadband revenues is due to the combined effects of (i) a 15% increase in
residential and business DSL subscriber customer base, (ii) an 80% increase in the number
of FTTP subscribers for broadband residential services and (iii) the continued expansion
of the broadband business services.

Operating
Expenses

Total operating expenses for the
Broadband segment increased $4,242 and $8,075 for the quarter and six months ended June
30, 2004, respectively, compared to the same period in 2003. Cost of services and products
increased $2,339 and $4,645 during the quarter and six months ended June 30, 2004,
respectively, compared to the same period in 2003 primarily due to (i) an increase in
programming and transport costs related to the 80% increase in FTTP subscriber growth of
broadband residential services, (ii) an increase in repairs and maintenance expense
resulting from an increase in outside plant and (iii) an increase in maintenance and
service agreements and network administration resulting from an increase in subscriber and
network growth.

Customer operations expense increased
$467 and $935 for the quarter and six months ended June 30, 2004, respectively, as
compared to the same periods in 2003 primarily due to increases in (i) advertising costs
due to an increase in marketable homes passed and expansion of bundled services into
Roseville, California and (ii) customer service expense due to an increase in headcount to
support the increased subscriber base. General and administrative expense increased $1,436
and $2,495 for the quarter and six months ended June 30, 2004, respectively, compared to
the same periods in 2003 due primarily to increases in (i) consulting and legal fees due
to the treasury investigation, audit services and Sarbanes-Oxley implementation and
compliance and (ii) the size of the Companys workforce, resulting in an increase to
salaries and wages and medical insurance costs. Depreciation and amortization expense
increased $1,306 and $2,475 for the quarter and six months ended June 30, 2004,
respectively, compared to the same periods in 2003, primarily due to an increase in
property, plant and equipment.

26



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Wireless

|                       | Quarter Ended June 30, | Six Months Ended June 30,
|---------------------- | ---------------------- | -------------------------
|
|Wireless revenues from |                        |                          
|external customers     |                        |                          
|Intersegment revenues  |                        |                          
|Operating expenses     |                        |                          
|Depreciation and       |                        |                          
|amortization           |                        |                          
|Operating loss         |                        |                          
|Net loss               |                        |                          

Operating
Revenues

Operating revenues from external
customers in the Wireless segment increased $943 and $1,860 for the quarter and six months
ended June 30, 2004, respectively, compared to the same periods in 2003. The increase in
Wireless revenues was due primarily to (i) a 9% increase in Wireless subscriber base, (ii)
an increase in roaming and long distance revenues due to an increase in minutes of use and
(iii) the introduction of bundled features, including voicemail and text messaging.

Operating
Expenses

Total operating expenses for the
Wireless segment increased $1,064 and $2,114 for the quarter and six months ended June 30,
2004, respectively, compared to the same periods in 2003. Cost of services and products
increased $826 and $1,626 during the quarter and six months ended June 30, 2004,
respectively, compared to the same periods in 2003. This increase was due primarily to
increases in (i) handset costs and interconnect expenses due to an increase in subscriber
base and the number of handsets sold, (ii) maintenance expense resulting from an increase
in network plant, (iii) tower rents due to an increase in cell sites and (iv) long
distance expense due to an increase in minutes of use. This increase was offset by a 34%
decrease in the average unit cost per handset and a decrease in roaming expenses due to
lower roaming rates. General and administrative expense increased $61 and $259 for the
quarter and six months ended June 30, 2004, respectively, compared to the same periods in
2003 due primarily to increases in (i) consulting and legal fees due to the treasury
investigation, audit services and Sarbanes-Oxley implementation and compliance and (ii)
the size of the Companys workforce, resulting in an increase to salaries and wages
and medical insurance costs.

Depreciation and amortization
decreased $899 and $1,581 for the quarter and six months ended June 30, 2004,
respectively, compared to the same periods in 2003. This decrease is due primarily to a
change in accounting estimate during the first quarter of 2004, resulting from the
adoption of certain new technologies which increased the estimated useful lives of base
stations, towers and network software by one to eight years. This change in accounting
estimate decreased depreciation expense by $1,360 and $2,668 for the quarter and six
months ended June 30, 2004, respectively. This decrease was offset by the effects of
continuing additions of property, plant and equipment and amortization of internal-use
software.

27



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Local
Number Portability

Effective November 24, 2003, the FCC
mandated that wireless carriers provide for local number portability (LNP).
LNP allows subscribers to keep their wireless phone numbers while switching to a different
service provider. Although the Company has experienced favorable porting activity, the
implementation of LNP has not had a material effect on the Companys consolidated
financial position or results of operations.

Non-operating Items

Interest
income and expense, Net

Consolidated interest income
decreased $145 and $169, respectively, for the quarter and six months ended June 30, 2004
compared to the same periods in 2003, due to lower average invested cash balances.
Interest expense decreased $189 for the quarter ended June 30, 2004 compared to the same
period on 2003 due to the commencement of principal payments on the Companys
Unsecured Series A Senior Notes in December 2003. Interest expense increased $64 for the
six months ended June 30, 2004 compared to the same prior year period due to the issuance
of the Companys unsecured Series B Senior Notes in March of 2003.

Income
Taxes

Consolidated income taxes for the
quarter ended and six months ended June 30, 2004, decreased $823 and $997, respectively,
compared to the same periods in 2003, due primarily to corresponding decreases in income
subject to tax. The effective federal and state income tax rates were approximately 41.4%
and 41.2% for the six month periods ended June 30, 2004 and 2003, respectively.

Liquidity and Capital
Resources

As reflected in the Condensed
Consolidated Statements of Cash Flows, net cash provided by operating activities was
$21,442 and $42,217 for the six month periods ended June 30, 2004 and 2003, respectively.
The decrease in cash provided by operating activities for the current year compared to the
same period in the prior year was due primarily to decreases in (i) liabilities related to
the Companys pension obligation due to the timing of payments to fund the
obligation, (ii) liabilities related to the Companys estimated shareable earnings
obligations, (iii) trade accounts payable and accrued
liabilities resulting from the timing of payments to vendors, (iv) depreciation due to a
change in estimated useful lives of certain Telecom and Wireless assets and (v) a
decrease in net income of $1,446. Net cash provided by operating activities during the six
month period ended June 30, 2004 was greater than net income of $1,942 due to non-cash
charges, consisting principally of depreciation and amortization offset by (i) decreases
in accrued liabilities and (ii) decreases in liabilities related to estimated shareable
earnings obligations. During the six month period ended June 30, 2004, the Company used
cash flows from operations and existing cash and cash equivalents to fund (i) capital
expenditures of $33,968 pertaining to ongoing plant construction projects and (ii)
dividends of $7,288.

The Companys most significant
use of funds for the remainder of 2004 is expected to be for (i) budgeted capital
expenditures of approximately $48,789, (ii) scheduled payments of long-term debt of
$3,708, (iii) support of the operations of broadband residential services up to an
anticipated $4,479 and (iv) support of the operations of SureWest Wireless up to an
anticipated $1,350. A substantial portion of the 2004 budgeted capital expenditures are at
the discretion of the Company, and are dependent upon the Companys working capital
position, operating cash flows and ability to borrow, as described below. The Company is
required to comply with its cable franchise agreements to continue its build-out in the
franchise areas.

