8-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C.20549

FORM 8-K

CURRENT REPORT

PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

Date of report (Date of earliest event reported): November 2, 2010

Otelco Inc.

(Exact Name of Registrant as Specified in its Charter)

Delaware	1-32362	52-2126395
(State of Incorporation)	(Commission File Number)	(I.R.S. Employer Identification No.)

505 Third Avenue East, Oneonta, AL35121

(Address of Principal Executive Offices) (Zip Code)

Registrant's telephone number, including area code: (205) 625-3574

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):

o    Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

o    Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

o    Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

o    Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

Item 2.02  Results of Operations and Financial Condition.

On November 2, 2010, Otelco Inc. announced its results of operations for its third quarter ended September 30, 2010.  A copy of the press release is attached hereto as Exhibit 99.1 and is incorporated herein by reference.

Item 9.01  Financial Statements and Exhibits.

(d)           Exhibits

99.1         Press Release Dated November 2, 2010

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

	OTELCO INC.
	(Registrant)
Date: November 2, 2010
	By:	/s/ Curtis L. Garner, Jr.
		Name: Curtis L. Garner, Jr.
		Title: Chief Financial Officer

EX-99.1

Exhibit 99.1

Contact:	Curtis Garner
	Chief Financial Officer
	Otelco Inc.
	205-625-3571
	Curtis@otelcotel.com

Otelco Reports Third Quarter 2010 Results

ONEONTA, Alabama (Nov. 2, 2010) – Otelco Inc. (NASDAQ: OTT) (TSX: OTT.un), a wireline telecommunications services provider in Alabama, Maine, Massachusetts, Missouri, New Hampshire and West Virginia, today announced results for its third quarter ended September 30, 2010.  Key highlights for Otelco include:

●   Total revenues of $26.1 million for third quarter 2010.

●   Operating income of $6.7 million for third quarter 2010.

●   Adjusted EBITDA (as defined below) of $12.7 million for third quarter 2010.

“Otelco continues to deliver consistently positive financial results for its shareholders, as we grow our competitive base of customers,” said Mike Weaver, President and Chief Executive Officer of Otelco.   “Adjusted EBITDA for the quarter was $12.7 million, bringing the total for the year to $37.9 million.  Our successful rollout of the hosted PBX product was a key driver in CLEC voice line growth for the quarter, more than offsetting the decline in RLEC voice lines. We continued to upgrade cable services by adding Video on Demand in Alabama and expanded our wireless data offerings in Missouri. While the malaise in the economy impacts our local markets, we continue to focus on areas where we see opportunities for growth,” Weaver concluded.

“Our marketing and expansion efforts into northeastern Maine have proven successful and we plan to continue to increase our sales presence and service capability in this area.  In addition, OTT Communications is open for business in New Hampshire, with sales resources, network facilities and support capability in market,” added Weaver.

“Our cash position has increased $5.8 million during 2010 while we made capital investments in the business of $6.4 million, including $2.4 million during third quarter. These investments include expanding our technology infrastructure in New England to support additional customers and to control costs while also expanding our capability to offer new services in Alabama and Missouri,” said Weaver.  “We have notified our senior lenders that we plan to make a $7.5 million voluntary prepayment in early November, reducing our principal balance due in October 2013 to $161.0 million. We remain committed to building value for and returning cash to our shareholders, as evidenced by our twenty-third consecutive IDS dividend.”

Distribution to Income Deposit Security Holders

Each quarter, the Board will consider the declaration of dividends during its normally scheduled meeting.  For this quarter, the Board is meeting on November 16, 2010.  The scheduled interest and any dividend declared will be paid on December 30, 2010, to holders of record as of the close of business on December 15, 2010.  The interest payment will cover the period from September 30, 2010 through December 29, 2010.  Currently, it is anticipated that the Company’s dividends in 2010 will continue to be treated as a return of capital for tax purposes.  The Company has made twenty-three successive quarterly distributions of dividends and interest since its IDS units were originally offered to the public in December 2004.

