##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 FORM 10-Q
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended September 30, 2005
 or
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 Commission File Number 0-556
 SUREWEST COMMUNICATIONS
  California
    
    68-0365195(State or Other Jurisdiction
    
    (IRS Employerof Incorporation or Organization)
    
    Identification No.)200 Vernon Street, Roseville, California
    
    95678(Address of Principal Executive Offices)
    
    (Zip Code)
 (916) 786-6141
  þ o
  þ o
 o þ
     1




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TABLE OF CONTENTS
  
 PagePART I  FINANCIAL INFORMATIONItem 1.
    
    Financial Statements
    
    
    3Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    16Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    37Item 4.
    
    Controls And Procedures
    
    
    38PART II  OTHER INFORMATIONItem 1.
    
    Legal Proceedings
    
    
    41Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    42Item 3.
    
    Defaults Upon Senior Securities
    
    
    42Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    42Item 5.
    
    Other Information
    
    
    42Item 6.
    
    Exhibits
    
    
    43SIGNATURES
    
    
    
    
    46EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2
  2




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##### Table of Contents



PART 1
 FINANCIAL INFORMATION
 
 ITEM 1. FINANCIAL STATEMENTS
 SUREWEST COMMUNICATIONS
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS  (Unaudited; Amounts in thousands, except per share amounts)
 Quarter Ended September 30,
    
    

Nine Months Ended September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Operating revenues:Local service
    
    $
    15,870
    
    
    $
    16,567
    
    
    $
    47,831
    
    
    $
    50,400Network access service
    
    
    11,575
    
    
    
    11,940
    
    
    
    34,009
    
    
    
    35,310Directory advertising
    
    
    4,409
    
    
    
    4,151
    
    
    
    13,045
    
    
    
    12,192Long distance service
    
    
    1,607
    
    
    
    1,408
    
    
    
    4,503
    
    
    
    3,961Wireless service
    
    
    8,832
    
    
    
    8,121
    
    
    
    25,764
    
    
    
    23,170Internet service
    
    
    4,537
    
    
    
    4,041
    
    
    
    13,230
    
    
    
    12,461Residential broadband service
    
    
    6,062
    
    
    
    4,427
    
    
    
    17,596
    
    
    
    12,064Business broadband service
    
    
    2,380
    
    
    
    1,498
    
    
    
    5,854
    
    
    
    4,130Other
    
    
    824
    
    
    
    1,086
    
    
    
    2,807
    
    
    
    3,255Total operating revenues
    
    
    56,096
    
    
    
    53,239
    
    
    
    164,639
    
    
    
    156,943Operating expenses:Cost of services and products
(exclusive of depreciation and
amortization)
    
    
    20,208
    
    
    
    21,260
    
    
    
    59,098
    
    
    
    57,898Customer operations and selling
    
    
    8,385
    
    
    
    9,150
    
    
    
    25,832
    
    
    
    26,258General and administrative
    
    
    8,954
    
    
    
    11,154
    
    
    
    27,595
    
    
    
    32,714Depreciation and amortization
    
    
    13,752
    
    
    
    13,192
    
    
    
    39,851
    
    
    
    36,061Total operating expenses
    
    
    51,299
    
    
    
    54,756
    
    
    
    152,376
    
    
    
    152,931Income (loss) from operations
    
    
    4,797
    
    
    
    (1,517
    )
    
    
    12,263
    
    
    
    4,012Other income (expense):Interest income
    
    
    44
    
    
    
    62
    
    
    
    183
    
    
    
    165Interest expense
    
    
    (1,459
    )
    
    
    (1,137
    )
    
    
    (4,083
    )
    
    
    (3,294
    )Other, net
    
    
    (170
    )
    
    
    (87
    )
    
    
    (249
    )
    
    
    (245
    )Total other expense, net
    
    
    (1,585
    )
    
    
    (1,162
    )
    
    
    (4,149
    )
    
    
    (3,374
    )Income (loss) before income taxes
    
    
    3,212
    
    
    
    (2,679
    )
    
    
    8,114
    
    
    
    638Income tax expense (benefit)
    
    
    1,252
    
    
    
    (1,077
    )
    
    
    3,164
    
    
    
    298Net income (loss)
    
    $
    1,960
    
    
    $
    (1,602
    )
    
    $
    4,950
    
    
    $
    340Earnings (loss) per share:Basic
    
    $
    0.13
    
    
    $
    (0.11
    )
    
    $
    0.34
    
    
    $
    0.02Diluted
    
    $
    0.13
    
    
    $
    (0.11
    )
    
    $
    0.34
    
    
    $
    0.02Cash dividends per share
    
    $
    0.25
    
    
    $
    0.25
    
    
    $
    0.75
    
    
    $
    0.75Shares of common stock used to
calculate earnings (loss) per
share:Basic
    
    
    14,548
    
    
    
    14,531
    
    
    
    14,544
    
    
    
    14,535Diluted
    
    
    14,659
    
    
    
    14,531
    
    
    
    14,637
    
    
    
    14,581
  3




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SUREWEST COMMUNICATIONS
CONDENSED CONSOLIDATED BALANCE SHEETS  (Unaudited; Amounts in thousands)
 September 30,
    
    
    December 31,2005
    
    
    2004ASSETSCurrent assets:Cash and cash equivalents
    
    $
    12,750
    
    
    $
    18,119Accounts receivable, net
    
    
    22,071
    
    
    
    20,155Inventories
    
    
    5,803
    
    
    
    5,578Deferred directory costs
    
    
    4,274
    
    
    
    5,599Prepaid expenses
    
    
    4,560
    
    
    
    2,359Total current assets
    
    
    49,458
    
    
    
    51,810Property, plant and equipment, net
    
    
    375,467
    
    
    
    365,613Intangible and other assets:Wireless spectrum licenses, net
    
    
    13,566
    
    
    
    13,566Goodwill
    
    
    2,171
    
    
    
    2,171Intangible asset relating to pension plans
    
    
    802
    
    
    
    802Intangible asset relating to favorable operating leases, net
    
    
    414
    
    
    
    506Deferred charges and other assets
    
    
    706
    
    
    
    71417,659
    
    
    
    17,759$
    442,584
    
    
    $
    435,182LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Short-term borrowings
    
    $
    25,000
    
    
    $
    10,000Current portion of long-term debt
    
    
    3,672
    
    
    
    3,779Accounts payable
    
    
    3,537
    
    
    
    2,886Other accrued liabilities
    
    
    16,070
    
    
    
    22,250Current portion of contractual shareable earnings obligations
    
    
    2,909
    
    
    
    3,040Estimated shareable earnings obligations
    
    
    304
    
    
    
    396Advance billings and deferred revenues
    
    
    10,021
    
    
    
    9,883Accrued income taxes
    
    
    2,052
    
    
    
    1,549Accrued pension benefits
    
    
    4,219
    
    
    
    3,216Accrued compensation
    
    
    5,830
    
    
    
    5,830Total current liabilities
    
    
    73,614
    
    
    
    62,829Long-term debt
    
    
    89,091
    
    
    
    89,091Long-term contractual shareable earnings obligations
    
    
    4,378
    
    
    
    6,202Deferred income taxes
    
    
    26,258
    
    
    