As described in Regulatory Mattersabove, the Company currently receives funding of $11,500 annually from the CHCF, a program
designed by the CPUC to establish a fair and equitable local rate structure and to reduce
any disparity in the rates charged by certain telephone companies serving high-cost areas.
This interim funding is currently due to expire on January 1, 2005. However, there is an
amendment pending, SB1276, to the current legislation, which will extend the expiration
date to January 1, 2009. A decision on this matter is expected during 2004. In the event
this pending law is not approved, the Company would file for emergent relief from its
existing NRF mechanism or other regulatory mechanisms.

28



---



In March 2003, the Company completed
a note purchase agreement for the issuance of its Series B Notes in the aggregate
principal amount of $60,000. The Series B Notes have a final maturity of ten years and an
average life of eight years. Interest is payable semi-annually at a fixed rate of 4.74%.
Principal payments are due in equal annual installments of $12,000 commencing in March
2009 and ending in March 2013. The Company used a portion of the proceeds from the
issuance of the Series B Notes to retire certain short-term borrowings, which had an
aggregate outstanding principal balance of $15,000. A substantial intended use of the
Series B Notes proceeds was and continues to be the funding of capital expenditures for
the Companys broadband residential services business.

In March 2000, the Company entered
into a business loan agreement with a bank for a $30,000 line of credit with a term of
three years. In July 2002, the bank amended the credit facility increasing the borrowing
capacity from $30,000 to $50,000. In March 2004, the bank further amended the credit
facility extending the expiration date until June 1, 2005 and revising certain covenants.
Interest on this credit facility is based on a LIBOR-based pricing formula. While the
Company has borrowed previously under this credit facility, there were no amounts
outstanding under this credit facility as of June 30, 2004, nor since the issuance of the
Series B Notes. The Company obtained a waiver as of June 30, 2004 with respect to a
technical violation of the business loan agreement; however, the Company does not believe
the violation to be of any consequence since there were no amounts outstanding as of the
time of the technical violation. The Company is currently having discussions with the bank
regarding the covenants, which may include obtaining a waiver or an amendment for future
periods affected.

In February 2000, the Board of
Directors authorized the repurchase of up to 1 million shares of the Companys common
stock. In June 2002, the Board of Directors approved the repurchase of an additional 500
thousand shares. The shares are purchased from time to time in the open market or through
privately negotiated transactions subject to overall financial and market conditions.
Additionally, the Company implemented an odd-lot repurchase program during 2001. Through
June 30, 2004, approximately 1 million shares of common stock have been repurchased
through these programs. The Company has remaining authorization from the Board of
Directors to repurchase an additional 469 thousand outstanding shares as of June 30, 2004.

The Company had cash, cash
equivalents and short-term investments at June 30, 2004, of $21,650. The Company believes
that its working capital position, operating cash flows and borrowing capacity are more
than sufficient to satisfy its liquidity requirements for the remainder of 2004. The
Companys forecast indicates it is likely that the Company will borrow additional
funds in the second-half of 2004 to fund operations and planned capital expenditures,
while maintaining adequate cash and cash equivalents. Such borrowing might be undertaken
under the newly extended credit facility or by the incurrence of additional long-term
indebtedness, or a combination of short and long-term borrowing. The Company believes,
given its financial position and debt-to-equity position, it has substantial additional
short-and long-term borrowing capacity. As indicated above, a substantial portion of the
Companys 2004 budgeted capital expenditures is at the discretion of the Company.
Accordingly, the Company also believes that it could modify its planned construction and
commitments if the results of operations or borrowing opportunities so require.

Dividends are declared at the
discretion of the Companys Board of Directors. However, unsecured Series A Senior
Notes, unsecured Series B Notes and other unsecured credit arrangements contain provisions
that could restrict the payment of dividends in certain circumstances. These restrictions
include various positive and negative covenants with respect to interest coverage ratio,
tangible net worth and leverage ratio. At June 30, 2004 and 2003, the entire amount of
retained earnings was unrestricted.

Critical Accounting
Policies and Estimates

Below is a summary of the
Companys critical accounting policies and estimates. Management has discussed
development and selection of critical accounting policies and estimates with the
Companys Audit Committee.

| | o | Total revenues from telephone services are affected by rates authorized by various
regulatory agencies. The FCC monitors SureWest Telephones interstate earnings
through the use of annual cost separation studies prepared by SureWest Telephone, which
utilize estimated cost information and projected demand usage. The FCC establishes rules
that carriers must follow in the preparation of the annual studies. In addition, under
NRF, SureWest Telephone is subject to ongoing monitoring and reporting requirements by the
CPUC, including a sharing mechanism whereby SureWest Telephone may be required to share
earnings with customers based on its earned annual rate-of-return. The calculations
supporting the liabilities associated with the Companys estimated shareable earnings
obligations are very complex and involve a variety of estimates prior to the ultimate
settlement of such obligations. A final decision from the CPUC that adopts the settlement
agreement, described above in Regulatory Matters, would settle the
Companys existing estimated intrastate shareable earnings obligations and eliminate
the exposure of the Company to sharing of any intrastate overearnings for the immediate
future and promote decision making that is focused more on competitive market needs rather
than these regulatory considerations. Accordingly, it is reasonably possible that
managements estimates of the Companys liabilities for interstate and
intrastate shareable earnings obligations could change in the near term, and the amounts
involved could be material.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

29



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| | o | The Company recognizes revenue when (i) persuasive evidence of an arrangement between the
Company and the customer exists, (ii) delivery of the product to the customer has occurred
or service has been provided to the customer, (iii) the price to the customer is fixed or
determinable and (iv) collectibility of the sales price is reasonably assured.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | o | The Company maintains allowances for doubtful accounts for estimated losses resulting from
the potential inability of its customers to make required payments. If the financial
condition of the Companys customers were to deteriorate, resulting in an impairment
of their ability to make payments, additional allowances may be required.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | o | The Company states its inventories held for sale at lower of cost or market. In assessing
the ultimate recoverability of inventories, the Company is required to make estimates
regarding future customer demand.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | o | Property, plant and equipment and intangible assets are recorded at cost. Retirements and
other reductions of regulated telephone plant and equipment are charged against
accumulated depreciation with no gain or loss recognized in accordance with the composite
group remaining life methodology utilized for telephone plant assets. When property
applicable to non-telephone operations is sold or retired, the asset and related
accumulated depreciation are removed from the accounts and the associated gain or loss is
recognized. Property, plant and equipment is depreciated or amortized using the
straight-line method over their estimated economic lives. The economic lives are estimated
at the time the assets are acquired and are based on historical experience with similar
assets, as well as anticipated technological or other changes. If technological changes
were to occur more rapidly than anticipated or differently than anticipated, the economic
lives assigned to these assets may need to be shortened, resulting in the recognition of
increased depreciation and amortization expense in future periods. Likewise, if the
anticipated technological or other changes occur more slowly than anticipated, the life of
the asset group could be extended based on the life assigned to new assets added to the
group. This could result in a reduction of depreciation and amortization expense in future
periods. The Company reviews these types of assets annually, or when events or
circumstances indicate that the carrying amount may not be recoverable over the remaining
lives of the assets. In assessing the recoverability of the Companys property, plant
and equipment and intangible assets, which consist principally of wireless spectrum
licenses and goodwill, the Company must make assumptions regarding estimated future cash
flows and other factors to determine the fair value of the respective assets. If these
estimates and assumptions change in the future, the Company may be required to record
impairment charges relating to its intangible assets.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | o | The Company accounts for income taxes using the liability method. Under this method,
deferred tax assets and liabilities are determined based on differences between the
financial reporting and tax bases of assets and liabilities and are measured using the
enacted tax rates and laws that are expected to be in effect when the differences are
expected to reverse. The Company does not have a valuation allowance on its deferred tax
asset as of June 30, 2004 or 2003 because it believes it is more likely than not that such
deferred tax asset will be realized. Should the Company determine that it would not be
able to realize all or part of its deferred tax asset in the future, an adjustment to the
deferred tax asset would be charged to income in the period in which the determination was
made.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

