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
      1934For
      the quarterly period ended March 31, 2009Or ̈
                          TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934For
      the transition period
from  to
  Commission
File Number: 1-32362
  OTELCO
INC.
 
 (Exact
name of registrant as specified in its charter)
 
 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)
 (205)
625-3574
 
 (Registrant’s
telephone number, including area code)
  N/A
 
 (Former
name, former address and former fiscal year, if changed since last
report)
 Indicate
by check mark whether the registrant: (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
  Yes  ý
                No   ̈
  Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was required to submit
and post such files).
  Yes   ̈
                No   ̈
  Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
  Large
      accelerated filer o
                Accelerated
      filer ý
                Non-accelerated
      filer o
                Smaller
      reporting company o
  Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
  Yes   ̈
                No  ý
  APPLICABLE
ONLY TO CORPORATE ISSUERS:
  Indicate
the number of shares outstanding of each of the issuer’s classes of common
stock, as of the latest practicable date.
  Class
                
                Outstanding
      at May 8, 2009Class
      A Common Stock ($0.01 par value per share)
                
                12,676,733Class
      B Common Stock ($0.01 par value per share)
                
                544,671
  
  OTELCO
INC.
 FORM
10-Q
 For
the three month period ended March 31, 2009
 TABLE
OF CONTENTS
  Page
  PART
      I  FINANCIAL INFORMATIONItem
      1.
                Financial
      Statements
                2Consolidated
      Balance Sheets as of December 31, 2008 and March 31, 2009
                2Consolidated
      Statements of Operations for the Three Months Ended March 31, 2008 and
      2009
                3Consolidated
      Statements of Cash Flows for the Three Months Ended March 31, 2008 and
      2009
                4Notes
      to Consolidated Financial Statements
                5Item
      2.
                Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
                15Item
      3.
                Quantitative
      and Qualitative Disclosures about Market Risk
                23Item
      4.
                Controls
      and Procedures
                23PART
      II  OTHER INFORMATIONItem
      6.
                Exhibits
                24
 
 i
  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 as of March 31, 2009.
  FORWARD-LOOKING
STATEMENTS
  This
report contains forward-looking statements that are subject to risks and
uncertainties.  Forward-looking statements give our current
expectations relating to our financial condition, results of operations, plans,
objectives, future performance and business.  These statements may
include words such as “anticipate,” “estimate,” “expect,” “project,” “plan,”
“intend,” “believe” and other words and terms of similar meaning in connection
with any discussion of the timing or nature of future operating or financial
performance or other events.  These forward-looking statements are
based on assumptions that we have made in light of our experience in the
industry in which we operate, as well as our perceptions of historical trends,
current conditions, expected future developments and other factors we believe
are appropriate under the circumstances.  Although we believe that
these forward-looking statements are based on reasonable assumptions, you should
be aware that many factors could affect our actual financial condition or
results of operations and cause actual results to differ materially from those
in the forward-looking statements.
  1
  PART
I  FINANCIAL INFORMATION
  Item
1.  Financial Statements
 OTELCO
      INC.
                    CONSOLIDATED BALANCE
      SHEETSDecember
      31,
                    2008
                
                
                March
      31,
                    2009Assets
                
                
                
                
                (unaudited)Current
      assetsCash
      and cash equivalents
                
                $
                13,542,255
                
                
                $
                16,424,881Accounts
      receivable:Due
      from subscribers, net of allowance for doubtful accounts of $318,446 and
      $361,348, respectively
                
                
                5,207,731
                
                
                
                4,977,439Unbilled
      receivables
                
                
                2,567,730
                
                
                
                2,487,246Other
                
                
                4,348,044
                
                
                
                4,470,202Materials
      and supplies
                
                
                2,305,755
                
                
                
                2,313,220Prepaid
      expenses
                
                
                1,141,908
                
                
                
                930,991Income
      tax receivable
                
                
                181,644
                
                
                
                181,644Deferred
      income taxes
                
                
                827,686
                
                
                
                827,686Total
      current assets
                
                
                30,122,753
                
                
                
                32,613,309Property
      and equipment, net
                
                
                75,407,062
                
                
                
                72,572,584Goodwill
                
                
                189,334,837
                
                
                
                189,334,837Intangible
      assets, net
                
                
                44,390,644
                
                
                
                41,681,083Investments
                
                
                2,015,583
                
                
                
                2,009,205Deferred
      financing costs
                
                
                8,315,921
                
                
                
                7,977,944Deferred
      income taxes
                
                
                5,897,382
                
                
                
                5,897,382Interest
      rate cap
                
                
                7,765
                
                
                
                1,459Deferred
      charges
                
                
                49,540
                
                
                
                36,868Total
      assets
                
                $
                355,541,487
                
                
                $
                352,124,671Liabilities
      and Stockholders’ EquityCurrent
      liabilitiesAccounts
      payable
                
                $
                2,312,920
                
                
                $
                2,357,206Accrued
      expenses
                
                
                6,632,287
                
                
                
                5,998,802Advance
      billings and payments
                
                
                2,024,123
                
                
                
                2,020,874Customer
      deposits
                
                
                180,582
                
                
                
                196,883Total
      current liabilities
                
                
                11,149,912
                
                
                
                10,573,765Deferred
      income taxes
                
                
                45,962,402
                
                
                
                45,962,402Interest
      rate swaps
                
                
                -
                
                
                
                962,683Advance
      billings and payments
                
                
                739,736
                
                
                
                729,390Other
      liabilities
                
                
                188,346
                
                
                
                157,124Long-term
      notes payable
                
                
                278,799,513
                
                
                
                278,779,842Total
      liabilities
                
                
                336,839,909
                
                
                
                337,165,206Derivative
      liability
                
                
                238,054
                
                
                
                226,474Class
      B common convertible to senior subordinated notes
                
                
                4,085,033
                
                
                
                4,085,033Stockholders’
      equityClass
      A Common Stock, $.01 par value-authorized 20,000,000 shares; issued and
      outstanding 12,676,733 shares
                
                
                126,767
                
                
                
                126,767Class
      B Common Stock, $.01 par value-authorized 800,000 shares; issued and
      outstanding 544,671 shares
                
                
                5,447
                
                
                
                5,447Additional
      paid in capital
                
                
                19,277,959
                
                
                
                17,043,685Retained
      deficit
                
                
                (3,870,923
                )
                
                
                (4,742,274
                )Accumulated
      other comprehensive loss
                
                
                (1,160,759
                )
                
                
                (1,785,667
                )Total
      stockholders’ equity
                
                
                14,378,491
                
                
                
                10,647,958Total
      liabilities and stockholders’ equity
                
                $
                355,541,487
                
                
                $
                352,124,671The
      accompanying notes are an integral part of these consolidated financial
      statements.
 2
  OTELCO
      INC.CONSOLIDATED
      STATEMENTS OF OPERATIONS(unaudited)Three
      months ended
                                                                                                                                                                                                                                                                                                                March
      31,2008
                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                              2009RevenuesLocal
      services
                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                              $
                                                                                                                                                                                                                                                                                                              6,726,190
                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                              $
                                                                                                                                                                                                                                                                                                              11,854,980Network
      access services
                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                              6,437,654
                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                              8,094,133Cable
      television services
                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                              546,162
                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                              606,687Internet
      services
                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                              3,001,466
                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                              3,541,677Transport
      services
                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                              1,147,948
                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                              1,402,699Total
      revenues
                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                              17,859,420
                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                              25,500,176Operating
      expensesCost
      of services
                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                              6,652,111
                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                              10,666,456Selling,
      general and administrative expenses
                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                              2,693,983
                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                              3,576,674Depreciation
      and amortization
                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                              3,373,248
                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                              6,791,839Total
      operating expenses
                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                              12,719,342
                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                              21,034,969Income
      from operations
                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                              5,140,078
                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                              4,465,207Other
      income (expense)Interest
      expense
                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                              (4,682,840
                                                                                                                                                                                                                                                                                                              )
                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                              (6,598,953
                                                                                                                                                                                                                                                                                                              )Change
      in fair value of derivative
                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                              (240,905
                                                                                                                                                                                                                                                                                                              )
                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                              11,580Other
      income
                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                              366,580
                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                              225,860Total
      other expenses
                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                              (4,557,165
                                                                                                                                                                                                                                                                                                              )
                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                              (6,361,513
                                                                                                                                                                                                                                                                                                              )Income
      (loss) before income tax
                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                              582,913
                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                              (1,896,306
                                                                                                                                                                                                                                                                                                              )Income
      tax (expense) benefit
                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                              (174,874
                                                                                                                                                                                                                                                                                                              )
                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                              1,024,953Net
      income (loss) available to common stockholders
                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                              $
                                                                                                                                                                                                                                                                                                              408,039
                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                              $
                                                                                                                                                                                                                                                                                                              (871,353
                                                                                                                                                                                                                                                                                                              )Weighted
      average shares outstanding:Basic
                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                              12,676,733
                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                              12,676,733Diluted
                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                              13,221,404
                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                              13,221,404Basic
      net income (loss) per share
                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                              $
                                                                                                                                                                                                                                                                                                              0.03
                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                              $
                                                                                                                                                                                                                                                                                                              (0.07
                                                                                                                                                                                                                                                                                                              )Diluted
      net income (loss) per share
                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                              $
                                                                                                                                                                                                                                                                                                              0.03
                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                              $
                                                                                                                                                                                                                                                                                                              (0.07
                                                                                                                                                                                                                                                                                                              )Dividends
      declared per share
                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                              $
                                                                                                                                                                                                                                                                                                              0.18
                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                              $
                                                                                                                                                                                                                                                                                                              0.18
 
 The
accompanying notes are an integral part of these consolidated financial
statements.
 3
  OTELCO
      INC.CONSOLIDATED
      STATEMENTS OF CASH FLOWS(unaudited)Three
      months endedMarch
      31,2008
                                                                    
                                                                    
                                                                    2009Cash
      flows from operating activities:Net
      income (loss)
                                                                    
                                                                    $
                                                                    408,039
                                                                    
                                                                    
                                                                    $
                                                                    (871,353
                                                                    )Adjustments
      to reconcile net income to cash flows from operating
      activities:Depreciation
                                                                    
                                                                    
                                                                    2,756,265
                                                                    
                                                                    
                                                                    
                                                                    3,680,873Amortization
                                                                    
                                                                    
                                                                    616,983
                                                                    
                                                                    
                                                                    
                                                                    3,110,966Interest
      rate caplet
                                                                    
                                                                    
                                                                    230,232
                                                                    
                                                                    
                                                                    
                                                                    344,082Amortization
      of debt premium
                                                                    
                                                                    
                                                                    (17,520
                                                                    )
                                                                    
                                                                    
                                                                    (19,671
                                                                    )Amortization
      of loan costs
                                                                    
                                                                    
                                                                    372,828
                                                                    
                                                                    
                                                                    
                                                                    337,976Change
      in fair value of derivative
                                                                    
                                                                    
                                                                    240,905
                                                                    
                                                                    
                                                                    
                                                                    (11,580
                                                                    )Provision
      for uncollectible revenue
                                                                    
                                                                    
                                                                    54,756
                                                                    
                                                                    
                                                                    
                                                                    58,691Changes
      in assets and liabilities; net of assets and liabilities
      acquired:Accounts
      receivables
                                                                    
                                                                    
                                                                    (15,608
                                                                    )
                                                                    
                                                                    
                                                                    129,927Material
      and supplies
                                                                    
                                                                    
                                                                    (228,321
                                                                    )
                                                                    
                                                                    
                                                                    (7,465
                                                                    )Prepaid
      expenses and other assets
                                                                    
                                                                    
                                                                    219,976
                                                                    
                                                                    
                                                                    
                                                                    210,917Income
      tax receivable
                                                                    
                                                                    
                                                                    255,106
                                                                    
                                                                    
                                                                    
                                                                    -Accounts
      payable and accrued liabilities
                                                                    
                                                                    
                                                                    80,081
                                                                    
                                                                    
                                                                    
                                                                    (589,196
                                                                    )Advance
      billings and payments
                                                                    
                                                                    
                                                                    (13,224
                                                                    )
                                                                    
                                                                    
                                                                    (13,595
                                                                    )Other
      liabilities
                                                                    
