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**UNITED      STATES**

**SECURITIES      AND EXCHANGE COMMISSION**

**Washington,      D.C. 20549**

**FORM      10-Q**

| (Mark                One) |                                                                                                                                  |
|---------------------------|---------------------------------------------------------------------------------------------------------------------------------------|
|                      |                                                                                                                                  |
| x                         | QUARTERLY                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE                ACT OF                1934  |
|                      |                                                                                                                                  |
|                      | For                the quarterly period ended March 31, 2006or                                                                        |
|                      |                                                                                                                                  |
| o                         | TRANSITION                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE                ACT OF                1934 |
|                      |                                                                                                                                  |
|                      | For                the transition period from to                                                                                      |

**OTELCO      INC. **

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

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**APPLICABLE      ONLY TO CORPORATE USERS:**

| **Class**                                                       |   | **Outstanding                at May 10, 2006** |
|-----------------------------------------------------------------|--------|------------------------------------------------|
| Class                A Common Stock ($0.01 par value per share) |   | 9,676,733                                      |
| Class                B Common Stock ($0.01 par value per share) |   | 544,671                                        |

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**OTELCO      INC.**

**FORM      10-Q**

**For      the three month period ended March 31, 2006**

**TABLE      OF CONTENTS**

**PART      I.  FINANCIAL INFORMATION**

| Item              1. | Financial                Statements |
|----------------------|-------------------------------------|

Consolidated      Balance Sheets as of December 31, 2005 and March 31,      2006 

Consolidated      Statements of Income for the three months ended March      31,      2005 and 2006 

Consolidated      Statements of Cash Flows for the three months ended March      31,      2005 and 2006 

Notes      to Consolidated Financial Statements

| Item                2. | Management’s                  Discussion and Analysis of Financial Condition                  and Results of Operations |
|------------------------|-------------------------------------------------------------------------------------------------------------------------------|
| Item                  3. | Quantitative                  and Qualitative Disclosures about Market                  Risk |
|--------------------------|----------------------------------------------------------------------------------------------|
| Item                  4. | Controls                  and                  Procedures |
|--------------------------|-----------------------------------------------------------|

**PART      II.  OTHER INFORMATION**

| Item                6. | Exhibits |
|------------------------|----------|

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

**FORWARD-LOOKING      STATEMENTS**

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**PART      1.**

**FINANCIAL        INFORMATION**

| **Item                1.** | ***Financial                  Statements*** |
|----------------------------|---------------------------------------------|

| **OTELCO                  INC.**                                  |
|-------------------------------------------------------------------|
| **CONSOLIDATED                  BALANCE                  SHEETS** |