30



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| | o | The Company has pension and post-retirement benefit costs and obligations. The
Companys pension and post-retirement benefit obligations are actuarially determined
based on estimates of discount rates, long-term rates of return on plan assets and
increases in future compensation levels. Changes in these estimates and other factors
could significantly impact the Companys pension and post-retirement benefit costs
and obligations.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | o | The Company is a party to a variety of litigation, regulatory proceedings and other
contingencies that arise in the ordinary course of business. The Company is required to
assess the likelihood of any adverse judgments or outcomes to these matters, as well as
potential ranges of probable losses for certain of these matters. The determination of the
liabilities required, if any, for loss contingencies is made after careful analysis of
each individual issue. In the opinion of management, the ultimate outcome of these matters
will not materially affect the Companys consolidated financial position and results
of operations.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | o | The Company currently sponsors two Equity Incentive Plans (the Plans) for
certain employees, outside directors and consultants of the Company, which were approved
by the Companys shareholders. The Plans permit issuance by the Company of awards in
the form of restricted shares, stock units, performance shares, stock options and stock
appreciation rights. Prior to 2003, the Company accounted for those plans under the
recognition and measurement provisions of Accounting Principles Board Opinion
(APB) No. 25, Accounting for stock issued to employees, and
related interpretations. No stock-based compensation expense for stock options was
reflected in net income for the years ended December 31, 2002 and 2001, as all stock
options granted under those plans had an exercise price equal to the fair value of the
underlying common stock on the date of grant. Effective January 1, 2003, the Company
adopted the preferable fair value recognition provisions of Statement of Financial
Accounting Standards (SFAS) No. 123, Accounting for Stock-Based
Compensation. Under the prospective transition method selected by the Company, as
described in SFAS No. 148, Accounting for Stock-Based Compensation-Transition and
Disclosure, compensation expense was recognized in 2003 for all employee awards
granted, modified or settled after January 1, 2003.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | The
Company voluntarily made the choice to change to the preferable method of accounting for
employee stock options in accordance with SFAS No. 123. The Company concluded that stock
options are a form of employee compensation expense and, therefore, it is appropriate that
these expenses be recorded in the results of operations to more clearly reflect economic
reality.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | The
Black-Scholes option pricing model includes assumptions regarding dividend yields,
expected volatility, expected lives and risk-free interest rates. These assumptions
reflect managements best estimates, but these items involve inherent uncertainties
based on market conditions generally outside of the control of the Company. As a result,
if other assumptions had been used in the current period, stock-based compensation expense
could have been materially different. If management uses different assumptions in future
periods, stock-based compensation expense could be materially impacted in future years.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Factors That Could
Affect Future Results

As a result of the following factors,
as well as other variables affecting our operating results, past financial performance may
not be a reliable indicator of future performance, and historical trends should not
necessarily be used to anticipate results or trends in future periods.

Representative examples of these
factors include (without limitation) the following:

| |  | We expect to continue to face significant competition in all parts
of our business and the
level of competition is expected to intensify.The telecommunications industry is highly
competitive. We face actual or potential competition from many existing and emerging
companies, including other incumbent and competitive local telephone companies,
long-distance carriers and resellers, wireless telephone companies, Internet service
providers, satellite companies and cable television companies. We may not be able to
successfully anticipate and respond to various competitive factors affecting the industry,
including regulatory changes that may affect our competitors and us differently, new
technologies and services that may be introduced, changes in consumer preferences,
demographic trends and discount pricing strategies by competitors. As the incumbent
carrier in Sacramento, SBC Communications enjoys certain business advantages, including
its size, financial resources, favorable regulatory position, brand recognition and
connection to virtually all of our customers and potential customers there. As the largest
cable operator in Sacramento and Placer County, Comcast enjoys certain business
advantages, including its size, financial resources, ownership or superior access to
programming and other content, brand recognition, and first-in-the-field advantages with a
customer base that generates positive cash flow for its operations. We face intense
competition in our markets for long-distance, Internet access and other ancillary services
that are important to our business and to our growth strategy.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

31



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| |  | We
must adapt to rapid technological change.Technological developments could increase our
costs and cause a decline in demand for our services. In addition, technology changes can
give competitors significant new advantages. If we do not replace or upgrade technology
and equipment that becomes obsolete, we will be unable to compete effectively because we
will not be able to meet the needs or expectations of our customers. Additionally,
replacing or upgrading our infrastructure in the future could result in significant
capital expenditures.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | We
are subject to a complex and uncertain regulatory environment.Some parts of our business
are extensively regulated, and the nature of regulation continues to undergo fundamental
change and reinterpretation.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Our
operations have undergone material changes, and our actual operating results can be
expected to differ from the results indicated in our historical financial statements.As a
result of our acquisition of assets from Western Integrated Networks, LLC and certain
affiliates in 2002, our mix of operating assets differs from those operations upon which
our historical financial statements are based. Consequently, our historical financial
statements may not be reliable as an indicator of future results.
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Our
success depends upon our ability to manage our growth and expansion. If our acquisitions
and growth initiatives are not successful, we could suffer an adverse effect on our
business and results of operations. Our growth strategy will require us to invest
significant capital in services that may not achieve the desired returns. Our future
success depends, in part, upon our ability to manage our growth, including our ability to
build network and related facilities to serve new customers, integrate our operations to
take advantage of new capabilities and systems; attract and retain skilled personnel
across the Company, effectively manage the demands of day to day operations in new areas
while attempting to execute our business strategy, and realize the projected growth and
revenue targets developed by Company management.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | We
are reliant on support funds provided under federal and state laws.We receive revenues
from various federal or state support funds: long term support from the Universal Service
Program, CHCF-B and Universal Lifeline Service Fund. These governmental programs are
reviewed and amended from time to time, and are likely to change in the near future. As
described in Regulatory Mattersabove, the Company currently receives funding of $11,500
annually from the CHCF, a program designed by the CPUC to establish a fair and equitable
local rate structure and to reduce any disparity in the rates charged by certain telephone
companies serving high-cost areas. This interim funding is currently due to expire on
January 1, 2005. However, there is an amendment pending, SB1276, to the existing
legislation, which would extend the expiration date to January 1, 2009. This bill has
passed the California Senate and awaits action by the Assembly. Action on this matter is
expected during 2004. In the event this pending law is not enacted, the Company would file
for emergent relief from its existing NRF mechanism or other regulatory mechanisms. The
outcome and impact on the Companys operations resulting from future changes to these
governmental programs cannot be determined at this time.
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | We
could be harmed by the recent adverse developments affecting other communications
companies.There have been numerous bankruptcies and other financial difficulties
experienced by other carriers and suppliers in the telecommunications and Internet
sectors. Similar situations with our suppliers, some of whom provide products and services
for which there are few substitutes, could cause us to experience delays, service
interruptions or additional expenses.
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | We
depend on third parties, over whom we have no control, to deliver our services.Because of
the interconnected nature of the telecommunications industry, we depend heavily on other
local telephone companies, long-distance carriers, and numerous other third parties to
deliver our services. In addition, we are dependent on easements, franchises and licenses
from various private parties such as established telephone companies and other utilities,
railroads, long-distance companies, state highway authorities, local governments and
transit authorities for access to aerial pole space, underground conduits and other
rights-of-way in order to construct and operate our networks. The failure to maintain in
effect the necessary third party arrangements on acceptable terms would have an adverse
effect on our ability to conduct our business.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