    24,134Other liabilities and deferred revenues
    
    
    12,721
    
    
    
    11,589Commitments and contingenciesShareholders equity:Common stock, without par value; 100,000 shares authorized,
14,590 and 14,591 shares issued and outstanding at
September 30, 2005 and December 31, 2004, respectively
    
    
    163,534
    
    
    
    161,824Deferred stock-based compensation
    
    
    (1,483
    )
    
    
    (949
    )Accumulated other comprehensive loss
    
    
    (2,126
    )
    
    
    (2,126
    )Retained earnings
    
    
    76,597
    
    
    
    82,588Total shareholders equity
    
    
    236,522
    
    
    
    241,337$
    442,584
    
    
    $
    435,182
  4




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SUREWEST COMMUNICATIONS
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS  (Unaudited; Amounts in thousands)
 Nine Months EndedSeptember 30,2005
    
    
    2004Net cash provided by operating activities
    
    $
    40,959
    
    
    $
    37,664Cash flows from investing activities:Capital expenditures for property, plant and equipment, including
network parts inventory
    
    
    (50,299
    )
    
    
    (50,382
    )Proceeds from the sale of pay telephone assets
    
    
    220
    
    
    
    Purchase of held-to-maturity investments
    
    
    
    
    
    
    (4,275
    )Maturities of held-to-maturity investments
    
    
    
    
    
    
    6,974Changes in deferred charges and other assets
    
    
    
    
    
    
    4Net cash used in investing activities
    
    
    (50,079
    )
    
    
    (47,679
    )Cash flows from financing activities:Increase in short-term borrowings
    
    
    15,000
    
    
    
    Principal payments of long-term debt and capital lease obligations
    
    
    (297
    )
    
    
    (365
    )Dividends paid
    
    
    (10,943
    )
    
    
    (10,933
    )Other
    
    
    (9
    )
    
    
    10Net cash provided by (used in) financing activities
    
    
    3,751
    
    
    
    (11,288
    )Net decrease in cash and cash equivalents
    
    
    (5,369
    )
    
    
    (21,303
    )Cash and cash equivalents at beginning of period
    
    
    18,119
    
    
    
    39,008Cash and cash equivalents at end of period
    
    $
    12,750
    
    
    $
    17,705
  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
   Stock-based Compensation
 Accounting for Stock-Based Compensation Accounting
for Stock-Based Compensation 
Transition and Disclosure
    6




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SUREWEST COMMUNICATIONS
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (CONTINUED)
 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
 Quarter Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2005
    
    2004
    
    2005
    
    2004Net income (loss), as reported
    
    $
    1,960
    
    
    $
    (1,602
    )
    
    $
    4,950
    
    
    $
    340Add: Stock-based employee
compensation expense included
in reported net income, net
of related tax effects
    
    
    290
    
    
    
    84
    
    
    
    730
    
    
    
    359Deduct: Total stock-based
employee compensation expense
determined using the fair
value method for all awards,
net of related tax effects
    
    
    (294
    )
    
    
    (119
    )
    
    
    (764
    )
    
    
    (512
    )Pro forma net income (loss)
    
    $
    1,956
    
    
    $
    (1,637
    )
    
    $
    4,916
    
    
    $
    187Earnings (loss) per share:Basicas reported
    
    $
    0.13
    
    
    $
    (0.11
    )
    
    $
    0.34
    
    
    $
    0.02Basicpro forma
    
    $
    0.13
    
    
    $
    (0.11
    )
    
    $
    0.34
    
    
    $
    0.01Dilutedas reported
    
    $
    0.13
    
    
    $
    (0.11
    )
    
    $
    0.34
    
    
    $
    0.02Dilutedpro forma
    
    $
    0.13
    
    
    $
    (0.11
    )
    
    $
    0.34
    
    
    $
    0.01
   Per Share Amounts
   7




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SUREWEST COMMUNICATIONS
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (CONTINUED)
 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
 Other Comprehensive Income (Loss)
   Impairment of Long-Lived Assets
  Adjustments and Reclassifications
   2. BUSINESS SEGMENTS
  8




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SUREWEST COMMUNICATIONS
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (CONTINUED)
 2. BUSINESS SEGMENTS (CONTINUED)
   Disclosure About Segments of an Enterprise and
Related Information
   Corporate
    
    IntercompanyTelecom
    
    Broadband
    
    Wireless
    
    Operations
    
    Eliminations
    
    ConsolidatedFor the Quarter
ended September 30,
2005:Operating revenues
from external
customers
    
    $
    34,285
    
    
    $
    12,979
    
    
    $
    8,832
    
    
    $
    
    
    
    $
    
    
    
    $
    56,096Intersegment revenues
    
    
    7,133
    
    
    
    428
    
    
    
    667
    
    
    
    
    
    
    
    (8,228
    )
    
    
    Operating expenses*
    
    
    21,277
    
    
    
    14,886
    
    
    
    9,612
    
    
    
    
    
    
    
    (8,228
    )
    
    
    37,547Depreciation and
amortization
    
    
    6,552
    
    
    
    4,215
    
    
    
    2,985
    
    
    
    
    
    
    
    
    
    
    
    13,752Income (loss) from
operations
    
    
    13,589
    
    
    
    (5,694
    )
    
    
    (3,098
    )
    
    
    
    
    
    
    
    
    
    
    4,797Net income (loss)
    
    $
    7,954
    
    
    $
    (3,851
    )
    
    $
    (2,143
    )
    
    $
    
    
    
    $
    
    
    
    $
    1,960For the Quarter
ended September 30,
2004:Operating revenues
from external
customers
    
    $
    35,152
    
    
    $
    9,966
    
    
    $
    8,121
    
    
    $
    
    
    
    $
    
    
    
    $
    53,239Intersegment revenues
    
    
    6,298
    
    
    
    447
    
    
    
    424
    
    
    
    
    
    
    
    (7,169
    )
    
    
    Operating expenses*
    
    
    23,316
    
    
    
    15,893
    
    
    
    9,524
    
    
    
    
    
    
    
    (7,169
    )
    
    
    41,564Depreciation and
amortization
    
    
    6,192
    
    
    
    3,981
    
    
    
    3,019
    
    
    
    
    
    
    
    
    
    
    
    13,192Income (loss) from
operations
    
    
    11,942
    
    
    
    (9,461
    )
    
    
    (3,998
    )
    
    
    
    
    
    
    
    
    
    
    (1,517
    )Net Income (loss)
    
    $
    7,034
    
    
    $
    (5,937
    )
    
    $
    (2,699
    )
    
    $
    
    
    
    $
    
    
    
    $
    (1,602
    )
 9




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SUREWEST COMMUNICATIONS
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (CONTINUED)
 2. BUSINESS SEGMENTS (CONTINUED)
 Corporate
    
    IntercompanyTelecom
    
    Broadband
    
    Wireless
    
    Operations
    
    Eliminations
    
    ConsolidatedAs of and for the Nine
months ended September 30,
2005:Operating revenues from
external customers
    
    $
    102,195
    
    
    $
    36,680
    
    
    $
    25,764
    
    
    $
    
    
    
    $
    
    
    
    $
    164,639Intersegment revenues
    
    
    21,117
    
    
    