|                                                                                                                      |   | **December                  31,** |        | **March                  31,** |   |
|---------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------------|-------------|--------------------------------|--------|
|                                                                                                                      |   | **2005**                          |        | **2006**                       |   |
| **Assets**                                                                                                                |   |                              |        | **(unaudited)**                |   |
| Current                    assets                                                                                         |   |                              |        |                           |   |
| Cash                  and cash equivalents                                                                                |   | $                                 | 5,569,233   |                           | $      | 5,586,214 |   |
| Accounts                  receivable:                                                                                     |   |                              |        |                           |   |   |   |
| Due                  from subscribers, net of allowance for doubtful                                                      |   |                              |        |                           |   |   |   |
| accounts                  of $163,028 and $162,350 respectively                                                           |   |                              | 1,212,909   |                           |   | 1,144,124 |   |
| Unbilled                  receivables                                                                                     |   |                              | 1,828,104   |                           |   | 1,799,377 |   |
| Other                                                                                                                     |   |                              | 1,482,171   |                           |   | 1,572,714 |   |
| Materials                  and supplies                                                                                   |   |                              | 932,861     |                           |   | 929,556 |   |
| Prepaid                  expenses                                                                                         |   |                              | 504,256     |                           |   | 513,345 |   |
| Income                  tax receivables                                                                                   |   |                              | 749,591     |                           |   | 749,591 |   |
| Deferred                  income taxes                                                                                    |   |                              | 872,675     |                           |   | 872,675 |   |
| Total                  current assets                                                                                     |   |                              | 13,151,800  |                           |   | 13,167,596 |   |
|                                                                                                                      |   |                              |        |                           |   |   |   |
| Property                  and equipment, net                                                                              |   |                              | 44,555,611  |                           |   | 43,803,951 |   |
| Goodwill                                                                                                                  |   |                              | 119,431,993 |                           |   | 119,431,993 |   |
| Intangible                  assets, net                                                                                   |   |                              | 1,588,079   |                           |   | 1,536,655 |   |
| Investments                                                                                                               |   |                              | 1,108,249   |                           |   | 973,313 |   |
| Deferred                  financing costs                                                                                 |   |                              | 6,971,610   |                           |   | 6,628,173 |   |
| Interest                  rate cap                                                                                        |   |                              | 5,318,728   |                           |   | 6,032,219 |   |
| Deferred                  charge - acquisition                                                                            |   |                              | —     |                           |   | 14,890 |   |
| Total                  assets                                                                                        |   | $                                 | 192,126,070 |                           | $      | 191,588,790 |   |
|                                                                                                                      |   |                              |        |                           |   |   |   |
| **Liabilities                  and Stockholders' Equity**                                                                 |   |                              |        |                           |   |   |   |
| Current                  liabilities                                                                                      |   |                              |        |                           |   |   |   |
| Accounts                  payable                                                                                         |   | $                                 | 1,106,114   |                           | $      | 826,515 |   |
| Accrued                  expenses                                                                                         |   |                              | 1,692,841   |                           |   | 2,038,733 |   |
| Advance                  billings and payments                                                                            |   |                              | 1,204,680   |                           |   | 1,253,810 |   |
| Customer                  deposits                                                                                        |   |                              | 213,524     |                           |   | 222,539 |   |
| Total                  Current Liabilities                                                                                |   |                              | 4,217,159   |                           |   | 4,341,597 |   |
|                                                                                                                      |   |                              |        |                           |   |   |   |
| Deferred                  income taxes                                                                                    |   |                              | 15,345,890  |                           |   | 15,345,890 |   |
| Other                  liabilities                                                                                        |   |                              | 192,769     |                           |   | 184,538 |   |
| Total                  deferred tax and other liabilities                                                                 |   |                              | 15,538,659  |                           |   | 15,530,428 |   |
|                                                                                                                      |   |                              |        |                           |   |   |   |
| Long-term                  notes payable                                                                                  |   |                              | 161,075,498 |                           |   | 161,075,498 |   |
| Derivative                  liability                                                                                     |   |                              | 1,830,095   |                           |   | 1,650,353 |   |
| Class                  B common convertible to senior subordinated notes                                                  |   |                              | 3,655,454   |                           |   | 3,766,186 |   |
|                                                                                                                      |   |                              |        |                           |   |   |   |
| Stockholders'                  Equity                                                                                     |   |                              |        |                           |   |   |   |
| Class                  A Common Stock, $.01 par value-authorized 20,000,000                  shares;                      |   |                              |        |                           |   |   |   |
| issued                  and outstanding 9,676,733 shares                                                                  |   |                              | 96,767      |                           |   | 96,767 |   |
| Class                  B Common Stock, $.01 par value-authorized 800,000 shares;                  issued                  |   |                              |        |                           |   |   |   |
| and                  outstanding 544,671 shares                                                                           |   |                              | 5,447       |                           |   | 5,447 |   |
| Additional                  paid in capital                                                                               |   |                              | 5,613,703   |                           |   | 3,908,179 |   |
| Retained                  deficit                                                                                         |   |                              | (805,731    | )                              |   | (561,137 | ) |
| Accumulated                  other comprehensive income                                                                   |   |                              | 899,019     |                           |   | 1,775,472 |   |
| Total                  stockholders' equity                                                                               |   |                              | 5,809,205   |                           |   | 5,224,728 |   |
| Total                  liabilities and stockholders' equity                                                               |   | $                                 | 192,126,070 |                           | $      | 191,588,790 |   |
|                                                                                                                      |   |                              |        |                           |   |   |   |
|                                                                                                                      |   |                              |        |                           |   |   |   |
| The                  accompanying notes are an integral part of these consolidated financial                  statements. |   |

