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**UNITED      STATES**

**SECURITIES      AND EXCHANGE COMMISSION**

**Washington,      D.C. 20549**

**FORM      10-Q**

| (Mark                One) |
|---------------------------|
|                      |   |
| ý                    | QUARTERLY                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE                ACT OF                1934 |
|                      |   |
|                      | For                the quarterly period ended June 30, 2008Or |
|                      |   |
|  ̈                    | TRANSITION                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE                ACT OF                1934 |
|                      |   |
|                      | For                the transition period                from                                    to |

**OTELCO      INC.**

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| Delaware                                                        |   | 52-2126395                                          |
|-----------------------------------------------------------------|--------|-----------------------------------------------------|
| (State                or other jurisdiction of incorporation or |   | (I.R.S.                Employer Identification No.) |
| organization)                                                   |   |                                                |
|                                                            |   |                                                |
| 505                Third Avenue East, Oneonta, Alabama          |   | 35121                                               |
| (Address                of Principal Executive Offices)         |   | (Zip                Code)                           |

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No       ̈

**APPLICABLE      ONLY TO CORPORATE ISSUERS:**

| **Class**                                                       |   | **Outstanding                at August 8, 2008** |
|-----------------------------------------------------------------|--------|--------------------------------------------------|
| Class                A Common Stock ($0.01 par value per share) |   | 12,676,733                                       |
| Class                B Common Stock ($0.01 par value per share) |   | 544,671                                          |

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**OTELCO      INC.**

**FORM      10-Q**

**For      the three month period ended June 30, 200**
**8**

**TABLE      OF CONTENTS**

|                                            | **Page**                                                                                                                                            |
|-------------------------------------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------|
|                                            |                                                                                                                                                |
| **PART                I FINANCIAL INFORMATION** |                                                                                                                                                |
| Item                1.                          | Condensed                Financial Statements                                                                                                       | 2 |
|                                            | Consolidated                Balance Sheets as of December 31, 2007 and June 30, 2008                                                                | 2 |
|                                            | Consolidated                Statements of Operations for the Three Months and Six Months Ended                June                30, 2007 and 2008 | 3 |
|                                            | Consolidated                Statements of Cash Flows for the Six Months Ended June 30, 2007 and                2008                                 | 4 |
|                                            | Notes                to Consolidated Financial Statements                                                                                           | 5 |
| Item                2.                          | Management’s                Discussion and Analysis of Financial Condition and Results of                Operations                           | 14 |
| Item                3.                          | Quantitative                and Qualitative Disclosures about Market Risk                                                                           | 24 |
| Item                4.                          | Controls                and Procedures                                                                                                              | 24 |
|                                            |                                                                                                                                                |    |
| **PART                II OTHER INFORMATION**    |                                                                                                                                                |
| Item                4.                          | Submission                of Matters to a Vote of Security Holders                                                                                  | 24 |
| Item                4.                          | Exhibits                                                                                                                                            | 24 |

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*Unless      the context otherwise requires, the words “we”, “us”, “our”, “the      Company*
*”and      “Otelco” refer to Otelco Inc., a Delaware corporation, and its consolidated      subsidiaries.*

**FORWARD-LOOKING      STATEMENTS**

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**PART      I FINANCIAL INFORMATION**

**Item      1. Financial Statements**

**OTELCO      INC.**

**CONSOLIDATED      BALANCE SHEETS**

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|                                                                                                                                                     |   | **December 31,****2007** |        | **June 30,****2008** |   |
|----------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------------|-------------|---------------------------|--------|
|                                                                                                                                                     |   |                          |        | **(unaudited)**           |   |
| **Assets**                                                                                                                                               |   |                          |        |                      |   |   |   |
| Current                assets                                                                                                                            |   |                          |        |                      |   |   |   |
| Cash                and cash equivalents                                                                                                                 |   | $                             | 12,810,497  |                      | $      | 12,849,128 |   |
| Accounts                receivable:                                                                                                                      |   |                          |        |                      |   |   |   |
| Due                from subscribers, net of allowance for doubtful accounts of $257,862                and                $160,136, respectively         |   |                          | 2,753,451   |                      |   | 2,709,891 |   |
| Unbilled                receivables                                                                                                                      |   |                          | 2,616,867   |                      |   | 2,617,230 |   |
| Other                                                                                                                                                    |   |                          | 1,760,207   |                      |   | 1,839,017 |   |
| Materials                and supplies                                                                                                                    |   |                          | 1,991,724   |                      |   | 2,275,760 |   |
| Prepaid                expenses                                                                                                                          |   |                          | 1,149,180   |                      |   | 722,378 |   |
| Income                tax receivable                                                                                                                     |   |                          | 469,546     |                      |   | 214,440 |   |
| Deferred                income taxes                                                                                                                     |   |                          | 1,486,439   |                      |   | 1,486,439 |   |
| Total                current assets                                                                                                                      |   |                          | 25,037,911  |                      |   | 24,714,283 |   |
|                                                                                                                                                     |   |                          |        |                      |   |   |   |
| Property                and equipment, net                                                                                                               |   |                          | 54,610,355  |                      |   | 52,684,279 |   |
| Goodwill                                                                                                                                                 |   |                          | 134,570,435 |                      |   | 134,570,435 |   |
| Intangible                assets, net                                                                                                                    |   |                          | 9,514,772   |                      |   | 8,660,111 |   |
| Investments                                                                                                                                              |   |                          | 1,207,183   |                      |   | 1,194,428 |   |
| Deferred                financing costs                                                                                                                  |   |                          | 5,878,943   |                      |   | 5,133,288 |   |
| Interest                rate cap                                                                                                                         |   |                          | 1,510,951   |                      |   | 624,008 |   |
| Deferred                charges                                                                                                                          |   |                          | 155,573     |                      |   | 365,598 |   |
| Total                assets                                                                                                                              |   | $                             | 232,486,123 |                      | $      | 227,946,430 |   |
|                                                                                                                                                     |   |                          |        |                      |   |   |   |
| **Liabilities                and Stockholders’ Equity**                                                                                            |   |                          |        |                      |   |   |   |
| Current                liabilities                                                                                                                       |   |                          |        |                      |   |   |   |
| Accounts                payable                                                                                                                          |   | $                             | 2,058,989   |                      | $      | 1,602,585 |   |
| Accrued                expenses                                                                                                                          |   |                          | 3,716,880   |                      |   | 3,780,820 |   |
| Advance                billings and payments                                                                                                             |   |                          | 2,077,713   |                      |   | 2,009,690 |   |
| Customer                deposits                                                                                                                         |   |                          | 185,147     |                      |   | 193,163 |   |
| Total                current liabilities                                                                                                                 |   |                          | 8,038,729   |                      |   | 7,586,258 |   |
|                                                                                                                                                     |   |                          |        |                      |   |   |   |
| Deferred                income taxes                                                                                                                     |   |                          | 25,223,656  |                      |   | 25,223,656 |   |
| Advance                billings and payments                                                                                                             |   |                          | 797,498     |                      |   | 756,979 |   |
| Other                liabilities                                                                                                                         |   |                          | 183,756     |                      |   | 169,846 |   |
| Long-term                notes payable                                                                                                                   |   |                          | 170,019,705 |                      |   | 169,984,152 |   |
| Total                liabilities                                                                                                                         |   |                          | 204,263,344 |                      |   | 203,720,891 |   |
|                                                                                                                                                     |   |                          |        |                      |   |   |   |
| Derivative                liability                                                                                                                      |   |                          | 814,005     |                      |   | 717,767 |   |
| Class                B common convertible to senior subordinated notes                                                                                   |   |                          | 4,085,033   |                      |   | 4,085,033 |   |
|                                                                                                                                                     |   |                          |        |                      |   |   |   |
| Stockholders’                equity                                                                                                                |   |                          |        |                      |   |   |   |
| Class                A Common Stock, $.01 par value-authorized 20,000,000 shares; issued                and                outstanding 12,676,733 shares |   |                          | 126,767     |                      |   | 126,767 |   |
| Class                B Common Stock, $.01 par value-authorized 800,000 shares; issued                and                outstanding 544,671 shares       |   |                          | 5,447       |                      |   | 5,447 |   |
| Additional                paid in capital                                                                                                                |   |                          | 28,215,056  |                      |   | 23,746,507 |   |
| Retained                deficit                                                                                                                          |   |                          | (4,084,797  | )                         |   | (3,270,622 | ) |
| Accumulated                other comprehensive loss                                                                                                      |   |                          | (938,732    | )                         |   | (1,185,360 | ) |
| Total                stockholders’ equity                                                                                                          |   |                          | 23,323,741  |                      |   | 19,422,739 |   |
| Total                liabilities and stockholders’ equity                                                                                          |   | $                             | 232,486,123 |                      | $      | 227,946,430 |   |