    1,269
    
    
    
    1,908
    
    
    
    
    
    
    
    (24,294
    )
    
    
    Operating expenses*
    
    
    64,502
    
    
    
    44,036
    
    
    
    28,281
    
    
    
    
    
    
    
    (24,294
    )
    
    
    112,525Depreciation and amortization
    
    
    18,910
    
    
    
    11,846
    
    
    
    9,095
    
    
    
    
    
    
    
    
    
    
    
    39,851Income (loss) from operations
    
    
    39,900
    
    
    
    (17,933
    )
    
    
    (9,704
    )
    
    
    
    
    
    
    
    
    
    
    12,263Net Income (loss)
    
    
    23,333
    
    
    
    (11,834
    )
    
    
    (6,549
    )
    
    
    
    
    
    
    
    
    
    
    4,950Total assets
    
    $
    655,903
    
    
    $
    257,969
    
    
    $
    139,299
    
    
    $
    278,862
    
    
    $
    (889,449
    )
    
    $
    442,584As of and for the Nine
months ended September 30,
2004:Operating revenues from
external customers
    
    $
    105,118
    
    
    $
    28,655
    
    
    $
    23,170
    
    
    $
    
    
    
    $
    
    
    
    $
    156,943Intersegment revenues
    
    
    19,002
    
    
    
    1,335
    
    
    
    1,113
    
    
    
    
    
    
    
    (21,450
    )
    
    
    Operating expenses*
    
    
    66,453
    
    
    
    44,421
    
    
    
    27,446
    
    
    
    
    
    
    
    (21,450
    )
    
    
    116,870Depreciation and amortization
    
    
    18,719
    
    
    
    8,270
    
    
    
    9,072
    
    
    
    
    
    
    
    
    
    
    
    36,061Income (loss) from operations
    
    
    38,948
    
    
    
    (22,701
    )
    
    
    (12,235
    )
    
    
    
    
    
    
    
    
    
    
    4,012Net income (loss)
    
    
    22,872
    
    
    
    (14,446
    )
    
    
    (8,086
    )
    
    
    
    
    
    
    
    
    
    
    340Total assets
    
    $
    603,386
    
    
    $
    182,243
    
    
    $
    138,698
    
    
    $
    141,304
    
    
    $
    (636,379
    )
    
    $
    429,252
 
 *
    Exclusive of depreciation and amortization
 3. ESTIMATED SHAREABLE EARNINGS OBLIGATIONS
    10




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SUREWEST COMMUNICATIONS
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (CONTINUED)
 3. ESTIMATED SHAREABLE EARNINGS OBLIGATIONS (CONTINUED)
      11




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SUREWEST COMMUNICATIONS
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (CONTINUED)
 3. ESTIMATED SHAREABLE EARNINGS OBLIGATIONS (CONTINUED)
      12




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SUREWEST COMMUNICATIONS
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (CONTINUED)
 4. PENSION AND OTHER POST-RETIREMENT BENEFITS
 Components of Net Periodic Benefit Cost
  Pension Plan and SERP
    
    
    Other Benefits2005
    
    
    2004
    
    
    2005
    
    
    2004Quarter ended September 30,Service cost-benefits earned during the
period
    
    $
    1,408
    
    
    $
    1,340
    
    
    $
    117
    
    
    $
    161Interest cost on projected benefit obligation
    
    
    1,866
    
    
    
    1,774
    
    
    
    88
    
    
    
    120Expected return on plan assets
    
    
    (2,184
    )
    
    
    (2,008
    )
    
    
    (38
    )
    
    
    (52
    )Amortization of prior service cost
    
    
    86
    
    
    
    86
    
    
    
    11
    
    
    
    15Recognized net actuarial loss
    
    
    176
    
    
    
    120
    
    
    
    
    
    
    
    Expected disbursement for life insurance
premiums
    
    
    
    
    
    
    
    
    
    
    (19
    )
    
    
    (26
    )Net pension cost
    
    $
    1,352
    
    
    $
    1,312
    
    
    $
    159
    
    
    $
    218Nine months ended September 30,Service cost-benefits earned during the
period
    
    $
    4,222
    
    
    $
    4,020
    
    
    $
    352
    
    
    $
    352Interest cost on projected benefit obligation
    
    
    5,598
    
    
    
    5,321
    
    
    
    263
    
    
    
    262Expected return on plan assets
    
    
    (6,550
    )
    
    
    (6,025
    )
    
    
    (114
    )
    
    
    (113
    )Amortization of prior service cost
    
    
    259
    
    
    
    259
    
    
    
    32
    
    
    
    32Recognized net actuarial loss
    
    
    528
    
    
    
    360
    
    
    
    
    
    
    
    Expected disbursement for life insurance
premiums
    
    
    
    
    
    
    
    
    
    
    (57
    )
    
    
    (57
    )Special termination benefits
    
    
    51
    
    
    
    
    
    
    
    740
    
    
    
    Net pension cost
    
    $
    4,108
    
    
    $
    3,935
    
    
    $
    1,216
    
    
    $
    476
  Employer Contributions
  13




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SUREWEST COMMUNICATIONS
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (CONTINUED)
 5. RECENT ACCOUNTING PRONOUNCEMENTS
 Accounting
Changes and Error Corrections, a replacement of APB Opinion No. 20 and FASB Statement No. 3.
 Share-Based Payment . Accounting for Stock Issued to Employees, Statement
of Cash Flows.
   1.
    
    A modified prospective method in which compensation cost is recognized beginning with
the effective date (a) based on the requirements of SFAS No. 123(R) for all share-based
payments granted after the effective date and (b) based on the requirements of SFAS No. 123
for all awards granted to employees prior to the effective date of SFAS No. 123(R) that
remain unvested on the effective date.2.
    
    A modified retrospective method, which includes the requirements of the modified
prospective method described above, but also permits entities to restate their financial
statements based on the amounts previously recognized under SFAS No. 123 for purposes of
pro forma disclosures either for (a) all prior periods presented or (b) prior interim
periods of the year of adoption.
  Accounting for Conditional Asset
Retirement Obligations Accounting for Asset Retirement Obligations
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SUREWEST COMMUNICATIONS
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (CONTINUED)
 6. COMMITMENTS AND CONTINGENCIES
     7. SUBSEQUENT EVENT
  15




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##### Table of Contents



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)
   Corporate Structure
      16




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Results of Operations
 Consolidated Overview
  Financial Data
 Quarter Ended September 30,
    
    Nine Months Ended September 30,2005
    
    2004
    
    $ Change
    
    % Change
    
    2005
    
    2004
    
    $ Change
    
    % ChangeOperating revenues(1)Telecom
    
    $
    34,285
    
    
    $
    35,152
    
    
    $
    (867
    )
    
    
    (2
    )%
    
    $
    102,195
    
    
    $
    105,118
    
    
    $
    (2,923
    )
    
    
    (3
    )%Broadband
    
    
    12,979
    
    
    
    9,966
    
    
    
    3,013
    
    
    
    30
    
    
    
    36,680
    
    
    
    28,655
    
    
    
    8,025
    
    
    
    28Wireless
    
    
    8,832
    
    
    
    8,121
    
    
    
    711
    
    
    