32



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| |  | If
we are unable to effectively and efficiently implement the necessary initiatives to
eliminate the material weaknesses identified in our internal controls and procedures,
there could be an adverse affect on our operations or financial results.Our auditors,
Ernst & Young LLP, in connection with the audit of the Companys consolidated
financial statements for the year ended December 31, 2003, advised us that they had
concluded that material weaknesses in the Companys internal control existed,
including with respect to issues identified as a result of the special investigation
instituted by the Audit Committee. The specific matters identified by Ernst & Young
LLP encompassed (i) control of cash and investments, (ii) accounting personnel, policies
and procedures and (iii) accounting for property, plant and equipment. We performed
substantial additional procedures designed to ensure that the internal control
deficiencies did not lead to material misstatements in our consolidated financial
statements.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | We
have already implemented various initiatives, and are considering additional initiatives
to improve our internal controls, and address the matters identified by Ernst & Young
LLP. The implementation of the initiatives and the consideration of additional necessary
improvements are among our highest priorities. The Board of Directors, under the direction
of the Audit Committee, will continually assess the progress of the initiatives and the
improvements, and take further actions as deemed necessary. Until all of the identified
material weaknesses are eliminated, there is a risk of an adverse affect on our operations
or financial results. In addition, we anticipate that the initiatives will require the
hiring of additional employees and the incurrence of fees and expenses of third parties
necessary to improve the internal controls, likely resulting in increased operating
expenses.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | We continue to devote significant resources and efforts in connection
with the compliance requirments imposed by Section 404 of The Sarbanes-Oxley Act of 2002.  It is anticipated that a substantial
portion of the documentation and testing phases relating to internal control review will be completed by September 30, 2004.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | As part of our efforts, we are currently documenting the policies and
procedures relating to the accounting for property, plant and equipment.  In that regard, we anticipate completing enhancements to certain of
the modules of the enterprise resource planning system relating to propery, plant and equipment by September 30, 2004.  Testing will
be undertaken in the fourth quarter of 2004 to assess the related internal controls, as required by Sarbanes-Oxley.  It is our current view
that testing of the internal controls relating to property, plant and equipment, in view of the short time period before the end of the 2004
fiscal year, will require manual processes to increase the likelihood of our favorable assessment with respect to such internal controls.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Regulatory and Legal
Matters

SureWest Telephone is subject to
regulation by the FCC and CPUC. In the past, there have been various proceedings before
these agencies to which SureWest Telephone has been a party. In 1996, Congress passed the
Telecommunications Act of 1996 (the Act), which significantly changed the
regulatory environment for telecommunications companies. Beginning in 1996, the FCC
conducted proceedings and adopted orders implementing the Acts provisions to open
local exchange service markets, such as the market of SureWest Telephone, to competition.
These proceedings and orders address interconnection, access charges and universal
service. With respect to local competition, the FCC rules outline pricing methodologies
for the states to follow when setting rates for incumbent carriers (such as SureWest
Telephone) to charge competitors for resale, interconnection and unbundled network
elements.

Given the Acts relatively
recent enactment, the ongoing actions taken by the FCC to promulgate rules and regulations
on interconnection access charges and universal service reform, and the various on-going
legal challenges considering the validity of these FCC orders, it is not yet possible to
determine fully the impact of the Act and related FCC regulations on SureWest
Telephones operations.

The Companys financial
condition and results of operations have been and will be affected by recent and future
proceedings before the CPUC and FCC. Pending before the FCC and CPUC are proceedings,
which are considering:

33



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| | o | additional rules governing the opening of markets to competition;
| | - | -----------------------------------------------------------------

| | o | the goals and definition of universal telephone
service in a changing environment,
including examination of subsidy support mechanisms for subscribers of different carriers
(including incumbent carriers) and in various geographic areas;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | o | rules that will provide non-discriminatory access
by competing service providers to the
network capabilities of local exchange carriers and
| | - | -------------------------------------------------------------------------------------------------------------------------------------------

| | o | the regulated rates and earnings of SureWest Telephone.
| | - | -------------------------------------------------------

The Company has been involved in a
proceeding at the CPUC that has considered the continued need for certain sharing
requirements in the intrastate jurisdiction and, in connection with that review, has also
considered the issue of whether the Company overearned in the intrastate jurisdiction in
recent monitoring periods and, if so, the amount of such overearnings that should be
shared with customers. On July 27, 2004, the Company entered into a settlement agreement
with the other parties in the proceeding, the ORA and The Utility Reform Network
(TURN), which is intended to resolve all issues in the proceeding. Among other
things, the settlement agreement addresses and resolves all earnings issues for the
monitoring periods 2000 through 2004, puts into place a surcredit mechanism for the amount
of the settlement, and suspends the requirement for any intrastate sharing for monitoring
periods from January 1, 2005 through at least December 31, 2010. The settlement agreement
is subject to approval by the CPUC. When the settlement agreement is approved by the CPUC,
the Company will reassess its estimated intrastate shareable earnings
obligations.

There are a number of pending and
anticipated other regulatory proceedings occurring at the federal and state levels that
may have a material impact on SureWest Telephone. These regulatory proceedings include,
but are not limited to, consideration of changes to the interstate universal service fund,
intercarrier compensation (including access charges) reform and the regulation of local
exchange carriers, and regulation of IPenabled services. The outcomes and impact on
SureWest Telephones operations of these proceedings and related court matters cannot
be determined at this time.

The eventual impact on the Company of
the effect of all the proceedings described above cannot presently be determined.

34



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|ITEM 3. | QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
|------- | ----------------------------------------------------------

The
Companys 2003 Annual Report on Form 10-K contains certain disclosures about the
Companys limited exposure to market risk for changes in interest rates. There have
been no material changes to the information provided which would require additional
disclosures as of the date of this filing.

35



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|ITEM 4. | CONTROLS AND PROCEDURES
|------- | -----------------------

Evaluation of Disclosure
Controls and Procedures

Company management, including the
chief executive officer and controller, have evaluated the Companys disclosure
controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of
1934, as amended (the Exchange Act)) as of the end of the period covered by
this Quarterly Report on Form 10-Q. Based upon that evaluation, the chief executive
officer and controller have concluded that the Companys disclosure controls and
procedures are effective, except as discussed below, to ensure that information required
to be disclosed by the Company in reports that it files or submits under the Exchange Act
is recorded, processed, summarized and reported within the time period specified in SEC
rules and forms. Notwithstanding managements conclusions, the effectiveness of a
system of disclosure controls and procedures is subject to certain inherent limitations,
including cost limitations, judgments used in decision making, assumptions regarding the
likelihood of future events, soundness of internal controls, and fraud. Due to the
limitations, there can only be reasonable, not absolute, assurance that any system of
disclosure controls and procedures will be successful in preventing all errors or fraud,
or in making all material information known in a timely manner to the appropriate
management.

In January 2004, The Audit Committee
of the Board of Directors launched a formal investigation, and retained independent legal
counsel to conduct the investigation with the assistance of forensic accountants. The
investigation resulted from a preliminary investigation by Company management, triggered
by the abrupt resignation of an employee in the Companys Corporate Finance
Department, indicating irregularities by the former employee in the Companys cash
management and investment functions, and violations of the Companys investment
policies. At the time of the commencement of the special investigation, approximately
$1,828 of Company funds were outstanding without proper documentation and remain
outstanding.