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**OTELCO      INC.**

**CONSOLIDATED      STATEMENTS OF OPERATIONS**

**(unaudited)**

|                                                              |   | **Three months ended****June 30,** |       | **Six months ended****June 30,** |   |
|-------------------------------------------------------------------|--------|---------------------------------------------------|------------|-------------------------------------------------|--------|
|                                                              |   | **2007**                                          |       | **2008**                                        |   | **2007** |   | **2008** |   |
| Revenues                                                          |   |                                              |       |                                            |   |   |   |   |   |   |   |   |   |
| Local                services                                     |   | $                                                 | 6,530,615  |                                            | $      | 6,711,884 |   | $ | 12,879,111 |   | $ | 13,438,075 |   |
| Network                access                                     |   |                                              | 6,140,830  |                                            |   | 6,105,129 |   |   | 12,578,418 |   |   | 12,542,783 |   |
| Cable                television                                   |   |                                              | 548,414    |                                            |   | 566,270 |   |   | 1,095,941 |   |   | 1,112,432 |   |
| Internet                                                          |   |                                              | 2,859,407  |                                            |   | 3,030,393 |   |   | 5,679,704 |   |   | 6,031,859 |   |
| Transport                services                                 |   |                                              | 1,038,936  |                                            |   | 1,255,054 |   |   | 2,057,419 |   |   | 2,403,002 |   |
| Total                revenues                                     |   |                                              | 17,118,202 |                                            |   | 17,668,730 |   |   | 34,290,593 |   |   | 35,528,151 |   |
| Operating                expenses                                 |   |                                              |       |                                            |   |   |   |   |   |   |   |   |   |
| Cost                of services and products                      |   |                                              | 6,534,399  |                                            |   | 6,745,612 |   |   | 12,805,456 |   |   | 13,397,723 |   |
| Selling,                general and administrative expenses       |   |                                              | 2,419,527  |                                            |   | 2,527,425 |   |   | 4,921,328 |   |   | 5,221,408 |   |
| Depreciation                and amortization                      |   |                                              | 3,775,623  |                                            |   | 3,389,765 |   |   | 7,404,714 |   |   | 6,763,013 |   |
| Total                operating expenses                           |   |                                              | 12,729,549 |                                            |   | 12,662,802 |   |   | 25,131,498 |   |   | 25,382,144 |   |
|                                                              |   |                                              |       |                                            |   |   |   |   |   |   |   |   |   |
| Income                from operations                             |   |                                              | 4,388,653  |                                            |   | 5,005,928 |   |   | 9,159,095 |   |   | 10,146,007 |   |
|                                                              |   |                                              |       |                                            |   |   |   |   |   |   |   |   |   |
| Other                income (expense)                             |   |                                              |       |                                            |   |   |   |   |   |   |   |   |   |
| Interest                expense                                   |   |                                              | (5,412,345 | )                                               |   | (4,773,240 | ) |   | (10,788,609 | ) |   | (9,456,080 | ) |
| Change                in fair value of derivative                 |   |                                              | 250,549    |                                            |   | 166,850 |   |   | 468,417 |   |   | (74,055 | ) |
| Other                income                                       |   |                                              | 165,581    |                                            |   | 64,045 |   |   | 447,033 |   |   | 430,625 |   |
| Total                other expense                                |   |                                              | (4,996,215 | )                                               |   | (4,542,345 | ) |   | (9,873,159 | ) |   | (9,099,510 | ) |
|                                                              |   |                                              |       |                                            |   |   |   |   |   |   |   |   |   |
| Income                (loss) before income tax expense            |   |                                              | (607,562   | )                                               |   | 463,583 |   |   | (714,064 | ) |   | 1,046,497 |   |
|                                                              |   |                                              |       |                                            |   |   |   |   |   |   |   |   |   |
| Income                tax (expense) benefit                       |   |                                              | 502,981    |                                            |   | (57,448 | ) |   | 491,276 |   |   | (232,322 | ) |
|                                                              |   |                                              |       |                                            |   |   |   |   |   |   |   |   |   |
| Net                income (loss) available to common stockholders |   | $                                                 | (104,581   | )                                               | $      | 406,135 |   | $ | (222,788 | ) | $ | 814,175 |   |
|                                                              |   |                                              |       |                                            |   |   |   |   |   |   |   |   |   |
| Weighted                average shares outstanding:               |   |                                              |       |                                            |   |   |   |   |   |   |   |   |   |
| Basic                                                             |   |                                              | 9,676,733  |                                            |   | 12,676,733 |   |   | 9,676,733 |   |   | 12,676,733 |   |
| Diluted                                                           |   |                                              | 10,221,404 |                                            |   | 13,221,404 |   |   | 10,221,404 |   |   | 13,221,404 |   |
|                                                              |   |                                              |       |                                            |   |   |   |   |   |   |   |   |   |
| Net                income (loss) per share                        |   |                                              |       |                                            |   |   |   |   |   |   |   |   |   |
| Basic                                                             |   | $                                                 | (0.01      | )                                               | $      | 0.03 |   | $ | (0.02 | ) | $ | 0.06 |   |
| Diluted                                                           |   | $                                                 | (0.03      | )                                               | $      | 0.02 |   | $ | (0.07 | ) | $ | 0.05 |   |
|                                                              |   |                                              |       |                                            |   |   |   |   |   |   |   |   |   |
| Dividends                declared per share                       |   | $                                                 | 0.18       |                                            | $      | 0.18 |   | $ | 0.35 |   | $ | 0.35 |   |

----

**OTELCO      INC.**

**CONSOLIDATED      STATEMENTS OF CASH FLOWS**

**(unaudited)**

|                                                                                                       |   | **Six months ended****June 30,** |       |
|------------------------------------------------------------------------------------------------------------|--------|-------------------------------------------------|------------|
|                                                                                                       |   | **2007**                                        |       | **2008** |   |
| Cash                flows from operating activities:                                                       |   |                                            |       |   |   |   |   |
| Net                income (loss)                                                                           |   | $                                               | (222,788   | ) | $ | 814,175 |   |
| Adjustments                to reconcile net income to cash flows from operating                activities: |   |                                            |       |   |   |   |   |
| Depreciation                                                                                               |   |                                            | 6,107,336  |   |   | 5,527,814 |   |
| Amortization                                                                                               |   |                                            | 1,297,378  |   |   | 1,235,199 |   |
| Interest                rate caplet                                                                        |   |                                            | 467,793    |   |   | 470,022 |   |
| Amortization                of debt premium                                                                |   |                                            | -          |   |   | (35,553 | ) |
| Amortization                of loan cost                                                                   |   |                                            | 796,245    |   |   | 745,655 |   |
| Change                in fair value of derivative liability                                                |   |                                            | (468,417   | ) |   | 74,055 |   |
| Provision                for uncollectible revenue                                                         |   |                                            | 78,231     |   |   | 129,453 |   |
| Changes                in assets and liabilities; net of assets and liabilities                acquired:   |   |                                            |       |   |   |   |   |
| Accounts                receivables                                                                        |   |                                            | (224,145   | ) |   | (165,066 | ) |
| Material                and supplies                                                                       |   |                                            | 59,352     |   |   | (284,036 | ) |
| Prepaid                expenses and other assets                                                           |   |                                            | 288,417    |   |   | 426,802 |   |
| Income                tax receivabe                                                                        |   |                                            | -          |   |   | 255,106 |   |
| Accounts                payable and accrued liabilities                                                    |   |                                            | (10,888    | ) |   | (392,464 | ) |
| Advance                billings and payments                                                               |   |                                            | (836       | ) |   | (108,542 | ) |
| Other                liabilities                                                                           |   |                                            | (6,816     | ) |   | (5,894 | ) |
|                                                                                                       |   |                                            |       |   |   |   |   |
| Net                cash from operating activities                                                          |   |                                            | 8,160,862  |   |   | 8,686,726 |   |
|                                                                                                       |   |                                            |       |   |   |   |   |
| Cash                flows from investing activities:                                                       |   |                                            |       |   |   |   |   |
| Acquisition                and construction of property and equipment                                      |   |                                            | (2,875,642 | ) |   | (3,947,447 | ) |
| Proceeds                from retirement of investment                                                      |   |                                            | 7,871      |   |   | - |   |
| Deferred                charges                                                                            |   |                                            | (166,921   | ) |   | (232,100 | ) |
|                                                                                                       |   |                                            |       |   |   |   |   |
| Net                cash used in investing activities                                                       |   |                                            | (3,034,692 | ) |   | (4,179,547 | ) |
|                                                                                                       |   |                                            |       |   |   |   |   |
| Cash                flows from financing activities:                                                       |   |                                            |       |   |   |   |   |
| Cash                dividends paid                                                                         |   |                                            | (3,411,048 | ) |   | (4,468,548 | ) |
|                                                                                                       |   |                                            |       |   |   |   |   |
| Net                cash used in financing activities                                                       |   |                                            | (3,411,048 | ) |   | (4,468,548 | ) |
|                                                                                                       |   |                                            |       |   |   |   |   |
| Net                increase in cash and cash equivalents                                                   |   |                                            | 1,715,122  |   |   | 38,631 |   |
| Cash                and cash equivalents, beginning of period                                              |   |                                            | 14,401,849 |   |   | 12,810,497 |   |
|                                                                                                       |   |                                            |       |   |   |   |   |
| Cash                and cash equivalents, end of period                                                    |   | $                                               | 16,116,971 |   | $ | 12,849,128 |   |
|                                                                                                       |   |                                            |       |   |   |   |   |
| Supplemental                disclosures of cash flow information:                                          |   |                                            |       |   |   |   |   |
| Interest                paid                                                                               |   | $                                               | 9,547,279  |   | $ | 8,569,514 |   |
|                                                                                                       |   |                                            |       |   |   |   |   |
| Income                taxes received                                                                       |   | $                                               | (173,718   | ) | $ | (146,606 | ) |
|                                                                                                       |   |                                            |       |   |   |   |   |
| Dividends                declared but not paid                                                             |   | $                                               | 1,705,524  |   | $ | - |   |