    9
    
    
    
    25,764
    
    
    
    23,170
    
    
    
    2,594
    
    
    
    11Total
    
    
    56,096
    
    
    
    53,239
    
    
    
    2,857
    
    
    
    5
    
    
    
    164,639
    
    
    
    156,943
    
    
    
    7,696
    
    
    
    5Operating income (loss)Telecom
    
    
    13,589
    
    
    
    11,942
    
    
    
    1,647
    
    
    
    14
    
    
    
    39,900
    
    
    
    38,948
    
    
    
    952
    
    
    
    2Broadband
    
    
    (5,694
    )
    
    
    (9,461
    )
    
    
    3,767
    
    
    
    40
    
    
    
    (17,933
    )
    
    
    (22,701
    )
    
    
    4,768
    
    
    
    21Wireless
    
    
    (3,098
    )
    
    
    (3,998
    )
    
    
    900
    
    
    
    23
    
    
    
    (9,704
    )
    
    
    (12,235
    )
    
    
    2,531
    
    
    
    21Total
    
    
    4,797
    
    
    
    (1,517
    )
    
    
    6,314
    
    
    
    416
    
    
    
    12,263
    
    
    
    4,012
    
    
    
    8,251
    
    
    
    206Net income (loss)Telecom
    
    
    7,954
    
    
    
    7,034
    
    
    
    920
    
    
    
    13
    
    
    
    23,333
    
    
    
    22,872
    
    
    
    461
    
    
    
    2Broadband
    
    
    (3,851
    )
    
    
    (5,937
    )
    
    
    2,086
    
    
    
    35
    
    
    
    (11,834
    )
    
    
    (14,446
    )
    
    
    2,612
    
    
    
    18Wireless
    
    
    (2,143
    )
    
    
    (2,699
    )
    
    
    556
    
    
    
    21
    
    
    
    (6,549
    )
    
    
    (8,086
    )
    
    
    1,537
    
    
    
    19Total
    
    $
    1,960
    
    
    $
    (1,602
    )
    
    $
    3,562
    
    
    
    222
    %
    
    $
    4,950

    
    
    $
    340
    
    
    $
    4,610
    
    
    
    1,356
    %
 
 (1)
    
    External customers only
 Selected Operating Metrics
 As of September 30,2005
    
    2004
    
    Change
    
    % ChangeTelecomIncumbent Local Exchange Carrier access lines
    
    
    130,000
    
    
    
    132,981
    
    
    
    (2,981
    )
    
    
    (2
    )%Long distance lines
    
    
    51,213
    
    
    
    46,191
    
    
    
    5,022
    
    
    
    11BroadbandInternet subscribers (1)
    
    
    24,518
    
    
    
    21,143
    
    
    
    3,375
    
    
    
    16Residential Broadband subscribers (2)
    
    
    21,047
    
    
    
    15,651
    
    
    
    5,396
    
    
    
    34Residential Broadband Revenue-generating units (3)
    
    
    48,705
    
    
    
    36,104
    
    
    
    12,601
    
    
    
    35WirelessSubscribers
    
    
    53,818
    
    
    
    49,072
    
    
    
    4,746
    
    
    
    10
    %
 
 (1)
    
    Internet subscribers are customers who receive data services primarily within SureWest
Telephones service area.(2)
    
    Residential Broadband subscribers are customers who receive digital video, voice and/or
data services from broadband residential services.(3)
    
    The Broadband segment can deliver multiple services to a customer. Accordingly, the
Company maintains statistical data regarding Revenue-generating units for digital video,
voice and data, in addition to the number of customers. For example, a single customer who
purchases digital video, voice and data services would be reflected as three
Revenue-generating units.
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ä
    ä
  18




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Adjustments and Reclassification
  19




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Segment Results of Operations
 Telecom
 Quarter Ended September 30,
    
    Nine Months Ended September 30,$
    
    %
    
    
    
    
    
    
    
    
    
    $
    
    %2005
    
    2004
    
    Change
    
    Change
    
    2005
    
    2004
    
    Change
    
    ChangeLocal service
    
    $
    15,870
    
    
    $
    16,567
    
    
    $
    (697
    )
    
    
    (4
    )%
    
    $
    47,831
    
    
    $
    50,400
    
    
    $
    (2,569
    )
    
    
    (5
    )%Network access service
    
    
    11,575
    
    
    
    11,940
    
    
    
    (365
    )
    
    
    (3
    )
    
    
    34,009
    
    
    
    35,310
    
    
    
    (1,301
    )
    
    
    (4
    )Directory advertising
    
    
    4,409
    
    
    
    4,151
    
    
    
    258
    
    
    
    6
    
    
    
    13,045
    
    
    
    12,192
    
    
    
    853
    
    
    
    7Long distance service
    
    
    1,607
    
    
    
    1,408
    
    
    
    199
    
    
    
    14
    
    
    
    4,503
    
    
    
    3,961
    
    
    
    542
    
    
    
    14Other
    
    
    824
    
    
    
    1,086
    
    
    
    (262
    )
    
    
    (24
    )
    
    
    2,807
    
    
    
    3,255
    
    
    
    (448
    )
    
    
    (14
    )Total operating
revenues from
external customers
    
    
    34,285
    
    
    
    35,152
    
    
    
    (867
    )
    
    
    (2
    )
    
    
    102,195
    
    
    
    105,118
    
    
    
    (2,923
    )
    
    
    (3
    )Intersegment revenues
    
    
    7,133
    
    
    
    6,298
    
    
    
    835
    
    
    
    13
    
    
    
    21,117
    
    
    
    19,002
    
    
    
    2,115
    
    
    
    11Operating expenses*
    
    
    21,277
    
    
    
    23,316
    
    
    
    (2,039
    )
    
    
    (9
    )
    
    
    64,502
    
    
    
    66,453
    
    
    
    (1,951
    )
    
    
    (3
    )Depreciation and
amortization
    
    
    6,552
    
    
    
    6,192
    
    
    
    360
    
    
    
    6
    
    
    
    18,910
    
    
    
    18,719
    
    
    
    191
    
    
    
    1Operating income
    
    
    13,589
    
    
    
    11,942
    
    
    
    1,647
    
    
    
    14
    
    
    
    39,900
    
    
    
    38,948
    
    
    
    952
    
    
    
    2Net income
    
    $
    7,954
    
    
    $
    7,034
    
    
    $
    920
    
    
    
    13
    %
    
    $
    23,333
    
    
    $
    22,872
    
    
    $
    461
    
    
    
    2
    %
 
 *
    Exclusive of depreciation and amortization Operating Revenues
  ä
 Regulatory Matters
 Operating Expenses
 Consolidated Overview Consolidated
Overview
 ä
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Consolidated Overview
  Regulatory Matters
  
    
    business and residential subscribers, for basic exchange services;
    
    surcharges, mandated by the California Public Utilities Commission (CPUC);
    
    long distance carriers, for network access service;
    
    competitive access providers and subscribers, for network access services;
    
    interstate pool settlements, from NECA;
    
    support payments from the Universal Service Fund; and
    
    support payments from the California High Cost Fund (CHCF),
recovering costs of services including extended area service.
  21




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Broadband
 Quarter Ended September 30,
    