The independent legal counsel, with
the assistance of the forensic accountants, undertook an extensive process to (i)
investigate the facts and circumstances giving rise to the misappropriation of Company
funds, (ii) determine whether there were any similar or related transactions, and any
Company employees involved in the previously-identified transactions other than those
known to the Company at the commencement of the investigation, (iii) determine the
underlying mechanics in the origination of the transactions and the circumstances under
which detection failed to occur, and (iv) evaluate internal controls relating to the
affected portion of the Companys business.

The Audit Committee of the Board of
Directors has been advised by independent legal counsel that:

| | o | All of the unauthorized transactions occurred in
2003 and remained undetected until December 2003;
| | - | --------------------------------------------------------------------------------------------------

| | o | The unauthorized  transactions
were actively  concealed by the Company's former employee in the Company's
books and records; and
| | - | --------------------------------------------------------------------------------------------------------------------------------

| | o | Independent legal counsel did not uncover
any other similar transactions nor any evidence
that any other Company employees intentionally participated in the unauthorized
transactions.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The independent legal counsel further
reported to the Audit Committee (i) its view that existing Company control procedures
prior to the discovery of the unauthorized transactions were either circumvented or
ignored, and the control procedures existing at the time of the unauthorized transactions
were not adequate, and (ii) the Company, subsequent to the discovery of the unauthorized
transactions, had developed and implemented a number of key internal controls. In
addition, the independent legal counsel provided additional control recommendations to the
Audit Committee for review and consideration.

In connection with the audit of the
Companys consolidated financial statements for the year ended December 31, 2003,
Ernst & Young LLP, the Companys independent auditors, advised the Company that
it had concluded that material weaknesses in the Companys internal control existed,
including with respect to certain of the issues identified as a result of the Audit
Committees special investigation. The Company has performed substantial additional
procedures designed to ensure that the internal control deficiencies did not lead to
material misstatements in its consolidated financial statements, notwithstanding the
presence of the noted internal control weaknesses. The specific matters identified by
Ernst & Young LLP involving internal control and its operation considered to be
material weaknesses encompassed:

36



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| | o | Control of cash and investments, including with respect control of cash disbursements,
reconciliation procedures, segregation of duties and investment policy compliance;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | o | Accounting personnel, policies and
procedures; and                                                                                                                       
| | o | Accounting for property, plant and equipment.                                                                                                                            

During 2004, the Company instituted
additional processes and procedures to improve internal control. Subsequent to the
discovery of the unauthorized wire transactions in 2003, the Company implemented a number
of internal controls with respect to cash and investment activities, including:

| | o | An improved process with respect to bank reconciliation procedures, including secondary
reviews performed by Company personnel with appropriate segregation of duties;
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | o | Revised  procedures  for the  initiation
of  modifications  to the  Company's  instructions  to its  bank
relating to authorizations; and                             
|
| | o | Weekly reviews of the
Companys wire transfer activity by the Chief Financial Officer or Controller.                                                                  

The Company has also implemented new
controls with respect to its investment activities, including:

| | o | Standardizing supporting documentation for investment
activity and approvals;                                                                                                         
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | o | Revisions to the journal  entry  process
for  investment  transactions,  and related  segregation  of duty
modifications;                                                             
|
| | o | An improved process with respect to investment schedule preparation procedures,
including secondary reviews performed by Company personnel with appropriate segregation
of duties; and
|
| | o | Monthly investment compliance testing.                                                                                                                                                

The Audit Committee made a number of
additional recommendations to the Companys Board of Directors for further review and
consideration, which were formally acted upon beginning early in the second quarter of
2004, and contemplate additional actions in 2004. Such initiatives relate to:

| | o | An assessment to be conducted with respect to the Companys Corporate Finance
Department, which encompasses the Companys accounting and finance personnel, including
specifically relating to the number of personnel, and the collective mix and technical skills of
such personnel, and the addition of new personnel if necessary.  During the second quarter, the Companys
Board of Directors approved the addition of six personnel in the Corporate Finance Department.  As of
August 6, 2004, the Company has hired three of six additional personnel and is actively recruiting
the remaining three.  Further evaluation will be conducted by the Chief Financial Officer and, if deemed
appropriate, with the assistance of a third party, in continuing consultation with the Board;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | o | An internal audit process, with tasks to be performed either by Company personnel or a
third party, with reporting duties to the Chairman of the Companys Audit Committee
(implemented in part by the Companys hiring of a Senior Internal Auditor in July
2004);
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | o | A more significant effort devoted to internal controls training for all affected
personnel, and an increased emphasis on the completion of internal controls documentation,
including as required by Section 404 of the Sarbanes-Oxley Act of 2002 (including the
retention in May 2004 of third-parties to assist in performing internal control reviews of
all of the Companys accounting systems, and to assist in expediting the completion
of the internal controls documentation); and
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

37



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| | o | The preparation and implementation of a formal accounting policies and procedures manual
or electronic database to serve as a reference tool for Company personnel and to establish
uniformity and consistency throughout the Company. The preparation of the accounting policies
and procedures manual is in process and the Company expects that it will be completed by the end
 of the third quarter.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The Company has previously taken
actions that it believes have improved internal controls, including:

| | o | The establishment of a Disclosure Committee comprised of Management personnel and senior
representatives of the Companys Corporate Finance Group, which undertakes reviews
prior to significant filings with the Securities and Exchange Commission;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | o | The modification of written ethics and compliance materials provided to Company employees,
and the formal adoption of a Code of Ethics and Business Conduct, and the related
establishment of confidential procedures which permit Company employees to communicate
anonymously in the event of suspected violations of laws or Company standards (together
with mandatory classes in 2004 for all Company employees to review the Code of Ethics and
Business Conduct); and
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | o | The implementation in 2003 of new enterprise resource planning and accounting software,
which likely assisted in identifying certain of the accounting deficiencies noted above
relating to property, plant and equipment. (The Company also anticipates completing enhancements
to certain modules of its new enterprise resouce planning system relating to property, plant
and equipment by September 30, 2004 and other
procedures to improve its accounting for property, plant and equipment).
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

On April 15, 2004, Michael D.
Campbell, the Companys Executive Vice President and Chief Financial Officer retired
from the Company. Brian H. Strom, President and Chief Executive Officer of the Company, is
serving as interim Chief Financial Officer, while the Company undertakes the search for a
new Chief Financial Officer, which the Company intends to complete in the third quarter of
2004.

The Company will continue to evaluate
the effectiveness of its disclosure controls and internal controls and procedures on an
ongoing basis, and will take further action as appropriate. The Company continues to devote significant resources and efforts in connection with the compliance
 requirements imposed by Section 404 of The Sarbanes-Oxley Act of 2002.  It is anticipated that a substantial portion of the documentation and testing phases relating
 to internal control review will be completed by September 30, 2004

As part of the Companys efforts, the Company is currently documenting its
policies and procedures relating to the accounting for property, plant and equipment.  In that regard, the Company anticipates completing
enhancements to certain of the modules of its enterprise resource planning system relating to property, plant and equipment by September
30, 2004.  Testing will be undertaken in the fourth quarter of 2004 to assess the related internal controls, as required by Sarbanes-Oxley.  Is is the Companys
current view that the testing of the internal controls relating to property, plant and equipment, in view of the short timer period before
the end of the 2004 fiscal year, will require manual process to increase the likelihood of Managements favorable assessment with
respect to such internal controls

With the exception of the items noted
above, there has been no change in the Companys internal control over financial
reporting during the period covered by the report, that has materially affected or is
reasonably likely to materially affect the Companys internal control over financial
reporting.