                                                                    
                                                                    2,310
                                                                    
                                                                    
                                                                    
                                                                    (14,921
                                                                    )Net
      cash from operating activities
                                                                    
                                                                    
                                                                    4,962,808
                                                                    
                                                                    
                                                                    
                                                                    6,345,651Cash
      flows from investing activities:Acquisition
      and construction of property and equipment
                                                                    
                                                                    
                                                                    (2,413,008
                                                                    )
                                                                    
                                                                    
                                                                    (1,228,751
                                                                    )Deferred
      charges
                                                                    
                                                                    
                                                                    (65,674
                                                                    )
                                                                    
                                                                    
                                                                    -Net
      cash used in investing activities
                                                                    
                                                                    
                                                                    (2,478,682
                                                                    )
                                                                    
                                                                    
                                                                    (1,228,751
                                                                    )Cash
      flows from financing activities:Cash
      dividends paid
                                                                    
                                                                    
                                                                    (2,234,274
                                                                    )
                                                                    
                                                                    
                                                                    (2,234,274
                                                                    )Net
      cash used in financing activities
                                                                    
                                                                    
                                                                    (2,234,274
                                                                    )
                                                                    
                                                                    
                                                                    (2,234,274
                                                                    )Net
      increase in cash and cash equivalents
                                                                    
                                                                    
                                                                    249,852
                                                                    
                                                                    
                                                                    
                                                                    2,882,626Cash
      and cash equivalents, beginning of period
                                                                    
                                                                    
                                                                    12,810,497
                                                                    
                                                                    
                                                                    
                                                                    13,542,255Cash
      and cash equivalents, end of period
                                                                    
                                                                    $
                                                                    13,060,349
                                                                    
                                                                    
                                                                    $
                                                                    16,424,881Supplemental
      disclosures of cash flow information:Interest
      paid
                                                                    
                                                                    $
                                                                    4,222,443
                                                                    
                                                                    
                                                                    $
                                                                    6,215,276Income
      taxes received
                                                                    
                                                                    $
                                                                    (229,106
                                                                    )
                                                                    
                                                                    $
                                                                    (61,342
                                                                    )
  The
accompanying notes are an integral part of these consolidated financial
statements.
 4
  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (unaudited)
 
 1.
                Organization
      and Basis of Financial
Reporting
  Basis
of Presentation and Principles of Consolidation
 
 The
consolidated financial statements include the accounts of Otelco Inc. (the
“Company”) and its subsidiaries, all of which are wholly owned. These
include:  Otelco Telecommunications LLC (“OTC”); Otelco Telephone LLC
(“OTP”); Hopper Holding Company, Inc. (“HHC”) and its wholly owned subsidiary,
Hopper Telecommunications Company, Inc. (“HTC”); Brindlee Holdings LLC (“BH”)
and its wholly owned subsidiary Brindlee Mountain Telephone Company, Inc.
(“BMTC”); Page & Kiser Communications, Inc. (“PKC”) and its wholly owned
subsidiary Blountsville Telephone Company, Inc. (“BTC”); Mid-Missouri Holding
Corporation (“MMH”) and its wholly owned subsidiary Mid-Missouri Telephone
Company (“MMT”) and its wholly owned subsidiary Imagination, Inc.; Mid-Maine
Communications, Inc. (“MMeT” or “Mid-Maine”) and its wholly owned subsidiaries
Mid-Maine Telecom, Inc. (“MMTI”) and Mid-Maine TelPlus (“MMTP”); Granby
Holdings, Inc. (“GH”) and its wholly owned subsidiary The Granby Telephone &
Telegraph Co. of Massachusetts (“GTT”); War Holdings, Inc. (“WH”) and its wholly
owned subsidiary War Acquisition Corporation (“WT”); and Pine Tree Holdings,
Inc. (“PTH”) and its wholly owned subsidiaries The Pine Tree Telephone and
Telegraph Company (“PTT”), Saco River Telegraph and Telephone Company (“SRT”),
CRC Communications of Maine, Inc. (“PTN”), and Communications Design Acquisition
Corporation (“CDAC”).
 
 GH, WH
and PTH (collectively, the “CR Companies”) were acquired on October 31, 2008
from Country Road Communications LLC (“CRC”).
 
 The
accompanying consolidated financial statements include the accounts of the
Company and all of the aforesaid subsidiaries after elimination of all material
intercompany balances and transactions.  The unaudited operating
results for the three months ended March 31, 2009 are not necessarily indicative
of the results that may be expected for the year ending December 31,
2009.
 
 The
consolidated financial statements and notes included in this Form 10-Q should be
read in conjunction with the consolidated financial statements and notes thereto
included in the Company’s annual report on Form 10-K for the year ended December
31, 2008.  The interim consolidated financial information herein is
unaudited.  The information reflects all adjustments (which include
only normal recurring adjustments), which are, in the opinion of management,
necessary for a fair presentation of the financial position and results of
operations for the periods included in the report.
 
 Certain
prior year amounts have been reclassified to conform with the current year’s
presentation.
 
 Recent
Accounting Pronouncements
 
 In
December 2007, the Financial Accounting Standards Board (“FASB”) issued
Statement of Financial Accounting Standards (“SFAS”) No. 141R, Business Combinations, or
SFAS 141R.  SFAS 141R replaces SFAS No. 141, Business Combinations, and
establishes principles and requirements for how the acquirer of a business
recognizes and measures in its financial statements the identifiable assets
acquired, the liabilities assumed, and any non-controlling interest in the
acquiree.  The statement also provides guidance for recognizing and
measuring the goodwill acquired in the business combination and determines what
information to disclose to enable users of the financial statements to evaluate
the nature and financial effects of the business combination.  SFAS
141R is effective for financial statements issued for fiscal years beginning
after December 31, 2008.  Accordingly, any business combinations the
Company engaged in prior to January 1, 2009 are recorded and disclosed following
generally accepted accounting principles as in effect on December 31,
2008.  The adoption of SFAS 141R will have an impact on the
consolidated financial statements but the nature and magnitude of the specific
effects will depend on the nature, terms, and size of acquisitions the Company
consummates after the effective date.
  5
  Effective
January 1, 2008, the Company adopted SFAS No. 157, Fair Value Measurements, or
SFAS 157. In February 2008, the FASB issued a staff position (FSP 157-2) that
delays the effective date of SFAS 157 for all non-financial assets and
liabilities except those recognized or disclosed at least annually, until
periods beginning after December 15, 2008. SFAS 157 defines fair value,
establishes a framework for measuring fair value and expands disclosure about
fair value measurements. Valuation techniques used to measure fair value under
SFAS 157 must maximize the use of observable inputs. The standard describes a
fair value hierarchy utilizing three levels of input. The first two levels are
considered observable and the third, unobservable:
 
 Level
      1 –
                    Quoted
      prices in active markets for identical assets or
    liabilities.Level
      2 –
                    Inputs
      other than Level 1 that are directly or indirectly observable, such as
      quoted prices for similar assets or liabilities or quoted prices in
      markets which are not active. The inputs are generally observable or can
      be corroborated in observable markets.Level
      3 –
                    Unobservable
      inputs where there is little or no market activity to support
      valuation.
  The
adoption of SFAS 157 did not have a material impact on our consolidated
financial statements.
 
 In March
2008, the FASB issued SFAS No. 161, Disclosures about Derivative
Instruments and Hedging Activities – an amendment of FASB Statement No.
133, or SFAS 161.  SFAS 161 expands quarterly disclosure
requirements in SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, about an entity’s derivative
instruments and hedging activities.  SFAS 161 is effective for fiscal
years beginning after November 15, 2008.  The implementation of this
standard did not have a material impact on our consolidated financial position
and results of operations.
 
 In
December 2008, the FASB issued FSP FAS 132(R)-1, Employers’ Disclosures about
Postretirement Benefit Plan Assets, or FSP FAS 132(R)-1, which requires
enhanced disclosures about plan assets in an employer’s defined benefit pension
or other postretirement plan.  The disclosures are intended to provide
users of financial statements with a greater understanding of how investment
allocation decisions are made, the major categories of plan assets, the inputs
and valuation techniques used to measure the fair value of plan assets and
significant concentrations of risk within plan assets.  FSP FAS
132(R)-1 will apply to our plan asset disclosures beginning with our fiscal year
ending December 31, 2009.  The implementation of this standard will
not have a material impact on our consolidated financial position and results of
operations.
 
 In April
2009, the FASB issued FSP 107-1 and APB 28-1, Interim Disclosures about Fair Value
of Financial Instruments, which requires disclosures about fair value of
financial instruments for interim reporting periods.  This guidance is
effective for interim reporting periods ending after June 15, 2009 and will
apply to our disclosures beginning with our second fiscal quarter of
2009.  The implementation of this standard will not have a material
impact on our consolidated financial position and results of
operations.
  6
  In April
2009, the FASB issued FSP 157-4, Determining Fair Value When the
Volume and Level of Activity for the Asset or Liability Have Significantly
Decreased and Identifying Transactions That Are Not Orderly, which
provides guidance for estimating fair value when the volume and level of
activity for the asset or liability have significantly
decreased.  This guidance is effective for interim reporting periods
ending after June 15, 2009 and will apply to our disclosures beginning with our
second fiscal quarter of 2009.  The implementation of this standard
will not have a material impact on our consolidated financial position and
results of operations.
 
 In April
2009, the FASB issued FSP FAS 115-2 and FAS 124-2, Recognition and Presentation of
Other-Than-Temporary Impairments, which amends the other-than-temporary
impairment guidance for debt securities to make the guidance more operational
and to improve the presentation and disclosure of other-than-temporary
impairments on debt and equity securities in the financial
statements.  This guidance is effective for interim reporting periods
ending after June 15, 2009 and will apply to our disclosures beginning with our
second fiscal quarter of 2009.  The implementation of this standard
will not have a material impact on our consolidated financial position and
results of operations.
 
 2.
                Commitments
      and Contingencies
 
 From time
to time, we may be involved in various claims, legal actions and regulatory
proceedings incidental to and in the ordinary course of business, including
administrative hearings of the Alabama, Maine, Massachusetts, Missouri, New
Hampshire, and West Virginia Public Service Commissions related primarily to
rate making.  Currently, none of the legal proceedings are expected to
have a material adverse effect on our business.
 
 3.
                Derivative
      and Hedge Activities
 
 An
interest rate cap was purchased on December 21, 2004, coincident with the
closing of our initial public offering and the recapitalization of our senior
notes payable. The interest rate cap was purchased to mitigate the risk of
rising interest rates to limit or cap the rate at 3% for the three month LIBOR
index plus the applicable margin on $80 million in senior debt for five years.
On July 5, 2007, the Company repaid $55,353,032 in debt, reducing its senior
debt below the level of the rate cap. The cap was considered an effective hedge
for the remaining senior debt as all critical terms of the interest rate cap are
identical to the underlying debt it hedges. The balance of the cap at that time
was considered as an investment and adjustments were made to accumulated other
comprehensive income to reflect this change. On October 31, 2008, the Company
implemented its second amended and restated credit agreement, increasing senior
debt to $173.5 million in conjunction with the acquisition of the CR Companies.
The full $80 million rate cap is accounted for as an effective hedge from that
date forward.
 
 The
second amended and restated credit agreement requires that the Company acquire
interest rate protection for at least half of the $173.5 million senior debt
through at least October 31, 2010. In addition to the existing rate cap hedge,
the Company has completed two interest rate swaps with approved counterparties.
The first swap has a notional amount of $90 million with the Company paying a
fixed rate of 1.85% and the counterparty paying a variable rate based upon the
three month LIBOR interest rate. It is effective from February 9, 2009 through
February 8, 2012. The second swap has a notional amount of $60 million with the
Company paying a fixed rate of 2.0475% and the counterparty paying a variable
rate based upon the three month LIBOR interest rate. It is effective from
February 9, 2010 through February 8, 2012. Both swaps are accounted for as an
effective hedge.
 