    Nine Months Ended September 30,2005
    
    2004
    
    $ Change
    
    % Change
    
    2005
    
    2004
    
    $ Change
    
    % ChangeInternet service
    
    $
    4,537
    
    
    $
    4,041
    
    
    $
    496
    
    
    
    12
    %
    
    $
    13,230
    
    
    $
    12,461
    
    
    $
    769
    
    
    
    6
    %Residential Broadband
service
    
    
    6,062
    
    
    
    4,427
    
    
    
    1,635
    
    
    
    37
    
    
    
    17,596
    
    
    
    12,064
    
    
    
    5,532
    
    
    
    46Business Broadband service
    
    
    2,380
    
    
    
    1,498
    
    
    
    882
    
    
    
    59
    
    
    
    5,854
    
    
    
    4,130
    
    
    
    1,724
    
    
    
    42Total operating revenues
from external customers
    
    
    12,979
    
    
    
    9,966
    
    
    
    3,013
    
    
    
    30
    
    
    
    36,680
    
    
    
    28,655
    
    
    
    8,025
    
    
    
    28Intersegment revenues
    
    
    428
    
    
    
    447
    
    
    
    (19
    )
    
    
    (4
    )
    
    
    1,269
    
    
    
    1,335
    
    
    
    (66
    )
    
    
    (5
    )Operating expenses*
    
    
    14,886
    
    
    
    15,893
    
    
    
    (1,007
    )
    
    
    (6
    )
    
    
    44,036
    
    
    
    44,421
    
    
    
    (385
    )
    
    
    (1
    )Depreciation and
amortization
    
    
    4,215
    
    
    
    3,981
    
    
    
    234
    
    
    
    6
    
    
    
    11,846
    
    
    
    8,270
    
    
    
    3,576
    
    
    
    43Operating loss
    
    
    (5,694
    )
    
    
    (9,461
    )
    
    
    3,767
    
    
    
    40
    
    
    
    (17,933
    )
    
    
    (22,701
    )
    
    
    4,768
    
    
    
    21Net loss
    
    $
    (3,851
    )
    
    $
    (5,937
    )
    
    $
    2,086
    
    
    
    35
    %
    
    $
    (11,834
    )
    
    $
    (14,446
    )
    
    $
    2,612
    
    
    
    18
    %
 
 *
        Exclusive of depreciation and amortization Operating Revenues
  Operating Expenses
     24




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Wireless
 Quarter Ended September 30,
    
    Nine Months Ended September 30,2005
    
    2004
    
    $ Change
    
    % Change
    
    2005
    
    2004
    
    $ Change
    
    % ChangeWireless revenues from
external customers
    
    $
    8,832
    
    
    $
    8,121
    
    
    $
    711
    
    
    
    9
    %
    
    $
    25,764
    
    
    $
    23,170
    
    
    $
    2,594
    
    
    
    11
    %Intersegment revenues
    
    
    667
    
    
    
    424
    
    
    
    243
    
    
    
    57
    
    
    
    1,908
    
    
    
    1,113
    
    
    
    795
    
    
    
    71Operating expenses*
    
    
    9,612
    
    
    
    9,524
    
    
    
    88
    
    
    
    1
    
    
    
    28,281
    
    
    
    27,446
    
    
    
    835
    
    
    
    3Depreciation and amortization
    
    
    2,985
    
    
    
    3,019
    
    
    
    (34
    )
    
    
    (1
    )
    
    
    9,095
    
    
    
    9,072
    
    
    
    23
    
    
    
    Operating loss
    
    
    (3,098
    )
    
    
    (3,998
    )
    
    
    900
    
    
    
    23
    
    
    
    (9,704
    )
    
    
    (12,235
    )
    
    
    2,531
    
    
    
    21Net loss
    
    $
    (2,143
    )
    
    $
    (2,699
    )
    
    $
    556
    
    
    
    21
    %
    
    $
    (6,549
    )
    
    $
    (8,086
    )
    
    $
    1,537
    
    
    
    19
    %
 
 *
    Exclusive of depreciation and amortization Operating Revenues
  Operating Expenses
 Consolidated Overview
    Non-operating Items
 Other Income and Expense, Net
  25




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Income Taxes
  Liquidity and Capital Resources
      Regulatory Matters
  26




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Critical Accounting Policies and Estimates
  
    
    In accordance with Statement of Financial Accounting Standards (SFAS) No. 142, Goodwill
and Other Intangible Assets,goodwill and wireless spectrum licenses are reviewed for
impairment annually, or more frequently if an event occurs or circumstances change that would
reduce the fair value below its carrying value. The impairment test for goodwill requires the
Company to estimate the fair value at the reporting unit level. To determine the fair value in
2004, the Company obtained an independent valuation of the Companys goodwill using a
discounted cash flow model. Assumptions used in this model include the following:
 
    
    cash flow assumptions regarding investment in network facilities, distribution channels
and customer base (the assumptions underlying these inputs are based upon a combination of
historical results and trends, new industry developments and the Companys business plans);
    
    an 11% weighted average cost of capital based on industry weighted averaged cost of capital; and
    
    no terminal growth rate.
  27




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##### Table of Contents




    
    cash flow assumptions regarding investment in network facilities, distribution channels
and customer base (the assumptions underlying these inputs are based upon a combination of
historical results and trends, new industry developments and the Companys business plans);
    
    a 20% weighted average cost of capital based on industry weighted averaged cost of
capital adjusted to reflect the inherent risks associated with the introduction of a new
service offering; and
    
    a 3% terminal value growth rate.
   
    
    Total revenues from telephone services are affected by rates authorized by
various regulatory agencies. The FCC monitors SureWest Telephones interstate earnings through
the use of annual cost separation studies prepared by SureWest Telephone. The FCC establishes
rules that carriers must follow in the preparation of the annual studies. Based on these
rules, the Company is required to prospectively set its annual interstate rates based on the
aforementioned cost separation studies. These cost studies include estimates and assumptions
regarding various financial data including operating expenses, taxes and investment in
property, plant and equipment. Non-financial data estimates are also utilized in the
preparation of these cost studies, including projected demand usage and detailed network
information. The Company must also make estimates of the jurisdictional separation of this
data to assign current financial and operating data to the interstate or intrastate
jurisdiction. These estimates are finalized in future periods as actual data becomes available
to complete the separation studies. Additionally, certain FCC rules regarding interstate
shareable earnings obligations have not yet been clarified as to whether the Companys rate
filings are deemed lawful and, therefore, protected from over-earnings liability. Further, the
Companys separation studies include estimates and assumptions regarding issues before the FCC
involving intercarrier interconnection, Internet traffic, and traffic utilizing Internet
Protocol. The Company also participates in the NECA pool for certain interstate revenues. In
addition to the estimates noted above, the Companys earned rate-of-return from its
participation in the NECA pool can also be impacted by the earnings and data of other carriers
who participate in the pool.
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##### Table of Contents