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Otelco Reports Third Quarter 2010 Results

Page 2

November 2, 2010

Third Quarter 2010 Financial Summary
(Dollars in thousands, except per share amounts)
	Three Months Ended September 30,						Change
	2009			2010			Amount			Percent
Revenues	$	26,403		$	26,145		$	(258	)		(1.0	)%
Operating income	$	6,209		$	6,728		$	519			8.4	%
Interest expense	$	(6,469	)	$	(6,321	)	$	(148	)		(2.3	)%
Net income (loss) available to stockholders	$	(1,595	)	$	63		$	1,658			*
Basic net income (loss) per share	$	(0.13	)	$	0.00		$	0.13			*
Diluted net income (loss) per share	$	(0.13	)	$	0.00		$	0.13			*
Adjusted EBITDA(a)	$	12,784		$	12,671		$	(113	)		(0.9	)%
Capital expenditures	$	2,815		$	2,357		$	(458	)		(16.3	)%
* Not a meaningful calculation
	Nine Months Ended September 30,						Change
		2009			2010		Amount			Percent
Revenues	$	77,700		$	78,450		$	750			1.0	%
Operating income	$	16,390		$	19,608		$	3,218			19.6	%
Interest expense	$	(19,515	)	$	(18,489	)	$	(1,026	)		(5.3	)%
Net income (loss) available to stockholders	$	(2,918	)	$	95		$	3,013			*
Basic net income (loss) per share	$	(0.23	)	$	0.01		$	0.24			*
Diluted net income (loss) per share	$	(0.23	)	$	0.01		$	0.24			*
Adjusted EBITDA(a)	$	36,637		$	37,891		$	1,254			3.4	%
Capital expenditures	$	6,392		$	6,444		$	52			0.8	%
* Not a meaningful calculation
Reconciliation of Adjusted EBITDA to Net Income (Loss)
	Three Months Ended September 30,						Nine Months Ended September 30,
		2009			2010			2009			2010
Net income (loss)	$	(1,595	)	$	63		$	(2,918	)	$	95
Add:  Depreciation		3,417			3,264			10,594			10,164
Interest expense - net of premium		5,662			5,979			17,332			17,470
Interest expense - caplet cost		469			-			1,169			-
Interest expense - amortize loan cost		338			342			1,014			1,019
Income tax expense (benefit)		(144	)		136			(1,109	)		137
Change in fair value of derivatives		1,509			359			1,170			1,421
Loan fees		19			19			57			57
Amortization - intangibles		3,109			2,509			9,328			7,528
Adjusted EBITDA	$	12,784		$	12,671		$	36,637		$	37,891

 (a) Adjusted EBITDA is defined as consolidated net income (loss) plus interest expense, depreciation and amortization, income taxes and certain non-recurring fees, expenses or charges and other non-cash charges reducing consolidated net income.  Adjusted EBITDA is not a measure calculated in accordance with generally acceptable accounting principles (GAAP).  While providing useful information, Adjusted EBITDA should not be considered in isolation or as a substitute for consolidated statement of operations data prepared in accordance with GAAP.  The Company believes Adjusted EBITDA is useful as a tool to analyze the Company on the basis of operating performance and leverage.  The definition of Adjusted EBITDA corr esponds to the definition of Adjusted EBITDA in the indenture governing the Company’s senior subordinated notes and its credit facility and certain of the covenants contained therein.  The Company’s presentation of Adjusted EBITDA may not be comparable to similarly titled measures used by other companies.

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Otelco Reports Third Quarter 2010 Results

Page 3

November 2, 2010

Otelco Inc. - Key Operating Statistics
	At and for the				At and for the
	Year Ended				Three Months Ended						% Change
	December 31,				March 31,		June 30,		Sept. 30,		June 30-Sept. 30
	2008		2009		2010		2010		2010		2010
Otelco access line equivalents(1)		100,043		100,356		100,522		100,126		100,872		0.7	%
RLEC and other services:
Voice access lines		51,530		48,215		47,552		46,788		46,359		(0.9	)%
Data access lines		18,709		20,066		20,614		20,703		20,890		0.9	%
Access line equivalents(1)		70,239		68,281		68,166		67,491		67,249		(0.4	)%
Cable television customers		4,082		4,195		4,239		4,205		4,248		1.0	%
Additional internet customers		11,864		9,116		8,528		8,048		7,483		(7.0	)%
RLEC dial-up		1,183		786		656		551		447		(18.9	)%
Other dial-up		9,213		6,439		5,765		5,340		4,804		(10.0	)%
Other data lines		1,468		1,891		2,107		2,157		2,232		3.5	%
Revenues (dollars in millions)	$	54.4	$	61.3	$	14.7	$	14.4	$	14.5		0.7	%
CLEC:
Voice access lines		26,558		28,647		28,889		29,070		30,118		3.6	%
Data access lines		3,246		3,428		3,467		3,565		3,505		(1.7	)%
Access line equivalents(1)		29,804		32,075		32,356		32,635		33,623		3.0	%
Wholesale network connections		98,187		132,324		137,318		142,837		145,300		1.7	%
Revenues (dollars in millions)	$	22.7	$	42.5	$	11.1	$	12.1	$	11.6		(4.1	)%

 (1) We define access line equivalents as voice access lines and data access lines (including cable modems, digital subscriber lines, and dedicated data access trunks).