38



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PART II

|ITEM 1. | LEGAL PROCEEDINGS
|------- | -----------------

Except for the proceedings described
below, the Company is not aware of any material pending legal proceedings, other than
ordinary routine litigation incidental to its business, to which it is a party or to which
any of its property is subject.

In 1996, the California Public
Utilities Commission (CPUC) issued a decision in connection with SureWest
Telephones general rate proceeding, which authorized SureWest Telephone to implement
a New Regulatory Framework (NRF) for services furnished within SureWest
Telephones service area in order to accommodate market and regulatory movement
toward competition and greater pricing flexibility. Under the NRF, SureWest Telephone is
subject to ongoing monitoring and reporting requirements, including a sharing mechanism
whereby SureWest Telephone is required to share earnings with customers through a
reduction of revenues if its earned annual rate-of-return exceeds that authorized by the
CPUC.

In accordance with the requirements
of its general rate case order, SureWest Telephone filed an application for review of its
NRF in 1999. In connection with this proceeding, the CPUCs Office of Ratepayer
Advocates (ORA) undertook a verification audit of SureWest Telephones
non-regulated and affiliated transactions pursuant to the general rate case and other CPUC
orders. In June 2001, the CPUC adopted its decision in this matter (the
Decision). The Decision did not suspend the sharing mechanism as SureWest
Telephone had requested, and further provided that SureWest Telephone must change the
method used to allocate costs for services provided by SureWest Telephone to its
affiliates, the treatment of certain directory revenues and the treatment of internal-use
software costs. Additionally, in accordance with the provisions of the Decision, the
Company recorded certain liabilities and reductions of revenues relating to estimated
intrastate shareable earnings obligations.

The Company has been involved in a
proceeding at the CPUC that has considered the continued need for certain sharing
requirements in the intrastate jurisdiction, and in connection with that review, has also
considered the issues of whether the Company overearned in the intrastate jurisdiction in
recent monitoring periods, and if so, the amount of such overearnings that should be
shared with customers. On July 27, 2004, the Company entered into a settlement agreement
with the other parties in the proceeding, the ORA and The Utility Reform Network
(TURN), which is intended to resolve all issues in the proceeding. Among other
things, the settlement agreement would address and resolve all earnings issues for the
monitoring periods 2000-2004, put into place a surcredit mechanism for the amount of the
settlement, and suspend the requirement for any intrastate sharing for later monitoring
periods from January 1, 2005 through at least December 31, 2010. This settlement agreement
is subject to approval by the CPUC. When this settlement agreement is approved by
the CPUC, the Company will reassess its estimated intrastate shareable earnings
obligations.

Prior to January 1, 2002, SureWest
Telephone billed SBC various charges for certain local service and network access service
revenues in accordance with certain agreements as described below. In 1999, SBC expressed
interest in withdrawing from the designated carrier plan (DCP) for SureWest
Telephones toll traffic. The DCP was a compensation arrangement between SureWest
Telephone and SBC for certain intrastate toll services. SureWest Telephone and SBC agreed
to allow the DCP arrangement to expire in December 2001.

In 1999, SBC also expressed interest
in entering into a new, permanent compensation arrangement for extended area service
(EAS). At that time, SBC had been paying SureWest Telephone approximately
$11,500 per year for EAS pursuant to a Settlement Transition Agreement. In November 2000,
the CPUC authorized SBC to terminate its annual EAS payments to SureWest Telephone
effective November 30, 2000. The CPUC authorized replacement funding to SureWest Telephone
on an interim basis using funds from the CHCF. The CHCF is a program designed by the CPUC
to establish a fair and equitable local rate structure and to reduce any disparity in the
rates charged by telephone companies serving high-cost areas. This interim funding is
currently due to expire on January 1, 2005. However, there is an amendment pending,
SB1276, to the existing legislation, which would extend the expiration date to January 1,
2009. This bill has passed the California Senate and awaits action by the Assembly. Action
on this matter is expected during 2004. In the event this pending bill is not enacted, the
Company would file for emergent relief under its existing NRF mechanism or other
regulatory mechanisms. In addition, the CPUC opened an Order Instituting Investigation
(OII) for the purpose of determining whether future recovery of all, none, or
a portion of the approximate $11,500 annual payments previously received from SBC should
come from SureWest Telephones ratepayers or other regulatory recovery mechanisms.
This proceeding began in 2001, evidentiary hearings were held during 2002, and briefing
was completed in February 2003. In this proceeding, the ORA recommended that the CPUC
discontinue SureWest Telephones present interim EAS funding from the CHCF without
replacement revenues from ratepayers. The CPUCs decision in this matter is expected
during 2004. The CPUC has made no indication as to what, if any, changes will be
forthcoming relating to EAS revenues. The results of these proceedings and their potential
effects on SureWest Telephone cannot yet be determined.

39



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SureWest Telephones operations
may also be impacted by the Telecommunications Act of 1996 (the Act). The Act
significantly changed the regulatory environment for telecommunications companies.
Beginning in 1996, the Federal Communications Commission (FCC) conducted
proceedings and adopted orders implementing the Acts provisions to open local
exchange service markets, such as the market of SureWest Telephone, to competition. These
proceedings and orders address interconnection, access charges and universal service.

Given the ongoing activities of the
FCC to promulgate rules and regulations on interconnection, access charges, and universal
service reform, and the various on-going legal challenges considering the validity of
these FCC orders, it is not yet possible to determine fully the impact of the Act and
related FCC regulations on SureWest Telephones operations.

There are a number of other
regulatory proceedings occurring at the federal and state levels that may have a material
impact on SureWest Telephone. These regulatory proceedings include, but are not limited
to, consideration of changes to the jurisdictional separations process, the interstate
universal service fund, access charge reform and the regulation of local exchange
carriers. The outcomes and impact on SureWest Telephones operations of these
proceedings and related court matters cannot be determined at this time.

The regulatory proceedings occurring
at the state and federal levels described above may also broaden the scope of competition
in the provision of regulated services and change the rates and rate structure for
regulated services furnished by SureWest Telephone, the effects of which on SureWest
Telephone cannot yet be determined.

40



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|ITEM 4. | SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS.
|------- | ----------------------------------------------------

On June 11, 2004, the Company held
its Annual Meeting of Shareholders, at which the shareholders elected a Board of seven (7)
Directors.