In accordance with the NRF, SureWest Telephone is subject to ongoing monitoring and reporting
requirements by the CPUC, and it was initially required to share earnings with customers based
on its earned annual rate-of-return. The Company utilizes models, which rely on estimates
regarding the jurisdictional separation of financial data and operational data into the
interstate jurisdictions as discussed previously for the purposes of calculating its earned
annual rate-of-return. However, SureWest Telephone has entered into a settlement agreement,
which was approved by the CPUC in November 2004, to cease intrastate sharing requirements
beginning January 1, 2005 through at least December 31, 2010. The settlement agreement also
resolves existing intrastate sharing obligations and related earnings issues for the monitoring
periods 2000-2004.In addition, the Company must make estimates and assumptions regarding various issues before the
FCC and CPUC involving intercarrier interconnection, Internet traffic, traffic utilizing
Internet Protocol, methods used to allocate costs for services provided by SureWest
Communications and SureWest Telephone to its affiliates and the treatment of certain plant and
tax costs, including internal-use software costs.As a result of these estimates and assumptions, it is reasonably possible that managements
estimates of SureWest Telephones interstate shareable earnings obligations could change in the
near term, and the amounts involved could be material. For example, the CPUC approved a
settlement agreement on November 19, 2004 that resolved the Companys intrastate shareable
earnings for the years 2000 through 2004. In accordance with this settlement agreement, the
Company recorded $2,948 in local revenues due to a change in accounting estimate in the fourth
quarter of 2004 (for a more detailed discussion regarding the settlement agreement, see
Regulation and Contractual and Estimated Shareable Earnings Obligationswithin Note 3 to the
Companys condensed consolidated financial statements). This increase in revenue resulted in a
decrease of the Companys net loss by $2,046 ($0.14 per share). In addition, in 2002 the Company
made changes in its estimates for interstate shareable earnings obligations for approximately
$5,800, principally due to the D.C. Circuit Court of Appeals decision issued in May 2002, which
determined that a tariff filed properly under Section 204 streamlined procedures and allowed
to go into effect without suspension is deemed lawful. Therefore, the carrier is not
subsequently obligated to pay refunds for earnings higher than the permitted rate of return as
prescribed by the FCC for that monitoring period.
    
    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.
    
    The Company maintains allowances for doubtful accounts for
estimated losses resulting from the potential inability of its
customers to make required payments. In evaluating the
collectibility of its accounts receivable, the Company assesses a
number of factors including a specific customers or carriers
ability to meet its financial obligations to the Company, the
length of time the receivable has been past due and historical and
future expectations of conditions that may impact the Companys
ability to collect its accounts receivable. If circumstances
change or economic conditions worsen such that the Companys past
collection experience is no longer relevant, the Companys
estimate of the recoverability of its accounts receivable could be
further reduced from the levels reflected in the Companys
condensed consolidated balance sheet. If uncollectibility of the
Companys billed revenue changes by 1%, the Company would expect
an increase in uncollectible expense of approximately $2,200. As
of September 30, 2005, the Company had three customers that in the
aggregate accounted for 3% of consolidated accounts receivable.
Although management believes that these customers are
creditworthy, a severe adverse impact on their business operations
could have a corresponding material effect on their ability to pay
timely and, therefore, on the Companys results of operations,
cash flows and financial condition. In addition, certain revenues
are subject to refund if the customer terminates services or
returns equipment within a stipulated time period, or if certain
performance criteria are not met. Accordingly, the Company
maintains accounts receivable allowances and recognizes certain
customer refund liabilities, through charges to revenues, based on
the Companys best estimates of the resolution of these
contingencies, which are based on historical experience.
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
    
    The Company states its inventories held for sale at lower of cost
or market. In assessing the ultimate recoverability of
inventories, the Company is required to make estimates regarding
future customer demand and technological advances of equipment.
    
    Property, plant and equipment are recorded at cost. Retirements
and other reductions of regulated telephone plant and equipment
are charged against accumulated depreciation with no gain or loss
recognized in accordance with the composite group remaining life
methodology utilized for telephone plant assets. When property
applicable to non-telephone operations is sold or retired, the
asset and related accumulated depreciation are removed from the
accounts and the associated gain or loss is recognized. Property,
plant and equipment is depreciated or amortized using the
straight-line method over their estimated economic lives. The
economic lives are estimated at the time the assets are acquired
and are based on historical experience with similar assets, as
well as anticipated technological or other changes. If
technological changes were to occur more rapidly than anticipated
or differently than anticipated, the economic lives assigned to
these assets may need to be shortened, resulting in the
recognition of increased depreciation and amortization expense in
future periods. Likewise, if the anticipated technological or
other changes occur more slowly than anticipated, the life of the
asset group could be extended based on the life assigned to new
assets added to the group. This could result in a reduction of
depreciation and amortization expense in future periods. The
Company reviews the estimated useful lives of its property, plant
and equipment once every three years, or when events or
circumstances indicate that the carrying amount may not be
recoverable over the remaining lives of the assets. In assessing
the recoverability of the Companys property, plant and equipment,
the Company must make assumptions regarding estimated future cash
flows and other factors to determine the fair value of the
respective assets.
    
    The Company accounts for asset retirement obligations in
accordance with SFAS No. 143, Accounting for Asset Retirement
Obligations, which requires the Company to recognize a retirement
obligation (future cost of removal) when a legal obligation exists
to remove plant at some point in the future. The Company believes
it may have potential retirement obligations relating to its
wireless cell sites. Based on terms outlined in its tower leases,
the Company is obligated to return the land or facilities to their
original condition at the end of the cell site lease term, should
the lease be terminated. The Company has used a
probability-weighted cash flow approach in estimating its
potential retirement obligation. The Company calculates the net
present value of the retirement obligation assuming an inflation
rate of 3%, a discount rate of 7% and a market risk premium of 4%.
The Company has also assumed the settlement date is 25 years from
the date the asset is placed into service. The Company has also
used a probability-weighted assessment to address the uncertainty
regarding the timing of future cash flows to settle the potential
liability. The Company believes that utilizing probabilities less
than 100% is appropriate because the Company believes the
likelihood of incurring material asset retirement expenditures is
remote. The Company monitors the estimates and assumptions used in
determining its potential asset retirement obligations for its
cell sites. However, the Company believes it is remote that any
future adjustment to its asset retirement liability for
obligations existing as of September 30, 2005 will be material to
the Companys condensed consolidated financial statements.
    
    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 September 30, 2005
or 2004 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.
    
    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.
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1-Percentage-
    
    1-Percentage-Point Increase
    
    Point DecreaseEffect on total 2004 service and interest cost
    
    $
    72
    
    
    $
    (61
    )Effect on post-retirement benefit obligation
as of December 31, 2004
    
    $
    526
    
    
    $
    (499
    )
 The discount rate is determined based on the current yields on high quality corporate
fixed-income investments with maturities corresponding to the expected duration of the benefit
obligations. During 2005, the Company expects the discount rate to remain at 5.75%, which is
consistent with the prior year.In 2004, the Company used an expected long-term rate of return of 8.50%. For 2005, the Company
does not believe the expected long-term rate will change significantly. The expected long-term
rate of return on plan assets is determined based on the current and projected investment
portfolio mix and estimated long-term investment returns for each asset class. The projected
portfolio mix of the plan assets is developed in consideration of the expected duration of
related plan obligations and private equity positions. The expected return on plan assets is
determined by applying the expected long-term rate of return to the market-value of plan assets.The future compensation levels are based on recent experience as well as future expectations.
During 2005 the Company expects its future compensation level to remain consistent at 5%, which
is consistent with the prior year.
    