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**NOTES      TO CONSOLIDATED FINANCIAL STATEMENTS**

**(unaudited)**

**1.**
**Organization      and Basis of Financial Reporting**

**Basis      of Presentation and Principles of Consolidation**

**Recent      Accounting Pronouncements**

*“Fair      Value Measurements”*

* *
*The      Fair Value Option for Financial Assets and Financial Liabilities –Including an Amendment of FASB Statement No. 115” *

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*“Disclosures      about Derivative Instruments and Hedging Activities - an amendment of FASB      Statement No. 133”*
*“Accounting      for Derivative Instruments and Hedging Activities”,*

*“Determination      of the Useful Life of Intangible Assets”*
*“Goodwill      and Other Intangible Assets”.*

*“The      Hierarchy of Generally Accepted Accounting Principles” *
*“The      Meaning of Present Fairly in Conformity with Generally Accepted Accounting      Principles”*

*“Determining      Whether an Instrument (or an Embedded Feature) Is Indexed to an Entity’s Own      Stock”*

*“Accounting      for Lessees for Maintenance Deposits Under Lease Arrangements”*

|   | **2.** | **Commitment                and Contingencies** |
|--------|--------|-------------------------------------------------|

----

|   | **3.** | **Derivative                and Hedge Activities** |
|--------|--------|----------------------------------------------------|

|  | **4.** | **Income                (Loss) per Common Share and Potential Common                Share** |
|--|--------|---------------------------------------------------------------------------------------------|

----

|                                                                              |   | Three months endedJune 30, |       | Six months endedJune 30, |   |
|-----------------------------------------------------------------------------------|--------|-------------------------------------------|------------|-----------------------------------------|--------|
|                                                                              |   | 2007                                      |       | 2008                                    |   | 2007 |   | 2008 |   |
|                                                                              |   |                                      |       |                                    |   |   |   |   |   |   |   |   |   |
| Weighted                average common shares-basic                               |   |                                      | 9,676,733  |                                    |   | 12,676,733 |   |   | 9,676,733 |   |   | 12,676,733 |   |
|                                                                              |   |                                      |       |                                    |   |   |   |   |   |   |   |   |   |
| Effect                of dilutive securities                                      |   |                                      | 544,671    |                                    |   | 544,671 |   |   | 544,671 |   |   | 544,671 |   |
|                                                                              |   |                                      |       |                                    |   |   |   |   |   |   |   |   |   |
| Weighted-average                common shares and potential common shares-diluted |   |                                      | 10,221,404 |                                    |   | 13,221,404 |   |   | 10,221,404 |   |   | 13,221,404 |   |
|                                                                              |   |                                      |       |                                    |   |   |   |   |   |   |   |   |   |
| Net                income (loss) available to common stockholders                 |   | $                                         | (104,578   | )                                       | $      | 406,135 |   | $ | (222,788 | ) | $ | 814,175 |   |
|                                                                              |   |                                      |       |                                    |   |   |   |   |   |   |   |   |   |
| Net                income (loss) per basic share                                  |   | $                                         | (0.01      | )                                       | $      | 0.03 |   | $ | (0.02 | ) | $ | 0.06 |   |
|                                                                              |   |                                      |       |                                    |   |   |   |   |   |   |   |   |   |
| Net                income (loss) available to common stockholders                 |   | $                                         | (104,578   | )                                       | $      | 406,135 |   | $ | (222,788 | ) | $ | 814,175 |   |
| Less:                Change in fair value of B share derivative                   |   |                                      | (250,549   | )                                       |   | (80,670 | ) |   | (468,417 | ) |   | (96,238 | ) |
|                                                                              |   |                                      |       |                                    |   |   |   |   |   |   |   |   |   |
| Net                income (loss) available for diluted shares                     |   | $                                         | (355,127   | )                                       | $      | 325,465 |   | $ | (691,205 | ) | $ | 717,937 |   |
|                                                                              |   |                                      |       |                                    |   |   |   |   |   |   |   |   |   |
| Net                income (loss) per diluted share                                |   |                                      | (0.03      | )                                       | $      | 0.02 |   | $ | (0.07 | ) | $ | 0.05 |   |

|  | **5.** | **Fair                Value Measurements** |
|--|--------|--------------------------------------------|

|                                         |   | **June 30, 2008** |       |
|----------------------------------------------|--------|-----------------------------|------------|
|                                         |   | **Fair Value**         |       | **Level 1** |   | **Level 2** |   | **Level 3** |   |
| **Assets**                                   |   |                        |       |   |   |   |   |   |   |   |   |   |   |
| Cash                and cash equivalents     |   | $                           | 12,849,128 |   | $ | 12,849,128 |   | $ | - |   | $ | - |   |
| Interest                rate cap             |   |                        | 624,008    |   |   | - |   |   | 624,008 |   |   | - |   |
| Co-operative                patronage shares |   |                        | 707,501    |   |   | - |   |   | - |   |   | 707,501 |   |
| Total                assets                  |   |                        | 14,180,637 |   |   | 12,849,128 |   |   | 624,008 |   |   | 707,501 |   |
| **Liabilities**                              |   |                        |       |   |   |   |   |   |   |   |   |   |   |
| Class                B derivative liability  |   |                        | 717,767    |   |   | - |   |   | - |   |   | 717,767 |   |
| Total                liabilities             |   | $                           | 717,767    |   | $ | - |   | $ | - |   | $ | 717,767 |   |

----

|  | **6.** | **Subsequent                Events** |
|--|--------|--------------------------------------|

|  | **7.** | **Subsidiary                Guarantees** |
|--|--------|------------------------------------------|

