Mr. Mike Weaver reports

OTELCO REPORTS FIRST QUARTER 2011 RESULTS

Otelco Inc. has released its results for the first quarter ended March 31, 2011. Key highlights for Otelco include:

• Total revenues of $25.4-million for first quarter 2011;
• Operating income of $5.3-million for first quarter 2011;
• Adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) of $11.4-million for first quarter 2011.

"After record-breaking performance in 2010, we had a challenging start for 2011," said Mike Weaver, president and chief executive officer of Otelco. "While the expansion of our sales and marketing department is now complete, the process of hiring and training new staff was more time consuming than anticipated. In addition, the planned expansion of our CLEC services in Massachusetts and New Hampshire was delayed, but is now in progress. As a result of these delays and the increased costs associated with the expanded sales staff, first quarter results were below our expectations.

"Our cash position remains strong," continued Mr. Weaver. "We increased our cash for the quarter by $200,000 while at the same time making significant capital investments of $2.8-million in our business infrastructure in all of our service territories. This investment included a new soft switch in Alabama and the initial investments in Massachusetts for our CLEC expansion. In May we intend to make another voluntary repayment of senior debt of $400,000, representing a reduction of $11.5-million in the past two years.

"We remain committed to continuing the expansion of our CLEC services in New England, including our planned acquisition of Shoreham Telephone Company in Vermont," added Mr. Weaver. "In addition to the increase of approximately 5,000 access line equivalents, this acquisition will anchor our CLEC expansion into the fourth New England state. Our investment in the existing sales organization anticipated this addition.

"The recent outbreak of tornadoes in Alabama inflicted some damage to our outside plant facilities, but we do not anticipate any significant long-term effects on our operations," noted Mr. Weaver. "Restoration efforts were under way immediately after the storm subsided. We supplemented our Alabama work force with crews from our Missouri and Maine operations, as well as outside contractors, and were able to restore service to most of our customers within a week. The costs for the restoration should generally be covered by our insurance.

"The strength of our commitment to building value for and returning cash to our shareholders is unwavering, as evidenced by our 25th consecutive IDS dividend," Mr. Weaver concluded.

Distribution to income deposit securityholders

Each quarter, the board will consider the declaration of dividends during its normally scheduled meeting. For this quarter, the board is meeting on May 12, 2011. The scheduled interest and any dividend declared will be paid on June 30, 2011, to holders of record as of the close of business on June 15, 2011. The interest payment will cover the period from March 30, 2011, through June 29, 2011. Currently, it is anticipated that the company's dividends in 2011 will continue to be treated as a return of capital for tax purposes. The company has made 25 successive quarterly distributions of dividends and interest since its IDS units were originally offered to the public in December, 2004.

Financial discussion for first quarter 2011

Revenues

Total revenues decreased 1.6 per cent in the three months ended March 31, 2011, to $25.4-million from $25.8-million in the three months ended March 31, 2010. Declines from the traditional loss of RLEC voice-access-line-related revenues were not fully offset by continued growth in CLEC and cable television revenues.

Local services revenue decreased 1.9 per cent in the first quarter to $12-million from $12.2-million in the quarter ended March 31, 2010. A decrease of $300,000 in basic services revenue and an increase of $100,000 in hosted private-branch exchange revenue comprised the change. Network access revenue decreased 1.6 per cent in the first quarter to $7.9-million from $8-million in the quarter ended March 31, 2010. The decrease of $100,000 relates to lower NECA settlements. Cable television revenue in the three months ended March 31, 2011, increased 13.1 per cent to $800,000 from $700,000 in the same period in 2010. Growth in digital family packages of $100,000 and revenue of $100,000 associated with the conversion of the company's Missouri cable customers to satellite services were partially offset by a $100,000 decrease in basic cable. Internet revenue for the first quarter of 2011 decreased 1.6 per cent to stay at $3.5-million in both quarters ended March 31, 2011, and 2010. Growth in broadband data lines offset the loss of dial-up subscribers. Transport services revenue decreased 5.5 per cent to $1.3-million in the three months ended March 31, 2011, from $1.4-million for the same period in 2010. The decrease of $100,000 is due to pricing changes in the WAN transport market.