 Changes
in the fair value of the effective portion of the interest rate hedges are not
included in earnings but are reported as a component of accumulated other
comprehensive income. For the three months ended March 31, 2008 and 2009, the
change in the fair value of the effective portion of the interest rate hedges
was $849,092 and $(620,070), respectively.
  7
  The cost
of the effective portion of the interest rate cap is expensed as interest over
the effective life of the hedge in accordance with the quarterly value of the
caplets as determined at the date of inception.  The expense related
to the ineffective portion of the interest rate cap in 2008 is reflected in the
change in fair value of derivative.  For the three months ended March
31, 2008 and 2009, the cost of the effective portion of the interest rate cap
was $230,232 and $344,082, respectively.
 
 4.
                Income
      (Loss) per Common Share and Potential Common
  Share
  Basic
income (loss) per common share is computed by dividing net income (loss) by the
weighted-average number of shares outstanding for the period.  Diluted
income (loss) per common share reflects the potential dilution that could occur
if the Class B common stock were exercised into Income Deposit Securities
(“IDS”) units.  Class B common stock is convertible on a one-for-one
basis into IDS units, each of which includes a Class A common
share.
  A
reconciliation of the common shares and net income (loss) for the Company’s
basic and diluted income (loss) per common share calculation is as
follows:
  For
      the three monthsended
      March 31,2008
                                  
                                  
                                  2009Weighted
      average common shares-basic
                                  
                                  
                                  12,676,733
                                  
                                  
                                  
                                  12,676,733Effect
      of dilutive securities
                                  
                                  
                                  544,671
                                  
                                  
                                  
                                  544,671Weighted-average
      common shares and potentialcommon
      shares-diluted
                                  
                                  
                                  13,221,404
                                  
                                  
                                  
                                  13,221,404Net
      income (loss) available to common stockholders
                                  
                                  $
                                  408,039
                                  
                                  
                                  $
                                  (871,353
                                  )Net
      income (loss) per basic share
                                  
                                  $
                                  0.03
                                  
                                  
                                  $
                                  (0.07
                                  )Net
      income (loss) available to common stockholders
                                  
                                  $
                                  408,039
                                  
                                  
                                  $
                                  (871,353
                                  )Less:
      Change in fair value of B share derivative
                                  
                                  
                                  (15,568
                                  )
                                  
                                  
                                  (11,580
                                  )Net
      income (loss) available for diluted shares
                                  
                                  $
                                  392,471
                                  
                                  
                                  $
                                  (882,933
                                  )Net
      income (loss) per diluted share
                                  
                                  $
                                  0.03
                                  
                                  
                                  $
                                  (0.07
                                  )
  5.
                  Fair
      Value Measurements
 In
accordance with SFAS 157, the following table represents the Company’s fair
value hierarchy for its financial assets and liabilities as of March 31,
2009:
  8
  March
      31, 2009Fair
      Value
                                                                  
                                                                  
                                                                  Level
      1(1)
                                                                  
                                                                  
                                                                  Level
      2(2)
                                                                  
                                                                  
                                                                  Level
      3(3)AssetsCash
      and cash equivalents
                                                                  
                                                                  $
                                                                  16,424,881
                                                                  
                                                                  
                                                                  $
                                                                  16,424,881
                                                                  
                                                                  
                                                                  $
                                                                  -
                                                                  
                                                                  
                                                                  $
                                                                  -Interest
      rate cap
                                                                  
                                                                  
                                                                  1,459
                                                                  
                                                                  
                                                                  
                                                                  -
                                                                  
                                                                  
                                                                  
                                                                  1,459
                                                                  
                                                                  
                                                                  
                                                                  -Co-operative
      patronage shares
                                                                  
                                                                  
                                                                  1,541,410
                                                                  
                                                                  
                                                                  
                                                                  -
                                                                  
                                                                  
                                                                  
                                                                  -
                                                                  
                                                                  
                                                                  
                                                                  1,541,410Total
      assets
                                                                  
                                                                  $
                                                                  17,967,750
                                                                  
                                                                  
                                                                  $
                                                                  16,424,881
                                                                  
                                                                  
                                                                  $
                                                                  1,459
                                                                  
                                                                  
                                                                  $
                                                                  1,541,410LiabilitiesInterest
      rate swaps
                                                                  
                                                                  $
                                                                  962,683
                                                                  
                                                                  
                                                                  $
                                                                  -
                                                                  
                                                                  
                                                                  $
                                                                  962,683
                                                                  
                                                                  
                                                                  $
                                                                  -Class
      B derivative liability
                                                                  
                                                                  
                                                                  226,474
                                                                  
                                                                  
                                                                  
                                                                  -
                                                                  
                                                                  
                                                                  
                                                                  -
                                                                  
                                                                  
                                                                  
                                                                  226,474Total
      liabilities
                                                                  
                                                                  $
                                                                  1,189,157
                                                                  
                                                                  
                                                                  $
                                                                  -
                                                                  
                                                                  
                                                                  $
                                                                  962,683
                                                                  
                                                                  
                                                                  $
                                                                  226,474
  (1)
                    Quoted
      prices in active markets for identical assets.(2)
                    Significant
      other observable inputs.(3)
                    Significant
      unobservable
inputs.
 
 The
Company retains its cash and cash equivalents in short-term interest bearing
instruments whose value is observable on a daily basis. Its interest rate cap is
valued at the end of each quarter by market experts in that business based on
similar transactions in the same financial market on the day of
valuation.  Patronage shares have been issued primarily by one of our
lenders which operates as a co-operative.  The Company does not pay
for these shares but receives them as a non-cash dividend. The market for these
shares is limited to the issuing organization and subject to uncertainty of
future redemption for cash. These shares are valued at approximately 55% of
their originally issued value. While the issuer and the Company expect these
shares to be worth their issued value, the current valuation recognizes some
uncertainty of their future redemption value.
  The
interest rate swaps are valued at the end of each quarter by market experts in
that business based on similar transactions and rates in an active financial
market.  The Class B derivative is valued at the end of each quarter
utilizing current observable factors and a market based model developed by a
company whose business includes the provision of valuation
expertise.  Annually, the Company evaluates the probability of its
Class B shares converting to IDS units in advance of their unrestricted December
2009 conversion date.  This estimate, as well as current market
conditions, impacts the quarterly valuation of the B share derivative
liability.   This liability is extinguished once the Class B
shares can be converted into IDS units.  This conversion can occur
without any financial test after December 21, 2009.
  6.
                Acquisitions
 On
October 31, 2008, the Company acquired 100% of the outstanding common stock of
the CR Companies from CRC.  GH owns 100% of its operating subsidiary
GTT. WH owns 100% of its operating subsidiary WT. PTH owns 100% of its operating
subsidiaries, PTT, SRT, PTN, and CDAC. These operating subsidiaries provide
telecommunications solutions, including voice, data and Internet services, to
residential and business customers in portions of Massachusetts, Maine and West
Virginia and extend the Company’s presence in the New England
market.  The acquisition added over 24,000 retail access line
equivalents to the Company’s presence in Maine; almost 5,000 retail access line
equivalents in Massachusetts and West Virginia; and a growing wholesale business
in New England.
 
 The
acquisition agreement relating to the CR Companies provided for cash
consideration of $101,329,000 subject to adjustment as provided in the
acquisition agreement, plus transaction costs.  The purchase price was
$109,003,040, including transaction costs.  The excess of the purchase
price over the market value of assets and liabilities is reflected as goodwill
of $54,764,402.  The goodwill related to the acquisition is not
deductible for tax purposes.  The aggregate consideration paid for the
acquisition was as follows:
  9
  Cash
                  
                  $
                  150,008Additional
      senior debt notes payable
                  
                  
                  108,853,032Purchase
      price
                  
                  $
                  109,003,040
 
 The
allocation of the net purchase price for the CR Companies acquisition was as
follows:
  October
      31, 2008Cash
                            
                            $
                            247,285Other
      current assets
                            
                            
                            4,602,298Property
      and equipment
                            
                            
                            24,034,772Intangible
      assets
                            
                            
                            37,800,000Goodwill
                            
                            
                            54,764,402Other
      assets
                            
                            
                            6,142,596Current
      liabilities
                            
                            
                            (2,948,933
                            )Deferred
      income tax liabilities
                            
                            
                            (15,614,962
                            )Other
      liabilities
                            
                            
                            (24,368
                            )Purchase
      price
                            
                            $
                            109,003,040
 
 Property
and equipment at the time of acquisition had a fair value of $24.0 million and
remaining lives of five to 40 years, which is consistent with current
policy.  The intangible assets at the time of acquisition included
regulated and unregulated customer based assets at a fair value of $17 million
which had remaining lives of six to nine years and a non-competition agreement
fair valued at $1.2 million which had a remaining life of one
year.  Unregulated contract based assets had a fair value of $19.6
million at the time of acquisition and remaining lives of seven
years.
 
 Prior to
the closing of the acquisition, the Company entered into a second amended and
restated credit agreement, dated as of October 20, 2008, to amend and restate
the amended and restated credit agreement, dated as of July 3, 2006, as amended
on July 13, 2007, by and among the Company and the other credit parties to the
agreement and General Electric Capital Corporation, as a lender and agent for
the lenders, and other lenders from time to time party thereto.  The
credit facilities under the second amended and restated credit agreement are
comprised of:
 
 ●
                Term
      loans of $173.5 million due October 31, 2013, consisting of an original
      term loan of $64.6 million, and an additional term loan of $108.9 million,
      used to finance the acquisition and related transaction costs and to
      provide working capital for the Company and its subsidiaries and for other
      corporate purposes; and●
                A
      revolving loan commitment of up to $15
million.
 
 The term
loan facility was fully drawn concurrent with closing.  Interest rates
applicable to the term loan and any revolving loans were an index rate plus
3.00% or LIBOR plus 4.00%.  In addition, there are fees associated
with undrawn revolver balances and certain annual fees.
 
 The
acquisition was accounted for using the purchase method of accounting and
accordingly, the accompanying financial statements include the financial
position and results of operations from the date of acquisition.
 
 The
following unaudited pro forma information presents the combined results of
operations of the Company as though the acquisition of the CR Companies had
occurred at the beginning of the preceding year.  The results include
certain adjustments, including increased interest expense on notes payable and
increased amortization expense related to intangible assets.  The pro
forma financial information does not necessarily reflect the results of
operations had the acquisition been completed at the beginning of the period or
those which may be obtained in the future.
  10
 Three
      months endedMarch
      31, 2008(unaudited)Revenues
                    
                    $
                    25,696,670Income
      from operations
                    
                    
                    4,300,311Net
      loss
                    
                    
                    (1,187,617
                    )Basic
      net loss per share
                    
                    $
                    (0.09
                    )Diluted
      net loss per share
                    
                    $
                    (0.09
                    )
  7.
                Subsidiary
      Guarantees
 The
Company has no independent assets or operations separate from its operating
subsidiaries.  The guarantees of its senior subordinated notes by 12
of its 14 operating subsidiaries are full and unconditional, joint and
several.  The operating subsidiaries have no independent long-term
notes payable.  There are no significant restrictions on the ability
of the Company to obtain funds from its operating subsidiaries by dividend or
loan.  The condensed consolidated financial information is provided
for the guarantor entities.
  The
following tables present condensed consolidating balance sheets as of December
31, 2008 and March 31, 2009; condensed consolidating statements of operations
for the three months ended March 31, 2008 and 2009; and condensed consolidating
statements of cash flows for the three months ended March 31, 2008 and
2009.
  Otelco
      Inc.Condensed
      Consolidating Balance SheetDecember
      31,
2008
  Guarantor
                            
                            
                            Non-GuarantorParent
                            
                            
                            Subsidiaries
                            
                            
                            Subsidiaries
                            
                            
                            Eliminations
                            
                            
                            ConsolidatedASSETSCurrent
      assetsCash
      and cash equivalents
                            
                            $
                            -
                            
                            
                            $
                            13,521,138
                            
                            
                            $
                            21,117
                            
                            
                            $
                            -
                            
                            
                            $
                            13,542,255Accounts
      receivable, net
                            
                            
                            -
                            
                            
                            
                            10,869,233
                            
                            
                            
                            1,254,272
                            
                            
                            
                            -
                            
                            
                            
                            12,123,505Materials
      and supplies
                            
                            
                            -
                            
                            
                            
                            1,029,214
                            
                            
                            
                            1,276,541
                            
                            
                            
                            -
                            
                            
                            
                            2,305,755Prepaid
      and other current assets
                            
                            
                            66,560
                            
                            
                            