----

| **Otelco Inc.****Condensed Consolidating Balance Sheet****June 30, 2008 **  |   |   |                         |         |   |          |   |         |       |         |   |
|---------------------------------------------------------------------------------------------------------------------|--------|--------|------------------------------|--------------|--------|---------------|--------|--------------|------------|--------------|--------|
|                                                                                                                |   | Parent |                         | Guarantor    |   | Non-Guarantor |   | Eliminations |       | Consolidated |   |
|                                                                                                                |   |   |                         | Subsidiaries |   | Subsidiaries  |   |         |       |         |   |
|                                                                                                                |   |   |                         |         |   |          |   |         |       |         |   |
| ASSETS                                                                                                              |   |   |                         |         |   |          |   |         |       |         |   |   |   |   |   |   |
|                                                                                                                |   |   |                         |         |   |          |   |         |       |         |   |   |   |   |   |   |
| Current                  assets                                                                                     |   |   |                         |         |   |          |   |         |       |         |   |   |   |   |   |   |
| Cash                  and cash equivalents                                                                          |   | $      | -                            |         | $      | 12,792,327    |   | $            | 56,801     |         | $      | - |   | $ | 12,849,128 |   |
| Accounts                  receivable, net                                                                           |   |   | -                            |         |   | 6,158,583     |   |         | 1,007,555  |         |   | - |   |   | 7,166,138 |   |
| Materials                  and supplies                                                                             |   |   | -                            |         |   | 993,706       |   |         | 1,282,054  |         |   | - |   |   | 2,275,760 |   |
| Prepaid                  and other current assets                                                                   |   |   | 59,338                       |         |   | 610,638       |   |         | 52,402     |         |   | - |   |   | 722,378 |   |
| Income                  tax receivables                                                                             |   |   | 214,440                      |         |   | -             |   |         | -          |         |   | - |   |   | 214,440 |   |
| Deferred                  income taxes                                                                              |   |   | 1,486,439                    |         |   | -             |   |         | -          |         |   | - |   |   | 1,486,439 |   |
| Investment                  in subsidiaries                                                                         |   |   | 94,077,738                   |         |   | -             |   |         | -          |         |   | (94,077,738 | ) |   | - |   |
| Intercompany                  receivables                                                                           |   |   | 58,771,309                   |         |   | -             |   |         | -          |         |   | (58,771,309 | ) |   | - |   |
| Total                  current assets                                                                               |   |   | 154,609,264                  |         |   | 20,555,254    |   |         | 2,398,812  |         |   | (152,849,047 | ) |   | 24,714,283 |   |
|                                                                                                                |   |   |                         |         |   |          |   |         |       |         |   |   |   |   |   |   |
| Property                  and equipment, net                                                                        |   |   | -                            |         |   | 38,735,732    |   |         | 13,948,547 |         |   | - |   |   | 52,684,279 |   |
| Goodwill                                                                                                            |   |   | -                            |         |   | 136,507,075   |   |         | (1,936,640 | )            |   | - |   |   | 134,570,435 |   |
| Intangibles                  assets, net                                                                            |   |   | -                            |         |   | 5,431,373     |   |         | 3,228,738  |         |   | - |   |   | 8,660,111 |   |
| Investments                                                                                                         |   |   | 1,000                        |         |   | 868,068       |   |         | 325,360    |         |   | - |   |   | 1,194,428 |   |
| Other                  long-term assets                                                                             |   |   | 6,596,358                    |         |   | (473,464      | )      |         | -          |         |   | - |   |   | 6,122,894 |   |
|                                                                                                                |   |   |                         |         |   |          |   |         |       |         |   |   |   |   |   |   |
| Total                  assets                                                                                       |   | $      | 161,206,622                  |         | $      | 201,624,038   |   | $            | 17,964,817 |         | $      | (152,849,047 | ) | $ | 227,946,430 |   |
|                                                                                                                |   |   |                         |         |   |          |   |         |       |         |   |   |   |   |   |   |
| LIABILITIES                  AND STOCKHOLDERS' EQUITY                                                               |   |   |                         |         |   |          |   |         |       |         |   |   |   |   |   |   |
|                                                                                                                |   |   |                         |         |   |          |   |         |       |         |   |   |   |   |   |   |
| Current                  liabilities                                                                                |   |   |                         |         |   |          |   |         |       |         |   |   |   |   |   |   |
| Accounts                  payables and accrued expenses                                                             |   |   | 1,863,078                  $ |         | $      | 2,165,461     |   | $            | 1,354,866  |         | $      | - |   | $ | 5,383,405 |   |
| Intercompany                  payables                                                                              |   |   | -                            |         | $      | 49,156,572    |   |         | 9,614,737  |         |   | (58,771,309 | ) |   | - |   |
| Other                  current liabilities                                                                          |   |   | -                            |         |   | 2,115,067     |   |         | 87,786     |         |   | - |   |   | 2,202,853 |   |
| Total                  current liabilities                                                                          |   |   | 1,863,078                    |         |   | 53,437,100    |   |         | 11,057,389 |         |   | (58,771,309 | ) |   | 7,586,258 |   |
|                                                                                                                |   |   |                         |         |   |          |   |         |       |         |   |   |   |   |   |   |
| Deferred                  income taxes                                                                              |   |   | 5,397,329                    |         |   | 15,241,738    |   |         | 4,584,589  |         |   | - |   |   | 25,223,656 |   |
| Other                  liabilities                                                                                  |   |   | -                            |         |   | 926,825       |   |         | -          |         |   | - |   |   | 926,825 |   |
| Long-term                  notes payables                                                                           |   |   | 129,720,676                  |         |   | 40,263,476    |   |         | -          |         |   | - |   |   | 169,984,152 |   |
| Derivative                  liability                                                                               |   |   | 717,767                      |         |   | -             |   |         | -          |         |   | - |   |   | 717,767 |   |
| Class                  B common convertible to senior subordinated notes                                            |   |   | 4,085,033                    |         |   | -             |   |         | -          |         |   | - |   |   | 4,085,033 |   |
| Stockholders'                  equity                                                                               |   |   | 19,422,739                   |         |   | 91,754,899    |   |         | 2,322,839  |         |   | (94,077,738 | ) |   | 19,422,739 |   |
|                                                                                                                |   |   |                         |         |   |          |   |         |       |         |   |   |   |   |   |   |
| Total                  liabilities and stockholders equity                                                          |   | $      | 161,206,622                  |         | $      | 201,624,038   |   | $            | 17,964,817 |         | $      | (152,849,047 | ) | $ | 227,946,430 |   |

----

| **Otelco                  Inc.****Condensed                  Consolidating Balance Sheet**     **December                  31, 2007** |   |   |        |         |   |          |   |         |       |         |   |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|-------------|--------------|--------|---------------|--------|--------------|------------|--------------|--------|
|                                                                                                                                                           |   | Parent |        | Guarantor    |   | Non-Guarantor |   | Eliminations |       | Consolidated |   |
|                                                                                                                                                           |   |   |        | Subsidiaries |   | Subsidiaries  |   |         |       |         |   |
|                                                                                                                                                           |   |   |        |         |   |          |   |         |       |         |   |
| ASSETS                                                                                                                                                         |   |   |        |         |   |          |   |         |       |         |   |   |   |   |   |   |
|                                                                                                                                                           |   |   |        |         |   |          |   |         |       |         |   |   |   |   |   |   |
| Current                  assets                                                                                                                                |   |   |        |         |   |          |   |         |       |         |   |   |   |   |   |   |
| Cash                  and cash equivalents                                                                                                                     |   | $      | -           |         | $      | 12,707,674    |   | $            | 102,823    |         | $      | - |   | $ | 12,810,497 |   |
| Accounts                  receivable, net                                                                                                                      |   |   | 29,305      |         |   | 5,976,939     |   |         | 1,124,281  |         |   | - |   |   | 7,130,525 |   |
| Materials                  and supplies                                                                                                                        |   |   | -           |         |   | 860,363       |   |         | 1,131,361  |         |   | - |   |   | 1,991,724 |   |
| Prepaid                  and other current assets                                                                                                              |   |   | 3,192       |         |   | 965,322       |   |         | 180,666    |         |   | - |   |   | 1,149,180 |   |
| Income                  tax receivables                                                                                                                        |   |   | 469,546     |         |   | -             |   |         | -          |         |   | - |   |   | 469,546 |   |
| Deferred                  income taxes                                                                                                                         |   |   | 1,486,439   |         |   | -             |   |         | -          |         |   | - |   |   | 1,486,439 |   |
| Investment                  in subsidiaries                                                                                                                    |   |   | 84,166,351  |         |   | -             |   |         | -          |         |   | (84,166,351 | ) |   | - |   |
| Intercompany                  receivables                                                                                                                      |   |   | 70,984,187  |         |   | -             |   |         | -          |         |   | (70,984,187 | ) |   | - |   |
| Total                  current assets                                                                                                                          |   |   | 157,139,020 |         |   | 20,510,298    |   |         | 2,539,131  |         |   | (155,150,538 | ) |   | 25,037,911 |   |
|                                                                                                                                                           |   |   |        |         |   |          |   |         |       |         |   |   |   |   |   |   |
| Property                  and equipment, net                                                                                                                   |   |   | -           |         |   | 39,117,969    |   |         | 15,492,386 |         |   | - |   |   | 54,610,355 |   |
| Goodwill                                                                                                                                                       |   |   | -           |         |   | 136,507,075   |   |         | (1,936,640 | )            |   | - |   |   | 134,570,435 |   |
| Intangibles                  assets, net                                                                                                                       |   |   | -           |         |   | 6,161,852     |   |         | 3,352,920  |         |   | - |   |   | 9,514,772 |   |
| Investments                                                                                                                                                    |   |   | 1,000       |         |   | 880,823       |   |         | 325,360    |         |   | - |   |   | 1,207,183 |   |
| Other                  long-term assets                                                                                                                        |   |   | 8,052,863   |         |   | (507,396      | )      |         | -          |         |   | - |   |   | 7,545,467 |   |
|                                                                                                                                                           |   |   |        |         |   |          |   |         |       |         |   |   |   |   |   |   |
| Total                  assets                                                                                                                                  |   | $      | 165,192,883 |         | $      | 202,670,621   |   | $            | 19,773,157 |         | $      | (155,150,538 | ) | $ | 232,486,123 |   |
|                                                                                                                                                           |   |   |        |         |   |          |   |         |       |         |   |   |   |   |   |   |
| LIABILITIES                  AND STOCKHOLDERS' EQUITY                                                                                                          |   |   |        |         |   |          |   |         |       |         |   |   |   |   |   |   |
|                                                                                                                                                           |   |   |        |         |   |          |   |         |       |         |   |   |   |   |   |   |
| Current                  liabilities                                                                                                                           |   |   |        |         |   |          |   |         |       |         |   |   |   |   |   |   |
| Accounts                  payables and accrued expenses                                                                                                        |   | $      | 1,816,546   |         | $      | 2,611,265     |   | $            | 1,348,058  |         | $      | - |   | $ | 5,775,869 |   |
| Intercompany                  payables                                                                                                                         |   |   | -           |         |   | 58,381,147    |   |         | 12,603,040 |         |   | (70,984,187 | ) |   | - |   |
| Other                  current liabilities                                                                                                                     |   |   | -           |         |   | 2,183,424     |   |         | 79,436     |         |   | - |   |   | 2,262,860 |   |
| Total                  current liabilities                                                                                                                     |   |   | 1,816,546   |         |   | 63,175,836    |   |         | 14,030,534 |         |   | (70,984,187 | ) |   | 8,038,729 |   |
|                                                                                                                                                           |   |   |        |         |   |          |   |         |       |         |   |   |   |   |   |   |
| Deferred                  income taxes                                                                                                                         |   |   | 5,397,329   |         |   | 15,241,738    |   |         | 4,584,589  |         |   | - |   |   | 25,223,656 |   |
| Other                  liabilities                                                                                                                             |   |   | -           |         |   | 981,254       |   |         | -          |         |   | - |   |   | 981,254 |   |
| Long-term                  notes payables                                                                                                                      |   |   | 129,756,229 |         |   | 40,263,476    |   |         | -          |         |   | - |   |   | 170,019,705 |   |
| Derivative                  liability                                                                                                                          |   |   | 814,005     |         |   | -             |   |         | -          |         |   | - |   |   | 814,005 |   |
| Class                  B common convertible to senior subordinated notes                                                                                       |   |   | 4,085,033   |         |   | -             |   |         | -          |         |   | - |   |   | 4,085,033 |   |
| Stockholders'                  equity                                                                                                                          |   |   | 23,323,741  |         |   | 83,008,317    |   |         | 1,158,034  |         |   | (84,166,351 | ) |   | 23,323,741 |   |
|                                                                                                                                                           |   |   |        |         |   |          |   |         |       |         |   |   |   |   |   |   |
| Total                  liabilities and stockholders equity                                                                                                     |   | $      | 165,192,883 |         | $      | 202,670,621   |   | $            | 19,773,157 |         | $      | (155,150,538 | ) | $ | 232,486,123 |   |