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| **OTELCO                INC.**                       |
|------------------------------------------------------|
| **CONSOLIDATED                STATEMENTS OF INCOME** |
|  (unaudited)                                    |

|                                                                                                                  |   | **Three                months ended****March                31,** |       |
|-----------------------------------------------------------------------------------------------------------------------|--------|-------------------------------------------------------------------|------------|
|                                                                                                                  |   | **2005**                                                          |       | **2006** |   |
| Revenues                                                                                                              |   |                                                              |       |   |   |
| Local                service                                                                                          |   | $                                                                 | 3,643,645  |   | $ | 3,501,885 |   |
| Network                access                                                                                         |   |                                                              | 5,729,307  |   |   | 5,145,055 |   |
| Long                distance and other telephone services                                                             |   |                                                              | 784,980    |   |   | 828,868 |   |
| Cable                television                                                                                       |   |                                                              | 496,118    |   |   | 542,506 |   |
| Internet                                                                                                              |   |                                                              | 1,373,045  |   |   | 1,495,083 |   |
| Total                revenues                                                                                         |   |                                                              | 12,027,095 |   |   | 11,513,397 |   |
| Operating                expenses                                                                                     |   |                                                              |       |   |   |   |   |
| Cost                of services and products                                                                          |   |                                                              | 3,055,324  |   |   | 3,176,442 |   |
| Selling,                general and administrative expenses                                                           |   |                                                              | 1,813,170  |   |   | 1,669,586 |   |
| Depreciation                and amortization                                                                          |   |                                                              | 2,365,206  |   |   | 2,311,779 |   |
| Total                operating expenses                                                                               |   |                                                              | 7,233,700  |   |   | 7,157,807 |   |
|                                                                                                                  |   |                                                              |       |   |   |   |   |
| Income                from operations                                                                                 |   |                                                              | 4,793,395  |   |   | 4,355,590 |   |
|                                                                                                                  |   |                                                              |       |   |   |   |   |
| Other                income (expense)                                                                                 |   |                                                              |       |   |   |   |   |
| Interest                expense                                                                                       |   |                                                              | (3,977,791 | ) |   | (4,206,037 | ) |
| Change                in fair value of derivative                                                                     |   |                                                              | 277,783    |   |   | 179,741 |   |
| Other                income                                                                                           |   |                                                              | 273,477    |   |   | 187,239 |   |
| Total                other expense                                                                                    |   |                                                              | (3,426,531 | ) |   | (3,839,057 | ) |
|                                                                                                                  |   |                                                              |       |   |   |   |   |
| Income                before income tax and accretion expense                                                         |   |                                                              | 1,366,864  |   |   | 516,533 |   |
|                                                                                                                  |   |                                                              |       |   |   |   |   |
| Income                tax expense                                                                                     |   |                                                              | (426,920   | ) |   | (161,210 | ) |
|                                                                                                                  |   |                                                              |       |   |   |   |   |
| Income                before accretion expense                                                                        |   |                                                              | 939,944    |   |   | 355,323 |   |
|                                                                                                                  |   |                                                              |       |   |   |   |   |
| Accretion                of Class B common convertible to senior                                                      |   |                                                              |       |   |   |   |   |
| subordinated                notes                                                                                     |   |                                                              | (110,732   | ) |   | (110,732 | ) |
|                                                                                                                  |   |                                                              |       |   |   |   |   |
| Net                income available to common stockholders                                                            |   | $                                                                 | 829,212    |   | $ | 244,591 |   |
|                                                                                                                  |   |                                                              |       |   |   |   |   |
| Weighted                average shares outstanding:                                                                   |   |                                                              |       |   |   |   |   |
| Basic                                                                                                                 |   |                                                              | 9,676,733  |   |   | 9,676,733 |   |
| Diluted                                                                                                               |   |                                                              | 10,221,404 |   |   | 10,221,404 |   |
|                                                                                                                  |   |                                                              |       |   |   |   |   |
| Net                income per share                                                                                   |   |                                                              |       |   |   |   |   |
| Basic                                                                                                                 |   | $                                                                 | 0.09       |   | $ | 0.03 |   |
| Diluted                                                                                                               |   | $                                                                 | 0.06       |   | $ | 0.02 |   |
|                                                                                                                  |   |                                                              |       |   |   |   |   |
| Dividends                declared per share                                                                           |   | $                                                                 | 0.18       |   | $ | 0.18 |   |
|                                                                                                                  |   |                                                              |       |   |   |   |   |
|                                                                                                                  |   |                                                              |       |   |   |   |   |
| The                accompanying notes are an integral part of these consolidated financial                statements. |   |