The seven nominees to serve as
directors, which constituted the entire Board of Directors as of the meeting date, were
all reelected to serve as directors by the following votes (out of 14,570,117).

|                    |            |         | Broker
|------------------- | ---------- | ------- | ------
|
|
|Kirk C. Doyle       | 12,014,689 | 272,513 | 15,006
|Brian H. Strom      | 11,933,629 | 353,573 | 15,006
|John R. Roberts III | 11,914,033 | 373,169 | 15,006
|Neil J. Doerhoff    | 11,880,404 | 406,798 | 15,006
|Timothy D. Taron    | 11,885,814 | 401,388 | 15,006
|Guy R. Gibson       | 12,002,800 | 284,402 | 15,006
|Steven C. Oldham    | 11,850,635 | 436,567 | 15,006
|                   

41



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|ITEM 6. | EXHIBITS AND REPORTS ON FORM 8-K
|------- | --------------------------------

| | a) | See Index to Exhibits                                                                                                                                                                                                                                                                                                                                  
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b) | Reports on Form 8-K:                                                                                                                                                                                                                                                                                                                                   
|
| |    | The
Company filed a report on Form 8-K on April 15, 2004 announcing the retirement of its
Executive Vice President and Chief Financial Officer.                                                                                                                                                                                                        
|
| |    | The
Company filed a report on Form 8-K on April 16, 2004 relating to the board implementation
of its Audit Committees recommendations.                                                                                                                                                                                                                
|
| |    | The
Company filed a report on Form 8-K on April 26, 2004 announcing that its Board of
Directors declared a quarterly cash dividend of $.025 per share payable June 15, 2004, to
its shareholders of record at the close of business on May 28, 2004. In addition, the
Company announced its annual shareholder meeting was scheduled for June 11, 2004.
|
| |    | The Company filed a report on Form
8-K on May 10, 2004 related to the announcement of first
quarter 2004 financial results.                                                                                                                                                                                                                            

42



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SUREWEST COMMUNICATIONSINDEX TO EXHIBITS(Item 6 (a))

|Exhibit No. | Description                                                                                                                                                                                                                                                                                                      | Method
of Filing         | Page
|----------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------ | ----
|3.1         | Articles of Incorporation of Registrant, together with
Certificate of Amendment of Articles of Incorporation dated
January 25, 1996 and Certificate of Amendment of Articles
of Incorporation dated June 21, 1996 (Filed as Exhibit 3(a)
to Form 10-Q Quarterly Report for the quarter ended
September 30, 1996) | Incorporated byreference | --  
|           
|3.2         | Certificate of Amendment of Articles of Incorporation dated
May 18, 2001 (Filed as Exhibit 3(b) to Form 10-Q Quarterly
Report for the quarter ended June 30, 2001)                                                                                                                                               | Incorporated byreference | --  
|           
|3.3         | Bylaws of Registrant (Filed as Exhibit 3(b)to Form 10-K
Annual Report of the Registrant for the year ended December
31, 2000)                                                                                                                                                                                    | Incorporated byreference | --  
|           
|4.1         | Shareholder Rights Plan(Filed as Exhibit 2.1 to Form 8-A
Registration Statement under the Securities Act of 1934)                                                                                                                                                                                                | Incorporated byreference | --  
|           
|10.1        | Credit Agreement of SureWest Telephone Company with Bank of
America National Trust and Savings Association, dated
January 4, 1994 (Filed as Exhibit 10(c) to Form 10-K Annual
Report of Registrant for the year ended December 31, 1993)                                                                         | Incorporated byreference | --  
|           
|10.2        | Note Purchase Agreement for Series A Senior Notes in the
aggregate amount of $40,000,000 dated December 9, 1998
(Filed as Exhibit 10(b) to Form 10-K Annual Report of
Registrant for the year ended December 31, 1998)                                                                                           | Incorporated byreference | --  
|           
|10.3        | Supplement to Note Purchase Agreement for Series B Senior
Notes in the aggregate amount of $60,000,000 dated March
13, 2003 (Filed as Exhibit 99.1 to the Form 8-K filed March
13, 2003)                                                                                                                         | Incorporated byreference | --  

43



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SUREWEST COMMUNICATIONSINDEX TO EXHIBITS(Item 6 (a))

|Exhibit No. | Description                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           | Method
of Filing         | Page
|----------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------ | ----
|10.4        | Business Loan Agreement of Registrant with Bank of America,
dated March 15, 2000, as amended by Amendment No. 1 dated
as of April 10, 2000 (Filed as Exhibit 10(f) to Form 10-Q
Quarterly Report of Registrant for the quarter ended March
31, 2000), as amended by Amendment No. 2 dated as of
September 15, 2000, Amendment No. 3 dated as of July 17,
2001, and Amendment No. 4 dated as of June 26, 2002 (Filed
as Exhibit 10(l) to Form 10-Q Quarterly Report of
Registrant for the Quarter ended June 30, 2002) | Incorporated byreference | --  
|           
|10.5        | Amendment No. 5 to Business Loan Agreement dated February
26, 2003 (Filed as Exhibit 10(e) to Form 10-K Annual Report
of Registrant for the year ended December 31, 2002)                                                                                                                                                                                                                                                                                                                                             | Incorporated byreference | --  
|           
|10.6        | Amendment No. 6 to Business Loan Agreement dated as of
January 13, 2004 (Filed as Exhibit 10.6 to Form 10-K Annual
Report of Registrant for year ended December 31, 2003)                                                                                                                                                                                                                                                                                                                                             | Incorporated byreference | --  
|           
|10.7        | Amendment No. 7 to Business Loan Agreement dated as of
March 25, 2004 (Filed as Exhibit 10.7 to Form 10-K Annual
Report of Registrant for year ended December 31, 2003)                                                                                                                                                                                                                                                                                                                                               | Incorporated byreference | --  
|           
|10.8        | 1999 Restricted Stock Bonus Plan (Filed as Exhibit 10(d) to
Form 10-K Annual Report of Registrant for the year ended
December 31, 1998)                                                                                                                                                                                                                                                                                                                                                                               | Incorporated byreference | --  
|           
|10.9        | 2000 Equity Incentive Plan, as amended (Filed as
Exhibit 10.9 to Form 10-K Annual Report of Registrant for
the year ended December 31, 2003)                                                                                                                                                                                                                                                                                                                                                                          | Incorporated byreference | --  
|           
|10.10       | SureWest KSOP (Filed as Exhibit 4.1 to Registration
Statement on Form S-8 [No. 333-87222])                                                                                                                                                                                                                                                                                                                                                                                                                            | Incorporated byreference | --  
|           
|10.11       | Letter agreement dated January 16, 2001
between Registrant and Brian H. Strom (Filed as Exhibit 10
(g) to Form 10-K Annual Report of Registrant for the year
ended December 31, 2000)                                                                                                                                                                                                                                                                                                                                 | Incorporated byreference | --  
|           
|10.12       | Letter agreement dated January 16, 2001
between Registrant and Michael D. Campbell (Filed as
Exhibit 10 (h) to Form 10-K Annual Report of Registrant for
the year ended December 31, 2000)                                                                                                                                                                                                                                                                                                                            | Incorporated byreference | --  

44



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SUREWEST COMMUNICATIONSINDEX TO EXHIBITS(Item 6 (a))

|Exhibit No. | Description                                                                                                                                                                          | Method
of Filing         | Page
|----------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | ------------------------ | ----
|10.13       | Letter agreement dated January 16, 2001
between Registrant and Jay B. Kinder (Filed as Exhibit 10
(i) to Form 10-K Annual Report of Registrant for the year
ended December 31, 2000) | Incorporated byreference | --  
|           
|10.14       | Letter agreement dated January 16, 2001
between Registrant and Bill M. DeMuth (Filed as Exhibit
10.14 to Form 10-K Annual Report of Registrant for the year
ended December 31, 2003) | Incorporated byreference | --  
|           
|10.15       | Letter agreement dated January 16, 2001
between Registrant and Fred A. Arcuri (Filed as Exhibit
10.15 to Form 10-K Annual Report of Registrant for the year
ended December 31, 2003) | Incorporated byreference | --  
|           
|31.1        | Certification of Brian H. Strom, President and Chief
Executive Officer, as adopted pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002                                         | Filed herewith           | 48  
|           
|31.2        | Certification of Dan T. Bessey, Controller, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                                     | Filed herewith           | 49  
|           
|32.1        | Certification of Brian H. Strom, President and Chief
Executive Officer, pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002     | Filed herewith           | 50  
|           
|32.2        | Certification of Dan T. Bessey, Controller, pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002                                 | Filed herewith           | 51  
|           