| **Otelco                  Inc.****Condensed                  Consolidated Statement of Operations****For                  the Three Months Ended June 30, 2008** |   |   |       |         |   |          |   |         |       |         |   |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|------------|--------------|--------|---------------|--------|--------------|------------|--------------|--------|
|                                                                                                                                                             |   |   |       | Guarantor    |   | Non-Guarantor |   |         |       |         |   |
|                                                                                                                                                             |   | Parent |       | Subsidiaries |   | Subsidiaries  |   | Eliminations |       | Consolidated |   |
|                                                                                                                                                             |   |   |       |         |   |          |   |         |       |         |   |
| Revenue                                                                                                                                                          |   | $      | 650,579    |         | $      | 16,203,007    |   | $            | 2,968,216  |         | $      | (2,153,072 | ) | $ | 17,668,730 |   |
| Operating                  expenses                                                                                                                              |   |   | (650,579   | )            |   | (11,640,351   | )      |         | (2,524,944 | )            |   | 2,153,072 |   |   | (12,662,802 | ) |
| Income                  from operations                                                                                                                          |   |   | -          |         |   | 4,562,656     |   |         | 443,272    |         |   | - |   |   | 5,005,928 |   |
| Other                  income (expense)                                                                                                                          |   |   | (4,417,403 | )            |   | (125,100      | )      |         | 158        |         |   | - |   |   | (4,542,345 | ) |
| Earnings                  from subsidiaries                                                                                                                      |   |   | 4,880,986  |         |   | -             |   |         | -          |         |   | (4,880,986 | ) |   | - |   |
| Income                  before income tax                                                                                                                        |   |   | 463,583    |         |   | 4,437,556     |   |         | 443,430    |         |   | (4,880,986 | ) |   | 463,583 |   |
| Income                  tax expense                                                                                                                              |   |   | (57,448    | )            |   | -             |   |         | -          |         |   | - |   |   | (57,448 | ) |
|                                                                                                                                                             |   |   |       |         |   |          |   |         |       |         |   |   |   |   |   |   |
| Net                  income (loss) to common stockholders                                                                                                        |   | $      | 406,135    |         | $      | 4,437,556     |   | $            | 443,430    |         | $      | (4,880,986 | ) | $ | 406,135 |   |

----

| **Otelco                  Inc.****Condensed                  Consolidated Statement of Operations****For                  the Three Months Ended June 30, 2007** |   |   |       |         |   |          |   |         |       |         |   |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|------------|--------------|--------|---------------|--------|--------------|------------|--------------|--------|
|                                                                                                                                                             |   |   |       | Guarantor    |   | Non-Guarantor |   |         |       |         |   |
|                                                                                                                                                             |   | Parent |       | Subsidiaries |   | Subsidiaries  |   | Eliminations |       | Consolidated |   |
|                                                                                                                                                             |   |   |       |         |   |          |   |         |       |         |   |
| Revenue                                                                                                                                                          |   | $      | 760,071    |         | $      | 15,581,806    |   | $            | 2,918,105  |         | $      | (2,141,780 | ) | $ | 17,118,202 |   |
| Operating                  expenses                                                                                                                              |   |   | (663,987   | )            |   | (11,638,545   | )      |         | (2,568,797 | )            |   | 2,141,780 |   |   | (12,729,549 | ) |
| Income                  from operations                                                                                                                          |   |   | 96,084     |         |   | 3,943,261     |   |         | 349,308    |         |   | - |   |   | 4,388,653 |   |
| Other                  income (expense)                                                                                                                          |   |   | (3,799,817 | )            |   | (1,196,384    | )      |         | (11        | )            |   | - |   |   | (4,996,212 | ) |
| Earnings                  from subsidiaries                                                                                                                      |   |   | 3,096,174  |         |   | (3            | )      |         | -          |         |   | (3,096,171 | ) |   | - |   |
| Income                  before income tax                                                                                                                        |   |   | (607,559   | )            |   | 2,746,874     |   |         | 349,297    |         |   | (3,096,171 | ) |   | (607,559 | ) |
| Income                  tax expense                                                                                                                              |   |   | 502,981    |         |   | -             |   |         | -          |         |   | - |   |   | 502,981 |   |
|                                                                                                                                                             |   |   |       |         |   |          |   |         |       |         |   |   |   |   |   |   |
| Net                  income (loss) to common stockholders                                                                                                        |   | $      | (104,578   | )            | $      | 2,746,874     |   | $            | 349,297    |         | $      | (3,096,171 | ) | $ | (104,578 | ) |

|                                                                                                                                                           |   |   |       |         |   |                         |   |         |       |         |   |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|------------|--------------|--------|------------------------------|--------|--------------|------------|--------------|--------|
| **Otelco                  Inc.****Condensed                  Consolidated Statement of Operations****For                  the Six Months Ended June 30, 2008** |   |   |       |         |   |                         |   |         |       |         |   |
|                                                                                                                                                           |   |   |       | Guarantor    |   | Non-Guarantor                |   |         |       |         |   |
|                                                                                                                                                           |   | Parent |       | Subsidiaries |   | Subsidiaries                 |   | Eliminations |       | Consolidated |   |
|                                                                                                                                                           |   |   |       |         |   |                         |   |         |       |         |   |
| Revenue                                                                                                                                                        |   | $      | 1,459,768  |         | $      | 32,390,939                   |   | $            | 6,126,420  |         | $      | (4,448,976 | ) | $ | 35,528,151 |   |
| Operating                  expenses                                                                                                                            |   |   | (1,459,768 | )            |   | (23,409,655                  | )      |         | (4,961,697 | )            |   | 4,448,976 |   |   | (25,382,144 | ) |
| Income                  from operations                                                                                                                        |   |   | -          |         |   | 8,981,284                    |   |         | 1,164,723  |         |   | - |   |   | 10,146,007 |   |
| Other                  income (expense)                                                                                                                        |   |   | (8,864,889 | )            |   | (234,703                     | )      |         | 82         |         |   | - |   |   | (9,099,510 | ) |
| Earnings                  from subsidiaries                                                                                                                    |   |   | 9,911,386  |         |   | -                            |   |         | -          |         |   | (9,911,386 | ) |   | - |   |
| Income                  before income tax                                                                                                                      |   |   | 1,046,497  |         |   | 8,746,581                    |   |         | 1,164,805  |         |   | (9,911,386 | ) |   | 1,046,497 |   |
| Income                  tax expense                                                                                                                            |   |   | (232,322   | )            |   | -                            |   |         | -          |         |   | - |   |   | (232,322 | ) |
|                                                                                                                                                           |   |   |       |         |   |                         |   |         |       |         |   |   |   |   |   |   |
| Net                  income (loss) to common stockholders                                                                                                      |   | $      | 814,175    |         |   | 8,746,581                  $ |   | $            | 1,164,805  |         | $      | (9,911,386 | ) | $ | 814,175 |   |