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| **OTELCO                  INC.**                                            |
|-----------------------------------------------------------------------------|
| **CONSOLIDATED                  STATEMENTS OF CASH                  FLOWS** |
| (unaudited)                                                                 |

|                                                                                                                      |   | Three                  months endedMarch                  31, |       |
|---------------------------------------------------------------------------------------------------------------------------|--------|---------------------------------------------------------------|------------|
|                                                                                                                      |   | **2005**                                                      |       | **2006** |   |
| Cash                  flows from operating activities:                                                                    |   |                                                          |       |   |   |
| Net                  income                                                                                               |   | $                                                             | 829,212    |   | $ | 244,591 |   |
| Adjustments                  to reconcile net income to cash flows from operating                  activities:            |   |                                                          |       |   |   |   |   |
| Depreciation                                                                                                              |   |                                                          | 1,920,757  |   |   | 1,916,918 |   |
| Amortization                                                                                                              |   |                                                          | 444,449    |   |   | 394,861 |   |
| Interest                  rate caplet                                                                                     |   |                                                          | 21,097     |   |   | 162,962 |   |
| Accretion                  expense                                                                                        |   |                                                          | 110,732    |   |   | 110,732 |   |
| Change                  in fair value of derivative liability                                                             |   |                                                          | (277,783   | ) |   | (179,741 | ) |
| Provision                  for uncollectible revenue                                                                      |   |                                                          | 28,902     |   |   | 38,947 |   |
| Changes                  in assets and liabilities; net of assets and liabilities                  acquired:              |   |                                                          |       |   |   |  |   |
| Accounts                  receivables                                                                                     |   |                                                          | 274,720    |   |   | (31,976 | ) |
| Material                  and supplies                                                                                    |   |                                                          | (82,322    | ) |   | 3,305 |   |
| Prepaid                  expenses and other assets                                                                        |   |                                                          | 32,058     |   |   | (9,089 | ) |
| Accounts                  payable and accrued liabilities                                                                 |   |                                                          | (1,161,947 | ) |   | 66,293 |   |
| Advance                  billings and payments                                                                            |   |                                                          | 46,570     |   |   | 49,130 |   |
| Other                  liabilities                                                                                        |   |                                                          | 11,040     |   |   | 784 |   |
|  Net                  cash from operating activities                                                                 |   |                                                          | 2,197,485  |   |   | 2,767,717 |   |
|                                                                                                                      |   |                                                          |       |   |   |   |   |
| Cash                  flows from investing activities:                                                                    |   |                                                          |       |   |   |   |   |
| Acquisition                  and construction of property and equipment                                                   |   |                                                          | (1,133,676 | ) |   | (1,158,880 | ) |
| Proceeds                  from retirement of investment                                                                   |   |                                                          | 38,778     |   |   | 128,558 |   |
| Deferred                  charges - acquisition                                                                           |   |                                                          | —    |   |   | (14,890 | ) |
|  Net                  cash from investing activities                                                                 |   |                                                          | (1,094,898 | ) |   | (1,045,212 | ) |
|                                                                                                                      |   |                                                          |       |   |   |   |   |
| Cash                  flows from financing activities:                                                                    |   |                                                          |       |   |   |   |   |
| Cash                  dividends paid                                                                                      |   |                                                          | (1,705,524 | ) |   | (1,705,524 | ) |
| Loan                  origination costs and transacation cost                                                             |   |                                                          | (30,533    | ) |   | — |   |
|  Net                  cash from financing activities                                                                 |   |                                                          | (1,736,057 | ) |   | (1,705,524 | ) |
|                                                                                                                      |   |                                                          |       |   |   |   |   |
| Net                  increase (decrease) in cash and cash equivalents                                                     |   |                                                          | (633,470   | ) |   | 16,981 |   |
| Cash                  and cash equivalents, beginning of period                                                           |   |                                                          | 5,406,545  |   |   | 5,569,233 |   |
| Cash                  and cash equivalents, end of period                                                                 |   | $                                                             | 4,773,075  |   | $ | 5,586,214 |   |
|                                                                                                                      |   |                                                          |       |   |   |   |   |
| Supplemental                  disclosures of cash flow information:                                                       |   |                                                          |       |   |   |   |   |
| Interest                  paid                                                                                            |   | $                                                             | 4,279,963  |   | $ | 4,046,312 |   |
|                                                                                                                      |   |                                                          |       |   |   |   |   |
| Income                  taxes paid (received)                                                                             |   | $                                                             | —    |   | $ | — |   |
|                                                                                                                      |   |                                                          |       |   |   |   |   |
|                                                                                                                      |   |
| The                  accompanying notes are an integral part of these consolidated financial                  statements. |   |

