**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**WASHINGTON,D.C. 20549**

 

**FORM 10-Q**

 
|   | **x**      | **QUARTERLY REPORT PURSUANT TO  SECTION 13 OR 15(d)** |
|--------|------------|-------------------------------------------------------|
|   | ** ** | **OF THE  SECURITIES EXCHANGE ACT OF 1934**           | ** ** |

 

**For the quarterly period endedMarch 31, 2008**

 

**or**

 
|   | **o**      | **TRANSITION REPORT PURSUANT TO  SECTION 13 or 15(d)** |
|--------|------------|--------------------------------------------------------|
|   | ** ** | **OF THE  SECURITIES EXCHANGE ACT OF 1934**            | ** ** |

 

**Commission File Number 0-556**

 

**SUREWESTCOMMUNICATIONS**

(Exact name ofregistrant as specified in its charter)

 

| **California**                                | ** ** | **68-0365195**       |
|-----------------------------------------------|------------|----------------------|
| (State or other  jurisdiction                 |       | (IRS Employer        |
| of incorporation  or organization)            |       | Identification  No.) |
|                                          |       |                 |
| **200  Vernon Street, Roseville, California** | ** ** | **95678**            |
| (Address of  principal executive offices)     |       | (Zip Code)           |

 

**(916)786-6141**

(Registrant’stelephone number, including area code)

 

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

 

Yes    x                 No   o

 

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

 

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

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act).

 

Yes    o                 No   x

 

Indicate the number ofshares outstanding of each of the issuer’s classes of common stock, as of thelatest practicable date.

 

As of May 2, 2008,14,244,883 shares of the registrant’s Common Stock were outstanding.

 

 

 

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**TABLE OF CONTENTS**

 
| ** **                              | ** ** | ** **                                                                                  | **Page**   |
|-----------------------------------------|------------|---------------------------------------------------------------------------------------------|------------|
| **PART I - FINANCIAL INFORMATION** | ** ** |
| ** **                              | ** ** | ** **                                                                                  | ** ** |
| Item 1.                                 |       | Financial Statements                                                                        | 1          |
|                                    |       |                                                                                        |       |
| Item 2.                                 |       | Management’s  Discussion and Analysis of Financial Condition and Results of Operations | 17         |
|                                    |       |                                                                                        |       |
| Item 3.                                 |       | Quantitative  and Qualitative Disclosures About Market Risk                                 | 30         |
|                                    |       |                                                                                        |       |
| Item 4.                                 |       | Controls and  Procedures                                                                    | 30         |
|                                    |       |                                                                                        |       |
| **PART II - OTHER  INFORMATION**   | ** ** |
| ** **                              | ** ** | ** **                                                                                  | ** ** |
| Item 1.                                 |       | Legal Proceedings                                                                           | 32         |
|                                    |       |                                                                                        |       |
| Item 1A.                                |       | Risk Factors                                                                                | 32         |
|                                    |       |                                                                                        |       |
| Item 2.                                 |       | Unregistered  Sales of Equity Securities and Use of Proceeds                                | 32         |
|                                    |       |                                                                                        |       |
| Item 3.                                 |       | Defaults Upon  Senior Securities                                                            | 32         |
|                                    |       |                                                                                        |       |
| Item 4.                                 |       | Submission of  Matters to a Vote of Security Holders                                        | 32         |
|                                    |       |                                                                                        |       |
| Item 5.                                 |       | Other Information                                                                           | 32         |
|                                    |       |                                                                                        |       |
| Item 6.                                 |       | Exhibits                                                                                    | 33         |
|                                    |       |                                                                                        |       |
| SIGNATURES                              | 34         |
|                                    |       |                                                                                        |       |
|                                         |            |                                                                                             |            |  |  |

** **

----

 

**PART 1 – FINANCIAL INFORMATION**

 

**ITEM 1.  FINANCIAL STATEMENTS.**

 

**SUREWEST COMMUNICATIONS**

**CONDENSED CONSOLIDATED STATEMENTS OFINCOME**

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

* *
| ** **                                                                  | ** ** | **Quarter Ended March 31,** | ** ** |
|-----------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                  | ** ** | **2008**                                   | ** ** | **2007** | ** ** |
|                                                                        |       |                                       |       |   |   |
| **Operating  revenues:**                                                    |       |                                       |       |   |   |
| Broadband                                                                   |       | $                                          | 27,042     |   | $ | 16,525 |   |
| Telecom                                                                     |       | 24,578                                     |       | 26,361 |   |
| Total operating  revenues                                                   |       | 51,620                                     |       | 42,886 |   |
|                                                                        |       |                                       |       |   |   |
| **Operating  expenses:**                                                    |       |                                       |       |   |   |
| Cost of services  and products (exclusive of depreciation and amortization) |       | 18,968                                     |       | 14,854 |   |
| Customer  operations and selling                                            |       | 7,570                                      |       | 6,764 |   |
| General and  administrative                                                 |       | 10,257                                     |       | 8,440 |   |
| Depreciation and  amortization                                              |       | 12,184                                     |       | 11,075 |   |
| Total operating  expenses                                                   |       | 48,979                                     |       | 41,133 |   |
|                                                                        |       |                                       |       |   |   |
| **Income  from operations**                                                 |       | 2,641                                      |       | 1,753 |   |
|                                                                        |       |                                       |       |   |   |
| Other income  (expense):                                                    |       |                                       |       |   |   |
| Interest income                                                             |       | 334                                        |       | 497 |   |
| Interest expense                                                            |       | (2,755                                     | )          | (1,428 | ) |
| Other, net                                                                  |       | 1                                          |       | (51 | ) |
| Total other  income (expense), net                                          |       | (2,420                                     | )          | (982 | ) |
|                                                                        |       |                                       |       |   |   |
| Income from  continuing operations before income taxes                      |       | 221                                        |       | 771 |   |
|                                                                        |       |                                       |       |   |   |
| Income tax  expense                                                         |       | 232                                        |       | 160 |   |
|                                                                        |       |                                       |       |   |   |
| **Income  (loss) from continuing operations**                               |       | (11                                        | )          | 611 |   |
|                                                                        |       |                                       |       |   |   |
| Discontinued  operations, net of tax:                                       |       |                                       |       |   |   |
| Income from  discontinued operations                                        |       | 294                                        |       | 440 |   |
| Gain on sale of  discontinued operations                                    |       | —                                     |       | 60,182 |   |
| Total  discontinued operations                                              |       | 294                                        |       | 60,622 |   |
|                                                                        |       |                                       |       |   |   |
| **Net  income**                                                             |       | $                                          | 283        |   | $ | 61,233 |   |
|                                                                        |       |                                       |       |   |   |
| **Basic  earnings per common share:**                                       |       |                                       |       |   |   |
| Income (loss)  from continuing operations                                   |       | $                                          | (0.00      | ) | $ | 0.04 |   |
| Discontinued  operations, net of tax                                        |       | 0.02                                       |       | 4.20 |   |
| Net income per  basic common share                                          |       | $                                          | 0.02       |   | $ | 4.24 |   |
|                                                                        |       |                                       |       |   |   |
| **Diluted  earnings per common share:**                                     |       |                                       |       |   |   |
| Income (loss)  from continuing operations                                   |       | $                                          | (0.00      | ) | $ | 0.04 |   |
| Discontinued  operations, net of tax                                        |       | 0.02                                       |       | 4.19 |   |
| Net income per  diluted common share                                        |       | $                                          | 0.02       |   | $ | 4.23 |   |
|                                                                        |       |                                       |       |   |   |
| **Dividends  per share**                                                    |       | $                                          | 0.25       |   | $ | 0.25 |   |
|                                                                        |       |                                       |       |   |   |
| **Shares  of common stock used to calculate earnings per share:**           |       |                                       |       |   |   |
| Basic                                                                       |       | 14,310                                     |       | 14,423 |   |
| Diluted                                                                     |       | 14,310                                     |       | 14,478 |   |

 

 

See accompanyingnotes.

 

 

1

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**SUREWESTCOMMUNICATIONS**

**CONDENSEDCONSOLIDATED BALANCE SHEETS**

*(Unaudited;Amounts in thousands)*

* *
| ** **                                                                                                                                                      | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                      | ** ** | **2008**           | ** ** | **2007**              | ** ** |
| **ASSETS**                                                                                                                                                      |       |               |       |                  |       |
| Current assets:                                                                                                                                                 |       |               |       |                  |       |
| Cash and cash  equivalents                                                                                                                                      |       | $                  | 7,702      |                  | $          | 31,114 |   |
| Short-term  investments                                                                                                                                         |       | 658                |       | 21,151                |       |
| Accounts  receivable, net                                                                                                                                       |       | 20,417             |       | 19,223                |       |
| Inventories                                                                                                                                                     |       | 6,807              |       | 4,251                 |       |
| Prepaid expenses                                                                                                                                                |       | 3,776              |       | 3,462                 |       |
| Deferred income  taxes                                                                                                                                          |       | 7,526              |       | 9,480                 |       |
| Other current  assets                                                                                                                                           |       | 2,869              |       | 3,095                 |       |
| Assets of  discontinued operations                                                                                                                              |       | 40,207             |       | 41,147                |       |
| Total current  assets                                                                                                                                           |       | 89,962             |       | 132,923               |       |
|                                                                                                                                                            |       |               |       |                  |       |
| Property, plant  and equipment, net                                                                                                                             |       | 505,630            |       | 346,740               |       |
|                                                                                                                                                            |       |               |       |                  |       |
| Intangible and  other assets:                                                                                                                                   |       |               |       |                  |       |
| Customer  relationships, net                                                                                                                                    |       | 6,561              |       | —                |       |
| Goodwill                                                                                                                                                        |       | 51,236             |       | 2,171                 |       |
| Deferred charges  and other assets                                                                                                                              |       | 5,596              |       | 2,933                 |       |
|                                                                                                                                                            |       | 63,393             |       | 5,104                 |       |
|                                                                                                                                                            |       | $                  | 658,985    |                  | $          | 484,767 |   |
|                                                                                                                                                            |       |               |       |                  |       |
| **LIABILITIES  AND SHAREHOLDERS’ EQUITY**                                                                                                                  |       |               |       |                  |       |
| Current  liabilities:                                                                                                                                           |       |               |       |                  |       |
| Short-term  borrowings                                                                                                                                          |       | $                  | 60,000     |                  | $          | — |   |
| Current portion  of long-term debt and capital lease obligations                                                                                                |       | 15,643             |       | 3,642                 |       |
| Accounts payable                                                                                                                                                |       | 5,298              |       | 2,544                 |       |
| Other accrued  liabilities                                                                                                                                      |       | 19,155             |       | 19,661                |       |
| Current portion  of contractual shareable earnings obligations                                                                                                  |       | 1,179              |       | 1,597                 |       |
| Advance billings  and deferred revenues                                                                                                                         |       | 9,198              |       | 7,288                 |       |
| Accrued  compensation and pension benefits                                                                                                                      |       | 7,955              |       | 8,755                 |       |
| Liabilities of  discontinued operations                                                                                                                         |       | 8,163              |       | 8,969                 |       |
| Total current  liabilities                                                                                                                                      |       | 126,591            |       | 52,456                |       |
|                                                                                                                                                            |       |               |       |                  |       |
| Long-term debt  and capital lease obligations                                                                                                                   |       | 202,187            |       | 118,189               |       |
| Deferred income  taxes                                                                                                                                          |       | 48,516             |       | 26,030                |       |
| Other  liabilities and deferred revenues                                                                                                                        |       | 18,044             |       | 17,089                |       |
|                                                                                                                                                            |       |               |       |                  |       |
| Commitments and  contingencies                                                                                                                                  |       |               |       |                  |       |
|                                                                                                                                                            |       |               |       |                  |       |
| Shareholders’  equity:                                                                                                                                     |       |               |       |                  |       |
| Common stock,  without par value; 100,000 shares authorized, 14,245 and 14,514 shares issued  and outstanding at March 31, 2008 and December 31, 2007 |       | 152,827            |       | 158,870               |       |
| Accumulated  other comprehensive income (loss)                                                                                                                  |       | (3,876             | )          | (3,530                | )          |
| Retained  earnings                                                                                                                                              |       | 114,696            |       | 115,663               |       |
| Total  shareholders’ equity                                                                                                                                |       | 263,647            |       | 271,003               |       |
|                                                                                                                                                            |       | $                  | 658,985    |                  | $          | 484,767 |   |

 

 

See accompanyingnotes.

 

 

2

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**SUREWESTCOMMUNICATIONS**

**CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS**

*(Unaudited;Amounts in thousands)*

* *
| ** **                                              | ** ** | **Three Months Ended March 31,** | ** ** |
|---------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                              | ** ** | **2008**                                             | ** ** | **2007** | ** ** |
| ** **                                              | ** ** | ** **                                           | ** ** | ** ** | ** ** |
| Net cash  provided by continuing operations             |       | $                                                    | 10,857     |   | $ | 14,351 |   |
| Net cash  provided by (used in) discontinued operations |       | 539                                                  |       | (2,139 | ) |
| Net cash  provided by operating activities              |       | 11,396                                               |       | 12,212 |   |
|                                                    |       |                                                 |       |   |   |
| Cash flows from  investing activities:                  |       |                                                 |       |   |   |
| Business  acquisition, net of cash acquired             |       | (181,646                                             | )          | — |   |
| Proceeds from  sale of discontinued operations          |       | —                                               |       | 110,123 |   |
| Capital  expenditures for property, plant and equipment |       | (18,270                                              | )          | (9,417 | ) |
| Purchases of  available-for-sale securities             |       | —                                               |       | (74,475 | ) |
| Proceeds from  sale of available-for-sale securities    |       | 16,650                                               |       | 21,825 |   |
| Net cash (used  in) provided by continuing operations   |       | (183,266                                             | )          | 48,056 |   |
| Net cash used in  discontinued operations               |       | (111                                                 | )          | (931 | ) |
| Net cash (used  in) provided by investing activities    |       | (183,377                                             | )          | 47,125 |   |
|                                                    |       |                                                 |       |   |   |
| Cash flows from  financing activities:                  |       |                                                 |       |   |   |
| Proceeds from  issuance of long-term debt               |       | 96,000                                               |       | — |   |
| Increase in  short-term borrowings                      |       | 60,000                                               |       | — |   |
| Dividends paid                                          |       | (3,563                                               | )          | (3,616 | ) |
| Repurchase of  common stock                             |       | (3,867                                               | )          | — |   |
| Other, net                                              |       | (1                                                   | )          | (1 | ) |
| Net cash  provided by (used in) financing activities    |       | 148,569                                              |       | (3,617 | ) |
|                                                    |       |                                                 |       |   |   |
| (Decrease)  increase in cash and cash equivalents       |       | (23,412                                              | )          | 55,720 |   |
|                                                    |       |                                                 |       |   |   |
| Cash and cash  equivalents at beginning of period       |       | 31,114                                               |       | 6,371 |   |
|                                                    |       |                                                 |       |   |   |
| Cash and cash  equivalents at end of period             |       | $                                                    | 7,702      |   | $ | 62,091 |   |

 

 

See accompanyingnotes.

