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Otelco Reports First Quarter 2011 Results

Operating Expenses

Operating expenses in the three months ended March 31, 2011, increased 0.7% to $20.1 million from $19.9 million in the three months ended March 31, 2010. Cost of services and products increased 3.9% to $11.0 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 $0.4 million increase in this category. Selling, general and administrative expenses increased 3.0% 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% to $5.7 million from $6.1 million in first quarter 2010. Amortization of intangible assets associated with the Country Road acquisition decreased $0.3 million, including contract and customer base intangible assets. The remaining decrease of $0.1 million reflected lower depreciation of plant assets in Alabama partially offset by an increase in depreciation in Missouri.

Interest Expense

Interest expense increased 3.0% to $6.2 million in the quarter ended March 31, 2011, from $6.0 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 our 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 $0.5 million in first quarter 2011 compared to an increase in the value of the swap liability of $0.9 million in the first quarter of 2010.

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