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**NOTES      TO CONSOLIDATED FINANCIAL STATEMENTS**

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

***Basis      of Presentation and Principles of Consolidation***

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

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

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|   | **4.** | **Income                per Common Share and Potential Common                Share** |
|--------|--------|--------------------------------------------------------------------------------------|

|                                                          |   | For                  the three months |       |
|---------------------------------------------------------------|--------|---------------------------------------|------------|
|                                                          |   | ended                  March 31,      |       |
|                                                          |   | 2005                                  |       | 2006 |   |
|                                                          |   |                                  |       |   |   |
| Weighted                  average common shares-basic         |   |                                  | 9,676,733  |   |   | 9,676,733 |   |
|                                                          |   |                                  |       |   |   |   |   |
| Effect                  of dilutive securities                |   |                                  | 544,671    |   |   | 544,671 |   |
|                                                          |   |                                  |       |   |   |   |   |
| Weighted-average                  common shares and potential |   |                                  |       |   |   |   |   |
| common                  shares-diluted                        |   |                                  | 10,221,404 |   |   | 10,221,404 |   |
|                                                          |   |                                  |       |   |   |   |   |
| Net                  income available to common stockholders  |   | $                                     | 829,212    |   | $ | 244,591 |   |
|                                                          |   |                                  |       |   |   |   |   |
| Net                  income per basic share                   |   | $                                     | 0.09       |   | $ | 0.03 |   |
|                                                          |   |                                  |       |   |   |   |   |
| Net                  income available to common stockholders  |   | $                                     | 829,212    |   | $ | 244,591 |   |
| Plus:                  Accretion expense of Class B common    |   |                                  |       |   |   |   |   |
| convertible                  to senior subordinated notes     |   |                                  | 110,732    |   |   | 110,732 |   |
| Less:                  Change in fair value of derivative     |   |                                  | (277,783   | ) |   | (179,741 | ) |
|                                                          |   |                                  |       |   |   |   |   |
| Net                  income available for diluted shares      |   | $                                     | 662,161    |   | $ | 175,582 |   |
|                                                          |   |                                  |       |   |   |   |   |
| Net                  income per diluted share                 |   | $                                     | 0.06       |   | $ | 0.02 |   |

|  | **5.** | **Other                Comprehensive Income** |
|--|--------|-----------------------------------------------|

|                                        |   | For                  the three months |      |
|---------------------------------------------|--------|---------------------------------------|-----------|
|                                        |   | ended                  March 31,      |      |
|                                             |   | 2005                                  |      | 2006 |   |
|                                        |   |                                  |      |   |   |
| Net                  income                 |   | $                                     | 829,212   |   | $ | 244,591 |   |
| Hedge                  accounting           |   |                                  | 803,132   |   |   | 876,453 |   |
| Total                  comprehensive income |   | $                                     | 1,632,344 |   | $ | 1,121,044 |   |

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

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

**Overview**

***General***

***Revenue      Sources***

|   | § | *Local                services.*                We                receive revenues from providing local exchange telephone services.                These                revenues include monthly subscription charges for basic service,                calling                to adjacent communities on a per minute basis, local private line                services                and enhanced calling features, such as voicemail, caller identification,                call waiting and call forwarding. |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | § | *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                and                Missouri are based on rates approved by the Alabama Public Service                Commission and Missouri Public Service Commission respectively. Switched                and special access charges for interstate and international services                are                based on rates approved by the Federal Communications                Commission. |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | § | *Long                distance and other telephone services*.                We receive revenues for providing long distance services to our customers.                We also provide billing and collections services for other carriers                under                contract and receive revenues from directory                advertising. |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | § | *Cable                television services.*                We                offer basic, digital and pay per view cable television services to                a                portion of our telephone service territory in both Alabama and Missouri. |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | § | *Internet                services.*                We                receive revenues from monthly recurring charges for dial-up and digital                high-speed Internet access. |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