 

 

3

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**SUREWESTCOMMUNICATIONS**

**NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

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

 

**1.     SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**

 

**Businessand Basis of Accounting**

 

SureWest Communications(the “Company”, “we” or “our”) is a holding company with wholly-ownedsubsidiaries that provide communications services in Northern California and thegreater Kansas City, Kansas and Missouri areas “Kansas City area”. The Company’soperating subsidiaries are SureWest Broadband, SureWest TeleVideo, SureWestTeleVideo of Roseville, SureWest Internet, SureWest Custom Data Services,Everest Broadband, Inc., SureWest Telephone, SureWest Long Distance andSureWest Wireless. As discussed in Note 2, the Company entered into adefinitive agreement to sell the operating assets of its Wireless business in January2008 and subsequently completed the transaction on May 9, 2008 (see Note 9) andin February 2007 the Company sold its wholly-owned subsidiary SureWestDirectories. Accordingly, the financial results of SureWest Wireless andSureWest Directories have been reported as discontinued operations for allperiods presented in accordance with Statement of Financial AccountingStandards (“SFAS”) No. 144, *Accounting for theImpairment or Disposal of Long-Lived Assets*. The notes to thecondensed consolidated financial statements reflect historical amountsexclusive of discontinued operations, unless otherwise noted. The Companyexpects that the sources of its revenues and its cost structure may bedifferent in future periods, both as a result of its entry into newcommunications markets and competitive forces in each of the markets in whichthe Company has operations.

 

In the opinion ofmanagement, the accompanying condensed consolidated balance sheets and relatedinterim statements of income and cash flows include all adjustments, consistingonly of normal recurring items, necessary for their fair presentation inconformity with accounting principles generally accepted in the United States (“U.S.GAAP”) for interim financial information and pursuant to the rules andregulations of the Securities and Exchange Commission (the “SEC”). Certaininformation and footnote disclosures normally included in annual financialstatements prepared in accordance with U.S. GAAP have been condensed or omittedpursuant to such SEC rules and regulations and accounting principlesapplicable for interim periods. Management believes that the disclosures madeare adequate to make the information presented not misleading. Interim resultsare not necessarily indicative of results for a full year.  The information presented in this Form10-Qshould be read in conjunction with Management’s Discussion and Analysis ofFinancial Condition and Results of Operations and the consolidated financialstatements and notes thereto included in the Company’s 2007 Annual Report on Form 10-Kfiled with the SEC.

 

**Fair Value of Financial Instruments**

 

TheCompany adopted SFAS No. 157, *Fair Value Measurements,*effective January 1, 2008 for financial assets and liabilities measured ona recurring basis. SFAS No. 157 applies to all financial assets andfinancial liabilities that are measured and reported on a fair value basis.There was no impact for adoption of SFAS No. 157 to the Company’scondensed consolidated financial statements. SFAS No. 157 requiresdisclosure that establishes a framework for measuring fair value and expandsdisclosure about fair value measurements.

 

SFASNo. 157 establishes a valuation hierarchy for disclosure of the inputs tovaluation used to measure fair value. This hierarchy prioritizes the inputsinto three broad levels as follows. Level 1 inputs are quoted prices(unadjusted) in active markets for identical assets or liabilities. Level 2inputs are quoted prices for similar assets and liabilities in active marketsor inputs that are observable for the asset or liability, either directly orindirectly through market corroboration, for substantially the full term of thefinancial instrument. Level 3 inputs are unobservable inputs based onmanagement’s own assumptions used to measure assets and liabilities at fairvalue. A financial asset or liability’s classification within the hierarchy isdetermined based on the lowest level input that is significant to the fairvalue measurement.

 

 

4

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Thefollowing tables summarizes the Company’s financial assets (cash equivalentsand investments) measured at fair value on a recurring basis:

 

| ** **               | ** ** | **As of March 31, 2008** | ** ** |
|--------------------------|------------|----------------------------------------------|------------|
| ** **               | ** ** | **Total**                                    | ** ** | **Level 1** | ** ** | **Level 2** | ** ** | **Level 3** | ** ** |
| Money market  funds      |       | $                                            | 2,257      |   | $ | 2,257 |   | $ | — |   | $ | — |   |
| Equity  securities       |       | 658                                          |       | 658 |   | — |   | — |   |
| Auction rate  securities |       | 3,260                                        |       | — |   | — |   | 3,260 |   |
|                     |       | $                                            | 6,175      |   | $ | 2,915 |   | $ | — |   | $ | 3,260 |   |

 

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

 

| ** **                                                | ** ** | **Auction Rate  Securities** | ** ** |
|-----------------------------------------------------------|------------|-----------------------------------|------------|
| Beginning  Balance                                        |       | $                                 | —     |   |
| Transfers in  and/or out of Level 3                       |       | 3,700                             |       |
| Unrealized losses  included in other comprehensive income |       | (440                              | )          |
| Ending Balance                                            |       | $                                 | 3,260      |   |

 

At March 31, 2008, the Company held one auction rate security (“ARS”)with an estimated fair value of $3,260, which was measured using Level 3inputs. The ARS is collateralized by student loans that are guaranteedprimarily by an insurance company and partially by the Federal Family EducationLoan Program (“FFELP”). The monthly auctions have historically provided aliquid market for these securities. The ARS in the Company’s portfolio had asuccessful auction in January 2008 and as such, its fair value would havebeen measured using Level 1 inputs at January 1, 2008. However, since February 2008,there has not been a successful auction for this ARS, therefore the Companytransferred this ARS from the Level 1 to the Level 3 category as of March 31,2008.

 

The Company obtained a Level 3 valuation from an investment advisor,which used a discounted cash flow model to estimate the fair value.  The significant inputs that were used in themodel were the credit quality of the issuer, the percentage and the types ofguarantees (such as an insurance company and FFELP), interest rates, expectedholding period of the ARS and an illiquidity discount factor. Changes in theassumptions of the model based on dynamic market conditions could have asignificant impact on the valuation of this security, which may lead theCompany in the future to take an impairment charge for this security.  Based on the Company’s review of the model,the inputs to the model and the assessment of fair value, as of March 31,2008, the Company determined there was a decline in the fair value of its ARSinvestment of approximately $440, which was deemed temporary as the Companycurrently has the ability and intent to hold this ARS investment until arecovery of the auction process or until maturity. As of March 31, 2008,the Company reclassified the entire ARS investment balance from short-terminvestments to long-term other assets on its condensed consolidated balancesheet.

 

**Stock-based Compensation**

 

***StockPlans***

 

 

The Company has twoEquity Incentive Plans (the “Stock Plans”) for certain employees, outsidedirectors and consultants of the Company, which were approved by shareholders.The Company authorized for future issuance under the Stock Plans approximately1.9 million shares (subject to upward adjustment based upon the Company’sissued and outstanding shares) of authorized, but unissued, common stock. TheStock Plans permit issuance by the Company of awards in the form of restrictedcommon stock (“RSAs”), restricted common stock units (“RSUs”), performance shares,stock options and stock appreciation rights. The exercise price per share ofthe Company’s common stock to be purchased under any incentive stock optionshall not be less than 100% of the fair market value of a share of the Company’scommon stock on the date of the grant, and the exercise price under anon-qualified stock option shall not be less than 85% of the fair market valueof the Company’s common stock at the date of the grant. The term of any stockoption shall not exceed 10 years.

 

 

5

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The Company accounts for stock-based compensation for both RSAs andRSUs in accordance with the provisions of SFASNo. 123(R), which requires the Company to measure the cost of employeeservices received in exchange for all equity awards granted, including stockoptions, RSUs and restricted shares, based on the fair market value of theaward as of the grant date.  The Companywill continue to recognize stock-based compensation on RSAs and RSUs grantedprior to the adoption of SFAS No. 123(R) using the graded vesting method.In accordance with the provisions of SFAS No. 123(R), the Company hasestimated expected forfeitures based on historical experience and isrecognizing compensation expense only for those RSAs and RSUs expected to vest.

 

***Restricted Common Stock Awardsand Units***

The following table summarizes the RSAs and RSUsgranted to certain eligible participants during the quarters ended March 31,2008 and 2007:

 

| ** **    | ** ** | **Quarter Ended March 31,** | ** ** |
|---------------|------------|--------------------------------------------|------------|
| ** **    | ** ** | ** **                                 | ** ** | **Grant Date** | ** ** | ** ** | ** ** | **Grant Date** | ** ** |
| ** **    | ** ** | **2008**                                   | ** ** | **Fair Value** | ** ** | **2007** | ** ** | **Fair Value** | ** ** |
|          |       |                                       |       |   |   |   |   |   |   |
| RSAs Granted  |       | 7,056                                      |       | $ | 15.59 |   | 1,338 |   | $ | 23.97 |   |
| RSUs Granted  |       | —                                     |       | — |   | — |   | — |   |
| RSU Dividends |       | —                                     |       | — |   | — |   | — |   |
| Total         |       | 7,056                                      |       |   |   | 1,338 |   |   |   |
|               |            |                                            |            |  |  |  |  |  |  |  |  |

 

Stock-based compensationexpense for both RSAs and RSUs of $150 and $177 was recorded during thequarters ended March 31, 2008 and 2007, respectively. RSAs and RSUs areamortized over their respective vesting periods, which range from immediatevesting to a five-year vesting period.

 

The following tablesummarizes the RSAs activity during the three-month period ended March 31,2008:

 

| ** **                      | ** ** | ** ** | ** ** | **Weighted Average**                | ** ** |
|---------------------------------|------------|------------|------------|------------------------------------------|------------|
| **Nonvested Shares**       | ** ** | **Shares** | ** ** | **Grant Date Fair Value** | ** ** |
|                            |       |       |       |                                     |       |
| Nonvested-January 1,  2008 |       | 144,935    |       | $21.85                                   |       |
| Granted                         |       | 7,056      |       | $15.59                                   |       |
| Vested                          |       | (3,141     | )          | $26.31                                   |       |
| Forfeited                       |       | (6,990     | )          | $26.98                                   |       |
| Nonvested-March 31,  2008  |       | 141,860    |       | $21.17                                   |       |

 

As of March 31,2008, total unrecognized compensation cost related to nonvested restrictedstock was $2,223 and will be recognized over a weighted-average period of approximatelytwo years. The total fair value of RSAs and RSUs vested during the three-monthperiod ended March 31, 2008 was $83.

 

***Stock Options Expense***

The Company issuesnew shares of common stock upon exercise of stock options.  The followingtable summarizes stock option activity for the Company’s stock option plans forthe three-month period ended March 31, 2008:

 

| ** **                                     | ** ** | ** ** | ** ** | **Weighted** | ** ** | **Weighted**              | ** ** |
|------------------------------------------------|------------|------------|------------|--------------|------------|---------------------------|------------|
| ** **                                     | ** ** | ** ** | ** ** | **Average**  | ** ** | **Average**               | ** ** |
| ** **                                     | ** ** | ** ** | ** ** | **Exercise** | ** ** | **Remaining**             | ** ** |
| **Options**                                    | ** ** | **Shares** | ** ** | **Price**    | ** ** | **Contractual Life** | ** ** |
|                                           |       |       |       |         |       |                      |       |
| Outstanding-January 1,  2008              |       | 362,039    |       | $40.38       |       |                      |       |
| Forfeited                                      |       | (13,000    | )          | —       |       |                      |       |
| Outstanding-March 31,  2008               |       | 349,039    |       | $40.37       |       | 3                         |       |
| Vested and  Exercisable at March 31, 2008 |       | 349,039    |       | $40.37       |       | 3                         |       |

 

There were nostock options granted, exercised or expired during the three-month period endedMarch 31, 2008. In addition, there were no stock options with an exerciseprice below the market price of the Company’s stock at that date.

 

6

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**Per ShareAmounts**

 

Sharesused in the computation of basic earnings (loss) per share are based on theweighted average number of common shares and RSUs outstanding, excludingunvested restricted common shares and unvested RSUs. Shares used in thecomputation of diluted earnings per share are based on the weighted averagenumber of common shares, restricted common shares and RSUs outstanding, alongwith other potentially dilutive securities outstanding in each period. Sharesused in the computation of diluted loss per share are based on the weightedaverage number of vested common shares and vested RSUs and exclude potentialdilutive common shares, unvested restricted common shares and unvested RSUsoutstanding, as the effect is anti-dilutive.

 

Cashdividends per share are based on the actual dividends per share, as declared bythe Company’s Board of Directors. On each date that the Company pays a cashdividend to the holders of the Company’s common stock, the Company credits tothe holders of RSUs an additional number of RSUs equal to the total number ofwhole RSUs and additional RSUs previously credited to the holders, multipliedby the dollar amount of the cash dividend per share of common stock. Anyfractional RSUs resulting from such calculation are included in the additionalRSUs.

 

**OtherComprehensive Income (Loss)**

 

Significant components of the Company’s other comprehensive (loss)income are as follows:

 

| ** **                                                 | ** ** | **Quarter Ended March 31,** | ** ** |
|------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                 | ** ** | **2008**                                   | ** ** | **2007** | ** ** |
| Net Income  (loss)                                         |       | $                                          | (11        | ) | $ | 611 |   |
| Unrealized  (loss) gain on investment, net of income taxes |       | (346                                       | )          | 11 |   |
| Other  comprehensive (loss) income                         |       | $                                          | (357       | ) | $ | 622 |   |

 

As of March 31, 2008 and 2007, accumulated other comprehensiveloss and income was $3,876 and $576, respectively. Accumulated othercomprehensive loss and income consists of adjustments, net of tax related tounrealized gains and losses on available-for-sale securities and minimumpension and post-retirement benefits.

 

**Reclassifications**

 

Certainamounts in the Company’s 2007 condensed consolidated financial statements havebeen reclassified to conform to the presentation of the Company’s 2008condensed consolidated financial statements, including the effects ofreclassifications from presentation of the Company’s Wireless business as adiscontinued operation.

 

**2.     ACQUISITION &DIVESTITURES**

 

***Acquisition***

 

*Everest Broadband, Inc.*

 

Effective February 13, 2008, the Company acquired 100% of theissued and outstanding stock of Everest Broadband, Inc. (“Everest”) for atotal purchase price of $182,100, including estimated transactions costs.Everest is a competitive provider of high-speed data, video and voice servicesin the greater Kansas City area.

 

The acquisition has been accounted for in the first quarter of fiscalyear 2008 using the purchase method in accordance with SFAS No. 141, *Business Combinations*. Accordingly, netassets acquired were recorded at their estimated fair values, and operatingresults are included in our financial statements from the date of acquisition.

 

 

7

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The following table summarizes the estimated fairvalues of the assets acquired and the liabilities assumed at the date ofacquisition. These values are derived from a preliminary purchase priceallocation, which is subject to change based on the final valuations of theacquired real and intangible assets and final working capital adjustments.

 

| Current assets                 |   | $       | 11,800  |   |
|--------------------------------|--------|---------|---------|--------|
| Property, plant  and equipment |   | 153,300 |    |
| Intangible  assets             |   | 6,700   |    |
| Goodwill                       |   | 49,100  |    |
| Other long-term  assets        |   | 200     |    |
| Total assets  acquired         |   | 221,100 |    |
|                           |   |    |    |
| Current  liabilities           |   | 9,700   |    |
| Long-term  liabilities         |   | 1,400   |    |
| Deferred income  taxes         |   | 27,900  |    |
| Total  liabilities acquired    |   | 39,000  |    |
| Net assets  acquired           |   | $       | 182,100 |   |

 

The acquired intangibles of approximately $6,700 were derived from theassociated value of a significant number of residential and business customers.  The intangibles are being amortized over theestimated useful life of 3 to 5 years. During the quarter ended March 31,2008, the Company recorded amortization expense of approximately $170 relatingto the customer relationships.  Goodwillof $49,100 has been accounted for as an indefinite lived asset and will betested annually for impairment at November 30.

 

The Company accrued in its preliminary purchase accounting a liabilityof $1,200 relating to the termination (the “Severance Plan”) of certain membersof management of Everest.  The SeverancePlan calls for payments to be made over a course of nine to eighteen months andis expected to be completed by August 2009.  For the quarter ended March 31, 2008,$362 was paid relating to the Severance Plan.

