1

Telergee Conference

Discussion Materials prepared for:

2009 Telergee Conference

October 15, 2009

2

Otelco Overview

Acquired and operate 10 RLECs and 2 facilities based CLECs in Alabama,

Maine, Massachusetts, Missouri, New Hampshire and West Virginia

Initial Public Offering on December 16, 2004

Follow-on offering priced June 28, 2007

As of 6/30/09, operate over 100,000 voice and data access lines and 122,000

wholesale CLEC network connections

LTM Revenue and Adjusted EBITDA of $92.9 million and $43.9 million

respectively

3

Otelco Q2 2009 Metrics

Key Operating Statistics

2007 2008 Q2 2009

RLEC Access Lines:

Voice Lines 36,687 51,530 50,078

RLEC Data Lines 12,160 18,709 19,596

RLEC Access Line Equivalents 48,847 70,239 69,674

CLEC Access Lines:

Voice Lines 16,973 26,558 27,110

Data Lines 2,571 3,246 3,298

CLEC Access Line Equivalents 19,544 29,804 30,408

Total Access Line Equivalents 68,391 100,043 100,082

Wholesale Network Connections 0 98,187 122,471

Cable Television Customers 4,169 4,082 4,114

Dial-Up Internet Customers 15,249 11,864 10,165

4

Industry Update

“We expect continuing declines in traditional access lines but offsets in growth in broadband and video services.” (2008 10-K)

“Telegraphs aren't relevant. Wireline voice, whether you're in a rural area or urban area, wireline voice-over copper over time will not be relevant. It is the way that it is.” (Q4 2008 Earnings Call)

“We expect competition to intensify as a result of the entrance of new competitors and the rapid development of new technologies, products and services.” (2008 10-K)

“We have lost access lines primarily because of competition, changing consumer behavior, economic conditions, [and] changing technology…” (2008 10-K)

“As consumers look to reduce expenses, they may be more inclined to discontinue their land line and maintain their wireless phone.” (2008 10-K)

“We continue to see an increasing correlation between our triple-play availability and line retention.” (Q4 2008 Earnings Call)

“Competitive expansions primarily from cable facilities into our service areas are expected to slow in 2009, but we could experience some increased competition from high-speed Internet offerings of wireless competitors.” (2008 10-K)

Source: Company filings, Company earnings calls, and Stifel Nicolaus analysis

Recent Service Provider Observations

5

Industry Update

RLECs are a declining industry

(millions) 2005 2006 2007 2008

RLEC access lines 158.5 149.8 142.0 128.5

CLEC facility based lines 10.2 11.1 11.7 11.8

Total access lines 168.7 160.9 153.7 140.3

Access lines lost 7.8 7.2 13.4

Rate of decline 4.6% 4.6% 8.7%

Source: JSI Capital Advisors, Phone Lines 2009

6

Industry Update

Change in service providers

2005 2006 2007 2008

% HH served by telcos 83.7 77.1 71.2 63.0

% HH served by cable telephony 4.9 7.7 11.8 15.2

% HH served by wireless only 8.4 12.8 15.8 20.2

% HH served by telco VOIP .6 1.4 2.0 2.9

Totals 97.6 99.0 100.8 101.3

Note: Assumed wireless will have multiple devices beginning in 2007

Source: NECA Trends Report 2008

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Industry Response

ILEC / Cable Battleground

Company (1)RGUs per

Basic Sub

Monthly ARPU

Deployment Penetration

Cable Modem Voice Cable Modem Voice

Cablevision 3.3 $136.55 100.0% 100.0% 52.3% 40.6%

Time Warner Cable 2.7 $111.29 99.5% 97.5% 33.5% 15.1%

Comcast 2.6 $115.27 99.4% 93.4% 30.2% 14.3%

Charter

Communications2.5 $110.32 94.9% 88.8% 26.1% 13.5%

Mediacom 2.3 $91.89 100.0% 91.9% 26.8% 10.1%

Source: Company filings, company press releases, and Stifel Nicolaus analysisNote:(1) Data is as of or for the three month period ended March 31, 2009.

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Industry Response

Data RPU as a % of Total RPU

17.6%16.0% 15.7%

14.3%

9.0%

23.2%21.5%

20.5%

16.6%

12.0%

27.9% 27.8%26.8%

19.6%

16.0%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

Verizon AT&T Sprint Nextel T-Mobile U.S. Cellular

1Q 2007 1Q 2008 1Q 2009

26%

Source: Company press releases, research reports and Stifel Nicolaus analysis

32%31%

17%

33%

Across the wireless industry, declining voice ARPU is increasingly offset by growing data service ARPU.