| **Otelco                  Inc.****Condensed                  Consolidated Statement of Operations****For                  the Six Months Ended June 30, 2007** |   |   |       |         |   |          |   |         |                         |         |   |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|------------|--------------|--------|---------------|--------|--------------|------------------------------|--------------|--------|
|                                                                                                                                                           |   |   |       | Guarantor    |   | Non-Guarantor |   |         |                         |         |   |
|                                                                                                                                                           |   | Parent |       | Subsidiaries |   | Subsidiaries  |   | Eliminations |                         | Consolidated |   |
|                                                                                                                                                           |   |   |       |         |   |          |   |         |                         |         |   |
| Revenue                                                                                                                                                        |   | $      | 1,487,886  |         | $      | 30,869,122    |   | $            | 6,163,778                    |         | $      | (4,230,193 | ) | $ | 34,290,593 |   |
| Operat                  ing expenses                                                                                                                           |   |   | (1,487,886 | )            |   | (22,874,723   | )      |         | (4,999,082                   | )            |   | 4,230,193 |   |   | (25,131,498 | ) |
| Income                  from operations                                                                                                                        |   |   | -          |         |   | 7,994,399     |   |         | 1,164,696                    |         |   | - |   |   | 9,159,095 |   |
| Other                  income (expense)                                                                                                                        |   |   | (7,510,984 | )            |   | (2,362,164    | )      |         | (11                          | )            |   | - |   |   | (9,873,159 | ) |
| Earnings                  from subsidiaries                                                                                                                    |   |   | 6,796,920  |         |   | -             |   |         | -                            |         |   | (6,796,920 | ) |   | - |   |
| Income                  before income tax                                                                                                                      |   |   | (714,064   | )            |   | 5,632,235     |   |         | 1,164,685                    |         |   | (6,796,920 | ) |   | (714,064 | ) |
| Income                  tax expense                                                                                                                            |   |   | 491,276    |         |   | -             |   |         | -                            |         |   | - |   |   | 491,276 |   |
|                                                                                                                                                           |   |   |       |         |   |          |   |         |                         |         |   |   |   |   |   |   |
| Net                  income (loss) to common stockholders                                                                                                      |   | $      | (222,788   | )            | $      | 5,632,235     |   |         | 1,164,685                  $ |         | $      | (6,796,920 | ) | $ | (222,788 | ) |

----

| **Otelco                    Inc.****Condensed                    Consolidating Statement of Cash Flows****For                    the Six Months Ended June 30, 2008** |   |   |        |         |   |          |   |         |       |         |   |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|-------------|--------------|--------|---------------|--------|--------------|------------|--------------|--------|
|                                                                                                                                                                  |   |   |        | Guarantor    |   | Non-Guarantor |   |         |       |         |   |
|                                                                                                                                                                  |   | Parent |        | Subsidiaries |   | Subsidiaries  |   | Eliminations |       | Consolidated |   |
|                                                                                                                                                                  |   |   |        |         |   |          |   |         |       |         |   |
| Cash                    flows from operating activities:                                                                                                              |   |   |        |         |   |          |   |         |       |         |   |   |   |   |   |   |
| Net                    income (loss)                                                                                                                                  |   | $      | 814,175     |         | $      | 8,746,581     |   | $            | 1,164,805  |         | $      | (9,911,386 | ) | $ | 814,175 |   |
| Adjustment                    to reconcile net income (loss) to cash flows from operating activities                                                                  |   |   | 1,254,179   |         |   | 4,853,928     |   |         | 2,038,538  |         |   | - |   |   | 8,146,645 |   |
| Changes                    in assets and liabilities, net of assets and liabilities acquired                                                                          |   |   | 12,487,674  |         |   | (9,839,317    | )      |         | (2,922,451 | )            |   | - |   |   | (274,094 | ) |
| Net                    cash provided by operating activities                                                                                                          |   |   | 14,556,028  |         |   | 3,761,192     |   |         | 280,892    |         |   | (9,911,386 | ) |   | 8,686,726 |   |
| Cash                    flows from investing activities                                                                                                               |   |   | (176,093    | )            |   | (3,676,540    | )      |         | (326,914   | )            |   | - |   |   | (4,179,547 | ) |
| Cash                    flows from financing activities                                                                                                               |   |   | (14,379,935 | )            |   | 1             |   |         | -          |         |   | 9,911,386 |   |   | (4,468,548 | ) |
| Net                    increase (decrease) in cash and cash equivalents                                                                                               |   |   | -           |         |   | 84,653        |   |         | (46,022    | )            |   | - |   |   | 38,631 |   |
| Cash                    and cash equivalents, beginning of period                                                                                                     |   |   | -           |         |   | 12,707,674    |   |         | 102,823    |         |   | - |   |   | 12,810,497 |   |
| Cash                    and cash equivalents, end of period                                                                                                           |   | $      | -           |         | $      | 12,792,327    |   | $            | 56,801     |         | $      | - |   | $ | 12,849,128 |   |

| **Otelco                    Inc.****Condensed                    Consolidating Statement of Cash Flows****For                    the Six Months Ended June 30, 2007** |   |   |       |         |   |          |   |         |       |         |   |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|------------|--------------|--------|---------------|--------|--------------|------------|--------------|--------|
|                                                                                                                                                                  |   |   |       | Guarantor    |   | Non-Guarantor |   |         |       |         |   |
|                                                                                                                                                                  |   | Parent |       | Subsidiaries |   | Subsidiaries  |   | Eliminations |       | Consolidated |   |
|                                                                                                                                                                  |   |   |       |         |   |          |   |         |       |         |   |
| Cash                    flows from operating activities:                                                                                                              |   |   |       |         |   |          |   |         |       |         |   |   |   |   |   |   |
| Net                    income (loss)                                                                                                                                  |   | $      | (222,788   | )            | $      | 5,632,235     |   | $            | 1,164,685  |         | $      | (6,796,920 | ) | $ | (222,788 | ) |
| Adjustment                    to reconcile net income (loss) to                    cash flows from operating activities                                          |   |   | 662,554    |         |   | 5,309,769     |   |         | 2,306,241  |         |   | - |   |   | 8,278,564 |   |
| Changes                    in assets and liabilities, net of assets                    and liabilities acquired                                                  |   |   | 8,213,916  |         |   | (6,902,671    | )      |         | (2,911,683 | )            |   | - |   |   | (1,600,438 | ) |
| Net                    cash provided by operating activities                                                                                                          |   |   | 8,653,682  |         |   | 4,039,333     |   |         | 559,243    |         |   | (6,796,920 | ) |   | 6,455,338 |   |
| Cash                    flows from investing activities                                                                                                               |   |   | (151,238   | )            |   | (2,333,547    | )      |         | (549,907   | )            |   | - |   |   | (3,034,692 | ) |
| Cash                    flows from financing activities                                                                                                               |   |   | (8,502,444 | )            |   | -             |   |         | -          |         |   | 6,796,920 |   |   | (1,705,524 | ) |
| Net                    increase (decrease) in cash and cash equivalents                                                                                               |   |   | -          |         |   | 1,705,786     |   |         | 9,336      |         |   | - |   |   | 1,715,122 |   |
| Cash                    and cash equivalents, beginning of period                                                                                                     |   |   | -          |         |   | 14,376,843    |   |         | 25,006     |         |   | - |   |   | 14,401,849 |   |
| Cash                    and cash equivalents, end of period                                                                                                           |   | $      | -          |         | $      | 16,082,629    |   | $            | 34,342     |         | $      | - |   | $ | 16,116,971 |   |