 

**Unaudited Pro Forma Results**

 

The following unaudited pro forma information presents the results ofoperations of the Company as if the acquisition of Everest occurred at thebeginning of the fiscal periods presented. The pro forma information below does not purport to present what theactual results would have been if the acquisition had in fact occurred at thebeginning of the fiscal periods presented, nor does the information projectresults for any future period.

 
| ** **                                   | ** ** | **Quarter Ended March 31,** | ** ** |
|----------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                   | ** ** | **2008**                                   | ** ** | **2007** | ** ** |
| ** **                                   | ** ** | ** **                                 | ** ** | ** ** | ** ** |
| Operating  revenues                          |       | $                                          | 59,177     |   | $ | 57,165 |   |
| Income from  operations                      |       | 3,953                                      |       | 3,741 |   |
| Loss from  continuing operations             |       | (4,590                                     | )          | (487 | ) |
| Net (loss)  income                           |       | $                                          | (4,296     | ) | $ | 60,135 |   |
|                                         |       |                                       |       |   |   |
| Basic and  diluted earnings per common share |       |                                       |       |   |   |   |   |
| Loss from  continuing operations             |       | $                                          | (0.32      | ) | $ | (0.03 | ) |
| Net (loss)  income                           |       | $                                          | (0.30      | ) | $ | 4.17 |   |

 

***Discontinued Operations***

 

*SureWest Wireless*

 

In January 2008, the Company entered into a definitive agreementto sell the operating assets of its Wireless business, SureWest Wireless, toVerizon Wireless (“Verizon”) for an aggregate cash purchase price of $69,000,subject to a post-closing working capital adjustment. The Company completed thetransaction to sell the operating assets of its Wireless business on May 9,2008.  For a more detailed discussionabout the closing of this transaction, refer to Note 9.  Under the agreement, Verizon acquired thespectrum licenses and operating assets of SureWest Wireless, excluding theCompany’s owned communication towers.

 

During the quarter ended March 31, 2008, the SureWest Wirelessbusiness sold has been presented as discontinued operations and the relatedassets and liabilities sold have been classified as assets of discontinuedoperations. The operations of the Company’s owned communication towers to beretained are included within the Broadband business segment.

 

 

8

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As of March 31, 2008 and December 31, 2007,the major components of SureWest Wireless assets and liabilities sold were asfollows:

 
| ** **                                      | ** ** | **March 31, 2008** | ** ** | **December 31, 2007** | ** ** |
|-------------------------------------------------|------------|------------------------------|------------|---------------------------------|------------|
| Accounts  receivable, net                       |       | $                            | 2,951      |                            | $          | 3,422 |   |
| Inventories                                     |       | 870                          |       | 894                             |       |
| Prepaid expenses                                |       | 736                          |       | 816                             |       |
| Property, plant  and equipment, net             |       | 26,725                       |       | 27,090                          |       |
| Wireless  licenses, net                         |       | 8,925                        |       | 8,925                           |       |
| Total assets                                    |       | $                            | 40,207     |                            | $          | 41,147 |   |
|                                            |       |                         |       |                            |       |
| Accounts payable  and other accrued liabilities |       | $                            | 2,029      |                            | $          | 2,209 |   |
| Accrued  compensation                           |       | 188                          |       | 259                             |       |
| Advance billings  and deferred revenues         |       | 2,843                        |       | 2,805                           |       |
| Deferred income  taxes                          |       | 3,103                        |       | 3,696                           |       |
| Total  liabilities                              |       | $                            | 8,163      |                            | $          | 8,969 |   |

 

The followingtable summarizes the financial information for SureWest Wireless’ operationsfor the quarters ended March 31, 2008 and 2007:

 
| ** **                                                  | ** ** | **March 31, 2008** | ** ** | **March 31, 2007** | ** ** |
|-------------------------------------------------------------|------------|------------------------------|------------|------------------------------|------------|
| Operating  revenues                                         |       | $                            | 7,127      |                         | $          | 8,098 |   |
| Operating  expenses including depreciation and amortization |       | 6,692                        |       | 8,861                        |       |
| Income (loss)  from operations                              |       | 435                          |       | (763                         | )          |
| Other income  (expense)                                     |       | 4                            |       | (117                         | )          |
| Income tax  expense (benefit)                               |       | 145                          |       | (321                         | )          |
| Net income  (loss)                                          |       | $                            | 294        |                         | $          | (559 | ) |

 

*SureWest Directories*

 

In February 2007,GateHouse Media acquired 100% of the stock of SureWest Directories (previouslyincluded in the Telecom segment), its directory publishing business, for anaggregate cash purchase price of $110,123, resulting in a gain as of December 31,2007 of $101,286, less estimated income taxes of $41,130. As part of thetransaction, GateHouse Media became the publisher of the official directory ofSureWest Telephone.  The results ofSureWest Directories are reported as a discontinued operation in theconsolidated financial statements for all years presented.

 

As part of the saleagreement with GateHouse Media, the Company performed certain administrativeand other functions on behalf of GateHouse Media for a period following thesale date, pursuant to a Transition Services Agreement (“TSA”).  The services rendered by the Company pursuantto the TSA concluded on December 31, 2007, and certain amounts owed to theCompany pursuant to the TSA have been submitted to GateHouse Media forpayment.  In the event that the amountultimately paid by GateHouse Media differs from the amount owed to the Companyunder the terms of the TSA, the gain on the sale will be adjustedaccordingly.  However, management doesnot believe that the amount of any such adjustment will be material to the gainon sale reflected in the 2007 consolidated statement of income.

 

The followingtable summarizes the financial information for SureWest Directories’ operationsfor the quarter ended March 31, 2007:

 

| Directory  advertising revenues                      |   | $     | 2,939  |   |
|------------------------------------------------------|--------|-------|--------|--------|
| Income before  income taxes                          |   | 1,682 |   |
| Income tax  expense                                  |   | 683   |   |
| Income from  discontinued operations                 |   | 999   |   |
| Gain on sale of  discontinued operations, net of tax |   | $     | 60,182 |   |

 

 

9

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**3.     BUSINESS SEGMENTS**

 

The Company has tworeportable business segments: Broadband and Telecommunications (“Telecom”). TheBroadband segment provides various services, including: high-speed and dial-upInternet, digital video, voice, network access, toll telephone and managedservices in the greater Sacramento, California and greater Kansas City, Kansasand Missouri areas.  The Company offershigh-speed Internet, digital video, voice and long distance phone service as abundled triple play package utilizing fiber-to-the-premise andfiber-to-the-node networks. The Broadband segment includes the Company’ssubsidiaries SureWest Broadband, SureWest TeleVideo, SureWest TeleVideo ofRoseville, SureWest Internet, SureWest Custom Data Services, Everest Broadband, Inc.and a division of SureWest Telephone operating as a Competitive Local ExchangeCarrier.

 

The Telecom segmentincludes SureWest Telephone and SureWest Long Distance, which provide landlinetelecommunications services, Digital Subscriber Line (“DSL”) service, longdistance services and certain non-regulated services. SureWest Telephone, whichis the principal operating subsidiary of the Telecom segment, provides localservices, toll telephone services, network access services and certainnon-regulated services.  SureWest LongDistance provides long distance services.

 

As discussed in Note 2, in January 2008, the Company entered intoa definitive agreement to sell the operating assets of its Wireless business,which was previously reported as a separate segment. The Company completed thetransaction to sell the operating assets of its Wireless business onMay 9, 2008. During the quarter ended March 31, 2008, the Wirelessbusiness sold has been presented as discontinued operations and the relatedassets and liabilities sold have been classified as assets and liabilities of discontinuedoperations. The operations of the Company’s owned communication towers to beretained are included within the Broadband business segment.

 

The Company hasaggregated certain of its operating segments within the Broadband and Telecomsegments because it believes that such operating segments share similareconomic characteristics.

 

Corporate Operations areallocated to the appropriate segment, except for cash; investments; certainproperty, plant, and equipment; and miscellaneous other assets, which are notallocated to the segments. However, the investment income associated with cashand investments held by Corporate Operations is included in the results of theoperations of the Company’s segments. The Company evaluates the performance ofits segments based on income (loss) from operations.

 

These segments arestrategic business units that offer different products and services. TheCompany accounts for intersegment revenues and expenses at prevailing marketrates. The Company’s business segment information is as follows:

 
| ** **                                      | ** ** | ** **    | ** ** | ** **  | ** ** | **Corporate**  | ** ** | **Discontinued** | ** ** | **Intercompany** | ** ** | ** **       | ** ** |
|-------------------------------------------------|------------|---------------|------------|-------------|------------|----------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** **                                      | ** ** | **Broadband** | ** ** | **Telecom** | ** ** | **Operations** | ** ** | **Operations**   | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| **For the  quarter ended March 31, 2008:** |       |          |       |        |       |           |       |             |       |             |       |             |       |
| Operating  revenues from external customers     |       | $             | 27,042     |        | $          | 24,578         |       | $                | —     |             | $          | —           |       | $ | — |   | $ | 51,620 |   |
| Intersegment  revenues                          |       | 140           |       | 4,343       |       | —         |       | —           |       | (4,483           | )          | —           |       |
| Operating  expenses*                            |       | 26,262        |       | 15,016      |       | —         |       | —           |       | (4,483           | )          | 36,795           |       |
| Depreciation and  amortization                  |       | 8,516         |       | 3,668       |       | —         |       | —           |       | —           |       | 12,184           |       |
| Income (loss)  from operations                  |       | (7,596        | )          | 10,237      |       | —         |       | —           |       | —           |       | 2,641            |       |
| Income (loss)  from continuing operations       |       | $             | (5,852     | )           | $          | 5,841          |       | $                | —     |             | $          | —           |       | $ | — |   | $ | (11 | ) |
| Total Assets                                    |       | $             | 766,441    |        | $          | 947,384        |       | $                | 846,587    |             | $          | 40,207           |       | $ | (1,941,634 | ) | $ | 658,985 |   |

----

*Exclusive of depreciationand amortization

 

 

10

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| ** **                                      | ** ** | ** **    | ** ** | ** **  | ** ** | **Corporate**  | ** ** | **Discontinued** | ** ** | **Intercompany** | ** ** | ** **       | ** ** |
|-------------------------------------------------|------------|---------------|------------|-------------|------------|----------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** **                                      | ** ** | **Broadband** | ** ** | **Telecom** | ** ** | **Operations** | ** ** | **Operations**   | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| **For the  quarter ended March 31, 2007:** |       |          |       |        |       |           |       |             |       |             |       |             |       |
| Operating  revenues from external customers     |       | $             | 16,525     |        | $          | 26,361         |       | $                | —     |             | $          | —           |       | $ | — |   | $ | 42,886 |   |
| Intersegment  revenues                          |       | 159           |       | 4,434       |       | —         |       | —           |       | (4,593           | )          | —           |       |
| Operating  expenses*                            |       | 19,099        |       | 15,552      |       | —         |       | —           |       | (4,593           | )          | 30,058           |       |
| Depreciation and  amortization                  |       | 5,425         |       | 5,650       |       | —         |       | —           |       | —           |       | 11,075           |       |
| Income (loss)  from operations                  |       | (7,840        | )          | 9,593       |       | —         |       | —           |       | —           |       | 1,753            |       |
| Income (loss) from  continuing operations       |       | $             | (5,262     | )           | $          | 5,873          |       | $                | —     |             | $          | —           |       | $ | — |   | $ | 611 |   |
| Total Assets                                    |       | $             | 427,191    |        | $          | 754,723        |       | $                | 740,396    |             | $          | 49,267           |       | $ | (1,428,856 | ) | $ | 542,721 |   |

----

*Exclusive of depreciationand amortization

 

**4.****              REGULATORYMATTERS AND ESTIMATED SHAREABLE EARNINGS OBLIGATIONS**

 

Certainof the Company’s rates are subject to regulation by the Federal CommunicationsCommission (“FCC”) and the State Commissions. Intrastate service rates aresubject to regulation by State Commissions. With respect to toll callsinitiated by interexchange carriers’ customers, the interexchange carriers areassessed access charges based on tariffs filed by the Company. Interstateaccess rates and resultant earnings are subject to regulation by the FCC. Withrespect to interstate services, SureWest Telephone has detariffed its DigitalSubscriber Line (“DSL”) services and files its own tariff with the FCC forswitched and special access services. For interstate common line (“CL”)charges, SureWest Telephone concurs with tariffs filed by the National ExchangeCarrier Association (“NECA”). Pending and future regulatory actions may have amaterial impact on the Company’s consolidated financial position and results ofoperations.

 

*FCC Matters*

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

 

As a result of periodiccost separation studies required by the FCC, SureWest Telephone changed itsestimates for certain NECA CL accounts receivable balances related to currentand prior year monitoring periods.  Thesechanges in estimates increased the Company’s consolidated revenues by $118 andnet income by $81 ($0.01 per share), during the quarter ended March 31,2007 (none in 2008).

 

*California Public UtilityCommission (“CPUC”) Matters*

In 2004, the Companyentered into a settlement agreement (the “Settlement Agreement”), which wasultimately approved by the CPUC, to resolve an ongoing regulatory proceedingwith various parties.  The SettlementAgreement resolved past sharing liabilities and suspended future sharingrequirements in the intrastate jurisdiction. In accordance with the Settlement Agreement, SureWest Telephone isreturning approximately $6,500 (“Dividend A”), plus interest at the 90-daycommercial paper rate for non-financial institutions, which was 2.35% as of March 31,2008, and an imputed rate of 3.15%, to its end users through a consumerdividend and is recorded as a reduction of the Company’s contractual shareableearnings obligations over a period of approximately four years, which began January 1,2005.  In addition, SureWest Telephonepaid a one-time consumer dividend of $2,600 (“Dividend B”) to consumers tosettle the monitoring periods 2000 to 2004 payable over approximately twoyears, which began January 1, 2005 and was completed in March 2007.  At March 31, 2008, the aggregatecontractual shareable earnings obligation for Dividend A was $1,179 (which isnet of an unamortized discount pertaining to imputed interest of $17 at thatdate).

 

 

11

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The following tablesummarizes the amounts returned to end users through consumer dividends for thequarters ended March 31, 2008 and 2007:

 

| ** ** | ** ** | **Quarter Ended** | ** ** |
|------------|------------|------------------------|------------|
| ** ** | ** ** | **March 31,**     | ** ** |
| ** ** | ** ** | **2008**               | ** ** | **2007** | ** ** |
| Dividend A |       | $                      | 431        |   | $ | 486 |   |
| Dividend B |       | —                 |       | 210 |   |
| Total      |       | $                      | 431        |   | $ | 696 |   |

 

As part of the SettlementAgreement, SureWest Telephone was to implement an additional annual consumerdividend of $1,300 on January 1, 2007 to end-users receiving SureWestTelephone services subject to sharing on or after that date.  However, this consumer dividend was subjectto reduction based upon the results of other pending regulatoryproceedings.  Pursuant to a CPUC order inDecember 2006, beginning in 2007 this dividend was offset by a reductionin the Company’s interim draw from the California High Cost Fund (“CHCF”).  The interim draw from the CHCF was previouslyauthorized by a CPUC decision in August 2005 which allowed SureWestTelephone to continue receiving $11,500 annually from the CHCF to offset itsintrastate regulated operating expenses on an interim basis. In August 2006,the Company requested permission from the CPUC to implement a graduatedphase-down of its annual $11,500 interim draw. In December 2006, the CPUCauthorized the Company to offset its interim draw from the CHCF with theaforementioned $1,300 consumer dividend. In September 2007, the CPUC issued Decision 07-09-002 whichprovides for SureWest Telephone to phase-down its annual CHCF draw over afive-year period, to end on January 1, 2012.  The phase-down of the interim draw began in January 2007,initially reducing the annual $11,500 interim draw by the aforementioned $1,300consumer dividend to $10,200. Starting in 2008, the interim CHCF draw is beingincrementally reduced by approximately $2,000 annually.