45



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SIGNATURES

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

| |                        
| | -----------------------
| | SUREWEST
COMMUNICATIONS
| |                        
| | (Registrant)           

Date: August 6, 2004

|By: | /s/ BRIAN H. STROM                                                                                           
|--- | -------------------------------------------------------------------------------------------------------------
|    | Brian H. Strom,President and ChiefExecutive Officer(Duly Authorized Signatoryand Principal Financial Officer)

47



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EXHIBIT 31.1

CERTIFICATION PURSUANT TO SECTION 302OF THE SARBANES-OXLEY
ACT OF 2002

I,
Brian Strom, President and Chief Executive Officer and Chief Financial Officer, certify
that:

|1. | I have reviewed this quarterly report on Form 10-Q of SureWest Communications;
|-- | ------------------------------------------------------------------------------

|2. | Based on my knowledge, this report does not contain any untrue statement of a
          material fact or omit to state a material fact necessary to make the statements
          made, in light of the circumstances under which such statements were made, not
          misleading with respect to the period covered by this report;
|-- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|3. | Based on my knowledge, the financial statements, and other financial information
          included in this report, fairly present in all material respects the financial
          condition, results of operations and cash flows of the registrant as of, and
          for, the periods presented in this report;
|-- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4. | The registrants other certifying officer and I are responsible for
          establishing and maintaining disclosure controls and procedures (as defined in
          Exchange Act Rules 13a-15(e)):
|-- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|a) |  | Designed such disclosure controls and procedures, or caused such disclosure
          controls and procedures to be designed under our supervision, to ensure that
          material information relating to the registrant, including its consolidated
          subsidiaries, is made known to us by others within those entities, particularly
          during the period in which this report is being prepared;
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|b) |  | Evaluated the effectiveness of the registrants disclosure controls and
          procedures and presented in this report our conclusions about the effectiveness
          of the disclosure controls and procedures, as of the end of the period covered
          by this report based on such evaluation; and
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|c) |  | Disclosed in this report any change in the registrants internal control
          over financial reporting that occurred during the registrants most recent
          fiscal quarter that has materially affected, or is reasonably likely to
          materially affect, the registrants internal control over financial
          reporting; and
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|5. | The registrants other certifying officer and I have disclosed, based on
          our most recent evaluation of internal control over financial reporting, to the
          registrants auditors and the audit committee of registrants board of
          directors (or persons performing the equivalent functions):
|-- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|a) |  | All significant deficiencies and material weaknesses in the design or operation
               of internal control over financial reporting which are reasonably likely to
               adversely affect the registrants ability to record, process, summarize and
               report financial information; and
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|b) |  | Any fraud, whether or not material, that involves management or other employees
               who have a significant role in the registrants internal control over
               financial reporting.
|-- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Date: August 6, 2004

|By: | /s/ BRIAN H. STROM                                 
|--- | ---------------------------------------------------
|    | Brian H. Strom,President and ChiefExecutive Officer

48



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EXHIBIT 31.2

CERTIFICATION PURSUANT TO SECTION 302OF THE SARBANES-OXLEY
ACT OF 2002

I, Dan T. Bessey, Controller, certify that:

|1. | I have reviewed this quarterly report on Form 10-Q of SureWest Communications;
|-- | ------------------------------------------------------------------------------

|2. | Based on my knowledge, this report does not contain any untrue statement of a
          material fact or omit to state a material fact necessary to make the statements
          made, in light of the circumstances under which such statements were made, not
          misleading with respect to the period covered by this report;
|-- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|3. | Based on my knowledge, the financial statements, and other financial information
          included in this report, fairly present in all material respects the financial
          condition, results of operations and cash flows of the registrant as of, and
          for, the periods presented in this report;
|-- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4. | The registrants other certifying officer and I are responsible for
          establishing and maintaining disclosure controls and procedures (as defined in
          Exchange Act Rules 13a-15(e)):
|-- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|a) |  | Designed such disclosure controls and procedures, or caused such disclosure
          controls and procedures to be designed under our supervision, to ensure that
          material information relating to the registrant, including its consolidated
          subsidiaries, is made known to us by others within those entities, particularly
          during the period in which this report is being prepared;
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|b) |  | Evaluated the effectiveness of the registrants disclosure controls and
          procedures and presented in this report our conclusions about the effectiveness
          of the disclosure controls and procedures, as of the end of the period covered
          by this report based on such evaluation; and
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|c) |  | Disclosed in this report any change in the registrants internal control
          over financial reporting that occurred during the registrants most recent
          fiscal quarter that has materially affected, or is reasonably likely to
          materially affect, the registrants internal control over financial
          reporting; and
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|5. | The registrants other certifying officer and I have disclosed, based on
          our most recent evaluation of internal control over financial reporting, to the
          registrants auditors and the audit committee of registrants board of
          directors (or persons performing the equivalent functions):
|-- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|a) |  | All significant deficiencies and material weaknesses in the design or operation
               of internal control over financial reporting which are reasonably likely to
               adversely affect the registrants ability to record, process, summarize and
               report financial information; and
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|b) |  | Any fraud, whether or not material, that involves management or other employees
               who have a significant role in the registrants internal control over
               financial reporting.
|-- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Date: August 6, 2004

|By: | /s/ DAN T. BESSEY       
|--- | ------------------------
|    | Dan T. Bessey,Controller

49



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EXHIBIT 32.1

CERTIFICATION PURSUANT TO18 U.S.C SECTION 1350, AS
ADOPTED PURSUANT TOSECTION 906 OF THE
SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly
Report of SureWest Communications (the Company), on Form 10-Q for the period
ended June 30, 2004 as filed with the Securities and Exchange Commission on the date
hereof (the Report), the undersigned, as the Chief Executive Officer of the
Company, hereby certifies pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, that:

| | 1. | The Report fully complies with the requirements of Section 13(a) and Section
          15(d) of the Securities Exchange Act of 1934; and
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------

| | 2. | The information contained in the Report fairly presents, in all material
          respects, the financial condition and results of operations of the Company.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------

Date: August 6, 2004

|By: | /s/ BRIAN H. STROM                                 
|--- | ---------------------------------------------------
|    | Brian H. Strom,President and ChiefExecutive Officer

A signed original of this written
statement required by Section 906 has been provided to SureWest Communications and will be
retained by SureWest Communications and furnished to the Securities and Exchange
Commission or its staff upon request.

50



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EXHIBIT 32.2

CERTIFICATION PURSUANT TO18 U.S.C SECTION 1350, AS
ADOPTED PURSUANT TOSECTION 906 OF THE
SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly
Report of SureWest Communications (the Company), on Form 10-Q for the period
ended June 30, 2004 as filed with the Securities and Exchange Commission on the date
hereof (the Report), the undersigned, as the Controller of the Company, hereby
certifies pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, that:

|1. |  | The Report fully complies with the requirements of Section 13(a) and Section
               15(d) of the Securities Exchange Act of 1934; and
|-- |  | ---------------------------------------------------------------------------------------------------------------------------------------------

|2. |  | The information contained in the Report fairly presents, in all material
               respects, the financial condition and results of operations of the Company.
|-- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------

Date: August 6, 2004

|By: | /s/ DAN T. BESSEY       
|--- | ------------------------
|    | Dan T. Bessey,Controller

A signed original of this written
statement required by Section 906 has been provided to SureWest Communications and will be
retained by SureWest Communications and furnished to the Securities and Exchange
Commission or its staff upon request.

51



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