FINANCIAL DISCUSSION FOR THIRD QUARTER 2010:

Revenue

Total revenues decreased 1.0% in the three months ended September 30, 2010, to $26.1 million from $26.4 million in the three months ended September 30, 2009.  Continued CLEC growth in New England and gains in cable television revenue produced positive results which were offset by declines in RLEC subscribers.  Local services revenue grew 0.2%, remaining at $12.4 million.  Expansion of CLEC revenue produced a $0.3 million increase, offset by $0.3 million in lower RLEC basic service and toll revenues. Network access revenue decreased 5.2% in the third quarter to $8.1 million from $8.5 million in the quarter ended September 30, 2009. Access revenue related to RLEC subscriber usage and lower NECA settlements accounted for the decline.  Cable television revenue in the three months ended September 30, 2010, increased 16.8% to $0.7 million from $0.6 million in third quarter 2009.  Growth in IPTV and digital family packages of $0.2 million was partially offset by a $0.1 million decrease in basic cable.  Internet revenue for the third quarter 2010 increased 0.6%, remaining at $3.5 million for both periods. Growth in broadband data lines was offset by the loss of dial-up subscribers.  Transport services revenue increased 2.4%, holding at $1.4 million in both periods.

Operating Expenses

Operating expenses in the three months ended September 30, 2010, decreased 3.8% to $19.4 million from $20.2 million in the three months ended September 30, 2009.  Cost of services and products decreased 1.0% to $10.3 million in the quarter ended September 30, 2010, from $10.4 million in the same period last year.   An increase of $0.1 million in digital/circuit and reciprocal compensation expenses primarily related to growth from network connections was more than offset by a decrease of $0.2 million in toll charges correlated with lower long distance cost.  Selling, general and administrative expenses increased 2.6% to $3.3 million in the three months ended September 30, 2010, from $3.2 million in the three months ended September 30, 2009. An increase for due diligence and accrued salary expenses of $ 0.3 million was partially offset by lower uncollectible reserves and continued benefits from integrated systems and process improvements offset of $0.2 million.  Depreciation and amortization for third quarter 2010 decreased 11.5% to $5.8 million from $6.5 million in the third quarter 2009.  Amortization of intangible assets associated with the Country Road acquisition decreased $0.6 million, including a covenant not to compete and 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.

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Otelco Reports Third Quarter 2010 Results

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November 2, 2010

Interest Expense

Interest expense decreased 2.3% to $6.3 million in the quarter ended September 30, 2010, from $6.5 million a year ago. A decrease of $0.4 million reflects the interest rate caplet expense present in third quarter 2009 that was fully expensed in 2009. This decline was partially offset by increased interest costs associated with an interest rate swap in effect during 2010 and the interest cost associated with the additional IDS units issued in the Class B conversion.

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 swaps declined $0.4 million in third quarter 2010 compared to a decrease of $1.5 million in the same period of 2009.

Adjusted EBITDA

Adjusted EBITDA for the three months ended September 30, 2010, was $12.7 million compared to $12.8 million for the same period in 2009, and $12.9 million in the second quarter of 2010.  See financial tables for a reconciliation of Adjusted EBITDA to net income (loss).

Balance Sheet

As of September 30, 2010, the Company had cash and cash equivalents of $23.5 million compared to $17.7 million at the end of 2009.  Total long-term notes payable at $277.7 million did not change during third quarter, reflecting the exchange of the Class B common stock in June 2010.  The Company has notified its senior credit facility lenders that it plans to make a voluntary prepayment of $7.5 million on November 8, 2010. The third quarter distribution of $5.5 million in interest and dividends to our shareowners and $0.3 million in interest to our bond holders occurred on September 30, 2010 and also reflects the new IDSs issued in exchange for the Class B common stock.  This represents the twenty-third consecutive quarterly distribution since going public in December 2004.

Capital Expenditures

Capital expenditures invested in our business this year are slightly ahead of the pace for 2009, reflecting additions to our property, plant and equipment of $6.4 million in the nine months ended September 30, 2010. The Company is expanding its CLEC capabilities in Maine and New Hampshire; enhancing DSL and wireless broadband capacity; and expanding IPTV capability in Alabama.