 

In 2006, the CPUCinitiated a Rulemaking pursuant to Senate Bill 1276 commencing a review of theCHCF-B program.  The goals of this reviewincluded, but were not limited to, adjusting universal service rate supportpayments to reflect updated operating costs, evaluating whether CHCF-B supportlevels can be reduced and made more predictable and making the currentadministration of the program more efficient. In September 2007, the CPUC approved a decision reforming theindustry CHCF-B program which significantly reduced the CHCF-B program fund andits associated surcharge.  The decisionreduces the current industry CHCF-B funding level by approximately 74% andorders the reduction to be transitioned over an 18-month period, which began inJanuary 2008 and will end in July 2009.  The Company received approximately $600 in2007.  Based on this level of receiptsand the threshold transition schedule outlined in the decision, the Company’sCHCF-B fund will be reduced approximately 91% and 100% in July 2008 and January 2009,respectively.  Accordingly, the Company’sgeneral CHCF-B fund draw will be approximately $323 and $0 in 2008 and 2009,respectively.  Furthermore, the decisionlifts the freeze on basic residential rates beginning in January 2009;however, the decision establishes a Phase II of the proceeding in which theCPUC may determine the amount by which the Company may increase basicresidential rates over time, among other issues.  The Company will continue to evaluate thismatter and the potential effects on its consolidated financial position andresults of operations.

 

In an ongoing proceedingrelating to the New Regulatory Framework (under which SureWest Telephone hasbeen regulated since 1996), the CPUC adopted decision 06-08-030 in 2006, whichgrants carriers broader pricing freedom in the provision of telecommunicationsservices, bundling of services, promotions and customer contracts.  This decision adopted a new regulatoryframework, the Uniform Regulatory Framework, which among other things (i) eliminatesprice regulation and allows full pricing flexibility for all new and retailservices except lifeline and basic residential services which will remaincapped at current levels until January 1, 2009, (ii) allows new formsof bundles and promotional packages of telecommunication services, (iii) allocatesall gains and losses from the sale of assets to shareholders and (iv) eliminatesalmost all elements of rate of return regulation, including the calculation ofshareable earnings.

 

 

12

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**5.     INCOME TAXES**

 

On January 1, 2007,the Company adopted FASB Interpretation (“FIN”) No. 48, *Accounting for Uncertainty in Income Taxes*.  FIN No. 48 clarifies the accounting foruncertainty in income taxes recognized in a company’s financial statements inaccordance with FASB No. 109, *Accounting for IncomeTaxes*. Specifically, the pronouncement prescribes a recognitionthreshold and a measurement attribute for the financial statement recognitionand measurement of a tax position taken or expected to be taken in a taxreturn. FIN No. 48 also provides guidance on de-recognition,classification, interest and penalties, accounting in interim periods,disclosure and transition of uncertain tax positions.

 

The Company had aliability for unrecognized tax benefits of approximately $330 and $305 at March 31,2008 and December 31, 2007, respectively. The following table provides a reconciliation of the beginning andending amount of unrecognized tax benefits during the first quarter of 2008:

 

| Balance as of  December 31, 2007                |   | $  | 305    |   |
|------------------------------------------------------|--------|----|--------|--------|
| Increases based  on tax positions prior to 2008      |   | 25 |   |
| Unrecognized tax  benefits as of March 31, 2008 |   | $  | 330    |   |

 

The total amount ofunrecognized tax benefits that, if recognized, would affect the effective taxrate were $118 and $120 at January 1, 2008 and March 31, 2008,respectively.  It is reasonably possiblethat a reduction of up to $189 of unrecognized tax benefits related to statededuction and credit issues and associated interest may occur within twelvemonths as a result of the expiration of the statute of limitations and paymentof taxes and interest with amended returns expected to be filed prior to theend of 2008.

 

The Company’s policy isto recognize interest and penalties related to uncertain tax positions inincome tax expense.  The Company did notrecord significant amounts of interest and penalties related to unrecognizedtax benefits during the quarter ended March 31, 2008.  As of March 31, 2008, the Company hadapproximately $96 of accrued interest and penalties in the unrecognized taxbenefits above.

 

As of March 31,2008, the following tax years and related taxing jurisdictions were open:

 

| **Tax Year** | ** ** | **Taxing Jurisdiction** | ** ** |
|-------------------|------------|------------------------------|------------|
| 2003              |       | California                   |       |
| 2006-2007         |       | Kansas and Missouri          |       |
| 2004 - 2007       |       | Federal and California       |       |

 

For the quarter endedMarch 31, 2008, the Company’s actual tax expense differed from the federalstatutory rate due to state taxes, the benefit of certain permanent taxdeductions and an increase to state deferred tax expense due to changes in theCompany’s state tax apportionment factors. For the quarter ended March 31, 2007, the Company’s actual tax expensediffered from the federal statutory rate due to state taxes, the benefit ofcertain permanent tax deductions and a reduction in the Fin No. 48 tax reserveresulting from the closure of certain statute of limitations.

 

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

 

TheCompany sponsors a noncontributory defined benefit pension plan (the “PensionPlan”) covering substantially all of its employees. Benefits are based on yearsof service and the employee’s average compensation during the five highestconsecutive years of the last ten years of credited service. The Company’sfunding policy is to contribute annually an actuarially determined amountconsistent with applicable federal income tax regulations. Contributions areintended to provide for benefits attributed to service to date. Pension Planassets are primarily invested in domestic equity securities, United Statesgovernment and agency securities and international equity securities.

 

The Company also has an unfunded Supplemental ExecutiveRetirement Plan (“SERP”), which provides supplemental retirement benefits tocertain retired executives of the Company. The SERP provides for incrementalpension payments to partially offset the reduction in amounts that would havebeen payable under the Pension Plan if it were not for limitations imposed byfederal income tax regulations.

 

Inaddition, the Company provides certain post-retirement benefits other thanpensions (“Other Benefits”) to substantially all employees, including lifeinsurance benefits and a stated reimbursement for Medicare supplementalinsurance. During the quarter ended March 31, 2007, the Company received$424 from the trust of the Other Benefits Plan for certain eligible medicalexpenses paid by the Company on behalf of the participants during the previousyear.

 

 

13

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In recent years, the Company’s managementsubstantially modified its employee compensation structure in order to attractand retain the right mix of talent necessary to successfully support a companywhich is significantly expanding and growing. For that reason, the Company amended its defined benefit pension plan(the “Pension Plan”), Supplemental Executive Retirement Plan and certainpost-retirement benefits other than pensions (“Other Benefits”) (collectivelythe “Plans”).  The Plans amendments,effective April 1, 2007, froze the Pension Plan so that no person iseligible to become a new participant in the Plans on or following that date andall future benefit accruals for existing participants under the Planscease.  The amendments to the Plans wereaccounted for as plan curtailments, resulting in the recognition of a $574non-cash pretax curtailment loss ($0.04 per share) reflected in operatingexpenses in the Company’s consolidated statement of income during the yearended December 31, 2006.

 

The Company accounts for its Pension Planin accordance with SFAS No. 158, *Employers’ Accounting forDefined Benefit Pension and Other Postretirement Plans, an Amendment of FASBStatements No’s 87, 88, 106 and 132(R)*.  SFAS No. 158 requires an employer torecognize the funded status of a defined benefit postretirement plan as anasset or liability in its statement of financial position and to recognizechanges in that funded status in the year in which the changes occur throughcomprehensive income.  The Statement alsorequires an employer to measure the funded status of a plan as of the date ofits year-end statement of financial position.

 

**Components of Net PeriodicBenefit Cost**

 

Net periodic pensioncosts recognized in the condensed consolidated statements of income for thequarters ended March 31, 2008 and 2007 under the Pension Plan and SERPincluded the following components:

 

| ** **                                     | ** ** | **Quarter Ended March 31,** | ** ** |
|------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                     | ** ** | **2008**                                   | ** ** | **2007** | ** ** |
| Service cost  incurred during the period       |       | $                                          | —     |   | $ | 1,200 |   |
| Interest cost on  projected benefit obligation |       | 1,808                                      |       | 1,800 |   |
| Expected return  on plan assets                |       | (2,250                                     | )          | (2,300 | ) |
| Amortization of  prior service cost            |       | 1                                          |       | — |   |
| Recognized net  actuarial loss                 |       | 6                                          |       | — |   |
| Net periodic  benefit (income)/cost            |       | $                                          | (435       | ) | $ | 700 |   |

 

Net periodicbenefit costs related to the Other Benefits Plan were not significant to thecondensed consolidated financial statements of the Company for the three monthsended March 31, 2008 or 2007.

 

**7.     COMMITMENTS AND CONTINGENCIES**

 

**Credit Arrangements**

 

In May 2007, the Company entered into an Amended and RestatedCredit Agreement (“Old Credit Agreement”) to restate and replace the May 2006credit agreement.  The Old CreditAgreement revised both the Term Loan facility and the Revolving Loan facility(collectively “Loan Facilities”) to principal amounts of $40,000 and up to$60,000, respectively. Principal payments on the outstanding amounts borrowedunder the Loan Facilities were due and payable on May 1, 2012. There wereno material changes to interest calculations, interest payments or financialcovenants as a result of the amended and restated Credit Agreement.

 

In February 2008,the Company entered into a Second Amended and Restated Credit Agreement (“CreditAgreement”) to restate and replace the credit agreement entered into in May 2007.The Credit Agreement terms, among other things: (i) revise the amountavailable under the Term Loan A facility from $40,000 to $120,000, (ii) issuea 1-year $60,000 Term Loan B facility and (iii) modify certain financialcovenants. No significant changes were made to the existing Revolving Loanfacility. The credit facilities were used in part to acquire Everest and areavailable for general corporate purposes. The Term Loan A facility and theRevolving Loan facility are due and payable on May 1, 2012.

 

The Term Loan A facility, prior to this new agreement, which had$40,000 outstanding, was extinguished resulting in a loss on extinguishment ofdebt of $607, which was recorded in the first quarter of 2008. $40,000 of thenew borrowings will bear interest at a fixed rate of 6.29%. The remaining$80,000 of the new borrowings will bear interest based, at the Company’selection, on the London interbank offered rate or the bank’s prime rate plus,in either case, an applicable margin. The Term Loan B facility is due andpayable on February 12, 2009 and includes

 

 

14

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automatic increases to the applicable interest margins on May 31,2008 and August 12, 2008 unless certain amounts are repaid prior to thosedates. As of March 31, 2008, $120,000, $60,000, and $16,000 wereoutstanding on the Term Loan A, Term Loan B, and Revolving facilities,respectively. As of December 31, 2007, $40,000 was outstanding on the TermLoan A facility and no amounts were outstanding under the Revolving facility.

 

The Company’s Series Aand Series B Senior Notes and the Credit Agreement contain financial andoperating covenants that may restrict, among other things, repurchase of theCompany’s capital stock, the making of certain other restricted payments andthe incurrence of additional indebtedness. The covenants also require theCompany to maintain certain financial ratios and minimum levels of tangible networth. At March 31, 2008 and December 31, 2007, retained earnings ofapproximately $103,647 and $111,003, respectively, were available for thepayments.

 

**Litigation, RegulatoryProceedings and Other Contingencies**

 

TheCompany is subject to certain legal and regulatory proceedings, InternalRevenue Service examinations and other income tax exposures, and other claimsarising in the ordinary course of its business. In the opinion of management,the ultimate outcome of these matters will not materially affect theconsolidated financial position, results of operations or cash flows of theCompany.

 

The Company is alsosubject to a number of regulatory proceedings occurring at the federal andstate levels that may have a material impact on its operations. Theseregulatory proceedings include, but are not limited to, consideration ofchanges to the jurisdictional separations process, the interstate universalservice fund, intercarrier compensation access charge reform, broadbanddeployment, the regulation of local exchange carriers and their competitors,including providers of Internet protocol-enabled services, and the provision ofvideo services and competition in the market. The outcomes and impact on theCompany’s operations of these proceedings and related court matters cannot bedetermined at this time.

 

The FCC continues topromulgate rules and regulations on competition, interconnection, accesscharges, broadband deployment and universal service reform, and the variouson-going legal challenges considering the validity of these FCC orders, it isnot yet possible to determine fully the impact of the Telecommunications Act of1996 and related FCC regulations on the Company’s operations.

 

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

 

**8.     RECENT ACCOUNTING PRONOUNCEMENTS**

 

** Recently Issued Accounting Pronouncements**

** **

In December 2007,the FASB issued SFAS No. 141(R), *BusinessCombinations* (“SFAS No. 141(R)”), which establishes principlesand requirements for how the acquirer:  (a) recognizes and measuresin its financial statements the identifiable assets acquired, the liabilitiesassumed and any noncontrolling interest in the acquiree; (b) recognizesand measures the goodwill acquired in the business combination or a gain from abargain purchase; and (c) determines what information to disclose toenable users of the financial statements to evaluate the nature and financialeffects of the business combination.  SFAS No. 141(R) requirescontingent consideration to be recognized at its fair value on the acquisitiondate and, for certain arrangements, changes in fair value to be recognized inearnings until settled.  SFAS No. 141(R) also requiresacquisition-related transaction and restructuring costs to be expensed ratherthan treated as part of the cost of the acquisition.  SFAS No. 141(R) appliesprospectively to business combinations for which the acquisition date is on orafter the beginning of the first annual reporting period beginning on or after December 15,2008.  The Company is currently evaluating the impact this statement willhave on its financial position and results of operations, however, the effectwill be dependent upon the acquisitions that are made in the future.

 

 

15

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**Recently AdoptedAccounting Pronouncements**

** **

In September 2006,the FASB issued SFAS No. 157, *Fair Value Measurements,*which defines fair value, establishes a framework for measuring fair value in generallyaccepted accounting principles and expands disclosures about fair valuemeasurements.  In February 2008, theFASB issued FASB Staff Position No. FAS 157-2, *EffectiveDate of FASB Statement No. 157*(the “FSP”).  The FSP amends SFAS No. 157 to delay theeffective date for nonfinancial assets and nonfinancial liabilities, except foritems that are recognized or disclosed at fair value in the financialstatements on a recurring basis, at least annually.  SFAS No. 157, as amended, is effectivefor financial statements issued for fiscal years beginning after November 15,2008, and for interim periods within those fiscal years. Effective for 2008 theCompany adopted SFAS No. 157, except as it applies to those non-financialassets and non-financial liabilities as noted in the FSP.  The partial adoption of SFAS No. 157 didnot have a material impact on the Company’s condensed consolidated financialstatements. For a more detailed discussion of the effects of applying theprovisions of SFAS No. 157 refer to the Fair Value of FinancialInstruments section of Note 1.

 

In February 2007,the FASB issued SFAS No. 159, *The Fair Value Option forFinancial Assets and Financial Liabilities.* This standard permits an entity to elect tomeasure many financial instruments and certain other items at fair value thatare not currently required to be measured at fair value. SFAS No. 159 alsoestablishes recognition, presentation and disclosure requirements.  The Company adopted SFAS No. 159effective January 1, 2008 and has not elected the fair value option forits financial instruments. The adoption of SFAS No. 159 did not have amaterial effect on the Company’s condensed consolidated financial statements.