    The Company is a party to a variety of litigation, regulatory proceedings and other
contingencies that arise in the ordinary course of business. The Company is required to assess
the likelihood of any adverse judgments or outcomes to these matters, as well as potential
ranges of probable losses for certain of these matters. The determination of the liabilities
required, if any, for loss contingencies is made after careful analysis of each individual
issue. In the opinion of management, the ultimate outcome of these matters will not materially
affect the Companys consolidated financial position and results of operations.
    
    The Company currently sponsors two Equity Incentive Plans (the Plans) for certain
employees, outside directors and consultants of the Company, which were approved by the
Companys shareholders. The Plans permit issuance by the Company of awards in the form of
restricted shares, stock units, performance shares, stock options and stock appreciation
rights. Effective January 1, 2003, the Company adopted the preferable fair value recognition
provisions of 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
beginning in 2003 for all employee awards granted, modified or settled after January 1, 2003.
This change in accounting for stock-based compensation resulted in increased compensation
expense of $5 and $14, which decreased net income by $3 (no effect on earnings per share) and
$9 (no effect on earnings per share) for the quarter and nine-month period ended September 30,
2005, respectively. For the same prior year periods, this change in accounting for stock
based compensation resulted in increased compensation expense of $5 and $24, respectively,
which decreased net income by $2 (no effect on earnings per share) and $13 (no effect on
earnings per share), respectively.The Company voluntarily made the choice to change to the preferable method of accounting for
employee stock options in accordance with SFAS No. 123. The Company concluded that stock
options are a form of employee compensation expense and, therefore, it is appropriate that
these expenses be recorded in the results of operations to more clearly reflect economic
reality.
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Recent Accounting Pronouncements
 Accounting
Changes and Error Corrections, a replacement of APB Opinion No. 20 and FASB Statement No. 3.
 Share-Based Payment . Accounting for Stock Issued to Employees, Statement
of Cash Flows.
   1.
    
    A modified prospective method in which compensation cost is recognized
beginning with the effective date (a) based on the requirements of SFAS No. 123(R) for
all share-based payments granted after the effective date and (b) based on the
requirements of SFAS No. 123 for all awards granted to employees prior to the effective
date of SFAS No. 123(R) that remain unvested on the effective date.2.
    
    A modified retrospective method, which includes the requirements of the
modified prospective method described above, but also permits entities to restate their
financial statements based on the amounts previously recognized under SFAS No. 123 for
purposes of pro forma disclosures either for (a) all prior periods presented or (b)
prior interim periods of the year of adoption.
  Accounting for Conditional Asset
Retirement Obligations Accounting for Asset Retirement Obligations
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Factors That Could Affect Future Results
   We expect to continue to face significant competition in all parts of our business and the level
of competition is expected to intensify.
 We must adapt to rapid technological change
 We are subject to a complex and uncertain regulatory environment.
 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
 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
 We are reliant on support funds provided under federal and state laws
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Regulation
 We could be harmed by the recent adverse developments affecting other communications companies
 We depend on third parties, over whom we have no control, to deliver our services
 We are subject to new corporate governance and internal control reporting requirements, and our
failure to comply with existing and future requirements could adversely affect our business.
 If we are unable to effectively and efficiently implement the necessary initiatives to eliminate
the material weakness identified in our internal controls and procedures, there could be an
adverse affect on our operations or financial results.
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Regulatory and Legal Matters
    
    
    Additional rules governing the opening of markets to competition and the
regulation of the competing telecommunications providers;
    
    The nature and extent of the compensation, if any, to be paid by carriers and
other providers to one another for network use, and the sums to be recovered
through end users and other sources;
    
    The goals and definition of universal telephone service in a changing
environment, including examination of subsidy support mechanisms for subscribers
of different carriers (including incumbent carriers) and in various geographic
areas;
    
    Rules that will provide non-discriminatory access by competing service
providers to the network capabilities of local exchange carriers; and
    
    The regulated rates and earnings of SureWest Telephone.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  37




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ITEM 4. CONTROLS AND PROCEDURES
     Remediation Steps Related to Material Weakness
  
    
    Enhancements to the Companys enterprise resource planning and accounting software, for
which implementation commenced in the second quarter of 2004, and which is ongoing.
    
    The performance of additional detailed reviews, on a monthly basis, of construction
projects by the appropriate project manager to validate the results generated by the
Companys systems.
    
    The review of systematic routines, which generate and transfer data between modules
within the enterprise resource planning system, as necessary to determine if the routines
are generating accurate reports.
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
    
    Timely detailed reviews by management will occur to provide reasonable assurance that
manual controls are operating effectively.
  Other Internal Control Matters
  Information Technology
    
    The Company has identified certain deficiencies related to its Information Technology
general and application controls. In response to these deficiencies, during the third
quarter of 2004, the Company engaged an outside consulting firm to design and implement
changes to the controls in an effort to remediate the identified deficiencies. Although the
Company has made progress in its remediation efforts, these efforts were not completed by
December 31, 2004. The Company believes that it is reasonably likely that this control
deficiency will be remediated and the related controls will be tested in 2005.
The Company has commenced its remediation and interim testing relating to specific
Information Technology controls discussed above, and based on the preliminary results, it
appears that the remediation efforts are improving the overall controls over the
Information Technology area. However, the Company is not able to make conclusions relative
to the overall effectiveness of the improvements.Accounting Personnel, Policies and Procedures
    
    During managements assessment of internal controls, it was noted that the quality of
evidence was not consistent across the Companys controls. Management put into place
various remediation steps during the third and fourth quarters of 2004 which it believed
would improve the overall quality of the control documentation. During managements
testing of internal controls in 2005, the Company will determine if such remediation was
effective in improving the Companys overall quality of control documentation. In April
2005, the Company commenced its 2005 testing plan of the Companys key controls over
financial reporting processes. In June 2005, the Company implemented its internal control
tracking software which requires control and process owners to update key controls for
changes on a quarterly basis. Based on the results of the Companys interim testing results
and updating of control documentation, it appears the quality of evidence and ownership of
controls has improved. The Company will test the balance of its internal controls during
the remainder of 2005 and ending in the first quarter of 2006 with respect to the necessary
testing of year-end controls.
 Change in Internal Control over Financial Reporting
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PART II
 
 ITEM 1. LEGAL PROCEEDINGS
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ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
  
 ITEM 3. DEFAULTS UPON SENIOR SECURITIES
  
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  
 ITEM 5. OTHER INFORMATION
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ITEM 6. EXHIBITS
  MethodExhibit No.
    