Third Quarter Earnings Conference Call

Otelco has scheduled a conference call, which will be broadcast live over the internet, on Wednesday, November 3, 2010, at 11:00 a.m. ET.  To participate in the call, participants should dial (913) 312-0692 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 at www.OtelcoInc.com  or www.earnings.com. To listen to the live call online, please visit the website at least 15 minutes early to register, 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 at www.OtelcoInc.com or www.earnings.com for 30 days.  A one-week telephonic replay may also be accessed by calling (719) 457-0820 and using the passcode 9020410.

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Otelco Reports Third Quarter 2010 Results

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November 2, 2010

ABOUT OTELCO

Otelco Inc. provides wireline telecommunications services in Alabama, Maine, Massachusetts, Missouri, New Hampshire and West Virginia.  The Company’s services include local and long distance telephone, network access, transport, digital high-speed data lines and dial-up internet access, cable television and other telephone related services. With more than 100,000 voice and data access lines, which are collectively referred to as access line equivalents, Otelco is among the top 25 largest local exchange carriers in the United States based on number of access lines.  Otelco operates ten incumbent telephone companies serving rural markets, or rural local exchange carriers.  It also provides competitive retail and wholesale communications services through several subsidiaries.  For more informa tion, visit the Company’s website at www.OtelcoInc.com.

FORWARD LOOKING STATEMENTS

Statements in this press release that are not statements of historical or current fact constitute forward-looking statements. Such forward-looking statements involve known and unknown risks, uncertainties, and other unknown factors that could cause the actual results of the Company to be materially different from the historical results or from any future results expressed or implied by such forward-looking statements. In addition to statements which explicitly describe such risks and uncertainties, readers are urged to consider statements labeled with the terms “believes”, “belief,” “expects,” ‘intends,” “anticipates,” “plans,” or similar terms to be uncertain and forward-looking. The forward-looking statements contained herein are also subject generally to other r isks and uncertainties that are described from time to time in the Company’s filings with the Securities and Exchange Commission.

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Otelco Reports Third Quarter 2010 Results

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November 2, 2010

OTELCO INC.
CONSOLIDATED BALANCE SHEETS
				December 31,			September 30,
				2009			2010
Assets							(unaudited)
	Current assets
		Cash and cash equivalents		$	17,731,044		$	23,476,300
		Accounts receivable:
		Due from subscribers, net of allowance for doubtful
		accounts of $473,572 and $285,687, respectively		4,650,909			4,850,888
		Unbilled receivables		2,444,979			2,450,710
		Other		3,200,945			4,299,743
		Materials and supplies		1,969,966			1,764,132
		Prepaid expenses		1,342,249			1,085,660
		Income tax receivable		389,486			-
		Deferred income taxes		744,531			744,531
			Total current assets	32,474,109			38,671,964
	Property and equipment, net			69,028,973			64,161,637
	Goodwill			188,190,078			188,190,078
	Intangible assets, net			34,218,115			27,847,650
	Investments			1,991,158			1,972,026
	Deferred financing costs			6,964,015			6,099,849
	Deferred income taxes			4,482,430			4,482,430
	Prepaid expenses			-			49,671
	Other assets			179,325			102,844
			Total assets	$	337,528,203		$	331,578,149
Liabilities and Stockholders' Equity (Deficit)
	Current liabilities
		Accounts payable		$	3,145,728		$	2,177,787
		Accrued expenses		6,167,023			6,816,482
		Advance billings and payments		1,665,422			1,636,601
		Deferred income taxes		394,850			394,850
		Customer deposits		172,109			182,359
			Total current liabilities	11,545,132			11,208,079
	Deferred income taxes			42,239,262			42,239,262
	Interest rate swaps			1,592,813			3,014,095
	Advance billings and payments			698,352			667,314
	Other liabilities			165,968			225,115
	Long-term notes payable			273,717,301			277,734,114
			Total liabilities	329,958,828			335,087,979
	Class B common convertible to senior subordinated notes			4,085,033			-
	Stockholders' Equity (Deficit)
		Class A  Common Stock, $.01 par value-authorized 20,000,000 shares;
		issued and outstanding 12,676,733 and 13,221,404 shares, respectively		126,767			132,214
		Class B  Common Stock, $.01 par value-authorized 800,000 shares; issued
		and outstanding 544,671 and 0 shares, respectively		5,447			-
		Additional paid in capital		10,340,862			3,251,990
		Retained deficit		(6,988,734		)	(6,894,034		)
			Total stockholders' equity (deficit)	3,484,342			(3,509,830		)
			Total liabilities and stockholders' equity (deficit)	$	337,528,203		$	331,578,149