 

## **In June 2007,the Emerging Issues Task Force (“EITF”) ratified EITF Issue No. 06-11, *Accounting for Income Tax Benefits of Dividends on Share-Based Payment*.  EITF No. 06-11 provides that realizedincome tax benefits from dividends or dividend equivalents that are charged toretained earnings and are paid to employees for equity classified nonvestedequity shares, nonvested equity share units and outstanding equity shareoptions should be recognized as an increase in additional paid-in capital.  The Company adopted EITF Issue No. 06-11effective January 1, 2008.  Theadoption of this standard did not have a material impact on the Company’sconsolidated financial position and results of operations.**

 

**9.     SUBSEQUENTEVENT**

 

On May 9, 2008, the Company completed the sale of the operating assetsof its Wireless business, SureWest Wireless, to Verizon for an aggregatepurchase price of $69,000, subject to a post-closing working capitaladjustment. A portion of the purchase price equal to $3,450 was placed inescrow, half of which will be available after twelve months and the balance ofwhich will be available 24 months following the closing, less the amount of anypending claims, in each case, to be held as security for certain losses, ifany, incurred by Verizon in the event of (i) any breach of the representationsand warranties set forth in the agreement, (ii) any breach or nonperformance ofcovenants set forth in the agreement, and (iii) certain other specifiedevents.  It is likely the actual gaincould vary based on the post-closing working capital adjustment and futureclaims, if any, made against the amounts held in escrow. The Company estimatesthat the gain on the sale of assets net of income taxes, which includes theamount held in escrow, will be in the range of $18,000 to $23,000.

 

 

16

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** **

**ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OFFINANCIAL CONDITION AND RESULTS OF OPERATIONS.**

 

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

 

Certain statementsincluded in this report, including that which relates to the impact on futurerevenue sources and potential sharing obligations of pending and futureregulatory orders, continued expansion of the telecommunications network andexpected changes in the sources of the Company’s revenue and its cost structureresulting from its entrance into new communications markets, areforward-looking statements and are made pursuant to the safe harbor provisionsof the Securities Litigation Reform Act of 1995. These forward lookingstatements generally are identified by the words “believe”, “expect”, “anticipate”,“estimate”, “intend”, “should”, “may”, “will”, “would”, “will be”, “willcontinue” or similar expressions. Such forward looking statements involve knownand unknown risks, uncertainties and other factors that may cause actualresults, performance or achievements of SureWest Communications to be differentfrom those expressed or implied in the forward-looking statements. A detaileddiscussion of these and other risks and uncertainties that could cause actual resultsand events to differ materially from such forward—looking statements isincluded in the Company’s 2007 Annual Report on Form 10-K filed with theSecurities and Exchange Commission (“SEC”). We disclaim any intention orobligation to update or revise publicly any forward-looking statements.

 

**CorporateStructure**

 

The Company is a holdingcompany with wholly-owned subsidiaries operating in the Broadband andTelecommunications (“Telecom”) segments.

 

The Broadband segment includes the Company’s subsidiaries SureWestBroadband, SureWest TeleVideo, SureWest TeleVideo of Roseville, SureWestInternet, SureWest Custom Data Services, Everest Broadband, Inc. (“Everest”or “Kansas City”) and a division of SureWest Telephone operating as aCompetitive Local Exchange Carrier (“CLEC”). The Broadband segment providesvarious services, including: high-speed and dial-up Internet, digital video,voice, network access, toll telephone and managed services in the greaterSacramento, California and greater Kansas City, Kansas and Missouri areas (“KansasCity area”).  Those customers served inthe Sacramento area substantially reside outside of SureWest Telephone’sservice area. The Company offers high-speed Internet, digital video, voice andlong distance phone service as a bundled triple play package utilizingfiber-to-the-premise and fiber-to-the-node networks.

 

In December 2007, the Company entered into a definitive agreementto purchase Everest. On February 13, 2008, the Company acquired 100% ofthe issued and outstanding stock of Everest for a total purchase price of$182,100, including estimated transaction costs. Everest is a competitiveprovider of high-speed data, video and voice services in the greater KansasCity area. The acquisition of Everest accelerates the Company’s growth strategyand builds on its status as a leading provider of network services toresidential and business customers.

 

The Telecom segment includes SureWest Telephone and SureWest LongDistance, which provide landline telecommunications services, DigitalSubscriber Line (“DSL”) service, long distance services and certainnon-regulated services. SureWest Telephone, which is the principal operatingsubsidiary of the Telecom segment, provides local services, toll telephoneservices, network access services and certain non-regulated services. SureWestLong Distance is a reseller of long distance services.

 

In February 2007, GateHouse Media acquired 100% of the stock ofSureWest Directories (previously included in the Telecom segment), itsdirectory publishing business, for an aggregate cash purchase price of$110,123, resulting in a gain as of December 31, 2007 of $101,286, lessestimated income taxes of $41,130. As part of the transaction, GateHouse Mediabecame the publisher of the official directory of SureWest Telephone.

 

The Company expects that the sources of its revenues and its coststructure may be different in future periods, as a result of its entry into newcommunications markets, the disposition of non-strategic investments andcompetitive forces in each of the markets in which the Company has operations.

 

 

17

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**CurrentBusiness Developments**

 

In January 2008, the Company entered into a definitive agreementto sell the operating assets of its Wireless business, SureWest Wireless(previously included in the Wireless segment), to Verizon Wireless (“Verizon”)for an aggregate cash purchase price of $69,000, subject to a post-closingworking capital adjustment. The Company completed the transaction to sell theoperating assets of its Wireless business on May 9, 2008.  Under the agreement, Verizon acquired thespectrum licenses and operating assets of SureWest Wireless, excluding theCompany’s owned communication towers.

 

**Resultsof Operations**

 

**Consolidated Overview**

 

The tables below reflectcertain financial data (on a consolidated and segment basis) and selectoperating metrics for each reportable segment as of and for the quarters ended March 31,2008 and 2007.

 

**FinancialData**

** **
| ** **                                    | ** ** | **Quarter Ended March 31,** | ** ** |
|-----------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                    | ** ** | ** **                                 | ** ** | ** ** | ** ** | **$** | ** ** | **%** | ** ** |
| ** **                                    | ** ** | **2008**                                   | ** ** | **2007** | ** ** | **Change** | ** ** | **Change** | ** ** |
| **Operating  revenues (1)**                   |       |                                       |       |   |   |   |   |   |   |
| Broadband                                     |       | $                                          | 27,042     |   | $ | 16,525 |   | $ | 10,517 |   | 64 | % |
| Telecom                                       |       | 24,578                                     |       | 26,361 |   | (1,783 | ) | (7 | ) |
| Operating  revenues                           |       | 51,620                                     |       | 42,886 |   | 8,734 |   | 20 |   |
|                                          |       |                                       |       |   |   |   |   |   |   |
| **Income  (loss) from operations**            |       |                                       |       |   |   |   |   |   |   |
| Broadband                                     |       | (7,596                                     | )          | (7,840 | ) | 244 |   | 3 |   |
| Telecom                                       |       | 10,237                                     |       | 9,593 |   | 644 |   | 7 |   |
| Income from  operations                       |       | 2,641                                      |       | 1,753 |   | 888 |   | 51 |   |
|                                          |       |                                       |       |   |   |   |   |   |   |
| **Income  (loss) from continuing operations** |       |                                       |       |   |   |   |   |   |   |
| Broadband                                     |       | (5,852                                     | )          | (5,262 | ) | (590 | ) | (11 | ) |
| Telecom                                       |       | 5,841                                      |       | 5,873 |   | (32 | ) | (1 | ) |
| Income (loss)  from continuing operations     |       | $                                          | (11        | ) | $ | 611 |   | $ | (622 | ) | (102 | )% |

 

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(1)   External Customers only

**SelectOperating Metrics**

** **
| ** **                                          | ** ** | **As of March 31,** | ** ** |
|-----------------------------------------------------|------------|------------------------------------|------------|
| ** **                                          | ** ** | **2008**                           | ** ** | **2007** | ** ** | **Change** | ** ** | **% Change** | ** ** |
| **Broadband**                                       |       |                               |       |   |   |   |   |   |   |
| Total  residential subscribers (1)                  |       | 96,900                             |       | 54,800 |   | 42,100 |   | 77 | % |
| Broadband  residential Revenue-generating units (2) |       | 200,800                            |       | 91,700 |   | 109,100 |   | 119 |   |
| Data                                                |       | 91,800                             |       | 52,800 |   | 39,000 |   | 74 |   |
| Video                                               |       | 55,200                             |       | 19,700 |   | 35,500 |   | 180 |   |
| Voice                                               |       | 53,800                             |       | 19,200 |   | 34,600 |   | 180 |   |
| Total business  customers (3)                       |       | 6,000                              |       | 3,900 |   | 2,100 |   | 54 |   |
| ** **                                          | ** ** | ** **                         | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Telecom**                                         |       |                               |       |   |   |   |   |   |   |
| Voice  Revenue-generating units (2)                 |       | 66,800                             |       | 77,300 |   | (10,500 | ) | (14 | ) |
| Access lines                                        |       | 110,241                            |       | 124,368 |   | (14,127 | ) | (11 | )% |

 

 

18

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(1)     Totalresidential subscribers are customers (excluding the CLEC customers) whoreceive residential data, video or voice services from SureWest Broadband.

(2)     TheCompany can deliver multiple services to a customer. Accordingly, the Companymaintains statistical data regarding Revenue-generating units (“RGUs”) fordigital video, voice and data, in addition to the number of subscribers. Forexample, a single customer who purchases digital video, voice and data serviceswould be reflected as three Revenue-generating units.

(3)     Totalbusiness customers are customers who receive business data, voice or videoservices and represent a unique customer account.

 

The Company’s Broadband segment operating revenues increased $10,517,or 64%, in the quarter ended March 31, 2008 compared to the same period in2007. The comparability of the Broadband segment results of operations andselect operating metrics in the current year compared to the same prior yearperiod have been impacted by the effects of the Everest acquisition, asdescribed above, in February 2008. The Kansas City operations contributed approximately $8,350 of operatingrevenues and 37,800, 102,200 and 1,700 residential subscribers, residentialRGUs and business customers, respectively, in the current year period.

 

At March 31, 2008, the Broadband segment experienced a 77% annualincrease in the number of residential subscribers compared to the same prioryear period. In the California market, both data and video RGUs increasedapproximately 8%, which was reflective of the Company’s ability to offersubscribers high-speed data, HDTV, HD DVR and other enhanced services.  In addition, Broadband operating revenuesincreased due to the continued expansion of the broadband network and growth inthe demand for digital video, voice and data offered as a bundled triple-playpackage.

 

In March 2008, the Company launched its new Voice over InternetProtocol (“VoIP”) Digital Phone product in the California market, including theTelecom service territory.  The Companyanticipates that this offering will result in elevated take rates and anincrease in broadband residential triple-play RGUs, while successfullymitigating access line losses in the Telecom segment by migrating thesecustomers to voice RGUs in the Broadband segment.

 

The Company will continue to invest in success-based capital andbuilding and deploying the broadband infrastructure while focusing on thegeneration of new customers and increasing residential penetration on existingmarketable homes.

 

Operating revenues in the Telecom segment decreased$1,783, or 7%, in the quarter ended March 31, 2008 compared to the sameperiod in 2007. Residential revenues accounted for nearly all of the decreasein operating revenues in the current year. Residential services were largely impacted by customer’s migrationtoward alternative communication services, including those offered by theCompany’s Broadband segment, such as VoIP and wireless services, whichcontributed to an approximate 14% decline in voice RGUs as of March 31,2008 compared to March 31, 2007. The decrease in operating revenues was also impacted by continuedscheduled reductions in California High Cost Fund subsidies of approximately$500 during the quarter ended March 31, 2008 compared to the same prioryear period.  As well, some competitorsinitiated marketing campaigns to include voice services targeted directly toresidential subscribers within SureWest Telephone’s service area. In an effortto mitigate future operating revenue and voice RGU declines, the Company nowoffers various flat-rate and bundled service packages and has introduced abroadband VoIP service to customer’s residing within SureWest Telephone’sservice area.

 

Consolidated operating expenses, excluding depreciation andamortization, increased $6,737 during the quarter ended March 31, 2008compared to the same period in 2007. The Company’s Broadband segment accountedfor substantially all of the increases in the Company’s consolidated operatingexpenses primarily as a result of the Kansas City operations. Cost of servicesand products expense increased $4,114 in the current year period primarily as aresult of increases in programming, transport and access costs related to thegrowth in Broadband subscribers, residential broadband RGUs and businesscustomers. Customer operations and selling expense increased $806 during thequarter ended March 31, 2008 compared to the same prior year period dueprimarily to an increase in sales and advertising costs to promote subscribergrowth and new product offerings within the Broadband segment. General andadministrative expenses increased $1,817 during the quarter ended March 31,2008 compared to the same period in 2007 primarily as a result of increases in (i) informationtechnology costs related to system enhancements, (ii) salaries and wagesfor employees to provide customer and other administrative services and (iii) consultingand advisory fees related to strategic initiatives and the outsourcing ofcertain non-core processes.

 

 

19

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The Company’s consolidated depreciation and amortization expenseincreased $1,109 during the quarter ended March 31, 2008 compared to thesame prior year period due to the continued network build-out and success-basedcapital projects undertaken within the residential broadband serviceterritories and the Kansas City operations.

 

*Reclassification*

 

Certain amounts in the Company’s 2007 condensed consolidated financialstatements have been reclassified to conform to the presentation of the Company’s2008 condensed consolidated financial statements, including the effects ofreclassifications from presentation of the Company’s Wireless business as adiscontinued operation. In addition, the calculation of certain selectoperating metrics has been revised over time to reflect the current view of theCompany’s business. Accordingly, where necessary, prior period metriccalculations have been revised to conform to current practice.

 

*Effectsof Strategic Corporate Actions*

 

The Company’s acquisition of Everest and the pending divestiture ofSureWest Wireless will yield various impacts to the Company’s financialstatements and results of operations in 2008.

 

As discussed above, the Company purchased Everest in February 2008.  As a result, the Broadband segment operatingrevenues and income from operations increased approximately $8,350 and $916,respectively, during the first quarter of 2008 compared to the same period in2007. The Everest acquisition has facilitated the rapid expansion of ourgeographic footprint and overall services targeted to businesses, while morethan doubling the number of our triple-play residential subscribers, asevidenced by the increase in RGUs of nearly 119% at March 31, 2008compared to the same period last year. The acquisition was largely financed by the Seconded Amended andRestated Credit Agreement entered into by the Company in February 2008.  Accordingly, subsequent to the closing of thetransaction the Company experienced increased interest expense resulting fromthe financing agreement.  The Company’sability to successfully integrate the Kansas City operations will depend on anumber of factors, including our ability to devote adequate personnel to theintegration process while still managing our current operations effectively.The Company does not anticipate difficulties integrating the acquired business;however such difficulties could increase our costs or adversely impact ourability to operate our business.

 

The sale of the operating assets of the Company’s Wireless business,SureWest Wireless, will also affect our financial statements and results ofoperations subsequent to the closing of the transaction which occurred May 9,2008.  In recent years, the Company’sconsolidated operating revenues have benefited from the Wireless business.  During the year ended December 31, 2007,the Wireless business contributed approximately $32,000, or 16%, of the Company’sconsolidated operating revenues. In 2008, the Company’s consolidated results ofoperations included operating revenues from the wireless business ofapproximately $7,100, or 12%, which was reflected in the Company’s condensedconsolidated statements of income, in net income from discontinued operations.