                            994,500
                            
                            
                            
                            80,848
                            
                            
                            
                            -
                            
                            
                            
                            1,141,908Income
      tax receivables
                            
                            
                            181,644
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            181,644Deferred
      income taxes
                            
                            
                            827,686
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            827,686Investment
      in subsidiaries
                            
                            
                            99,481,692
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            (99,481,692
                            )
                            
                            
                            -Intercompany
      receivable
                            
                            
                            155,535,369
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            (155,535,369
                            )
                            
                            
                            -Total
      current assets
                            
                            
                            256,092,951
                            
                            
                            
                            26,414,085
                            
                            
                            
                            2,632,778
                            
                            
                            
                            (255,017,061
                            )
                            
                            
                            30,122,753Property
      and equipment, net
                            
                            
                            -
                            
                            
                            
                            62,507,141
                            
                            
                            
                            12,899,921
                            
                            
                            
                            -
                            
                            
                            
                            75,407,062Goodwill
                            
                            
                            -
                            
                            
                            
                            191,271,477
                            
                            
                            
                            (1,936,640
                            )
                            
                            
                            -
                            
                            
                            
                            189,334,837Intangibles
      assets, net
                            
                            
                            -
                            
                            
                            
                            41,286,088
                            
                            
                            
                            3,104,556
                            
                            
                            
                            -
                            
                            
                            
                            44,390,644Investments
                            
                            
                            1,000
                            
                            
                            
                            1,686,908
                            
                            
                            
                            327,675
                            
                            
                            
                            -
                            
                            
                            
                            2,015,583Deferred
      income taxes
                            
                            
                            5,897,382
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            5,897,382Other
      long-term assets
                            
                            
                            8,879,424
                            
                            
                            
                            (506,198
                            )
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            8,373,226Total
      assets
                            
                            $
                            270,870,757
                            
                            
                            $
                            322,659,501
                            
                            
                            $
                            17,028,290
                            
                            
                            $
                            (255,017,061
                            )
                            
                            $
                            355,541,487LIABILITIES
      AND STOCKHOLDERS' EQUITYCurrent
      liabilitiesAccounts
      payable and accrued expenses
                            
                            $
                            3,316,323
                            
                            
                            $
                            4,543,542
                            
                            
                            $
                            1,085,342
                            
                            
                            $
                            -
                            
                            
                            $
                            8,945,207Intercompany
      payables
                            
                            
                            -
                            
                            
                            
                            146,585,645
                            
                            
                            
                            8,949,724
                            
                            
                            
                            (155,535,369
                            )
                            
                            
                            -Other
      current liabilities
                            
                            
                            -
                            
                            
                            
                            2,129,257
                            
                            
                            
                            75,448
                            
                            
                            
                            -
                            
                            
                            
                            2,204,705Total
      current liabilities
                            
                            
                            3,316,323
                            
                            
                            
                            153,258,444
                            
                            
                            
                            10,110,514
                            
                            
                            
                            (155,535,369
                            )
                            
                            
                            11,149,912Deferred
      income taxes
                            
                            
                            10,316,819
                            
                            
                            
                            31,595,332
                            
                            
                            
                            4,050,251
                            
                            
                            
                            -
                            
                            
                            
                            45,962,402Other
      liabilities
                            
                            
                            -
                            
                            
                            
                            928,082
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            928,082Long-term
      notes payable
                            
                            
                            238,536,037
                            
                            
                            
                            40,263,476
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            278,799,513Derivative
      liability
                            
                            
                            238,054
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            238,054Class
      B common convertible to senior subordinated notes
                            
                            
                            4,085,033
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            4,085,033Stockholders'
      equity
                            
                            
                            14,378,491
                            
                            
                            
                            96,614,167
                            
                            
                            
                            2,867,525
                            
                            
                            
                            (99,481,692
                            )
                            
                            
                            14,378,491Total
      liabilities and stockholders' equity
                            
                            $
                            270,870,757
                            
                            
                            $
                            322,659,501
                            
                            
                            $
                            17,028,290
                            
                            
                            $
                            (255,017,061
                            )
                            
                            $
                            355,541,487
  11
  Otelco
      Inc.Condensed
      Consolidating Balance SheetMarch
      31, 2009Guarantor
                                                                              
                                                                              
                                                                              Non-GuarantorParent
                                                                              
                                                                              
                                                                              Subsidiaries
                                                                              
                                                                              
                                                                              Subsidiaries
                                                                              
                                                                              
                                                                              Eliminations
                                                                              
                                                                              
                                                                              ConsolidatedASSETSCurrent
      assetsCash
      and cash equivalents
                                                                              
                                                                              $
                                                                              -
                                                                              
                                                                              
                                                                              $
                                                                              16,402,999
                                                                              
                                                                              
                                                                              $
                                                                              21,882
                                                                              
                                                                              
                                                                              $
                                                                              -
                                                                              
                                                                              
                                                                              $
                                                                              16,424,881Accounts
      receivable, net
                                                                              
                                                                              
                                                                              -
                                                                              
                                                                              
                                                                              
                                                                              10,780,828
                                                                              
                                                                              
                                                                              
                                                                              1,154,059
                                                                              
                                                                              
                                                                              
                                                                              -
                                                                              
                                                                              
                                                                              
                                                                              11,934,887Materials
      and supplies
                                                                              
                                                                              
                                                                              -
                                                                              
                                                                              
                                                                              
                                                                              1,050,683
                                                                              
                                                                              
                                                                              
                                                                              1,262,537
                                                                              
                                                                              
                                                                              
                                                                              -
                                                                              
                                                                              
                                                                              
                                                                              2,313,220Prepaid
      and other current assets
                                                                              
                                                                              
                                                                              123,243
                                                                              
                                                                              
                                                                              
                                                                              745,641
                                                                              
                                                                              
                                                                              
                                                                              62,107
                                                                              
                                                                              
                                                                              
                                                                              -
                                                                              
                                                                              
                                                                              
                                                                              930,991Income
      tax receivables
                                                                              
                                                                              
                                                                              181,644
                                                                              
                                                                              
                                                                              
                                                                              -
                                                                              
                                                                              
                                                                              
                                                                              -
                                                                              
                                                                              
                                                                              
                                                                              -
                                                                              
                                                                              
                                                                              
                                                                              181,644Deferred
      income taxes
                                                                              
                                                                              
                                                                              827,686
                                                                              
                                                                              
                                                                              
                                                                              -
                                                                              
                                                                              
                                                                              
                                                                              -
                                                                              
                                                                              
                                                                              
                                                                              -
                                                                              
                                                                              
                                                                              
                                                                              827,686Investment
      in subsidiaries
                                                                              
                                                                              
                                                                              103,825,783
                                                                              
                                                                              
                                                                              
                                                                              -
                                                                              
                                                                              
                                                                              
                                                                              -
                                                                              
                                                                              
                                                                              
                                                                              (103,825,783
                                                                              )
                                                                              
                                                                              
                                                                              -Intercompany
      receivable
                                                                              
                                                                              
                                                                              146,787,788
                                                                              
                                                                              
                                                                              
                                                                              -
                                                                              
                                                                              
                                                                              
                                                                              -
                                                                              
                                                                              
                                                                              
                                                                              (146,787,788
                                                                              )
                                                                              
                                                                              
                                                                              -Total
      current assets
                                                                              
                                                                              
                                                                              251,746,144
                                                                              
                                                                              
                                                                              
                                                                              28,980,151
                                                                              
                                                                              
                                                                              
                                                                              2,500,585
                                                                              
                                                                              
                                                                              
                                                                              (250,613,571
                                                                              )
                                                                              
                                                                              
                                                                              32,613,309Property
      and equipment, net
                                                                              
                                                                              
                                                                              -
                                                                              
                                                                              
                                                                              
                                                                              60,345,625
                                                                              
                                                                              
                                                                              
                                                                              12,226,959
                                                                              
                                                                              
                                                                              
                                                                              -
                                                                              
                                                                              
                                                                              
                                                                              72,572,584Goodwill
                                                                              
                                                                              
                                                                              -
                                                                              
                                                                              
                                                                              
                                                                              191,271,477
                                                                              
                                                                              
                                                                              
                                                                              (1,936,640
                                                                              )
                                                                              
                                                                              
                                                                              -
                                                                              
                                                                              
                                                                              
                                                                              189,334,837Intangibles
      assets, net
                                                                              
                                                                              
                                                                              -
                                                                              
                                                                              
                                                                              
                                                                              38,638,618
                                                                              
                                                                              
                                                                              
                                                                              3,042,465
                                                                              
                                                                              
                                                                              
                                                                              -
                                                                              
                                                                              
                                                                              
                                                                              41,681,083Investments
                                                                              
                                                                              
                                                                              1,000
                                                                              
                                                                              
                                                                              
                                                                              1,680,530
                                                                              
                                                                              
                                                                              
                                                                              327,675
                                                                              
                                                                              
                                                                              
                                                                              -
                                                                              
                                                                              
                                                                              
                                                                              2,009,205Deferred
      income taxes
                                                                              
                                                                              
                                                                              5,897,382
                                                                              
                                                                              
                                                                              
                                                                              -
                                                                              
                                                                              
                                                                              
                                                                              -
                                                                              
                                                                              
                                                                              
                                                                              -
                                                                              
                                                                              
                                                                              
                                                                              5,897,382Other
      long-term assets
                                                                              
                                                                              
                                                                              8,535,141
                                                                              
                                                                              
                                                                              
                                                                              (518,870
                                                                              )
                                                                              
                                                                              
                                                                              -
                                                                              
                                                                              
                                                                              
                                                                              -
                                                                              
                                                                              
                                                                              
                                                                              8,016,271Total
      assets
                                                                              
                                                                              $
                                                                              266,179,667
                                                                              
                                                                              
                                                                              $
                                                                              320,397,531
                                                                              
                                                                              
                                                                              $
                                                                              16,161,044
                                                                              
                                                                              
                                                                              $
                                                                              (250,613,571
                                                                              )
                                                                              
                                                                              $
                                                                              352,124,671LIABILITIES
      AND STOCKHOLDERS' EQUITYCurrent
      liabilitiesAccounts
      payable and accrued expenses
                                                                              
                                                                              $
                                                                              1,424,334
                                                                              
                                                                              
                                                                              $
                                                                              5,629,842
                                                                              
                                                                              
                                                                              $
                                                                              1,301,832
                                                                              
                                                                              
                                                                              $
                                                                              -
                                                                              
                                                                              
                                                                              $
                                                                              8,356,008Intercompany
      payables
                                                                              
                                                                              
                                                                              -
                                                                              
                                                                              
                                                                              
                                                                              139,685,315
                                                                              
                                                                              
                                                                              
                                                                              7,102,473
                                                                              
                                                                              
                                                                              
                                                                              (146,787,788
                                                                              )
                                                                              
                                                                              
                                                                              -Other
      current liabilities
                                                                              
                                                                              
                                                                              -
                                                                              
                                                                              
                                                                              
                                                                              2,135,805
                                                                              
                                                                              
                                                                              
                                                                              81,952
                                                                              
                                                                              
                                                                              
                                                                              -
                                                                              
                                                                              
                                                                              
                                                                              2,217,757Total
      current liabilities
                                                                              
                                                                              
                                                                              1,424,334
                                                                              
                                                                              
                                                                              
                                                                              147,450,962
                                                                              
                                                                              
                                                                              
                                                                              8,486,257
                                                                              
                                                                              
                                                                              
                                                                              (146,787,788
                                                                              )
                                                                              
                                                                              
                                                                              10,573,765Deferred
      income taxes
                                                                              
                                                                              
                                                                              10,316,819
                                                                              
                                                                              
                                                                              
                                                                              31,595,332
                                                                              
                                                                              
                                                                              
                                                                              4,050,251
                                                                              
                                                                              
                                                                              
                                                                              -
                                                                              
                                                                              
                                                                              
                                                                              45,962,402Other
      liabilities
                                                                              
                                                                              
                                                                              962,683
                                                                              
                                                                              
                                                                              
                                                                              886,514
                                                                              
                                                                              
                                                                              
                                                                              -
                                                                              
                                                                              
                                                                              
                                                                              -
                                                                              
                                                                              
                                                                              