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Otelco Reports Third Quarter 2010 Results

Page 7

November 2, 2010

OTELCO INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
	Three months ended September 30,						Nine months ended September 30,
	2009			2010			2009			2010
Revenues
Local services	$	12,396,806		$	12,423,429		$	36,315,205		$	36,948,418
Network access		8,517,512			8,077,256			24,876,708			24,665,860
Cable television		614,114			717,344			1,833,164			2,081,918
Internet		3,500,870			3,520,835			10,542,696			10,559,067
Transport Services		1,373,832			1,406,363			4,132,208			4,195,118
Total revenues		26,403,134			26,145,227			77,699,981			78,450,381
Operating expenses
Cost of services and products		10,445,442			10,336,220			31,245,153			31,374,193
Selling, general and administrative expenses		3,222,825			3,307,743			10,142,354			9,775,255
Depreciation and amortization		6,525,796			5,773,298			19,922,383			17,692,899
Total operating expenses		20,194,063			19,417,261			61,309,890			58,842,347
Income from operations		6,209,071			6,727,966			16,390,091			19,608,034
Other income (expense)
Interest expense		(6,468,875	)		(6,320,757	)		(19,514,730	)		(18,488,869	)
Change in fair value of derivatives		(1,508,601	)		(358,833	)		(1,169,872	)		(1,421,282	)
Other income		29,540			150,790			267,911			533,649
Total other expenses		(7,947,936	)		(6,528,800	)		(20,416,691	)		(19,376,502	)
Income (loss) before income tax		(1,738,865	)		199,166			(4,026,600	)		231,532
Income tax (expense) benefit		144,251			(136,091	)		1,108,652			(136,835	)
Net income (loss) available to common stockholders	$	(1,594,614	)	$	63,075		$	(2,917,948	)	$	94,697
Weighted average shares outstanding:
Basic		12,676,733			13,221,404			12,676,733			12,906,173
Diluted		13,221,404			13,221,404			13,221,404			13,221,404
Basic net income (loss) per share	$	(0.13	)	$	0.00		$	(0.23	)	$	0.01
Diluted net income (loss) per share	$	(0.13	)	$	0.00		$	(0.23	)	$	0.01
Dividends declared per share	$	0.18		$	0.18		$	0.53		$	0.53

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Otelco Reports Third Quarter 2010 Results

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November 2, 2010

OTELCO INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
	Nine months ended
	September 30,
	2009			2010
Cash flows from operating activities:
Net income (loss)	$	(2,917,948	)	$	94,697
Adjustments to reconcile net income to cash flows from operating activities:
Depreciation		10,594,257			10,164,224
Amortization		9,328,126			7,528,676
Interest rate caplet		1,168,521			-
Amortization of debt premium		(60,759	)		(68,220	)
Amortization of loan costs		1,013,930			1,019,326
Change in fair value of derivatives		1,169,872			1,421,282
Provision for deferred income taxes		114,171			-
Provision for uncollectible revenue		271,536			179,634
Changes in assets and liabilities; net of assets and liabilities acquired:
Accounts receivables		1,147,822			(1,410,565	)
Material and supplies		212,913			205,834
Prepaid expenses and other assets		89,204			206,918
Income tax receivable		175,644			389,486
Accounts payable and accrued liabilities		(616,048	)		(306,542	)
Advance billings and payments		(395,019	)		(59,859	)
Other liabilities		(19,216	)		69,397
Net cash from operating activities		21,277,006			19,434,288
Cash flows from investing activities:
Acquisition and construction of property and equipment		(6,392,058	)		(6,443,959	)
Deferred charges		(6,551	)		(1,041	)
Net cash used in investing activities		(6,398,609	)		(6,445,000	)
Cash flows from financing activities:
Cash dividends paid		(6,702,823	)		(6,894,819	)
Direct cost of exchange of Class B shares for Class A shares		-			(194,053	)
Loan origination costs		-			(155,160	)
Repayment of long-term notes payable		(5,000,000	)		-
Net cash used in financing activities		(11,702,823	)		(7,244,032	)
Net increase in cash and cash equivalents		3,175,574			5,745,256
Cash and cash equivalents, beginning of period		13,542,255			17,731,044
Cash and cash equivalents, end of period	$	16,717,829		$	23,476,300
Supplemental disclosures of cash flow information:
Interest paid	$	17,767,703		$	17,345,346
Income taxes paid (received)	$	53,658		$	(197,534	)

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