***Access      Line and Customer Trends***

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|                                                |   | Year                  Ended December 31, |   | March                  31, |   |
|------------------------------------------------|--------|------------------------------------------|--------|----------------------------|--------|
|                                           |   | 2003                                     |   | 2004                       |   | 2005 |   | 2006 |   |
| Access                line equivalents (1):    |   |                                |   |                       |   |   |   |   |   |
| Residential                  access lines      |   |                                     | 22,100 |                       |   | 25,237 |   |   | 24,541 |   |   | 24,491 |   |
| Business                  access lines         |   |                                     | 7,355  |                       |   | 8,414 |   |   | 8,036 |   |   | 7,877 |   |
|  Access                  lines            |   |                                     | 29,455 |                       |   | 33,651 |   |   | 32,577 |   |   | 32,368 |   |
| Digital                  high-speed lines      |   |                                     | 2,185  |                       |   | 3,488 |   |   | 5,962 |   |   | 6,800 |   |
| Total                  access line equivalents |   |                                     | 31,640 |                       |   | 37,139 |   |   | 38,539 |   |   | 39,168 |   |
|                                           |   |                                     |   |                       |   |   |   |   |   |   |   |   |   |
| Long                  distance customers       |   |                                     | 11,374 |                       |   | 13,641 |   |   | 14,438 |   |   | 15,618 |   |
| Cable                  television customers    |   |                                     | 3,628  |                       |   | 3,959 |   |   | 4,220 |   |   | 4,236 |   |
| Dial-up                  Internet customers    |   |                                     | 2,331  |                       |   | 15,348 |   |   | 12,149 |   |   | 11,659 |   |
|                                           |   |                                     |   |                       |   |   |   |   |   |   |   |   |   |

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| (1) | We                define total access line equivalents as access lines, cable modems                and                digital subscriber lines. |
|-----|--------------------------------------------------------------------------------------------------------------------------------------------------|

***Categories      of Operating Expenses***

*Cost      of services. *

*Selling,      general and administrative expenses. *

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*Depreciation      and amortization. *

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

***Results      of Operations***

|                                                               |   |                                                                  |   |    |   |
|--------------------------------------------------------------------|--------|-----------------------------------------------------------------------|--------|--------------|--------|
|                                                               |   | **Three                  Months Ended****March                  31,** |   |
|                                                               |   | **2005**                                                              |   | **2006**     |   |
| Revenues                                                           |   |                                                                  |   |    |   |
| Local                  service                                     |   |                                                                  | 30.3   | %            |   | 30.4 | % |
| Network                  access                                    |   |                                                                  | 47.6   |         |   | 44.7 |   |
| Long                  distance and other telephone services        |   |                                                                  | 6.5    |         |   | 7.2 |   |
| Cable                  television                                  |   |                                                                  | 4.2    |         |   | 4.7 |   |
| Internet                                                           |   |                                                                  | 11.4   |         |   | 13.0 |   |
|  Total                  revenues                              |   |                                                                  | 100.0  | %            |   | 100.0 | % |
| Operating                  expenses                                |   |                                                                  |   |         |   |   |   |
| Cost                  of services and products                     |   |                                                                  | 25.4   | %            |   | 27.6 | % |
| Selling,                  general and administrative expenses      |   |                                                                  | 15.1   |         |   | 14.5 |   |
| Depreciation                  and amortization                     |   |                                                                  | 19.7   |         |   | 20.1 |   |
|  Total                  operating expenses                    |   |                                                                  | 60.2   |         |   | 62.2 |   |
|                                                               |   |                                                                  |   |         |   |   |   |
| Income                  from operations                            |   |                                                                  | 39.8   |         |   | 37.8 |   |
|                                                               |   |                                                                  |   |         |   |   |   |
| Other                  income (expense)                            |   |                                                                  |   |         |   |   |   |
| Interest                  expense                                  |   |                                                                  | (33.1  | )            |   | (36.5 | ) |
| Change                  in fair value of derivative                |   |                                                                  | 2.3    |         |   | 1.6 |   |
| Other                  income                                      |   |                                                                  | 2.3    |         |   | 1.6 |   |
|  Total                  other expense                         |   |                                                                  | (28.5  | )            |   | (33.3 | ) |
|                                                               |   |                                                                  |   |         |   |   |   |
| Income                  before income taxes and accretion expense  |   |                                                                  | 11.3   |         |   | 4.5 |   |
|                                                               |   |                                                                  |   |         |   |   |   |
| Income                  tax expense                                |   |                                                                  | (3.5   | )            |   | (1.4 | ) |
| Income                  before accretion expense                   |   |                                                                  | 7.8    |         |   | 3.1 |   |
|                                                               |   |                                                                  |   |         |   |   |   |
| Accretion                  of Class B common convertible to senior |   |                                                                  |   |         |   |   |   |
| subordinated                  notes                                |   |                                                                  | (0.9   | )            |   | (1.0 | ) |
| Net                  income available to common stockholders       |   |                                                                  | 6.9    | %            |   | 2.1 | % |