 

The Company amended its defined benefit pension plan (the “Pension Plan”),Supplemental Executive Retirement Plan and certain post-retirement benefitsother than pensions (“Other Benefits”) (collectively the “Plans”). The Plansamendments, effective April 1, 2007, froze the Pension Plan so that noperson is eligible to become a new participant in the Plans on or followingthat date and all future benefit accruals for existing participants under thePlans cease. The Company’s decision to freeze the Pension Plan also affectedits financial statements and results of operations beginning in 2007. Thefreeze reduced the Company’s operating expenses by approximately $4,100 for theyear ended December 31, 2007. For the quarters ended March 31, 2008and 2007, the Company recorded $353 in income and $726 in expense,respectively, related to the Plans.  Inaddition, the Company did not make any contributions to the Pension Plan in2007 and does not expect to make any contributions during 2008. Historically, forthe fiscal years 2004 through 2006, the Company’s cash contributions to thePension Plan ranged from $3,000 to $5,000, and the annual service cost averagedapproximately $4,000 over the same time period. See Note 6 for moreinformation on the Plans.

 

Recently, the Company’smanagement substantially modified its employee compensation structure in orderto attract and retain the right mix of talent necessary to successfully supporta company which is significantly expanding and growing. The program encouragesemployees to achieve the Company’s financial, operational and strategic targetsby fostering superior employee performance and job satisfaction.

 

 

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**Segment Results of Operations**

 

**Broadband**

** **
| ** **                                        | ** ** | **Quarter Ended March 31,** | ** ** |
|---------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                        | ** ** | ** **                                 | ** ** | ** ** | ** ** | **$** | ** ** | **%** | ** ** |
| ** **                                        | ** ** | **2008**                                   | ** ** | **2007** | ** ** | **Change** | ** ** | **Change** | ** ** |
|                                              |       |                                       |       |   |   |   |   |   |   |
| Data                                              |       | $                                          | 8,748      |   | $ | 6,450 |   | $ | 2,298 |   | 36% |   |
| Video                                             |       | 7,434                                      |       | 3,546 |   | 3,888 |   | 110 |   |
| Voice                                             |       | 3,696                                      |       | 2,010 |   | 1,686 |   | 84 |   |
| Total  residential revenues                       |       | 19,878                                     |       | 12,006 |   | 7,872 |   | 66 |   |
| Business                                          |       | 6,341                                      |       | 4,074 |   | 2,267 |   | 56 |   |
| Access                                            |       | 234                                        |       | 68 |   | 166 |   | 244 |   |
| Other                                             |       | 589                                        |       | 377 |   | 212 |   | 56 |   |
| Total  operating revenues from external customers |       | 27,042                                     |       | 16,525 |   | 10,517 |   | 64 |   |
| Intersegment  revenues                            |       | 140                                        |       | 159 |   | (19 | ) | (12) |   |
| Operating  expenses*                              |       | 26,262                                     |       | 19,099 |   | 7,163 |   | 38 |   |
| Depreciation  and amortization                    |       | 8,516                                      |       | 5,425 |   | 3,091 |   | 57 |   |
| Loss  from operations                             |       | (7,596                                     | )          | (7,840 | ) | 244 |   | 3 |   |
| Loss  from continuing operations                  |       | $                                          | (5,852     | ) | $ | (5,262 | ) | $ | (590 | ) | (11)% |   |

 

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*Exclusive ofdepreciation and amortization

 

*Operating Revenues*

 

Operating revenues from external customers in the Broadband segmentincreased $10,517 during the quarter ended March 31, 2008 compared to thesame period in 2007.  The Company’s KansasCity operations, as described above, contributed approximately $8,350 ofoperating revenues in the current year period.

 

Broadband residential revenues increased $7,872, or 66%, during thequarter ended March 31, 2008 compared to the same prior year period, ofwhich approximately $6,435, or 82%, was attributable to the Kansas Cityoperations.  Broadband residentialsubscribers and RGUs increased 77% and 119%, respectively, as of March 31,2008 compared to the same period in 2007. The Company anticipates continued growth in residential broadband RGUsand average revenue per user resulting from the recently launched DVR andSureWest Digital Phone, which was recently launched in the Californiamarket.  SureWest Digital Phone presentsthe Company with a more competitive triple-play offering with increased optionsand multiple packages.

 

Residential Data revenues increased $2,298, or 36%, during the currentyear compared to the same prior year period. Data RGUs in the California market increased 8%, which was reflective ofthe Company’s ability to offer subscribers superior high-speed data productsand other enhanced services such as remote monitoring.  The reliability and high speeds of the dataservice in both the California and Kansas City markets enhance other servicessuch as the SureWest Digital Phone, where customers manage phone servicesthrough the online SureWest portal.  Theremaining increase in Data revenues was due to the Kansas City operations.

 

Residential Video revenues increased $3,888, or 110%, during thecurrent year compared to the same prior year period.  In the California market, the Broadbandsegment experienced a 7% growth in Video RGUs due in part to demand for theCompany’s new product offerings and other enhanced services and features suchas HD DVR and HDTV.  In addition,effective January 2008 video rates increased 10%.  The remaining increase was the result of theKansas City operations.

 

The increase in residential voice revenues was due in part to thegrowth in voice RGUs, of which 6% were in the California market.  In March 2008, the Company launched itsnew Voice over Internet Protocol (“VoIP”) Digital Phone product in Californiamarket, including the Telecom service territory.  The Company anticipates that this offeringwill result in elevated take rates and an increase in broadband residentialtriple-play RGUs.

 

 

21

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Business revenues increased $2,267, or 56%, during the current yearcompared to the same prior year period.  Business customers increased 54% as of March 31,2008 compared to the same period in 2007. The Company continues to expand its business broadband services inCalifornia; however a significant portion of the business revenue growth wasdue to the Kansas City operations.

 

*Operating Expenses*

 

Total operating expensesin the Broadband segment increased $7,163 during the quarter ended March 31,2008 compared to the same period in 2007. The increase in operating expenses was offset in part by a decline inthe costs related to the Plans of $465 for the quarter ended March 31,2008, respectively, as described in the Consolidated Overview section above.

 

Cost of services andproducts (exclusive of depreciation and amortization) increased $4,546 duringthe quarter ended March 31, 2008 compared to the same prior yearperiod.  The increase in costs in thecurrent year period was primarily due to Kansas City operations, contributingapproximately $4,100 in additional expenses. The increase was also attributable to (i) an increase inprogramming, transport and access costs related to the growth in Broadbandsubscribers, residential broadband Revenue-generating units and businesscustomers and (ii) an increase in maintenance costs corresponding to theincreased subscriber count, as well as the expanded network footprint.

 

Customer operationsexpense increased $996 during the quarter ended March 31, 2008 compared tothe same prior year period.  Although theCompany experienced modest increases in sales and advertising costs to promotenew and existing product offerings, substantially all of the increase in thecurrent year period was attributable to Kansas City operations.

 

General and administrative expense increased $1,621 for the quarterended March 31, 2008 compared to the same period in 2007 primarily due toin (i) information technology costs related to system enhancements, (ii) salariesand wages for employees, including our Kansas City operations, to providecustomer and other administrative services and (iii) consulting andadvisory fees related to strategic initiatives and the outsourcing of certainnon-core processes. In 2008, Kansas City operations contributed approximately$512 to the increase in general and administrative expenses.

 

Depreciation andamortization increased $3,091 for the quarter ended March 31, 2008compared to the same period in 2007 due to the continued expansion of thebroadband network and success based capital projects.  Kansas City operations increased depreciationand amortization expense by approximately $2,040 in the current year.

 

**Telecom**

** **
| ** **                                        | ** ** | **Quarter Ended March 31,** | ** ** |
|---------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                        | ** ** | ** **                                 | ** ** | ** ** | ** ** | **$** | ** ** | **%** | ** ** |
| ** **                                        | ** ** | **2008**                                   | ** ** | **2007** | ** ** | **Change** | ** ** | **Change** | ** ** |
|                                              |       |                                       |       |   |   |   |   |   |   |
| Residential                                       |       | $                                          | 8,902      |   | $ | 10,543 |   | $ | (1,641 | ) | (16)% |   |
| Business                                          |       | 9,047                                      |       | 9,217 |   | (170 | ) | (2) |   |
| Access                                            |       | 6,342                                      |       | 6,382 |   | (40 | ) | (1) |   |
| Other                                             |       | 287                                        |       | 219 |   | 68 |   | 31 |   |
| Total  operating revenues from external customers |       | 24,578                                     |       | 26,361 |   | (1,783 | ) | (7) |   |
| Intersegment  revenues                            |       | 4,343                                      |       | 4,434 |   | (91 | ) | (2) |   |
| Operating  expenses*                              |       | 15,016                                     |       | 15,552 |   | (536 | ) | (3) |   |
| Depreciation  and amortization                    |       | 3,668                                      |       | 5,650 |   | (1,982 | ) | (35) |   |
| Income  from operations                           |       | 10,237                                     |       | 9,593 |   | 644 |   | 7 |   |
| Income  from continuing operations                |       | $                                          | 5,841      |   | $ | 5,873 |   | $ | (32 | ) | (1)% |   |

 

----

*Exclusive ofdepreciation and amortization

 

 

22

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*OperatingRevenues*

 

Operating revenues from external customers in the Telecom segmentdecreased $1,783, or 7%, during the quarter ended March 31, 2008 comparedto the same period in 2007. SureWest Telephone continues to experiencedecreases in residential revenue due to competition from wireless, wirelinecompetitors and cable providers, contributing to an approximate 14% decline invoice RGUs.  In addition, somecompetitors initiated marketing campaigns to include voice services targeteddirectly to residential subscribers within SureWest Telephone’s servicearea.  In an effort to mitigate futurevoice services and operating revenue declines, the Company now offers variousflat-rate and bundled voice service packages. In March 2008, the Companyalso began offering VoIP phone service to customers within the Telecom servicearea through its SureWest Broadband segment. As a result, the Company expects a portion of voice revenue to continueto migrate to the VoIP service being offered by the Company’s Broadbandsegment.

 

Business revenue has also been impacted by the same competitivepressures previously discussed, which has caused a 3% decline in businesscustomers.  However, the decline inbusiness revenues was partially offset by continued strong demand for dataservices.

 

Access revenues, whichincludes switched access revenue, interstate common line (“CL”) revenue anddraws from the California High Cost Fund (“CHCF”) have decreased by $40 duringthe quarter ended March 31, 2008 compared to the same prior yearperiod.  As anticipated, subsidiesreceived from the CHCF have decreased, as discussed in the *RegulatoryMatters* section below. Switched access revenues also declined with the reduction of residentialvoice services.  These decreases werepartially offset by an increase in interstate CCL settlements received from NationalExchange Carrier Association (“NECA”) as a result of an increase in regulatorycosts and associated rate base (see *Regulatory Matters*sectionbelow).

 

*OperatingExpenses*

 

Operating expenses forthe Telecom segment decreased $536 during the quarter ended March 31, 2008compared to the same period in 2007.  The decrease was due primarily to$614 in cost savings realized through the Plans, during the quarter ended March 31,2008, as described in the Consolidated Overview section above.  Thedecrease was offset by additional costs associated with (i) a shift inTelecom resources that reduced operating costs allocated to other segments and (ii) anincrease in information technology costs.

 

Cost of services andproducts (exclusive of depreciation and amortization) decreased $522 due mainlyto the decline in local and long distance expenses as a result of the decreasein (i) residential and business services and (ii) long distanceminutes of use.

 

General and administrative expense increased $184 during the quarterended March 31, 2008 compared to the same period in 2007.  The increase in the current year three-monthperiod was due to an increase in information technology costs associated withvarious system enhancements and automation projects and related maintenancecontracts.  The increase was partiallyoffset by lower legal fees as a result of additional costs incurred in thefirst quarter of 2007 associated with various regulatory matters.

 

Depreciation and amortization decreased $1,982 during the quarter endedMarch 31, 2008 compared to the same period in 2007 due primarily to (i) asignificant portion of computer software becoming fully depreciated during thefirst quarter of 2007 and (ii) a majority of the circuit and digitalswitch equipment becoming fully depreciated during the third quarter of 2007.

 

*RegulatoryMatters*

 

Revenues from services subject to regulation constituted approximately43% and 56% of the Company’s total operating revenues for the quarters ended March 31,2008 and 2007, respectively. Those revenues, which include local service,network access service and toll service, are derived from various sources,including:

 

·                  business and residential subscribers, for basicexchange services;

·                  surcharges, mandated by State Commissions;

·                  long distance carriers, for network access service;

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

·                  interstate pool settlements from;

·                  support payments from federal or state programs, and

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

 

 

23

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

 

Certainof the Company’s rates are subject to regulation by the FCC and StateCommissions. Intrastate service rates are subject to regulation by StateCommissions. With respect to toll calls initiated by interexchange carriers’customers, the interexchange carriers are assessed access charges based ontariffs filed by the Company. Interstate access rates and resultant earningsare subject to regulation by the FCC. With respect to interstate services,SureWest Telephone has detariffed its DSL services and files its own tariffwith the FCC for switched and special access services. For interstate CLcharges, SureWest Telephone concurs with tariffs filed by the NECA. Pending andfuture regulatory actions may have a material impact on the Company’sconsolidated financial position and results of operations.

 

*FCC Matters*

 

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

 

As a result of periodiccost separation studies required by the FCC, SureWest Telephone changed itsestimates for certain NECA CL accounts receivable balances related to currentand prior year monitoring periods.  Thesechanges in estimates increased the Company’s consolidated revenues by $118 andnet income by $81 ($0.01 per share), during the quarter ended March 31,2007 (none in 2008).

 

*California Public UtilityCommission (“CPUC”) Matters*

 

In 2004, the Companyentered into a settlement agreement (the “Settlement Agreement”), which wasultimately approved by the CPUC, to resolve an ongoing regulatory proceedingwith various parties.  The SettlementAgreement resolved past sharing liabilities and suspended future sharingrequirements in the intrastate jurisdiction. In accordance with the Settlement Agreement, SureWest Telephone isreturning approximately $6,500 (“Dividend A”), plus interest at the 90-daycommercial paper rate for non-financial institutions, which was 2.35% as of March 31,2008, and an imputed rate of 3.15%, to its end users through a consumerdividend and is recorded as a reduction of the Company’s contractual shareableearnings obligations over a period of approximately four years, which began January 1,2005.  In addition, SureWest Telephonepaid a one-time consumer dividend of $2,600 (“Dividend B”) to consumers tosettle the monitoring periods 2000 to 2004 payable over approximately twoyears, which began January 1, 2005 and was completed in March 2007.  At March 31, 2008, the aggregatecontractual shareable earnings obligation for Dividend A was $1,179 (which isnet of an unamortized discount pertaining to imputed interest of $17 at thatdate).