                                                                              1,849,197Long-term
      notes payable
                                                                              
                                                                              
                                                                              238,516,366
                                                                              
                                                                              
                                                                              
                                                                              40,263,476
                                                                              
                                                                              
                                                                              
                                                                              -
                                                                              
                                                                              
                                                                              
                                                                              -
                                                                              
                                                                              
                                                                              
                                                                              278,779,842Derivative
      liability
                                                                              
                                                                              
                                                                              226,474
                                                                              
                                                                              
                                                                              
                                                                              -
                                                                              
                                                                              
                                                                              
                                                                              -
                                                                              
                                                                              
                                                                              
                                                                              -
                                                                              
                                                                              
                                                                              
                                                                              226,474Class
      B common convertible to senior subordinated notes
                                                                              
                                                                              
                                                                              4,085,033
                                                                              
                                                                              
                                                                              
                                                                              -
                                                                              
                                                                              
                                                                              
                                                                              -
                                                                              
                                                                              
                                                                              
                                                                              -
                                                                              
                                                                              
                                                                              
                                                                              4,085,033Stockholders'
      equity
                                                                              
                                                                              
                                                                              10,647,958
                                                                              
                                                                              
                                                                              
                                                                              100,201,247
                                                                              
                                                                              
                                                                              
                                                                              3,624,536
                                                                              
                                                                              
                                                                              
                                                                              (103,825,783
                                                                              )
                                                                              
                                                                              
                                                                              10,647,958Total
      liabilities and stockholders' equity
                                                                              
                                                                              $
                                                                              266,179,667
                                                                              
                                                                              
                                                                              $
                                                                              320,397,531
                                                                              
                                                                              
                                                                              $
                                                                              16,161,044
                                                                              
                                                                              
                                                                              $
                                                                              (250,613,571
                                                                              )
                                                                              
                                                                              $
                                                                              352,124,671
  Otelco
      Inc.Condensed
      Consolidated Statement of OperationsFor
      the Three Months Ended March 31, 2008Guarantor
                                                                                  
                                                                                  
                                                                                  Non-GuarantorParent
                                                                                  
                                                                                  
                                                                                  Subsidiaries
                                                                                  
                                                                                  
                                                                                  Subsidiaries
                                                                                  
                                                                                  
                                                                                  Eliminations
                                                                                  
                                                                                  
                                                                                  ConsolidatedRevenue
                                                                                  
                                                                                  $
                                                                                  809,189
                                                                                  
                                                                                  
                                                                                  $
                                                                                  16,187,931
                                                                                  
                                                                                  
                                                                                  $
                                                                                  3,158,204
                                                                                  
                                                                                  
                                                                                  $
                                                                                  (2,295,904
                                                                                  )
                                                                                  
                                                                                  $
                                                                                  17,859,420Operating
      expenses
                                                                                  
                                                                                  
                                                                                  (809,189
                                                                                  )
                                                                                  
                                                                                  
                                                                                  (11,769,304
                                                                                  )
                                                                                  
                                                                                  
                                                                                  (2,436,753
                                                                                  )
                                                                                  
                                                                                  
                                                                                  2,295,904
                                                                                  
                                                                                  
                                                                                  
                                                                                  (12,719,342
                                                                                  )Income
      from operations
                                                                                  
                                                                                  
                                                                                  -
                                                                                  
                                                                                  
                                                                                  
                                                                                  4,418,627
                                                                                  
                                                                                  
                                                                                  
                                                                                  721,451
                                                                                  
                                                                                  
                                                                                  
                                                                                  -
                                                                                  
                                                                                  
                                                                                  
                                                                                  5,140,078Other
      income (expense)
                                                                                  
                                                                                  
                                                                                  (4,447,486
                                                                                  )
                                                                                  
                                                                                  
                                                                                  (109,603
                                                                                  )
                                                                                  
                                                                                  
                                                                                  (76
                                                                                  )
                                                                                  
                                                                                  
                                                                                  -
                                                                                  
                                                                                  
                                                                                  
                                                                                  (4,557,165
                                                                                  )Earnings
      from subsidiaries
                                                                                  
                                                                                  
                                                                                  5,030,399
                                                                                  
                                                                                  
                                                                                  
                                                                                  -
                                                                                  
                                                                                  
                                                                                  
                                                                                  -
                                                                                  
                                                                                  
                                                                                  
                                                                                  (5,030,399
                                                                                  )
                                                                                  
                                                                                  
                                                                                  -Income
      before income tax
                                                                                  
                                                                                  
                                                                                  582,913
                                                                                  
                                                                                  
                                                                                  
                                                                                  4,309,024
                                                                                  
                                                                                  
                                                                                  
                                                                                  721,375
                                                                                  
                                                                                  
                                                                                  
                                                                                  (5,030,399
                                                                                  )
                                                                                  
                                                                                  
                                                                                  582,913Income
      tax expense
                                                                                  
                                                                                  
                                                                                  (174,874
                                                                                  )
                                                                                  
                                                                                  
                                                                                  -
                                                                                  
                                                                                  
                                                                                  
                                                                                  -
                                                                                  
                                                                                  
                                                                                  
                                                                                  -
                                                                                  
                                                                                  
                                                                                  
                                                                                  (174,874
                                                                                  )Net
      income (loss) to common stockholders
                                                                                  
                                                                                  $
                                                                                  408,039
                                                                                  
                                                                                  
                                                                                  $
                                                                                  4,309,024
                                                                                  
                                                                                  
                                                                                  $
                                                                                  721,375
                                                                                  
                                                                                  
                                                                                  $
                                                                                  (5,030,399
                                                                                  )
                                                                                  
                                                                                  $
                                                                                  408,039
  12
  Otelco
      Inc.Condensed
      Consolidated Statement of OperationsFor
      the Three Months Ended March 31, 2009Guarantor
                                                                                  
                                                                                  
                                                                                  Non-GuarantorParent
                                                                                  
                                                                                  
                                                                                  Subsidiaries
                                                                                  
                                                                                  
                                                                                  Subsidiaries
                                                                                  
                                                                                  
                                                                                  Eliminations
                                                                                  
                                                                                  
                                                                                  ConsolidatedRevenue
                                                                                  
                                                                                  $
                                                                                  834,291
                                                                                  
                                                                                  
                                                                                  $
                                                                                  24,517,361
                                                                                  
                                                                                  
                                                                                  $
                                                                                  2,944,759
                                                                                  
                                                                                  
                                                                                  $
                                                                                  (2,796,235
                                                                                  )
                                                                                  
                                                                                  $
                                                                                  25,500,176Operating
      expenses
                                                                                  
                                                                                  
                                                                                  (834,291
                                                                                  )
                                                                                  
                                                                                  
                                                                                  (20,807,675
                                                                                  )
                                                                                  
                                                                                  
                                                                                  (2,189,238
                                                                                  )
                                                                                  
                                                                                  
                                                                                  2,796,235
                                                                                  
                                                                                  
                                                                                  
                                                                                  (21,034,969
                                                                                  )Income
      from operations
                                                                                  
                                                                                  
                                                                                  -
                                                                                  
                                                                                  
                                                                                  
                                                                                  3,709,686
                                                                                  
                                                                                  
                                                                                  
                                                                                  755,521
                                                                                  
                                                                                  
                                                                                  
                                                                                  -
                                                                                  
                                                                                  
                                                                                  
                                                                                  4,465,207Other
      income (expense)
                                                                                  
                                                                                  
                                                                                  (6,240,397
                                                                                  )
                                                                                  
                                                                                  
                                                                                  (122,608
                                                                                  )
                                                                                  
                                                                                  
                                                                                  1,492
                                                                                  
                                                                                  
                                                                                  
                                                                                  -
                                                                                  
                                                                                  
                                                                                  
                                                                                  (6,361,513
                                                                                  )Earnings
      from subsidiaries
                                                                                  
                                                                                  
                                                                                  4,344,091
                                                                                  
                                                                                  
                                                                                  
                                                                                  -
                                                                                  
                                                                                  
                                                                                  
                                                                                  -
                                                                                  
                                                                                  
                                                                                  
                                                                                  (4,344,091
                                                                                  )
                                                                                  
                                                                                  
                                                                                  -Income
      (loss) before income tax
                                                                                  
                                                                                  
                                                                                  (1,896,306
                                                                                  )
                                                                                  
                                                                                  
                                                                                  3,587,078
                                                                                  
                                                                                  
                                                                                  
                                                                                  757,013
                                                                                  
                                                                                  
                                                                                  
                                                                                  (4,344,091
                                                                                  )
                                                                                  
                                                                                  
                                                                                  (1,896,306
                                                                                  )Income
      tax (expense) benefit
                                                                                  
                                                                                  
                                                                                  1,024,953
                                                                                  
                                                                                  
                                                                                  
                                                                                  -
                                                                                  
                                                                                  
                                                                                  
                                                                                  -
                                                                                  
                                                                                  
                                                                                  
                                                                                  -
                                                                                  
                                                                                  
                                                                                  
                                                                                  1,024,953Net
      income (loss) to common stockholders
                                                                                  
                                                                                  $
                                                                                  (871,353
                                                                                  )
                                                                                  
                                                                                  $
                                                                                  3,587,078
                                                                                  
                                                                                  
                                                                                  $
                                                                                  757,013
                                                                                  
                                                                                  
                                                                                  $
                                                                                  (4,344,091
                                                                                  )
                                                                                  
                                                                                  $
                                                                                  (871,353
                                                                                  )
  Otelco
      Inc.Condensed
      Consolidating Statement of Cash FlowsFor
      the Three Months Ended March 31, 2008Guarantor
                                                                                    
                                                                                    
                                                                                    Non-GuarantorParent
                                                                                    
                                                                                    
                                                                                    Subsidiaries
                                                                                    
                                                                                    
                                                                                    Subsidiaries
                                                                                    
                                                                                    
                                                                                    Eliminations
                                                                                    
                                                                                    
                                                                                    ConsolidatedCash
      flows from operating activities:Net
      income (loss)
                                                                                    
                                                                                    $
                                                                                    408,039
                                                                                    
                                                                                    
                                                                                    $
                                                                                    4,309,024
                                                                                    
                                                                                    
                                                                                    $
                                                                                    721,375
                                                                                    
                                                                                    
                                                                                    $
                                                                                    (5,030,399
                                                                                    )
                                                                                    
                                                                                    $
                                                                                    408,039Adjustment
      to reconcile net income (loss)to
      cash flows from operating activities
                                                                                    
                                                                                    
                                                                                    826,444
                                                                                    
                                                                                    
                                                                                    
                                                                                    2,377,692
                                                                                    
                                                                                    
                                                                                    
                                                                                    1,050,313
                                                                                    
                                                                                    
                                                                                    
                                                                                    -
                                                                                    
                                                                                    
                                                                                    
                                                                                    4,254,449Changes
      in assets and liabilities, net ofassets
      and liabilities acquired
                                                                                    
                                                                                    
                                                                                    6,077,419
                                                                                    
                                                                                    
                                                                                    
                                                                                    (4,034,364
                                                                                    )
                                                                                    
                                                                                    
                                                                                    (1,742,735
                                                                                    )
                                                                                    
                                                                                    
                                                                                    -
                                                                                    
                                                                                    
                                                                                    
                                                                                    300,320Net
      cash provided by operating activities
                                                                                    
                                                                                    
                                                                                    7,311,902
                                                                                    
                                                                                    
                                                                                    
                                                                                    2,652,352
                                                                                    
                                                                                    
                                                                                    
                                                                                    28,953
                                                                                    
                                                                                    
                                                                                    
                                                                                    (5,030,399
                                                                                    )
                                                                                    
                                                                                    
                                                                                    4,962,808Cash
      flows from investing activities
                                                                                    
                                                                                    
                                                                                    (47,229
                                                                                    )
                                                                                    
                                                                                    
                                                                                    (2,311,449
                                                                                    )
                                                                                    
                                                                                    
                                                                                    (120,004
                                                                                    )
                                                                                    
                                                                                    
                                                                                    -
                                                                                    
                                                                                    
                                                                                    
                                                                                    (2,478,682
                                                                                    )Cash
      flows from financing activities
                                                                                    
                                                                                    
                                                                                    (7,264,673
                                                                                    )
                                                                                    
                                                                                    
                                                                                    -
                                                                                    
                                                                                    
                                                                                    