***Three      months ended March 31, 2006 compared to three months ended March 31,      2005***

*Total      Revenues. *

|                                                        |   |                                                                  |   |                                    |   |       |   |        |   |
|-------------------------------------------------------------|--------|-----------------------------------------------------------------------|--------|-----------------------------------------|--------|------------|--------|-------------|--------|
|                                                        |   | **Three                  Months Ended****March                  31,** |   | **Change**                              |   |
|                                                        |   | **2005**                                                              |   | **2006**                                |   | **Amount** |   | **Percent** |   |
|                                                        |   |                                                                  |   | (dollars                  in thousands) |   |       |   |
| Local                  service                              |   | $                                                                     | 3,644  |                                    | $      | 3,502      |   | $           | (142   | ) |   | (3.9 | )% |
| Network                  access                             |   |                                                                  | 5,729  |                                    |   | 5,145      |   |        | (584   | ) |   | (10.2 | ) |
| Long                  distance and other telephone services |   |                                                                  | 785    |                                    |   | 829        |   |        | 44     |   |   | 5.6 |   |
| Cable                  television                           |   |                                                                  | 496    |                                    |   | 543        |   |        | 47     |   |   | 9.5 |   |
| Internet                                                    |   |                                                                  | 1,373  |                                    |   | 1,495      |   |        | 122    |   |   | 8.9 |   |
| Total                                                       |   | $                                                                     | 12,027 |                                    | $      | 11,514     |   | $           | (513   | ) |   | (4.3 | ) |

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*Operating      expenses. *

|                                                          |   |                                                                  |   |                                    |   |       |   |        |   |
|---------------------------------------------------------------|--------|-----------------------------------------------------------------------|--------|-----------------------------------------|--------|------------|--------|-------------|--------|
|                                                               |   | **Three                  Months Ended****March                  31,** |   | **Change**                              |   |
|                                                          |   | **2005**                                                              |   | **2006**                                |   | **Amount** |   | **Percent** |   |
|                                                               |   |                                                                  |   | (dollars                  in thousands) |   |       |   |
| Cost                  of services                             |   | $                                                                     | 3,056  |                                    | $      | 3,176      |   | $           | 120    |   |   | 4.0 | % |
| Selling,                  general and administrative expenses |   |                                                                  | 1,813  |                                    |   | 1,670      |   |        | (143   | ) |   | (7.9 | ) |
| Depreciation                  and amortization                |   |                                                                  | 2,365  |                                    |   | 2,312      |   |        | (53    | ) |   | (2.2 | ) |
| Total                                                         |   | $                                                                     | 7,234  |                                    | $      | 7,158      |   | $           | (76    | ) |   | (1.1 | ) |

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*Interest      expense. *

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

*Other      income. *

*Income      taxes. *

*Accretion      of Class B common convertible to senior subordinated notes. *

*Net      income. *

**Liquidity      and Capital Resources**

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**Subsequent      events**

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| **Item              3.** | ***Quantitative                and Qualitative Disclosures About Market                Risk*** |
|--------------------------|------------------------------------------------------------------------------------------------|

| **Item              4.** | ***Controls                and Procedures*** |
|--------------------------|----------------------------------------------|

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**PART      II.**

**OTHER      INFORMATION**

| **Item              6.** | ***Exhibits*** |
|--------------------------|----------------|

See      Exhibit Index.

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**SIGNATURES**

|                                 |                                                                                                                        |                                                     |
|--------------------------------------|-----------------------------------------------------------------------------------------------------------------------------|----------------------------------------------------------|
|                                 | **OTELCO              INC.**                                                                                                |
|                            |                                                                                                                   |                                                |
| Date: May              10, 2006 | By:                                                                                                               | /s/ CURTIS              L.              GARNER, JR. |
|                                 |                                                                                                                             |
|                                 | Name:                  Curtis L. Garner, Jr.Title:                    Chief Financial Officer |

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**EXHIBIT      INDEX**

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

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