 

The following tablesummarizes the amounts returned to end users through consumer dividends for thequarters ended March 31, 2008 and 2007:

 
| ** ** | ** ** | **Quarter Ended** | ** ** |
|------------|------------|------------------------|------------|
| ** ** | ** ** | **March 31,**     | ** ** |
| ** ** | ** ** | **2008**               | ** ** | **2007** | ** ** |
| Dividend A |       | $                      | 431        |   | $ | 486 |   |
| Dividend B |       | —                 |       | 210 |   |
| Total      |       | $                      | 431        |   | $ | 696 |   |

 

 

24

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As part of theSettlement Agreement, SureWest Telephone was to implement an additional annualconsumer dividend of $1,300 on January 1, 2007 to end-users receivingSureWest Telephone services subject to sharing on or after that date.  However, this consumer dividend was subjectto reduction based upon the results of other pending regulatoryproceedings.  Pursuant to a CPUC order inDecember 2006, beginning in 2007 this dividend was offset by a reductionin the Company’s interim draw from the (CHCF). The interim draw from the CHCF was previously authorized by a CPUCdecision in August 2005 which allowed SureWest Telephone to continuereceiving $11,500 annually from the CHCF to offset its intrastate regulatedoperating expenses on an interim basis. In August 2006, the Companyrequested permission from the CPUC to implement a graduated phase-down of itsannual $11,500 interim draw. In December 2006, the CPUC authorized theCompany to offset its interim draw from the CHCF with the aforementioned $1,300consumer dividend.  In September 2007,the CPUC issued Decision 07-09-002 which provides for SureWest Telephone tophase-down its annual CHCF draw over a five-year period, to end on January 1,2012.  The phase-down of the interim drawbegan in January 2007, initially reducing the annual $11,500 interim drawby the aforementioned $1,300 consumer dividend to $10,200. Starting in 2008,the interim CHCF draw is being incrementally reduced by approximately $2,000annually.

 

In 2006, the CPUCinitiated a Rulemaking pursuant to Senate Bill 1276 commencing a review of theCHCF-B program.  The goals of this reviewincluded, but were not limited to, adjusting universal service rate supportpayments to reflect updated operating costs, evaluating whether CHCF-B supportlevels can be reduced and made more predictable and making the currentadministration of the program more efficient. Comments in the CHCF-B rulemaking were filed in September 2006 andin April 2007.  In September 2007,the CPUC approved a decision reforming the industry CHCF-B program whichsignificantly reduced the CHCF-B program fund and its associatedsurcharge.  The decision reduces thecurrent industry CHCF-B funding level by approximately 74% and orders thereduction to be transitioned over an 18-month period, which began in January 2008and will end in July 2009.  TheCompany received approximately $600 in 2007. Based on this level of receipts and the threshold transition scheduleoutlined in the decision, the Company’s CHCF-B fund will be reducedapproximately 91% and 100% in July 2008 and January 2009,respectively.  Accordingly, the Company’sgeneral CHCF-B fund draw will be approximately $323 and $0 in 2008 and 2009,respectively.  Furthermore, the decisionlifts the freeze on basic residential rates beginning in January 2009;however, the decision establishes a Phase II of the proceeding in which theCPUC may determine the amount by which the Company may increase basicresidential rates over time, among other issues.  The Company will continue to evaluate thismatter and the potential effects on its consolidated financial position andresults of operations.

 

In an ongoing proceedingrelating to the New Regulatory Framework (under which SureWest Telephone hasbeen regulated since 1996), the CPUC adopted decision 06-08-030 in 2006, whichgrants carriers broader pricing freedom in the provision of telecommunicationsservices, bundling of services, promotions and customer contracts.  This decision adopted a new regulatory framework,the Uniform Regulatory Framework, which among other things (i) eliminatesprice regulation and allows full pricing flexibility for all new and retailservices except lifeline and basic residential services which will remaincapped at current levels until January 1, 2009, (ii) allows new formsof bundles and promotional packages of telecommunication services, (iii) allocatesall gains and losses from the sale of assets to shareholders and (iv) eliminatesalmost all elements of rate of return regulation, including the calculation ofshareable earnings.

 

*OtherRegulatory Matters*

 

There are a number of other regulatory proceedings occurring at thefederal and state levels that may have a material impact on the Company. Theseregulatory proceedings include, but are not limited to, consideration ofchanges to the jurisdictional separations process, the interstate universalservice fund, intercarrier compensation access charge reform, broadbanddeployment, the regulation of local exchange carriers and their competitors,including providers of Internet protocol-enabled services and the provision ofvideo services and competition in the market. The outcomes and impact on theCompany’s operations of these proceedings and related court matters cannot bedetermined at this time.

 

The regulatory proceedings occurring at the state and federal levelsdescribed above may also authorize new competition in the provision ofregulated services and change the rates and rate structure for regulatedservices furnished by the Company, the effects of which on the Company cannotyet be determined.

 

 

25

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**Non-operatingItems**

 

*OtherIncome and Expense, Net*

 

Consolidated interest income decreased $163 during the quarter ended March 31,2008 compared to the same period in 2007 due to the use of cash and short-terminvestments to fund the acquisition of Everest. Consolidated interest expenseincreased $1,327 during the current year quarter compared to the same period in2007 primarily due to increased principal balances.  The increase in interest expense was offsetin part by the receipt of a $400 patronage dividend, which was based on theCompany’s share of the net income earned by CoBank, ACB.  The Company’s policy is to apply patronage dividendsearned against interest expense.

 

*Income**Taxes*

 

Income taxes increased$72 for the quarter ended March 31, 2008 compared to the same period in2007. The effective federal and state income tax rates for continuingoperations were approximately 105.0% and 20.8% for the three-month periodsended March 31, 2008 and 2007, respectively.  The increase in income tax expense and taxrates in the current year period compared to the prior year period was dueprimarily to an increase in deferred state income tax expense related to statetax apportionment changes.

 

**Liquidityand Capital Resources**

 

As reflected in theCondensed Consolidated Statements of Cash Flows, net cash provided by operatingactivities was $11,396 for the three months ended March 31, 2008 dueprimarily to (i) non-cash charges of $12,184 consisting primarily ofdepreciation and amortization due to capital investments principally in theBroadband segment and (ii) a decrease in trade and miscellaneous accountsreceivable of $3,879 due primarily to the timing in the collection ofreceivables from regulatory agencies. Cash provided by operating activities was offset in part by a decreasein (i) accrued liabilities of $2,930 related to the timing of outstandingobligations for inventory and capital project expenditures and (ii) accruedcompensation of $2,100 as a result of the payment during the current quarter ofannual incentive compensation.

 

Net cash used ininvesting activities for the three months ended March 31, 2008 was$183,377 primarily attributable to the acquisition of Everest for $181,646, netof cash acquired. Capital expenditures pertaining to ongoing plant constructionprojects of $18,270 were offset by the proceeds from the sale of short-terminvestments of $16,650.

 

Net cash provided byfinancing activities was $148,569 for the three months ended March 31,2007 due primarily to the proceeds from short and long-term borrowings of$156,000 offset by cash payments for dividends of $3,563 and $3,867 for therepurchase of the Company’s common stock.

 

The Company’s working capital deficit was $36,629 at March 31,2008.  The decrease in working capitalduring the three months ended March 31, 2008 was primarily attributable tothe acquisition of Everest in February 2008 for $182,100 as discussed inNote 2. The purchase of Everest resulted in a decrease in cash, cashequivalents, short-term investments and an increase in debt, including acurrent portion of $60,000, as described below. In addition, principal paymentson the Company’s Series B Notes, which will commence in March 2009,are classified as short term thus further reducing working capital at March 31,2008.

 

In February 2008, the Company entered into a Second Amended andRestated Credit Agreement (“Credit Agreement”) to restate and replace thecredit agreement entered into by the Company in May 2007. The CreditAgreement terms, among other things: (i) revise the amount available underthe Term Loan A facility from $40,000 to $120,000, (ii) issue a 1-year$60,000 Term Loan B facility and (iii) modify certain financial covenants.No significant changes were made to the existing Revolving Loan facility. Thecredit facilities were used in part to acquire Everest and are available forgeneral corporate purposes. The Term Loan A facility and the Revolving Loanfacility are due and payable on May 1, 2012.

 

The Term Loan A facility, prior to this new agreement, which had$40,000 outstanding, was extinguished resulting in a loss on extinguishment ofdebt of $607, which was recorded in the first quarter of 2008. $40,000 of thenew borrowings will bear interest at a fixed rate of 6.29%. The remaining$80,000 of the new borrowings will bear interest based, at the Company’selection, on the London interbank offered rate or CoBank’s prime rate plus, in eithercase, an applicable margin. The Term Loan B facility is due and payable on February 12,2009 and includes automatic increases to the applicable interest margins on May 31,2008 and August 12, 2008 unless certain amounts are repaid prior to thosedates. As of March 31, 2008, $120,000, $60,000, and $16,000 wereoutstanding on the Term Loan A, Term Loan B, and Revolving facilities,respectively. As of December 31, 2007, $40,000 was outstanding on the TermLoan A facility and no amounts were outstanding under the Revolving facility.

 

 

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There have been nosignificant changes to our “Contractual Obligations” table in Part II,Item 7, “Management’s Discussion and Analysis of Financial Condition andResults of Operations” included in the Company’s 2007 Annual Report on Form10-K, other than those resulting from changes in the amount of outstandingdebt. As of the quarter ended March 31, 2008, debt increased by $156,000,as compared to December 31, 2007, from $121,818 to $277,818.  The increase in long-term and short-term debtwas used primarily to fund the acquisition in February 2008 and generalcorporate purposes.  As of March 31,2008, future debt payments plus interest were as follows:

 
| ** **      | ** ** | **2008** | ** ** | **2009** | ** ** | **2010** | ** ** | **2011** | ** ** | **2012** | ** ** | **Thereafter** | ** ** | **Total** | ** ** |
|-----------------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------------|------------|-----------|------------|
| Short-term debt |       | $        | 2,725      |     | $          | 60,389   |       | $        | —     |     | $          | —         |       | $         | —     |   | $ | — |   | $ | 63,114 |   |
| Long-term debt  |       | 14,452   |       | 26,453   |       | 25,655   |       | 24,858   |       | 155,359  |       | 16,150         |       | 262,927   |       |
|                 |            |          |            |          |            |          |            |          |            |          |            |                |            |           |            |  |  |  |  |  |  |  |

 

The Company’s Series A and Series B Senior Notes and theCredit Agreement contain financial and operating covenants that may restrict,among other things, repurchase of the Company’s capital stock, the making ofcertain other restricted payments and the incurrence of additionalindebtedness. The covenants also require the Company to maintain certainfinancial ratios and minimum levels of tangible net worth. At March 31,2008 and December 31, 2007, retained earnings of approximately $103,647and $111,003, respectively were available for the payments described above.

 

In January 2008, the Company entered into a definitive agreementto sell the operating assets of its Wireless business, SureWest Wireless, toVerizon Wireless for an aggregate cash purchase price of $69,000, subject to apost-closing working capital adjustment. The Company completed the transactionto sell the operating assets of its Wireless business on May 9, 2008.  Proceeds from the sale of the Wirelessbusiness will, in part, be used to repay a portion of the Credit Agreement.

 

The Company had cash,cash equivalents and short-term investments March 31, 2008 of $8,360. TheCompany’s most significant use of funds in the remainder of 2008 is expected tobe for (i) budgeted capital expenditures of up to $60,000, (ii) scheduledpayments of long-term debt of $3,636 and (iii) the payment of a cashdividend of up to approximately $3,600 (see the discussion below regardingfuture dividend distributions). As discussed below, throughout the year theCompany may repurchase shares of its common stock in the open market at theprevailing market price up to an amount authorized by the Board of Directors. Asubstantial portion of the 2008 budgeted capital expenditures is at thediscretion of the Company and dependent upon the Company’s working capitalposition, operating cash flows and ability to borrow. The Company can modifyits planned construction and commitments if the results of operations oravailable capital so require. The Company is required to comply with its cablefranchise agreements to continue its build-out in the franchise areas. TheCompany believes given its financial position and debt-to-equity position, ithas substantial additional short and long-term borrowing capacity. Accordingly,the Company believes that its working capital position, the proceeds from thesale of SureWest Wireless, operating cash flows from the Company and itsborrowing capacity are sufficient to satisfy its liquidity requirements for thenext twelve months, while maintaining adequate cash and cash equivalents.

 

In April 2008, the Company’s Board of Directors announced thedecision to discontinue dividend payments for the foreseeable future in aneffort to foster the Company’s growth strategy by reinvesting the approximate $14,500 of annual dividend distributions back into the Company.  The cash dividend of $0.25 per share, payableon June 16, 2008 to shareholders of record at the close of business on May 15,2008, will be the last dividend paid to shareholders in the foreseeablefuture.  The reinstatement of futuredividend payments is at the discretion of the Company’s Board of Directors.

 

The Company’s Board of Directors has authorized the repurchase of up to2.5 million shares of the Company’s common stock. Shares are purchasedfrom time to time in the open market or through privately negotiatedtransactions, subject to overall financial and market conditions. Through March 31,2008, approximately 1.5 million shares of common stock had beenrepurchased. As of March 31, 2008, the Company had remaining authorizationfrom the Board of Directors to repurchase approximately 1.0 millionadditional outstanding shares.   The purchaseof common shares did not have substantive effect on the average number ofcommon shares outstanding or the calculation of basic and diluted earnings pershare for the quarters ended March 31, 2008 or 2007.

 

At March 31, 2008, the Company held one auction rate security (“ARS”)with an estimated fair value of $3,260. This ARS is collateralized by studentloans that are guaranteed primarily by an insurance company and partially bythe Federal Family Education Loan Program (“FFELP”). The monthly auctions havehistorically provided a liquid market for these securities. The ARS in theCompany’s portfolio had a successful auction in January 2008 however,since February 2008 there has not been a successful auction for thisARS.  The Company obtained a valuationfrom an investment advisor, which used a discounted cash flow model to estimatethe fair value of the ARS at March 31, 2008. The significant inputs that were used in the model were the creditquality of the issuer, the percentage and the types of guarantees (such as 

 

 

27

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an insurance company and FFELP), interest rates, expected holdingperiod of the ARS and an illiquidity discount factor. Changes in theassumptions of the model based on dynamic market conditions could have asignificant impact on the valuation of this security, which may lead theCompany in the future to take an impairment charge for this security.  Based on the Company’s review of the model,the inputs to the model and the assessment of fair value, as of March 31,2008, the Company determined there was a decline in the fair value of its ARSinvestment of approximately $440, which was deemed temporary as the Companycurrently has the ability and intent to hold this ARS investment until arecovery of the auction process or until maturity. As of March 31, 2008,the Company reclassified the entire ARS investment balance from short-terminvestments to long-term other assets on its condensed consolidated balancesheet.

 

As required, the Company contributes to the Pension Plan and OtherBenefits Plans, which provide retirement benefits to all employees.Contributions are intended to provide for benefits attributed to service todate. The Company’s funding policy is to contribute annually an actuariallydetermined amount consistent with applicable federal income tax regulations. Asdiscussed in the Consolidated Overview section above, the Company stoppedaccruing benefits for active participants effective April 1, 2007. TheCompany believes that future funding requirements will decrease significantlyas a result of the freeze of the Plans. The Company will continue to evaluatethe future funding requirements of the Plans and fund them as deemed necessary.The Company does not expect to make any contributions during 2008. SeeNote 6 of the Notes to the Condensed Consolidated Financial Statements fora more detailed discussion on the Company’s Pension and Other Benefits Plans.

 

As discussed more fully in the *RegulatoryMatters* within the Telecom Segment Results of Operations sectionabove, the CPUC issued certain final decisions which will (i) phase downthe Company’s current annual CHCF draw of $11,500, over a 5-year period endingon January 1, 2012 and (ii) decrease the CHCF-B industry funding level,which will reduce the Company’s current annual receipt of approximately $600 tozero over an 18-month period beginning in July 2008 and ending in 2009.

 

The Company had a liability of $330 for unrecognized tax benefits as ofMarch 31, 2008 for which it cannot make a reasonable estimate of theperiod of related future payments, if any.