    Description
    
    of Filing3.1
    
    Articles of Incorporation of Registrant, together with
Certificate of Amendment of Articles of Incorporation
dated January 25, 1996 and Certificate of Amendment of
Articles of Incorporation dated June 21, 1996 (Filed as
Exhibit 3(a) to Form 10-Q Quarterly Report for the
quarter
ended September 30, 1996)
    
    Incorporated by
reference3.2
    
    Certificate of Amendment of Articles of Incorporation
dated May 18, 2001 (Filed as Exhibit 3(b) to Form 10-Q
Quarterly Report for the quarter ended June 30, 2001)
    
    Incorporated by
reference3.3
    
    Bylaws of Registrant (Filed as Exhibit 3(b) to Form 10-K
Annual Report of the Registrant for the year ended
December 31, 2000)
    
    Incorporated by
reference4.1
    
    Shareholder Rights Plan (Filed as Exhibit 2.1 to Form
8-A
Registration Statement under the Securities Act of 1934)
    
    Incorporated by
reference10.1
    
    Note Purchase Agreement for Series A Senior Notes in the
aggregate amount of $40,000,000 dated December 9, 1998
(Filed as Exhibit 10(b) to Form 10-K Annual Report of
Registrant for the year ended December 31, 1998)
    
    Incorporated by
reference10.2
    
    Supplement to Note Purchase Agreement for Series B
Senior Notes in the aggregate amount of $60,000,000
dated
March 13, 2003 (Filed as Exhibit 99.1 to the Form 8-K
filed
March 13, 2003)
    
    Incorporated by
reference10.3
    
    Business Loan Agreement of Registrant with Bank of
America, dated March 15, 2000, as amended by
Amendment No. 1 dated as of April 10, 2000 (Filed as
Exhibit 10(f) to Form 10-Q Quarterly Report of
Registrant
for the quarter ended March 31, 2000), as amended by
Amendment No. 2 dated as of September 15, 2000,
Amendment No. 3 dated as of July 17, 2001, and
Amendment No. 4 dated as of June 26, 2000 (Filed as
Exhibit 10(l) to Form 10-Q Quarterly Report of
Registrant
for the Quarter ended June 30, 2002)
    
    Incorporated by
reference10.4
    
    Amendment No. 5 to Business Loan Agreement dated
February 26, 2003 (filed as Exhibit 10(e) to Form 10-K
Annual Report of Registrant for the year ended
December 31, 2002)
    
    Incorporated by
reference
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MethodExhibit No.
    
    Description
    
    of Filing10.5
    
    Amendment No. 6 to Business Loan Agreement dated as
of January 13, 2004 (Filed as Exhibit 10.7 to Form 10-
K/A Annual Report of Registrant for the year ended
December 31, 2003)
    
    Incorporated by
reference10.6
    
    Amendment No. 7 to Business Loan Agreement dated as of
March 25, 2004 (Filed as Exhibit 10.7 to Form 10-K/A
Annual Report of Registrant for the year ended December
31, 2003)
    
    Incorporated by
reference10.7
    
    Amendment No. 8 to Business Loan Agreement dated as of
December 31, 2004
    
    Incorporated by
reference10.8
    
    1999 Restricted Stock Bonus Plan (Filed as Exhibit 10(d)
to
Form 10-K Annual Report of Registrant for the year ended
December 31, 1998)
    
    Incorporated by
reference10.9
    
    2000 Equity Incentive Plan, as amended (Filed as Exhibit
10.9 to Form 10-Q Quarterly Report for the quarter ended
June 30, 2005)
    
    Incorporated by
reference10.10
    
    SureWest KSOP (filed as Exhibit 4.1 to Registration
Statement on Form S-8 [No. 333-87222])
    
    Incorporated by
reference10.11
    
    Letter agreement dated January 16, 2001 between
Registrant and Brian H. Strom (Filed as Exhibit 10 (g) to
Form 10-K Annual Report of Registrant for the year ended
December 31, 2000)
    
    Incorporated by
reference10.12
    
    Letter agreement dated January 16, 2001 between
Registrant and Jay B. Kinder (Filed as Exhibit 10 (i) to
Form 10-K Annual Report of Registrant for the year ended
December 31, 2000)
    
    Incorporated by
reference10.13
    
    Letter agreement dated January 16, 2001
between Registrant and Bill M. DeMuth (Filed as Exhibit
10.14 to Form 10-K/A Annual Report of Registrant for the
year ended December 31, 2003)
    
    Incorporated by
reference10.14
    
    Letter agreement dated January 16, 2001
between Registrant and Fred A. Arcuri (Filed as Exhibit
10.15 to Form 10-K/A Annual Report of Registrant for the
year ended December 31, 2003)
    
    Incorporated by
reference10.15
    
    Separation Agreement dated
October 6, 2005 between Registrant
and Robert M. Burger (Filed as Exhibit 99.1 to Form 8-K
filed October 7, 2005)
    
    Incorporated by
reference10.16
    
    Restricted Stock Unit Award, dated December 21, 2004,
between Registrant and Roger J. Valine (Filed as Exhibit
10.15 to Form 10-K Annual Report of Registrant for the
year ended December 31, 2004)
    
    Incorporated by
reference
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MethodExhibit No.
    
    Description
    
    of Filing10.17
    
    Form of Restricted Stock Unit Award, dated December 21,
2004, between Registrant and each of Guy R. Gibson,
Steven C. Oldham, John R. Roberts III and Timothy D.
Taron (Filed as Exhibit 10.16 to Form 10-K Annual Report
of Registrant for the year ended December 31, 2004)
    
    Incorporated by
reference10.18
    
    Form of Restricted Stock Unit Award, dated February 23,
2005, between Registrant and Brian H. Strom (Filed as
Exhibit 10.17 to Form 10-K Annual Report of Registrant
for the year ended December 31, 2004)
    
    Incorporated by
reference10.19
    
    Form of Restricted Stock Unit Award, dated February 23,
2005, between Registrant and each of Fred A. Arcuri, Bill
M. DeMuth and Jay B. Kinder (Filed as Exhibit 10.18 to
Form 10-K Annual Report of Registrant for the year ended
December 31, 2004)
    
    Incorporated by
reference10.20
    
    Form of Restricted Stock Unit Award for Registrants 2000
Equity Incentive Plan (Filed as Exhibit 10.19 to Form
10-K
Annual Report of Registrant for the year ended December
31, 2004)
    
    Incorporated by
reference10.21
    
    Form of Stock Option Agreement for Registrants 2000
Equity Incentive Plan (Filed as Exhibit 10.20 to Form
10-K
Annual Report of Registrant for the year ended December
31, 2004)
    
    Incorporated by
reference10.22
    
    Form of Restricted Stock Agreement for Registrants 2000
Equity Incentive Plan (Filed as Exhibit 10.21 to Form
10-K
Annual Report of Registrant for the year ended December
31, 2004)
    
    Incorporated by
reference31.1
    
    Certification of Brian H. Strom, President and Chief
Executive Officer, as adopted pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
    
    Filed herewith31.2
    
    Certification of Philip A. Grybas, Senior Vice President
and
Chief Financial Officer, as adopted pursuant to Section
302
of the Sarbanes-Oxley Act of 2002
    
    Filed herewith32.1
    
    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 herewith32.2
    
    Certification of Philip A. Grybas, Senior Vice President
and
Chief Financial Officer, pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002
    
    Filed herewith
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SIGNATURES
  SUREWEST COMMUNICATIONS
(Registrant)By:
    /s/ BRIAN H. STROMBrian H. Strom,President and Chief
Executive Officer By:
    /s/ PHILIP A. GRYBASPhilip A. Grybas,Senior Vice President and
Chief Financial Officer  46