                                                                                    -
                                                                                    
                                                                                    
                                                                                    
                                                                                    5,030,399
                                                                                    
                                                                                    
                                                                                    
                                                                                    (2,234,274
                                                                                    )Net
      increase (decrease) in cash and cash equivalents
                                                                                    
                                                                                    
                                                                                    -
                                                                                    
                                                                                    
                                                                                    
                                                                                    340,903
                                                                                    
                                                                                    
                                                                                    
                                                                                    (91,051
                                                                                    )
                                                                                    
                                                                                    
                                                                                    -
                                                                                    
                                                                                    
                                                                                    
                                                                                    249,852Cash
      and cash equivalents, beginning of period
                                                                                    
                                                                                    
                                                                                    -
                                                                                    
                                                                                    
                                                                                    
                                                                                    12,707,674
                                                                                    
                                                                                    
                                                                                    
                                                                                    102,823
                                                                                    
                                                                                    
                                                                                    
                                                                                    -
                                                                                    
                                                                                    
                                                                                    
                                                                                    12,810,497Cash
      and cash equivalents, end of period
                                                                                    
                                                                                    $
                                                                                    -
                                                                                    
                                                                                    
                                                                                    $
                                                                                    13,048,577
                                                                                    
                                                                                    
                                                                                    $
                                                                                    11,772
                                                                                    
                                                                                    
                                                                                    $
                                                                                    -
                                                                                    
                                                                                    
                                                                                    $
                                                                                    13,060,349
  Otelco
      Inc.Condensed
      Consolidating Statement of Cash FlowsFor
      the Three Months Ended March 31, 2009Guarantor
                                                                                  
                                                                                  
                                                                                  Non-GuarantorParent
                                                                                  
                                                                                  
                                                                                  Subsidiaries
                                                                                  
                                                                                  
                                                                                  Subsidiaries
                                                                                  
                                                                                  
                                                                                  Eliminations
                                                                                  
                                                                                  
                                                                                  ConsolidatedCash
      flows from operating activities:Net
      income (loss)
                                                                                  
                                                                                  $
                                                                                  (871,353
                                                                                  )
                                                                                  
                                                                                  $
                                                                                  3,587,078
                                                                                  
                                                                                  
                                                                                  $
                                                                                  757,013
                                                                                  
                                                                                  
                                                                                  $
                                                                                  (4,344,091
                                                                                  )
                                                                                  
                                                                                  $
                                                                                  (871,353
                                                                                  )Adjustment
      to reconcile net income (loss)to
      cash flows from operating activities
                                                                                  
                                                                                  
                                                                                  650,808
                                                                                  
                                                                                  
                                                                                  
                                                                                  5,961,077
                                                                                  
                                                                                  
                                                                                  
                                                                                  889,452
                                                                                  
                                                                                  
                                                                                  
                                                                                  -
                                                                                  
                                                                                  
                                                                                  
                                                                                  7,501,337Changes
      in assets and liabilities, net ofassets
      and liabilities acquired
                                                                                  
                                                                                  
                                                                                  6,798,910
                                                                                  
                                                                                  
                                                                                  
                                                                                  (5,576,966
                                                                                  )
                                                                                  
                                                                                  
                                                                                  (1,506,277
                                                                                  )
                                                                                  
                                                                                  
                                                                                  -
                                                                                  
                                                                                  
                                                                                  
                                                                                  (284,333
                                                                                  )Net
      cash provided by operating activities
                                                                                  
                                                                                  
                                                                                  6,578,365
                                                                                  
                                                                                  
                                                                                  
                                                                                  3,971,189
                                                                                  
                                                                                  
                                                                                  
                                                                                  140,188
                                                                                  
                                                                                  
                                                                                  
                                                                                  (4,344,091
                                                                                  )
                                                                                  
                                                                                  
                                                                                  6,345,651Cash
      flows from investing activities
                                                                                  
                                                                                  
                                                                                  -
                                                                                  
                                                                                  
                                                                                  
                                                                                  (1,089,328
                                                                                  )
                                                                                  
                                                                                  
                                                                                  (139,423
                                                                                  )
                                                                                  
                                                                                  
                                                                                  -
                                                                                  
                                                                                  
                                                                                  
                                                                                  (1,228,751
                                                                                  )Cash
      flows from financing activities
                                                                                  
                                                                                  
                                                                                  (6,578,365
                                                                                  )
                                                                                  
                                                                                  
                                                                                  -
                                                                                  
                                                                                  
                                                                                  
                                                                                  -
                                                                                  
                                                                                  
                                                                                  
                                                                                  4,344,091
                                                                                  
                                                                                  
                                                                                  
                                                                                  (2,234,274
                                                                                  )Net
      increase in cash and cash equivalents
                                                                                  
                                                                                  
                                                                                  -
                                                                                  
                                                                                  
                                                                                  
                                                                                  2,881,861
                                                                                  
                                                                                  
                                                                                  
                                                                                  765
                                                                                  
                                                                                  
                                                                                  
                                                                                  -
                                                                                  
                                                                                  
                                                                                  
                                                                                  2,882,626Cash
      and cash equivalents, beginning of period
                                                                                  
                                                                                  
                                                                                  -
                                                                                  
                                                                                  
                                                                                  
                                                                                  13,521,138
                                                                                  
                                                                                  
                                                                                  
                                                                                  21,117
                                                                                  
                                                                                  
                                                                                  
                                                                                  -
                                                                                  
                                                                                  
                                                                                  
                                                                                  13,542,255Cash
      and cash equivalents, end of period
                                                                                  
                                                                                  $
                                                                                  -
                                                                                  
                                                                                  
                                                                                  $
                                                                                  16,402,999
                                                                                  
                                                                                  
                                                                                  $
                                                                                  21,882
                                                                                  
                                                                                  
                                                                                  $
                                                                                  -
                                                                                  
                                                                                  
                                                                                  $
                                                                                  16,424,881
  8.
                Revenue
      Concentrations
 Revenues
for interstate access services are based on reimbursement of costs and an
allowed rate of return.  Revenues of this nature are received from the
National Exchange Carrier Association in the form of monthly
settlements.  Such revenues amounted to 14.9%, 13.8%, and 11.0% of the
Company’s total revenues from continuing operations for the three months ended
March 31, 2007, 2008 and 2009, respectively.
  13
  The
Company acquired a multi-year contract with a large multiple system operator for
the provision of wholesale network connections to its customers in Maine and New
Hampshire. Associated with closing the acquisition of the CR Companies, various
terms of the agreement were amended, including extending the contract through
2012. The customer represented approximately 10.8% of the consolidated revenue
for the three months ended March 31, 2009.
 
 14
  Item
2.  Management’s Discussion and Analysis of Financial
Condition and Results of Operations
  Overview
  General
  Since
1999, we have acquired and operate ten rural local exchange carriers (“RLEC”)
serving subscribers in north central Alabama, central Maine, western
Massachusetts, central Missouri and southern West Virginia. We are the sole
wireline telephone services provider for many of the rural communities we serve.
We also acquired and operate competitive local exchange carriers (“CLEC”)
serving subscribers throughout the state of Maine.  In addition, we
have authority to provide services in New Hampshire.  Our services
include local and long distance telephone services, network access, other
telephone related services, cable television (in some markets) and Internet
access. We view, manage and evaluate the results of operations from the various
telecommunications services as one company and therefore have identified one
reporting segment as it relates to providing segment information. As of March
31, 2009, we operated approximately 100,144 access line equivalents and supply
an additional 113,855 wholesale network connections.
  Our core
businesses are local and long distance telecommunications services, wholesale
access to the local and long distance network, and the provision of network
access to other wireline, long distance and wireless carriers for calls
originated or terminated on our network. Our core businesses generated
approximately 78.2% of our total revenues in the first quarter of 2009. We also
provide cable television service in some markets and digital high-speed and
dial-up Internet access in all of our markets.
  The
following discussion and analysis should be read in conjunction with our
financial statements and the related notes included in Item 1 of Part I and
other financial information appearing elsewhere in this report.  The
following discussion and analysis addresses our financial condition and results
of operations on a consolidated basis, including the acquisition of Pine Tree
Holdings, Inc., Granby Holdings, Inc. and War Holdings, Inc. (collectively, the
“CR Companies”) from Country Road Communications LLC as of October 31,
2008.
  Revenue
Sources
  We derive
our revenues from five sources:
  ●
                  Local
      services.  We receive revenues from providing local
      exchange telecommunications services in our ten rural territories, from
      the wholesale network services in New England, and on a competitive basis
      throughout Maine. These revenues include monthly subscription charges for
      basic service, calling beyond the local territory on a fixed price and on
      a per minute basis, local private line services and enhanced calling
      features, such as voicemail, caller identification, call waiting and call
      forwarding. We also provide billing and collections services for other
      carriers under contract and receive revenues from directory advertising. A
      growing portion of our rural subscribers take bundled service plans which
      include multiple services, including unlimited domestic calling, for a
      flat monthly fee.●
                  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, Massachusetts, Maine, Missouri and West Virginia
      are based on rates approved by the Alabama Public Service Commission, the
      Massachusetts Department of Telecommunications and Cable, the Maine Public
      Utilities Commission (“MPUC”), the Missouri Public Service Commission and
      the West Virginia Public Service Commission, respectively, where
      appropriate. Switched and special access charges for interstate and
      international services are based on rates approved by the Federal
      Communications
Commission.
 
 15
  ●
                    Cable television
      services.  We offer basic, digital, high-definition,
      digital video recording and pay per view cable television services to a
      portion of our telephone service territory in both Alabama and Missouri,
      including Internet Protocol television (“IPTV”) in
  Alabama.●
                    Internet
      services.  We receive revenues from monthly recurring
      charges for dial-up and digital high-speed Internet
  access.●
                    Transport
      services.  We receive monthly recurring revenues for the
      rental of fiber to transport data and other telecommunications services in
      Maine.
  Voice
and Data Access Line Trends
  The
number of access lines served is a fundamental factor in determining revenue
stability for a telecommunications provider. Reflecting a general trend in the
RLEC industry, the number of rural voice access lines we serve has been
decreasing gradually when normalized for territory acquisitions. We expect that
this trend will continue, and may be potentially impacted by the effect of the
economy on our customers. These trends will be offset by the growth of data
access lines, also called digital high-speed Internet access service. Our
competitive carrier voice and data access lines have grown as we continue to
further penetrate our chosen markets. Our ability to continue this growth and
our response to the rural trends will have an important impact on our future
revenues. Our primary strategy consists of leveraging our strong incumbent
market position, selling additional services to our rural customer base and
providing better service and support levels than the incumbent carrier to our
competitive customer base.
  Year Ended December 31,
                        
                        
                        March
      31,Key
      Operating Statistics
                        
                        2007
                        
                        
                        2008(2)
                        
                        
                        2009(2)RLEC
      access lines:Voice
      lines
                        
                        
                        36,687
                        
                        
                        
                        51,530
                        
                        
                        
                        50,807Data
      lines
                        
                        
                        12,160
                        
                        
                        
                        18,709
                        
                        
                        
                        19,365RLEC
      access lineequivalents(1)
                        
                        
                        48,847
                        
                        
                        
                        70,239
                        
                        
                        
                        70,172CLEC
      access lines:Voice
      lines
                        
                        
                        16,973
                        
                        
                        
                        26,558
                        
                        
                        
                        26,744Data
      lines
                        
                        
                        2,571
                        
                        
                        
                        3,246
                        
                        
                        
                        3,228CLEC
      access lineequivalents(1)
                        
                        
                        19,544
                        
                        
                        
                        29,804
                        
                        
                        
                        29,972Otelco
      access lineequivalents(1)
                        
                        
                        68,391
                        
                        
                        
                        100,043
                        
                        
                        
                        100,144Wholesale
      network connections
                        
                        
                        -
                        
                        
                        
                        98,187
                        
                        
                        
                        113,855Cable
      television customers
                        
                        
                        4,169
                        
                        
                        
                        4,082
                        
                        
                        
                        4,132Dial-up
      Internet customers
                        
                        
                        15,249
                        
                        
                        
                        11,864
                        
                        
                        