Operating expenses

Operating expenses in the three months ended March 31, 2011, increased 0.7 per cent to $20.1-million from $19.9-million in the three months ended March 31, 2010. Cost of services and products increased 3.9 per cent to $11-million in the quarter ended March 31, 2011, from $10.6-million in the quarter ended March 31, 2010. A non-recurring accrual for the Universal Service Fund costs, start-up network costs in New Hampshire, and increased employee and benefit costs accounted for the $400,000 increase in this category. Selling, general and administrative expenses increased 3 per cent to $3.3-million in the three months ended March 31, 2011, from $3.2-million in the three months ended March 31, 2010, primarily related to increased employee and benefit costs. Depreciation and amortization for first quarter 2011 decreased 5.9 per cent to $5.7-million from $6.1-million in first quarter of 2010. Amortization of intangible assets associated with the Country Road acquisition decreased $300,000, including contract and customer base intangible assets. The remaining decrease of $100,000 reflected lower depreciation of plant assets in Alabama, partially offset by an increase in depreciation in Missouri.

Interest expense

Interest expense increased 3 per cent to $6.2-million in the quarter ended March 31, 2011, from $6-million a year ago. The increase in interest expense is primarily driven by interest on the additional senior subordinated notes issued in the exchange of the company's Class B shares that occurred in June, 2010.

Change in fair value of derivatives

As a requirement of the existing senior debt, the company has two interest rate swap agreements intended to hedge changes in interest rates on its senior debt. The swap agreements do not qualify for hedge accounting under the technical requirements of Accounting Standards Codification 815. Changes in value for the two swaps are reflected in change in the fair value of derivatives on the income statement and have no impact on cash. Over the life of the swaps, the change in value will be zero, with no impact on adjusted EBITDA or operations. The value of the swap liability decreased $500,000 in the first quarter of 2011, compared with an increase in the value of the swap liability of $900,000 in the first quarter of 2010.

Adjusted EBITDA

Adjusted EBITDA for the three months ended March 31, 2011, was $11.4-million, compared with $12.3-million for the same period in 2010 and $12.8-million in the fourth quarter of 2010.

Balance sheet

As of March 31, 2011, the company had cash and cash equivalents of $18.5-million, compared with $18.2-million at the end of 2010. The company intends to make a $400,000 voluntary prepayment in May, 2011, on its senior long-term notes payable, reducing the balance to $162-million. This represents a combined reduction of $11.5-million since October, 2008. The first quarter distribution of $5.6-million in interest and dividends to the company's shareholders, and $300,000 in interest to the company's bondholders, occurred on March 30, 2011. This represents the 25th consecutive quarterly distribution since going public in December, 2004.

Capital expenditures

Capital expenditures were $2.8-million for the quarter as the company continues to grow and invest in its infrastructure. The company is adding a soft switch in Alabama, while continuing to expand its CLEC capabilities in Maine, Massachusetts and New Hampshire, enhancing DSL and wireless broadband capacity, and expanding IPTV capability in Alabama.

First quarter earnings conference call

Otelco has scheduled a conference call, which will be broadcast live over the Internet, on Thursday, May 5, 2011, at 11 a.m. ET. To participate in the call, participants should dial 719-325-2363 and ask for the Otelco call 10 minutes prior to the start time. Investors, analysts and the general public will also have the opportunity to listen to the conference call free over the Internet by visiting the company's website. To listen to the live call on-line, please visit the website at least 15 minutes early to register, as well as to download and install any necessary audio software. For those who cannot listen to the live webcast, a replay of the webcast will be available on the company's website for 30 days. A one-week telephonic replay may also be accessed by calling 719-457-0820 and using the passcode 1353922.

                        CONSOLIDATED STATEMENTS OF OPERATIONS                             
                                                                                               
                                                          Three months ended March 31,         
                                                              2010                2011          
                                                                                               
Revenues                                            $   25,794,209     $    25,392,000        
Operating expenses                                                                             
Cost of services and products                           10,610,193          11,020,212       
Selling, general and administrative expenses             3,230,996           3,327,057      
Depreciation and amortization                            6,084,291           5,724,018      
Total operating expenses                                19,925,480          20,071,287       
Income from operations                                   5,868,729           5,320,713      
Other income (expense)                                                                          
Interest expense                                        (5,988,642)         (6,170,131)     
Change in fair value of derivatives                       (886,170)            506,155     
Other income                                               358,832             349,349     
Total other expenses                                    (6,515,980)         (5,314,627)     
Income (loss) before income tax                           (647,251)              6,086   
Income tax (expense) benefit                               261,595              (1,432)  
Net income (loss) available to common stockholders  $     (385,656)    $         4,654    
Basic net income (loss) per share                   $        (0.03)    $             -  
Diluted net income (loss) per share                 $        (0.03)    $             -  
Dividends declared per share                        $         0.18     $          0.18   

We seek Safe Harbor.