 

**CriticalAccounting Estimates**

 

The Company’s condensedconsolidated financial statements and accompanying notes are prepared inaccordance with accounting principles generally accepted in the United States.Preparing financial statements requires management to make estimates andassumptions that affect the reported amounts of assets, liabilities, revenue,and expenses. These estimates and assumptions are affected by management’sapplication of accounting policies. The Company’s judgments are based onhistorical experience and on various other assumptions that are believed to bereasonable under the circumstances, the results of which form the basis formaking estimates about the carrying values of assets and liabilities that arenot readily apparent from other sources. For a full discussion of ouraccounting estimates and assumptions that the Company has identified ascritical in the preparation of our condensed consolidated financial statements,please refer to our 2007 Annual Report on Form 10-K.

 

**Recent Accounting Pronouncements**

 

**Recently IssuedAccounting Pronouncements**

** **

In December 2007,the FASB issued SFAS No. 141(R), *BusinessCombinations* (“SFAS No. 141(R)”), which establishes principlesand requirements for how the acquirer:  (a) recognizes and measuresin its financial statements the identifiable assets acquired, the liabilitiesassumed and any noncontrolling interest in the acquiree; (b) recognizesand measures the goodwill acquired in the business combination or a gain from abargain purchase; and (c) determines what information to disclose toenable users of the financial statements to evaluate the nature and financialeffects of the business combination.  SFAS No. 141(R) requirescontingent consideration to be recognized at its fair value on the acquisitiondate and, for certain arrangements, changes in fair value to be recognized inearnings until settled.  SFAS No. 141(R) also requiresacquisition-related transaction and restructuring costs to be expensed ratherthan treated as part of the cost of the acquisition.  SFAS No. 141(R) appliesprospectively to business combinations for which the acquisition date is on orafter the beginning of the first annual reporting period beginning on or after December 15,2008.  The Company is currently evaluating the impact this statement willhave on its financial position and results of operations, however, the effectwill be dependent upon the acquisitions that are made in the future.

 

 

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**Recently Adopted AccountingPronouncements**

 

In September 2006,the FASB issued SFAS No. 157, *Fair Value Measurements*,which defines fair value, establishes a framework for measuring fair value ingenerally accepted accounting principles and expands disclosures about fairvalue measurements.  In February 2008,the FASB issued FASB Staff Position No. FAS 157-2, *EffectiveDate of FASB Statement No. 157*(the “FSP”).  The FSP amends SFAS No. 157 to delay theeffective date for nonfinancial assets and nonfinancial liabilities, except foritems that are recognized or disclosed at fair value in the financialstatements on a recurring basis, at least annually.  SFAS No. 157, as amended, is effectivefor financial statements issued for fiscal years beginning after November 15,2008, and for interim periods within those fiscal years. Effective for 2008 theCompany adopted SFAS No. 157, except as it applies to those non-financialassets and non-financial liabilities as noted in the FSP.  The partial adoption of SFAS No. 157 didnot have a material impact on the Company’s condensed consolidated financialstatements. For a more detailed discussion of the effects of applying theprovisions of SFAS No. 157 refer to the Fair Value of FinancialInstruments section of Note 1.

 

In February 2007,the FASB issued SFAS No. 159, *The Fair Value Option forFinancial Assets and Financial Liabilities.* This standard permits an entity to elect tomeasure many financial instruments and certain other items at fair value thatare not currently required to be measured at fair value. SFAS No. 159 alsoestablishes recognition, presentation and disclosure requirements.  The Company adopted SFAS No. 159effective January 1, 2008 and has not elected the fair value option forits financial instruments. The adoption of SFAS No. 159 did not have amaterial effect on the Company’s condensed consolidated financial statements.

 

## **In June 2007,the Emerging Issues Task Force (“EITF”) ratified EITF Issue No. 06-11, *Accounting for Income Tax Benefits of Dividends on Share-Based Payment*.  EITF No. 06-11 provides that realizedincome tax benefits from dividends or dividend equivalents that are charged toretained earnings and are paid to employees for equity classified nonvestedequity shares, nonvested equity share units and outstanding equity shareoptions should be recognized as an increase in additional paid-in capital.  The Company adopted EITF Issue No. 06-11effective January 1, 2008.  Theadoption of this standard did not have a material impact on the Company’sconsolidated financial position and results of operations.**

## ** **

**Regulatoryand Legal Matters**

 

Significant portions ofthe Company’s telephone rates and charges are subject to regulation by the FCCand State Commissions.  Rates and chargesare based on various tariffs filed by SureWest and others, including thosefiled by the NECA for CL charges. Pending and future regulatory actions, with respect to these and othermatters and the filing of new or amended tariffs, may have a material impact onthe Company’s consolidated financial position and results of operations.

 

The Company’s financialcondition and results of operations have been and will be affected by recentand future proceedings before State Commissions and FCC. Pending before the FCCand State Commissions are proceedings, which are considering:

 

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

 

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

 

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

 

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

 

·                              the regulated rates and earnings ofSureWest Telephone.

 

There are a number ofpending and anticipated other regulatory proceedings occurring at the federaland state levels that may have a material impact on the Company. Theseregulatory proceedings also include newer issues, such as consideration ofbroadband deployment and regulation of Internet Protocol-enabled services. Theoutcomes and impact of these proceedings and related court matters on theCompany’s operations and the Company cannot be determined at this time.

 

 

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**ITEM3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.**

 

The Company’s 2007 AnnualReport on Form 10-K contains certain disclosures about the Company’slimited exposure to market risk for changes in interest rates.  There havebeen no material changes to the information provided which would requireadditional disclosures as of the date of this filing except as noted below.

 

At March 31, 2008, the Company held one auction rate security (“ARS”)with an estimated fair value of $3,260, which was measured using Level 3 inputsunder the requirements of SFAS No. 157. This ARS is collateralized by student loans that are guaranteedprimarily by an insurance company and partially by the Federal Family EducationLoan Program (“FFELP”). The monthly auctions have historically provided aliquid market for these securities. The ARS in the Company’s portfolio had asuccessful auction in January 2008 and as such, its fair value would havebeen measured using Level 1 inputs at January 1, 2008. However, since February 2008,there has not been a successful auction for this ARS, therefore the Companytransferred this ARS from the Level 1 to the Level 3 category as of March 31,2008.

 

The Company obtained a Level 3 valuation from an investment advisor,which used a discounted cash flow model to estimate the fair value of the ARSat March 31, 2008.  The significantinputs that were used in the model were the credit quality of the issuer, thepercentage and the types of guarantees (such as an insurance company andFFELP), interest rates, expected holding period of the ARS and an illiquiditydiscount factor. Changes in the assumptions of the model based on dynamicmarket conditions could have a significant impact on the valuation of thissecurity, which may lead the Company in the future to take an impairment chargefor this security.  Based on the Company’sreview of the model, the inputs to the model and the assessment of fair value,as of March 31, 2008, the Company determined there was a decline in the fairvalue of its ARS investment of approximately $440, which was deemed temporaryas the Company currently has the ability and intent to hold this ARS investmentuntil a recovery of the auction process or until maturity. As of March 31,2008, the Company reclassified the entire ARS investment balance fromshort-term investments to long-term other assets on its condensed consolidatedbalance sheet.  The Company will continueto analyze its auction rate security each reporting period for impairment andmay be required to record an impairment charge in the statement of operationsif the decline in fair value is determined to be other than temporary.

 

**ITEM4.  CONTROLS AND PROCEDURES.**

 

**Evaluation of disclosure controls and procedures**

 

As of the end of theperiod covered by this report, the Company carried out an evaluation, under thesupervision and with the participation of our management, including the ChiefExecutive Officer and Chief Financial Officer, of the effectiveness of thedesign and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) underthe Securities Exchange Act of 1934, as amended). Based upon, and as of thedate of this evaluation, the Chief Executive Officer and Chief FinancialOfficer have concluded that, the Company’s disclosure controls and procedureswere effective, at the reasonable assurance level, to ensure that informationrequired to be disclosed by the Company in reports that it files or submitsunder the Securities Exchange Act is authorized, recorded, processed,summarized and reported within the time periods specified in the Securities andExchange Commission (the “SEC”) rules and forms.

 

Our assessment of theinternal control structure excluded Everest Broadband, Inc. (“Everest”) whichwas acquired on February 13, 2008. Everest had net revenues of $8,350 and total assets of $221,800, whichare included in the condensed consolidated financial statements of the Companyas of and for the three months ended March 31, 2008. Under guidelinesestablished by the SEC, companies are allowed to exclude acquisitions fromtheir assessment of internal control over financial reporting during the firstyear of an acquisition while integrating the acquired company.

 

The Company’s managementis responsible for establishing and maintaining adequate internal control overfinancial reporting. The Company’s internal control system was designed toprovide reasonable assurance to the Company’s management, Board of Directorsand Audit Committee regarding the reliability of financial reporting and thepreparation of published financial statements in accordance with generallyaccepted accounting principles.

 

 

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**Change in internal control overfinancial reporting**

 

During the quarter ended March 31,2008, the Company had the following changes relating to its controls overfinancial reporting:

 

·                                          In January 2008, the Companyannounced the sale of the assets of SureWest Wireless.  The Company has concluded that theannouncement of the sale and subsequent completion of the sale on May 9, 2008, hasnot materially affected the Company’s internal controls over financialreporting.

 

·                                          In February 2008, the Companycompleted its outsourcing of its payroll function.  As part of the outsourcing assessmentprocess, management has reviewed the controls in place at the outsourceproviders’ locations and evaluated the Company’s internal controls overfinancial reporting.  Based on the Company’s review and assessment of thecontrols over the payroll process, the Company has concluded that theoutsourcing of the payroll process has not materially affected the Company’sinternal controls over financial reporting.

 

·                                          As noted above, our assessment of theinternal control structure excluded Everest which was acquired on February 13,2008. Under guidelines established by the SEC, companies are permitted toexclude acquisitions from their assessment of internal control over financialreporting during the first year of an acquisition while integrating theacquired company.  During the integrationperiod management is developing additional controls to ensure the financialinformation provided by Everest Broadband, Inc. is complete and accuratein all material respects.

 

·                                          The Company’s Principal FinancialOfficer, Senior Vice President and Chief Financial Officer Philip A. Grybas,resigned from his position on March 25, 2008. The Company’s Vice President,Finance, Dan Bessey, assumed the position of the Principal Financial Officer onthat same date.  The Company believesthat the change in officers has not materially affected the Company’s internalcontrols over financial reporting or disclosure controls and procedures.  The Company will continue to monitor thischange in officers for any potential impacts to the Company’s internalcontrols.

 

·                                          Except as noted above, there have been noother changes in the Company’s internal control over financial reporting duringthe period ended March 31, 2008 that has materially affected, or isreasonably likely to materially affect, the Company’s control over financialreporting.

 

**Limitations on the effectivenessof controls**

 

The Company’s management is responsible for establishing andmaintaining adequate internal control over financial reporting. The Company’sinternal control system was designed to provide reasonable assurance to theCompany’s management, Board of Directors and Audit Committee regarding thereliability of financial reporting and the preparation of published financialstatements in accordance with generally accepted accounting principles.

 

 

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**PART II –OTHERINFORMATION**

 

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

 

Refer to Notes 4 and 7 toour condensed consolidated financial statements of the Quarterly Report on Form 10-Qfor a discussion of recent developments related to our regulatory and legalproceedings.

 

**ITEM 1A.       RISK FACTORS.**

 

There have been nomaterial changes from risk factors disclosed in the Company’s Annual Report on Form 10-Kfor the year ended December 31, 2007, identified in Item 1A of Part Iof the Form 10-K.

 

**ITEM 2.  UNREGISTERED SALES OF EQUITY SECURITIES ANDUSE OF PROCEEDS.**

** **
| **Period**                                      | ** ** | **(a)Total Number  of Shares  Purchased** | ** ** | **(b) Average  Price Paid  per Share** | ** ** | **(c) Total Number of  Shares Purchased as Part  of Publicly Announced  Plan** | ** ** | **(d) Shares Available  for Repurchase  under the Plan** | ** ** |
|-------------------------------------------------|------------|-----------------------------------------------------|------------|-------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------|------------|
| January 1, 2008  - January 31, 2008        |       | 125,574                                             |       | $                                                     | 13.56      |                                                                                                                   | 1,353,567  |                                                                              | 1,146,433  |   |
| February 1,  2008 - February 29, 2008 |       | 143,237                                             |       | $                                                     | 15.12      |                                                                                                                   | 1,496,804  |                                                                              | 1,003,196  |   |
| March 1,  2008- March 31, 2008        |       | —                                              |       | $                                                     | —     |                                                                                                                   | —     |                                                                              | 1,003,196  |   |

 

**ITEM 3.  DEFAULTS UPON SENIOR SECURITIES.**

 

Not applicable.

 

**ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS.**

 

Not applicable.

 

**ITEM 5.  OTHER INFORMATION.**

 

Not applicable.

 

 

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**ITEM 6.  EXHIBITS.**

 

(a)          Index to Exhibits.

 
| **Exhibit  No.** | ** ** | **Description**                                                                                                                                                                                                                                                                                                                                     | ** ** | **Method of Filing**       |
|------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------|
| 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  by reference |
| 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  by reference |
| 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  by reference |
| 4.1              |       | Amended and Restated  Rights Agreement (Filed as Exhibit 4.1 to Form 8-A/A filed  March 12, 2008 and as Exhibit 9.01 to Form 8-K filed  May 1, 2008)                                                                                                                                                                  |       | Incorporated  by reference |
| 10.1             |       | Second Amended and  Restated Credit Agreement dated as of February 13, 2008 among SureWest  Communications and CoBank, ACB (Filed as Exhibit 10.1 to Form 8-K  filed February 15, 2008)                                                                                                                                         |       | Incorporated  by reference |
| 10.2             |       | Change in Control  Agreement dated January 31, 2008 between Registrant and Steven C. Oldham  (Filed as Exhibit 10.11 to Form 10-K Annual Report of the  Registrant for the year ended December 31, 2007)                                                                                                                        |       | Incorporated  by reference |
| 10.3             |       | Change in Control  Agreement dated January 31, 2008 between Registrant and Officers (Filed  as Exhibit 10.12 to Form 10-K Annual Report of the Registrant for  the year ended December 31, 2007)                                                                                                                                |       | Incorporated  by reference |
| 10.4             |       | Asset Purchase  Agreement among SureWest Wireless, West Coast PCS LLC, SureWest  Communications and Cellco Partnership d/b/a Verizon Wireless dated  January 18, 2008 (Filed as Exhibit 2.1 to Form 8-K filed  January 22, 2008)                                                                                                |       | Incorporated  by reference |
| 10.5             |       | Purchase and Sale  Agreement among Everest Broadband, Inc., the Equity Holders of Everest  Broadband, Inc. and SureWest Communications dated December 6, 2007  (Filed as Exhibit 2.1 to Form 8-K filed December 7, 2007)                                                                                              |       | Incorporated  by reference |
| 10.6             |       | Severance Agreement  dated March 25, 2008 between SureWest Communications and Philip A. Grybas                                                                                                                                                                                                                                                      |       | Filed  herewith            |
| 31.1             |       | Certification of  Steven C. Oldham, President and Chief Executive Officer, as adopted pursuant  to Section 302 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                               |       | Filed  herewith            |
| 31.2             |       | Certification of Dan  T. Bessey, Vice President and Chief Financial Officer, as adopted pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                             |       | Filed  herewith            |
| 32.1             |       | Certification of  Steven C. Oldham, President and Chief Executive Officer, pursuant to 18  U.S.C. Section 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002                                                                                                                                                     |       | Filed  herewith            |
| 32.2             |       | Certification of Dan  T. Bessey, Vice President and Chief Financial Officer, pursuant to 18 U.S.C.  Section 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002                                                                                                                                                   |       | Filed  herewith            |

 

 

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**SIGNATURES**

 

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

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

 

 

Date: May 5, 2008

 

 

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