----

**Item      2. Management’s Discussion and Analysis of Financial Condition and Results of      Operations**

**Overview**

***General***

***Revenue      Sources***

|  | · | *Local                services.*                We                receive revenues from providing local exchange telephone services                in both                our six rural territories and on a competitive basis throughout Maine.                These revenues include monthly subscription charges for basic service,                calling to adjacent communities on a per minute basis, local private                line                services and enhanced calling features, such as voicemail, caller                identification, call waiting and call forwarding. We receive revenues                for                providing long distance services to our customer. We also provide                billing                and collections services for other carriers under contract and receive                revenues from directory advertising in our local communities. A growing                portion of our subscribers take bundled service plans which contain                multiple services, including unlimited domestic long distance calling,                for                a flat rate. |
|--|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | · | *Network                access services.*                We                receive revenues from charges established to compensate us for the                origination, transport and termination of calls of long distance                and other                interexchange carriers. These include subscriber line charges imposed                on                end users and switched and special access charges paid by carriers.                Switched access charges for long distance services within Alabama,                Maine                and Missouri are based on rates approved by the Alabama Public Service                Commission (“APSC”), Maine Public Utilities Commission (“MPUC”) and                Missouri Public Service Commission (“MPSC”), respectively. Switched and                special access charges for interstate and international services                are based                on rates approved by the Federal Communications                Commission. |
|--|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | · | *Cable                television services.*                We                offer a variety of digital cable television services to a portion                of our                telephone service territory in Alabama and Missouri where we are                the                incumbent cable provider. Our offering includes high definition,                digital                video recording and pay-per-view services in Alabama. We also install                satellite television in portions of our territory and expect to expand                our                cable service area with the implementation of Internet Protocol Television                services (IPTV) by the end of 2008. |
|--|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

|  | · | *Internet                services.*                We                receive revenues from monthly recurring charges for digital high-speed                Internet data lines, as well as dial-up Internet services, including                dial-up customers throughout Maine and                Missouri. |
|--|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | · | *Transport                services.*                We                receive monthly recurring revenues for the rental of fiber to transport                data and other telecommunications services in Maine. We have increased                the                coverage of our fiber in Maine to cover 220                miles. |
|--|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

***Voice      and Data Access Line Trends***

|                                              |   | **Year                Ended December 31,** |   | **March                31,** |   | **June                30,** |   |
|---------------------------------------------------|--------|--------------------------------------------|--------|------------------------------|--------|-----------------------------|--------|
| **Key                Operating Statistics**       |   | **2006**                                   |   | **2007**                     |   | **2008**                    |   | **2008** |   |
| RLEC                access lines:                 |   |                                       |   |                         |   |                        |   |   |   |   |   |   |   |
| Voice                lines                        |   |                                       | 37,736 |                         |   | 36,687                      |   |   | 36,239 |   |   | 35,989 |   |
| Data                lines                         |   |                                       | 10,016 |                         |   | 12,160                      |   |   | 12,729 |   |   | 13,065 |   |
| RLEC                access line equivalents (1)   |   |                                       | 47,752 |                         |   | 48,847                      |   |   | 48,968 |   |   | 49,054 |   |
|                                              |   |                                       |   |                         |   |                        |   |   |   |   |   |   |   |
| CLEC                access lines:                 |   |                                       |   |                         |   |                        |   |   |   |   |   |   |   |
| Voice                lines                        |   |                                       | 14,267 |                         |   | 16,973                      |   |   | 17,457 |   |   | 17,740 |   |
| Data                lines                         |   |                                       | 2,016  |                         |   | 2,571                       |   |   | 2,602 |   |   | 2,735 |   |
| CLEC                access line equivalents (1)   |   |                                       | 16,283 |                         |   | 19,544                      |   |   | 20,059 |   |   | 20,475 |   |
|                                              |   |                                       |   |                         |   |                        |   |   |   |   |   |   |   |
| Otelco                access line equivalents (1) |   |                                       | 64,035 |                         |   | 68,391                      |   |   | 69,027 |   |   | 69,529 |   |
|                                              |   |                                       |   |                         |   |                        |   |   |   |   |   |   |   |
| Cable                television customers         |   |                                       | 4,188  |                         |   | 4,169                       |   |   | 4,175 |   |   | 4,109 |   |
| Dial-up                Internet customers         |   |                                       | 19,587 |                         |   | 15,249                      |   |   | 14,290 |   |   | 13,419 |   |

----

***Our      Rate and Pricing Structure***

**Categories      of Operating Expenses**

*Cost      of services and products. *

*Selling,      general and administrative expenses. *

*Depreciation      and amortization. *

***Our      Ability to Control Operating Expenses***

----

***Results      of Operations***

|                                                        |   | **Three Months Ended June 30,** |   | **Six Months Ended June 30,** |   |
|-------------------------------------------------------------|--------|-----------------------------------------------------|--------|---------------------------------------------------|--------|
|                                                        |   | **2007**                                            |   | **2008**                                          |   | **2007** |   | **2008** |   |
| Revenues                                                    |   |                                                |   |                                              |   |   |   |   |   |   |   |   |   |
| Local                services                               |   |                                                | 38.1   | %                                                 |   | 38.0 | % |   | 37.5 | % |   | 37.8 | % |
| Network                access                               |   |                                                | 35.9   |                                              |   | 34.5 |   |   | 36.7 |   |   | 35.3 |   |
| Cable                television                             |   |                                                | 3.2    |                                              |   | 3.2 |   |   | 3.2 |   |   | 3.1 |   |
| Internet                                                    |   |                                                | 16.7   |                                              |   | 17.2 |   |   | 16.6 |   |   | 17.0 |   |
| Transport                services                           |   |                                                | 6.1    |                                              |   | 7.1 |   |   | 6.0 |   |   | 6.8 |   |
| Total                revenues                               |   |                                                | 100.0  | %                                                 |   | 100.0 | % |   | 100.0 | % |   | 100.0 | % |
| Operating                expenses                           |   |                                                |   |                                              |   |   |   |   |   |   |   |   |   |
| Cost                of services and products                |   |                                                | 38.2   | %                                                 |   | 38.2 | % |   | 37.3 | % |   | 37.7 | % |
| Selling,                general and administrative expenses |   |                                                | 14.1   |                                              |   | 14.3 |   |   | 14.4 |   |   | 14.7 |   |
| Depreciation                and amortization                |   |                                                | 22.1   |                                              |   | 19.2 |   |   | 21.6 |   |   | 19.0 |   |
| Total                operating expenses                     |   |                                                | 74.4   |                                              |   | 71.7 |   |   | 73.3 |   |   | 71.4 |   |
|                                                        |   |                                                |   |                                              |   |   |   |   |   |   |   |   |   |
| Income                from operations                       |   |                                                | 25.6   |                                              |   | 28.3 |   |   | 26.7 |   |   | 28.6 |   |
|                                                        |   |                                                |   |                                              |   |   |   |   |   |   |   |   |   |
| Other                income (expense)                       |   |                                                |   |                                              |   |   |   |   |   |   |   |   |   |
| Interest                expense                             |   |                                                | (31.6  | )                                                 |   | (27.0 | ) |   | (31.5 | ) |   | (26.6 | ) |
| Change                in fair value of derivative           |   |                                                | 1.5    |                                              |   | 0.9 |   |   | 1.4 |   |   | (0.2 | ) |
| Other                income                                 |   |                                                | 0.9    |                                              |   | 0.4 |   |   | 1.3 |   |   | 1.2 |   |
| Total                other expense                          |   |                                                | (29.2  | )                                                 |   | (25.7 | ) |   | (28.8 | ) |   | (25.6 | ) |
|                                                        |   |                                                |   |                                              |   |   |   |   |   |   |   |   |   |
| Income                before income taxes                   |   |                                                | (3.6   | )                                                 |   | 2.6 |   |   | (2.1 | ) |   | 3.0 |   |
|                                                        |   |                                                |   |                                              |   |   |   |   |   |   |   |   |   |
| Income                tax expense                           |   |                                                | 3.0    |                                              |   | (0.3 | ) |   | 1.4 |   |   | (0.7 | ) |
|                                                        |   |                                                |   |                                              |   |   |   |   |   |   |   |   |   |
| Net                income available to common stockholders  |   |                                                | (0.6)  | %                                                 |   | 2.3 | % |   | (0.7) | % |   | 2.3 | % |

***Three      Months and Six Months Ended June 30, 2008 Compared to Three Months and Six      Month      Ended June 30, 2007***

*Total      revenues. *

*For      the three months ended June 30, 2007 and 2008*

|                              |   | **Three Months Ended ****June 30, ** |   | **Change** |   |
|-----------------------------------|--------|---------------------------------------------------------------|--------|------------|--------|
|                              |   | **2007**                                                      |   | **2008**   |   | **Amount** |   | **Percent** |   |
|                              |   | (dollars                in thousands)                         |   |
| Local                services     |   | $                                                             | 6,531  |       | $      | 6,712 |   | $ | 181 |   |   | 2.8 | % |
| Network                access     |   |                                                          | 6,141  |       |   | 6,105 |   |   | (36 | ) |   | (0.6 | ) |
| Cable                television   |   |                                                          | 548    |       |   | 566 |   |   | 18 |   |   | 3.3 |   |
| Internet                          |   |                                                          | 2,859  |       |   | 3,031 |   |   | 172 |   |   | 6.0 |   |
| Transport                services |   |                                                          | 1,039  |       |   | 1,255 |   |   | 216 |   |   | 20.8 |   |
| Total                             |   | $                                                             | 17,118 |       | $      | 17,669 |   | $ | 551 |   |   | 3.2 |   |