Since 4Q 2006, data ARPU as a percent of total ARPU has grown 33% on a compound annual basis.

Wireless Data ARPU Year-Over-Year Growth

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Industry Update

Continuing decline in access minutes of use (mou):

2006 2007 2008

Access mou 3.671B 3.291B 3.053B

Rate of decline 10.4% 7.24%

Additionally, the revenue per mou is declining due to the increasing percentage of wireless minutes – negative effect on EBITDA

Source: JSI study of 53 companies with access lines ranging from 352 to 80,000

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Industry Response

“Our strategy is to offset [our] line losses by increasing non-access-line-related revenues from customer connections for data, video and voice.” (2008 10-K)

“We continue to focus on increasing our revenues per customer, primarily by improving our DSL and IPTV market penetration…” (2008 10-K)

“We believe there is a high correlation between service quality and the likelihood that our customers will remain with us when presented with a competitive alternative.” (2008 10-K)

“We are going to be able to offer a lot of new products and services to our customers… including customizable bundles [and] business services that leverage [our] high-speed IP data network...” (2008 10-K)

“Our message is that customers need not cut back on their must-have high-speed, video, and voice products when they bundle with Frontier.” (Q4 2008 Earnings Call)

“We will utilize value added services such as speed, content, and features along with unparalleled customer service as a differentiator.” (2008 10-K)

“We believe that broadband, having broadband in the homes is an important part of our service offering.” (Q4 2008 Earnings Call)

“We understand that these are tough times and we want to be competitively priced for that.” (Q4 2008 Earnings Call)

“In the consumer segment, we see the near-term competitive battle for data services moving to affordability rather than top end speed…We are very cognizant of the pocketbook, and [are] moving to introduce product sets focused on affordability.” (Q4 2008 Earnings Call)

“In the current market environment, to stay competitive, we must be able to offer a Video product on par with our competitors at a competitive price.” (2008 10-K)

Source: Company press releases, research reports and Stifel Nicolaus analysis

Service Provider Strategies

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Industry Response

Increased efforts to effectively manage costs and operations

Offset access line losses by increasing revenues for data, video and other products

Bundled service offerings

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Industry Response

-10.0%

-8.0%

-6.0%

-4.0%

-2.0%

0.0%

2.0%

4.0%

Revenue EBITDA Access Lines

Growth Trends (1)

Source: Company filings, press releases and Stifel Nicolaus analysisNote: (1) Composite Index is comprised of CenturyTel, D&E, Embarq, Frontier, and Iowa Telecom.

The increased pace of access line erosion in 2008 caused the ILECs torealize negative revenue growth.

2005 2006 2007 2008

13

Industry Response

Overall broadband availability to customers served by NECA TS pool companies members reached 92% in 2008

More than 500 NECA RLEC companies are offering video services

Other products include data storage, transport services, fiber lease, etc.

Source: NECA Trend Report 2008

14

Industry Response

Consolidation opportunities:

Currently there are 784 independent telcos in the USA

Combining operations provides economies of scale necessary to compete with wireless and cable operators

Opportunities to improve margins by consolidation of administrative and certain back office functions

Current difficulties for acquisitions include declining RLEC values and tight credit markets

15

Industry Response

ILEC Enterprise Valuation Trends – LTM EBITDA

3.0x

4.0x

5.0x

6.0x

7.0x

8.0x

9.0x

10.0x

RBOCs Integrated LECs High Yielding LECs Pure Play LECs

Independent ILEC valuations have decreased over time as access line loss continues and DSL and video growth slows.

Source: Company filings, press releases, Stifel Nicolaus Research, Thompson Research, and Stifel Nicolaus analysis.

9.6x

6.6x6.7x

5.3x

6.4x

5.2x5.3x

4.8x

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Industry Response

LIBOR – OIS Spread (bps) (1)

Source: Bloomberg and Stifel Nicolaus analysisNote: (1) LIBOR-OIS spread is the difference between the 3-month LIBOR and the Overnight Index Swap Rate.

-

50

100

150

200

250

300

350

400

Stable Financial System

Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09

9/14/07

Northern Rock

12/10/07

Bank Writedowns 3/17/08

Bear Stearns

9/15/08

Lehman Brothers

10/10/08

Global Financial Crisis

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Other Items of Interest

Broadband Stimulus

Fairpoint and Hawaii Telecom