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"Cannot be surprised" means "cannot be surprised".

Note that this will not help his teammates; they will still have to make Perception checks against the attacker's Stealth rolls (or the attacker rolls against Passive Perception if they aren't looking for trouble).

From the Compendium, Surprise Round:
Some combat encounters begin with a surprise round, which occurs if any creatures are caught completely off guard at the start of battle. If even one creature is surprised, a surprise round occurs, and all creatures that aren’t surprised act in initiative order during that round. Surprised creatures can’t act at all during the surprise round.

Special Rules Two special rules apply to the surprise round.

Limited Action: If a creature is not surprised, it can take only one of the following actions on its turn during the surprise round: a standard action, a move action, or a minor action. The creature can also take free actions, but it cannot spend an action point. During the surprise round (but not on its turn), the creature can take an immediate action, as well as opportunity actions. See “Action Types” for definitions of these terms.
    After every creature that is not surprised has acted, the surprise round ends, and creatures can act normally in subsequent rounds.

Surprised: If a creature is surprised, it can’t take any actions, not even free actions, during the surprise round. The creature also grants combat advantage. As soon as the surprise round ends, the creature is no longer surprised.

I'm still unclear on this, I should have been more clear in my question. 

A player in the party has Foresight: "You and allies within 5 cannot be surprised."

I understand what a surprise round is. 

Let me offer a scenario:   some hidden enemies await the party's arrival with readied attack actions.   As soon as the party is within range, their readied actions are triggered.  
1.   With the foresight ability, the attack goes off, but the party members still get their 1 action during that surprise round, and then both sides roll for initiative.
2.   Without the foresight ability, the attack goes off, and the party members get no action.   Then both sides roll for initiative.

Is that about right?

But according to Red_Tanker "If you have not spotted the enemies/ambush, but are not surprised due to foresight and your init beats the enemies init, then you know there is some threat, but not what/where it is."

This seems to be RAW, and I agree with his assessment.   Are you saying you would do it different?  I'm not looking for a debate, but rather the proper way to handle it.

As the DM, I might say something to the players like "Your intuition tells you something is amiss, and you feel threatened.   You do not see what is causing it."   The problem is, as per RAW, I shouldn't say this to them until after initiative is rolled (since there's no surprise round now).    Having them roll initiative kind of makes saying "you feel threatened" pointless.

Sigh, more confusion.

Jan 19, 2013 -- 8:42AM, thespaceinvader wrote:

I'm not sure, it's something I've thought long and hard about due to the presence of two Divine Oracles in our high-level LFR play, and not yet really resolved.  I like the 'spidey sense tingling' type explanation, but I've had a storming argument and later slightly less storming discussion with one particular player about how it's terrible and wrong for reasons I don't entirely understand, so YMMV.

My mileage doesn't vary much from that, sadly.

My preference would be to remove any "cannot be surprised" powers/feats from the game, or at least from PC selection.  As it stands, it's awkward at best.