----

*For      the six months ended June 30, 2007 and 2008*

|                              |   | **Six Months Ended June 30,** |   | **Change** |   |
|-----------------------------------|--------|---------------------------------------------------|--------|------------|--------|
|                              |   | **2007**                                          |   | **2008**   |   | **Amount** |   | **Percent** |   |
|                              |   | (dollars                in thousands)             |   |
| Local                service      |   | $                                                 | 12,879 |       | $      | 13,438 |   | $ | 559 |   |   | 4.3 | % |
| Network                access     |   |                                              | 12,579 |       |   | 12,543 |   |   | (36 | ) |   | (0.3 | ) |
| Cable                television   |   |                                              | 1,096  |       |   | 1,112 |   |   | 16 |   |   | 1.5 |   |
| Internet                          |   |                                              | 5,680  |       |   | 6,032 |   |   | 352 |   |   | 6.2 |   |
| Transport                services |   |                                              | 2,057  |       |   | 2,403 |   |   | 346 |   |   | 16.8 |   |
| Total                             |   | $                                                 | 34,291 |       | $      | 35,528 |   | $ | 1,237 |   |   | 3.6 |   |

----

*Operating      expenses. *

*For      the three months ended June 30, 2007 and 2008*

|                                                        |   | **Three Months Ended ****June 30,** |   | **Change** |   |
|-------------------------------------------------------------|--------|---------------------------------------------------------|--------|------------|--------|
|                                                        |   | **2007**                                                |   | **2008**   |   | **Amount** |   | **Percent** |   |
|                                                        |   | (dollars                in thousands)                   |   |
| Cost                of services                             |   | $                                                       | 6,534  |       | $      | 6,746 |   | $ | 212 |   |   | 3.2 | % |
| Selling,                general and administrative expenses |   |                                                    | 2,420  |       |   | 2,527 |   |   | 107 |   |   | 4.4 |   |
| Depreciation                and amortization                |   |                                                    | 3,776  |       |   | 3,390 |   |   | (386 | ) |   | (10.2 | ) |
| Total                                                       |   | $                                                       | 12,730 |       | $      | 12,663 |   | $ | (67 | ) |   | (0.5 | ) |

*For      the six months ended June 30, 2007 and 2008*

|                                                        |   | **Six Months Ended ****June 30,** |   | **Change** |   |
|-------------------------------------------------------------|--------|-------------------------------------------------------|--------|------------|--------|
|                                                        |   | **2007**                                              |   | **2008**   |   | **Amount** |   | **Percent** |   |
|                                                        |   | (dollars                in thousands)                 |   |
| Cost                of services                             |   | $                                                     | 12,805 |       | $      | 13,398 |   | $ | 593 |   |   | 4.6 | % |
| Selling,                general and administrative expenses |   |                                                  | 4,921  |       |   | 5,221 |   |   | 300 |   |   | 6.1 |   |
| Depreciation                and amortization                |   |                                                  | 7,405  |       |   | 6,763 |   |   | (642 | ) |   | (8.7 | ) |
| Total                                                       |   | $                                                     | 25,131 |       | $      | 25,382 |   | $ | 251 |   |   | 1.0 |   |

----

*For      the three months ended June 30, 2007 and 2008*

|                                              |   | **Three Months Ended ****June 30,** |   | **Change** |   |
|---------------------------------------------------|--------|---------------------------------------------------------|--------|------------|--------|
|                                              |   | **2007**                                                |   | **2008**   |   | **Amount** |   | **Percent** |   |
|                                              |   | (dollars                in thousands)                   |   |
| Interest                expense                   |   | $                                                       | (5,412 | )          | $      | (4,773 | ) | $ | (639 | ) |   | (11.8) | % |
| Change                in fair value of derivative |   |                                                    | 251    |       |   | 167 |   |   | (84 | ) |   | (33.5 | ) |
| Other                income                       |   |                                                    | 166    |       |   | 64 |   |   | (102 | ) |   | (61.4 | ) |
| Income                tax expense                 |   |                                                    | 503    |       |   | (57 | ) |   | (560 | ) |   | (111.3 | ) |

*Interest      expense. *

*Change      in fair value of derivative associated with Class B common convertible to Class      A common. *

*Other      income. *

*Income      taxes. *

----

*For      the six months ended June 30, 2007 and 2008*

|                                              |   | **Six Months Ended ****June 30,** |    | **Change** |   |
|---------------------------------------------------|--------|-------------------------------------------------------|---------|------------|--------|
|                                              |   | **2007**                                              |    | **2008**   |   | **Amount** |   | **Percent** |   |
|                                              |   | (dollars                in thousands)                 |    |
| Interest                expense                   |   | $                                                     | (10,789 | )          | $      | (9,456 | ) | $ | (1,333 | ) |   | (12.4) | % |
| Change                in fair value of derivative |   |                                                  | 468     |       |   | (74 | ) |   | (542 | ) |   | (115.8 | ) |
| Other                income                       |   |                                                  | 447     |       |   | 431 |   |   | (16 | ) |   | (3.6 | ) |
| Income                tax expense                 |   |                                                  | 491     |       |   | (232 | ) |   | (723 | ) |   | (147.3 | ) |

*Interest      expense. *

*Change      in fair value of derivative associated with Class B common convertible to Class      A common. *

*Other      income. *

*Income      taxes. *

*Net      income. *

**Liquidity      and Capital Resources**

----

**Recent      Accounting Pronouncements**

*“Fair      Value Measurements”*

* *
*The      Fair Value Option for Financial Assets and Financial Liabilities - Including      an      Amendment of FASB Statement No. 115” *

----

*“Disclosures      about Derivative Instruments and Hedging Activities - an amendment of FASB      Statement No. 133”*
*Accounting      for Derivative Instruments and Hedging Activities”,*

*“Determination      of the Useful Life of Intangible Assets”*
*“Goodwill      and Other Intangible Assets”.*

*“The      Hierarchy of Generally Accepted Accounting Principles” *
*“The      Meaning of Present Fairly in Conformity with Generally Accepted Accounting      Principles”*

*“Determining      Whether an Instrument (or an Embedded Feature) Is Indexed to an Entity’s Own      Stock”*

*“Accounting      for Lessees for Maintenance Deposits Under Lease Arrangements”*

**Subsequent      Events**

----

**Item      3. Quantitative and Qualitative Disclosures about Market      Risk**

**Item      4. Controls and Procedures**

**PART      II OTHER INFORMATION**

**Item      4. Submission of Matters to a Vote of Security Holders**

|                               |   | **Votes For ** |       | **Votes Withheld** |   |
|------------------------------------|--------|--------------------------|------------|-------------------------|--------|
|                               |   |                     |       |                    |   |
| William                  Bak       |   |                     | 11,915,527 |                    |   | 23,947 |   |
| Michael                  D. Weaver |   |                     | 11,936,932 |                    |   | 2,542 |   |

|                                                                                          |   | **Votes For ** |       | **Votes Against ** |   | **Abstain ** |   | **Broker Non-Vote ** |   |
|-----------------------------------------------------------------------------------------------|--------|--------------------------|------------|------------------------------|--------|-------------------|--------|--------------------------------|--------|
|                                                                                          |   |                     |       |                         |   |              |   |                           |   |
| Ratification                  of appointment of independent registered public accounting firm |   |                     | 11,984,111 |                         |   | 74,002            |   |                           | 66,858 |   |   | 0 |   |

**Item      6. Exhibits**

----

**Signatures**

| Date:                August 8, 2008 | **OTELCO                INC.** |
|-------------------------------------|--------------------------------|
|                                |                           |   |
|                                | By:                            | /s/                Curtis L. Garner, Jr. |
|                                |                           | Curtis                L. Garner, Jr. |
|                                |                           | Chief                Financial Officer |

----

**EXHIBIT      INDEX**

| **Exhibit No.** |   | **Description**                                                                                                                                                                                                        |
|----------------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 31.1                 |   | Certificate pursuant to                Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of                1934 of                the Chief Executive Officer                             |
| 31.2                 |   | Certificate                pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange                Act of 1934 of the Chief Financial Officer                                                      |
| 32.1                 |   | Certificate                pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section                906 of                the Sarbanes-Oxley Act of 2002, of the Chief Executive                Officer  |
| 32.2                 |   | Certificate                pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section                906 of                the Sarbanes-Oxley Act of 2002, of the Chief Financial                Officer  |

----