                        10,885
 
 (1)
                  We
      define access line equivalents as voice access lines and data access lines
      (including cable modems, digital subscriber lines, and dedicated data
      access trunks).(2)
                  We
      acquired the CR Companies effective October 31,
  2008.
 In our
RLEC territories, access line equivalents decreased by 67 during first quarter
2009, or 0.1%, compared to December 31, 2008. Voice access lines declined 1.4%
while data access lines increased 3.5% during the period. We offer location
specific bundled service packages, many including unlimited domestic calling,
tailored to the telecommunications requirements of our customers.
  16
  In our
Maine CLEC operations, access line equivalents increased by 168 during first
quarter 2009, or 0.6%, compared to December 31, 2008. Voice access lines
increased 0.7% while data access lines decreased 0.6% during the period.
Virtually all of our competitive customers are businesses, with service bundles
tailored to their specific business requirements. The Company currently has an
increased backlog of service requests with FairPoint Communications to complete
pending CLEC orders.
  Competitive
pricing and bundling of services have led Otelco’s long distance service to be
the choice of the majority of the long distance customers in the rural markets
we serve. Over 90% of our Maine CLEC customers have selected us as their long
distance carrier. Our cable television customers increased 1.2% from December
31, 2008 to 4,132 as of March 31, 2009.  Included in this number are
190 customers who have upgraded to our digital high-definition offer during
first quarter 2009. Dial-up Internet customers decreased 8.3% to 10,885 on March
31, 2009 compared to December 31, 2008. This also includes the subscribers we
service outside of our telephone service area throughout Missouri and Maine,
reflecting the shift to digital high-speed Internet services. In Missouri, we
have introduced data access lines for digital high-speed Internet in selected
areas outside of our telephone service territory.
  Our
Rate and Pricing Structure
  Our CLEC
pricing is based on market requirements. We combine varying services to meet
individual customer requirements, including technical support and provide
multi-year contracts which are both market sensitive for the customer and
profitable for us.  The MPUC and the New Hampshire Public Utilities
Commission impose certain requirements on all CLECs operating in their markets
for reporting and for interactions with the various incumbent local exchange and
interexchange carriers. These requirements provide a wide latitude in pricing
services.
  Our RLECs
operate in five states and are regulated in varying degrees by the respective
state regulatory authorities. The impact on pricing flexibility varies by state.
In Maine, our Saco River Telegraph and Telephone Company and Pine Tree Telephone
and Telegraph Company subsidiaries have obtained authority to implement pricing
flexibility while remaining under rate-of-return regulation. Our rates for other
services we provide, including cable, long-distance, and dial-up and high-speed
Internet access, are not price regulated. The market for competitive services,
such as wireless, also impacts the ability to adjust prices. With the increase
of bundled services offerings, including unlimited long distance, pricing for
individual services takes on reduced importance to revenue stability. We expect
this trend to continue into the immediate future.
  Categories
of Operating Expenses
  Our
operating expenses are categorized as cost of services; selling, general and
administrative expenses; and depreciation and amortization.
  Cost of
services.  This includes expenses for salaries, wages and
benefits relating to plant operation, maintenance, sales and customer service;
other plant operations, maintenance and administrative costs; network access
costs; and costs of services for long distance, cable television, Internet and
directory services.
  Selling, general and administrative
expenses.  This includes expenses for salaries, wages and
benefits and contract service payments (e.g., legal fees) relating to
engineering, financial, human resources and corporate operations; information
management expenses, including billing; allowance for uncollectible revenue;
expenses for travel, lodging and meals; internal and external communications
costs; insurance premiums; stock exchange and banking fees; and
postage.
  17
  Depreciation and
amortization.  This includes depreciation of our
telecommunications, cable and Internet networks and equipment, and amortization
of intangible assets. Certain of these amortization expenses continue to be
deductible for tax purposes.
  Our
Ability to Control Operating Expenses
  We strive
to control expenses in order to maintain our strong operating margins. As our
revenue shifts to non-regulated services and CLEC customers, operating margins
decrease reflecting the lower margins associated with these services. We expect
to control expenses while we continue to grow our business.
  Results
of Operations
  The
following table sets forth our results of operations as a percentage of total
revenues for the periods indicated.
  Three
      Months Ended March 31,2008
                                                              
                                                              
                                                              2009RevenuesLocal
      services
                                                              
                                                              
                                                              37.7
                                                              %
                                                              
                                                              46.5
                                                              %Network
      access services
                                                              
                                                              
                                                              36.0
                                                              
                                                              
                                                              31.7Cable
      television services
                                                              
                                                              
                                                              3.1
                                                              
                                                              
                                                              2.4Internet
      services
                                                              
                                                              
                                                              16.8
                                                              
                                                              
                                                              13.9Transport
      services
                                                              
                                                              
                                                              6.4
                                                              
                                                              
                                                              5.5Total
      revenues
                                                              
                                                              
                                                              100.0
                                                              %
                                                              
                                                              100.0
                                                              %Operating
      expensesCost
      of services
                                                              
                                                              
                                                              37.2
                                                              %
                                                              
                                                              41.8
                                                              %Selling,
      general and administrative expenses
                                                              
                                                              15.1
                                                              
                                                              
                                                              14.0Depreciation
      and amortization
                                                              
                                                              
                                                              18.9
                                                              
                                                              
                                                              26.7Total
      operating expenses
                                                              
                                                              
                                                              71.2
                                                              
                                                              
                                                              82.5Income
      from operations
                                                              
                                                              
                                                              28.8
                                                              
                                                              
                                                              17.5Other
      income (expense)Interest
      expense
                                                              
                                                              
                                                              (26.2)
                                                              
                                                              
                                                              (25.9)Change
      in fair value of derivative
                                                              
                                                              (1.4)
                                                              
                                                              
                                                              0.0Other
      income
                                                              
                                                              
                                                              2.1
                                                              
                                                              
                                                              0.9Total
      other expense
                                                              
                                                              
                                                              (25.5)
                                                              
                                                              
                                                              (24.9)Income
      (loss) before income tax
                                                              
                                                              
                                                              3.3
                                                              
                                                              
                                                              (7.4)Income
      tax (expense) benefit
                                                              
                                                              
                                                              (1.0)
                                                              
                                                              
                                                              4.0Net
      income (loss) available to common stockholders
                                                              
                                                              2.3
                                                              %
                                                              
                                                              (3.4)
                                                              %
  18
  Three
Months Ended March 31, 2009 Compared to Three Months Ended March 31,
2008
  Total
revenues.Total revenues increased 42.8% in the three months
ended March 31, 2009 to $25.5 million from $17.9 million in the three months
ended March 31, 2008.  The primary reason for the increase is the
acquisition of the CR Companies. The table below provides the components of our
revenues for the three months ended March 31, 2009 compared to the same period
of 2008.
  Three
      Months Ended March 31,
                
                
                Change2008
                
                
                2009
                
                
                Amount
                
                
                Percent(dollars
      in thousands)Local
      services
                
                $
                6,726
                
                
                $
                11,855
                
                
                $
                5,129
                
                
                
                76.3
                %Network
      access services
                
                
                6,438
                
                
                
                8,094
                
                
                
                1,656
                
                
                
                25.7Cable
      television services
                
                
                546
                
                
                
                607
                
                
                
                61
                
                
                
                11.2Internet
      services
                
                
                3,001
                
                
                
                3,541
                
                
                
                540
                
                
                
                18.0Transport
      services
                
                
                1,148
                
                
                
                1,403
                
                
                
                255
                
                
                
                22.2Total
                
                $
                17,859
                
                
                $
                25,500
                
                
                $
                7,641
                
                
                
                42.8
 
 Local
services.  Local services revenue increased 76.3% to $11.9
million in the three months ended March 31, 2009 from $6.7 million in the three
months ended March 31, 2008.  The acquisition of the CR Companies and
growth in CLEC revenue accounted for an increase of $5.5 million. RLEC revenue,
including bundled services such as long distance, decreased $0.2 million
reflecting the decline in RLEC access lines. Billing and collecting services and
directory advertising decreased $0.2 million.
  Network access
services.  Network access revenue increased 25.7% to $8.1
million in the three months ended March 31, 2009 from $6.4 million in the three
months ended March 31, 2008.  The acquisition of the CR Companies
accounted for an increase of $2.2 million. RLEC switched access and high cost
loop revenue decreased $0.3 million; special access decreased $0.2 million and
customer related charges decreased $0.1 million.
  Cable television
services.  Cable television revenue increased 11.2% to $0.6
million in the three months ended March 31, 2009 from $0.5 million in the three
months ended March 31, 2008.  Growth in high-definition television and
IPTV fees in Alabama and satellite television services in Missouri accounted for
the increase.
  Internet
services.  Internet revenue increased 18.0% to $3.5 million in
the three months ended March 31, 2009 from $3.0 million in the three months
ended March 31, 2008.  The acquisition of the CR Companies accounted
for the increase. For the balance of the Company, the growth in new digital data
access lines, including related equipment rental, offset the decline of dial-up
Internet customers associated with the conversion to digital data access lines,
including those customers in Maine and Missouri that are outside of our local
service areas.
  Transport
services.  Transport services revenue increased 22.2% to $1.4
million in the three months ended March 31, 2009 from $1.1 million in the three
months ended March 31, 2008. The continued growth in Wide Area Network revenue
from CLEC customers in Maine drove this increase.
  Operating
expenses.Operating expenses in the three months ended March
31, 2009 increased 65.4% to $21.0 million from $12.7 million in the three months
ended March 31, 2008.
  19
  Three
      Months Ended
                    March
      31,
                
                
                Change2008
                
                
                2009
                
                
                Amount
                
                
                Percent(dollars
      in thousands)Cost
      of services
                
                $
                6,652
                
                
                $
                10,666
                
                
                $
                4,014
                
                
                
                60.3
                %Selling,
      general and administrative expenses
                
                
                2,694
                
                
                
                3,577
                
                
                
                883
                
                
                
                32.8Depreciation
      and amortization
                
                
                3,373
                
                
                
                6,792
                
                
                
                3,419
                
                
                
                101.4Total
                
                $
                12,719
                
                
                $
                21,035
                
                
                $
                8,316
                
                
                
                65.4
 
 Cost of
services.  Cost of services increased 60.3% to $10.7 million in
the three months ended March 31, 2009 from $6.7 million in the three months
ended March 31, 2008.  The acquisition of the CR Companies and growth
in CLEC revenue accounted for an increase of $4.1 million. The combination of
increased long distance minutes; higher digital television programming costs;
and increased pole attachment expense were more than offset by reduced directory
costs and outside plant operational efficiencies for a decrease in costs by $0.1
million.
  Selling, general and
administrative expenses.  Selling, general and administrative
expenses increased 32.8% to $3.6 million in the three months ended March 31,
2009 from $2.7 million in the three months ended March 31, 2008. The acquisition
of the CR Companies accounted for an increase of $0.9 million. Increases in
employee costs and legal expenses of $0.2 million were offset by lower insurance
and external relations costs of $0.2 million.
  Depreciation and
amortization.  Depreciation and amortization increased 101.4%
to $6.8 million in the three months ended March 31, 2009 from $3.4 million in
the three months ended March 31, 2008. The acquisition of the CR Companies
accounted for an increase of $3.6 million, including $2.5 million in
amortization of intangible assets such as non-competition agreements and the
value of customer lists and contracts. The legacy business had a decrease of
$0.2 million, reflecting lower amortization expense for a non-competition
agreement.
  Three
      Months Ended March 31,
                                          
                                          
                                          Change2008
                                          
                                          
                                          2009
                                          
                                          
                                          Amount
                                          
                                          
                                          Percent(dollars
      in thousands)Interest
      expense
                                          
                                          $
                                          (4,683
                                          )
                                          
                                          $
                                          (6,599
                                          )
                                          
                                          $
                                          (1,916
                                          )
                                          
                                          
                                          40.9
                                          %Change
      in fair value of derivative
                                          
                                          
                                          (241
                                          )
                                          
                                          
                                          12
                                          
                                          
                                          
                                          253
                                          
                                          
                                          
                                          (105.0
                                          )Other
      income
                                          
                                          
                                          367
                                          
                                          
                                          
                                          226
                                          
                                          
                                          
                                          (141
                                          )
                                          
                                          
                                          (38.4
                                          )Income
      tax expense
                                          
                                          
                                          (175
                                          )
                                          
                                          
                                          1,025
                                          
                                          
                                          
                                          1,200
                                          
                                          
                                          
                                          (685.7
                                          )
 
 Interest
expense.Interest expense increased 40.9% to $6.6 million in
the three months ended March 31, 2009 from $4.7 million in the three months
ended March 31, 2008.  Our senior credit facility was increased by
$108.9 million in October 2008 to $173.5 million associated with the acquisition
of the CR Companies. The increased borrowing under the amended credit facility
accounted for $1.8 million of the increase. The balance of $0.1 million reflects
the increased amortization expenses associated with the interest rate cap
purchased in 2004.
  Change in fair value of
derivative.The derivative value associated with the
conversion option for our Class B common stock must be fair valued each quarter
until such conversion no longer requires a financial test (December 21, 2009).
The change in value of the derivative liability was essentially the same for the
three months ended March 31, 2009 and 2008.
  The
repayment of senior indebtedness in July 2007 reduced senior debt below the $80
million level of our 3% three month LIBOR interest rate cap. The acquisition of
the CR Companies increased senior debt above that $80 million level. Therefore,
there was a $15.4 million balance of the rate cap that was not an effective
hedge to interest costs in first quarter 2008 and was considered an investment.
The full $80 million cap was effective in first quarter 2009. The change in fair
value of the ineffective portion of the rate cap decreased by slightly more than
$0.2 million during first quarter 2008, compared to no ineffective portion in
the same period of 2009.
  20
  Other
income.Other income decreased 38.4% to $0.2 million in the
three months ended March 31, 2009 from $0.4 million in the three months ended
March 31, 2008. The decrease was the result of $0.2 million in lower interest
associated with short term investing of our cash balances and two one time 2008
items – an additional distribution associated with the Rural Telephone Bank
dissolution and gain associated with the ineffective portion of the rate cap.
These impacts were partially offset by a gain of less than $0.1 million
associated with increased CoBank dividends.
  Income
taxes.Provision for income taxes was a benefit of $1.0
million in the three months ended March 31, 2009 compared to an expense of $0.2
million in the three months ended March 31, 2008.
  Net income.As a
result of the foregoing, there was net loss of $0.9 million in the three months
ended March 31, 2009 and net income of $0.4 million in the three months ended
March 31, 2008.
  Liquidity
and Capital Resources
  Our
liquidity needs arise primarily from: (i) interest payments related to our
credit facility and our senior subordinated notes; (ii) capital expenditures;
(iii) working capital requirements; (iv) dividend payments on our Class A common
stock; and (v) potential acquisitions.
  Historically,
we satisfy our operating cash requirements from the cash generated by our
business and utilize borrowings under our credit facility to facilitate
acquisitions. For the three months ended March 31, 2009, we generated cash from
our business to invest in additional property and equipment, pay interest on our
senior debt, pay interest associated with the subordinated debt inherent in our
IDS units, and fund dividends on our Class A common stock (as declared by our
board of directors) that are inherent in our IDS units. After meeting all of
these needs of our business, cash grew from $13.5 million at December 31, 2008
to $16.4 million at March 31, 2009. The Company has as its current policy to
return a high percentage of its available cash to its IDS unit
holders.
  Cash
flows from operating activities for the first three months of 2009 amounted to
$6.3 million compared to $5.0 million for the first three months of 2008. Net
income, when adjusted for its non-cash components, increased by $2.0 million,
offset by a decrease of $0.6 million in future cash components, primarily
accounts payable and income tax receivable.
  Cash
flows used in investing activities in the first three months of 2009 were $1.2
million compared to $2.5 million in the first three months of 2008. The
lower rate of capital expenditures for property and equipment accounted for the
difference.
  Cash
flows used in financing activities for the first three months of 2009 and 2008
were $2.2 respectively, reflecting payment of dividends to stockholders in both
periods.  The dividend was $0.17625 per share for the quarter in both
periods.  We have paid seventeen consecutive dividends at this rate
since the Company went public in December 2004.
  We do not
invest in financial instruments as part of our business strategy. At March 31,
2009, the Company had an $80 million interest rate cap at 3% LIBOR through
December 2009. It had a $90 million notional amount interest rate swap with the
Company paying 1.85% and the counterparty paying a variable rate based upon the
3 month LIBOR for three years beginning February 9, 2009 and a $60 million
notional amount interest rate swap with the Company paying 2.0475% and the
counterparty paying a variable rate based upon the 3 month LIBOR for two years
beginning February 9, 2010. All three instruments are effective hedges of the
Company’s senior debt against interest rate fluctuations and are valued at
market price.
  21
  We also
have received patronage shares, primarily from one of our lenders, over a period
of years for which there is a limited market to determine value until the shares
are redeemed by the issuing institution. Historically, these shares have been
redeemed at a value similar to their issued value. Due to the uncertainty of
this future value, these shares are carried at approximately 55% of their issued
value. The Class B derivative is valued based on an expert model developed
specifically for the valuation of this derivative which uses current market
factors to assess the B share derivative value at the end of each quarter. This
liability will be extinguished upon the conversion of the Class B shares into
IDS units. The specific value of these instruments is included in the notes to
the March 31, 2009 financial statements.
  We
anticipate that operating cash flow, together with borrowings under our credit
facility, will be adequate to meet our currently anticipated operating and
capital expenditure requirements for at least the next 12 months.
  Recent
Accounting Pronouncements
  In
December 2007, the Financial Accounting Standards Board (“FASB”) issued
Statement of Financial Accounting Standards (“SFAS”) No. 141R, Business Combinations, or
SFAS 141R.  SFAS 141R replaces SFAS No. 141, Business Combinations, and
establishes principles and requirements for how the acquirer of a business
recognizes and measures in its financial statements the identifiable assets
acquired, the liabilities assumed, and any non-controlling interest in the
acquiree.  The statement also provides guidance for recognizing and
measuring the goodwill acquired in the business combination and determines what
information to disclose to enable users of the financial statements to evaluate
the nature and financial effects of the business combination.  SFAS
141R is effective for financial statements issued for fiscal years beginning
after December 31, 2008.  Accordingly, any business combinations the
Company engaged in prior to January 1, 2009 are recorded and disclosed following
generally accepted accounting principles as in effect on December 31,
2008.  The adoption of SFAS 141R will have an impact on the
consolidated financial statements but the nature and magnitude of the specific
effects will depend on the nature, terms, and size of acquisitions the Company
consummates after the effective date.
 
 Effective
January 1, 2008, the Company adopted SFAS No. 157, Fair Value Measurements, or
SFAS 157. In February 2008, the FASB issued a staff position (FSP 157-2) that
delays the effective date of SFAS 157 for all non-financial assets and
liabilities except those recognized or disclosed at least annually, until
periods beginning after December 15, 2008. SFAS 157 defines fair value,
establishes a framework for measuring fair value and expands disclosure about
fair value measurements. Valuation techniques used to measure fair value under
SFAS 157 must maximize the use of observable inputs. The standard describes a
fair value hierarchy utilizing three levels of input. The first two levels are
considered observable and the third, unobservable:
 
 Level
      1 –
                Quoted
      prices in active markets for identical assets or
    liabilities.Level
      2 –
                Inputs
      other than Level 1 that are directly or indirectly observable, such as
      quoted prices for similar assets or liabilities or quoted prices in
      markets which are not active. The inputs are generally observable or can
      be corroborated in observable markets.Level
      3 –
                Unobservable
      inputs where there is little or no market activity to support
      valuation.
 
 The
adoption of SFAS 157 did not have a material impact on our consolidated
financial statements.
 
 In March
2008, the FASB issued SFAS No. 161, Disclosures about Derivative
Instruments and Hedging Activities – an amendment of FASB Statement
No. 133, or SFAS
161.  SFAS 161 expands quarterly disclosure requirements in SFAS
No. 133, Accounting for
Derivative Instruments and Hedging Activities, about an entity’s
derivative instruments and hedging activities.  SFAS 161 is effective
for fiscal years beginning after November 15, 2008.  The
implementation of this standard did not have a material impact on our
consolidated financial position and results of operations.
  22
  In
December 2008, the FASB issued FSP FAS 132(R)-1, Employers’ Disclosures about
Postretirement Benefit Plan Assets, or FSP FAS 132(R)-1, which requires
enhanced disclosures about plan assets in an employer’s defined benefit pension
or other postretirement plan.  The disclosures are intended to provide
users of financial statements with a greater understanding of how investment
allocation decisions are made, the major categories of plan assets, the inputs
and valuation techniques used to measure the fair value of plan assets and
significant concentrations of risk within plan assets.  FSP
FAS 132(R)-1 will apply to our plan asset disclosures beginning with our
fiscal year ending December 31, 2009.  The implementation of this
standard will not have a material impact on our consolidated financial position
and results of operations.
 
 In April
2009, the FASB issued FSP 107-1 and APB 28-1, Interim Disclosures about Fair Value
of Financial Instruments, which requires disclosures about fair value of
financial instruments for interim reporting periods.  This guidance is
effective for interim reporting periods ending after June 15, 2009 and will
apply to our disclosures beginning with our second fiscal quarter of
2009.  The implementation of this standard will not have a material
impact on our consolidated financial position and results of
operations.
 
 In April
2009, the FASB issued FSP 157-4, Determining Fair Value When the
Volume and Level of Activity for the Asset or Liability Have Significantly
Decreased and Identifying Transactions That Are Not Orderly, which
provides guidance for estimating fair value when the volume and level of
activity for the asset or liability have significantly
decreased.  This guidance is effective for interim reporting periods
ending after June 15, 2009 and will apply to our disclosures beginning with our
second fiscal quarter of 2009.  The implementation of this standard
will not have a material impact on our consolidated financial position and
results of operations.
 
 In April
2009, the FASB issued FSP FAS 115-2 and FAS 124-2, Recognition and Presentation of
Other-Than-Temporary Impairments, which amends the other-than-temporary
impairment guidance for debt securities to make the guidance more operational
and to improve the presentation and disclosure of other-than-temporary
impairments on debt and equity securities in the financial
statements.  This guidance is effective for interim reporting periods
ending after June 15, 2009 and will apply to our disclosures beginning with our
second fiscal quarter of 2009.  The implementation of this standard
will not have a material impact on our consolidated financial position and
results of operations.
 
 Item
3.  Quantitative and Qualitative Disclosures about
Market Risk
  Our
short-term excess cash balance is invested in short-term commercial paper. We do
not invest in any derivative or commodity type instruments, although when a
portion of our interest rate cap was ineffective, it was considered an
investment. Since October 31, 2008, there has not been an ineffective portion of
our interest rate cap. Accordingly, we are subject to minimal market risk on our
investments.
  We have
the ability to borrow up to $15.0 million under a revolving loan
facility.  The interest rate is variable and, accordingly, we would be
exposed to interest rate risk, primarily from a change in LIBOR or a base rate
should the facility be used.  Currently, we have no loans drawn under
this facility.
  Item
4.  Controls and
Procedures
  With the
participation of the Chief Executive Officer and the Chief Financial Officer,
management has evaluated the effectiveness of our disclosure controls and
procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of
1934).  Based on that evaluation, the Chief Executive Officer and the
Chief Financial Officer concluded that our disclosure controls and procedures
were effective as of March 31, 2009.
  There
were no changes in our internal control over financial reporting (as defined in
Rule 13a-15(f) under the Securities Exchange Act of 1934) during the three
months ended March 31, 2009 that materially affected, or are reasonably likely
to materially affect, our internal control over financial
reporting.
  23
  PART
II  OTHER INFORMATION
  Item
6.  Exhibits
  Exhibits
  See
Exhibit Index.
  24
  Signatures
  Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
  Date:  May
      8, 2009
                    OTELCO
      INC.By:
                    /s/ Curtis L. Garner, Jr.Curtis
      L. Garner, Jr.Chief
      Financial Officer
  
  EXHIBIT
INDEX
 
 Exhibit
      No.
                            
                            Description31.1
                            
                            Certificate
      pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange
      Act of 1934 of the Chief Executive Officer31.2
                            
                            Certificate
      pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange
      Act of 1934 of the Chief Financial Officer32.1
                            
                            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
    Officer32.2
                            
                            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