**UNITED      STATES**

**SECURITIES      AND EXCHANGE COMMISSION**

**Washington,      D.C. 20549**

**FORM      10-Q/AAmendment      No. 1**

| (Mark                One) |                                                                                                                                  |
|---------------------------|---------------------------------------------------------------------------------------------------------------------------------------|
|                      |                                                                                                                                  |
| ý                    | QUARTERLY                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE                ACT OF                1934  |
|                      |                                                                                                                                  |
|                      | For                the quarterly period ended March 31, 2007or                                                                        |
|                      |                                                                                                                                  |
|  ̈                    | TRANSITION                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE                ACT OF                1934 |
|                      |                                                                                                                                  |
|                      | For                the transition period from to                                                                                      |

**OTELCO      INC.**

| 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)                           |
|                                                            |   |                                                |

----

----

 No       ̈

**APPLICABLE      ONLY TO CORPORATE USERS:**

| **Class**                                                       |   | **Outstanding                at May 9, 2007** |
|-----------------------------------------------------------------|--------|-----------------------------------------------|
| 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                                       |

----

**OTELCO      INC.**

**FORM      10-Q/AAmendment No. 1**

**For      the three month period ended March 31, 2007**

**TABLE      OF CONTENTS**

**PART      I FINANCIAL INFORMATION**

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

|   | Consolidated                Balance Sheets as of December 31, 2006 and March 31,                2007 |
|--------|------------------------------------------------------------------------------------------------------|

|   | Consolidated                Statements of Income for the three months ended March 31, 2006 and                2007 |
|--------|--------------------------------------------------------------------------------------------------------------------|

|   | Consolidated                Statements of Cash Flows for the three months ended March 31, 2006                and                2007 |
|--------|---------------------------------------------------------------------------------------------------------------------------------------|

|   | 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 |
|------------------------|----------|

----

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

**EXPLANATORY        NOTE**

**FORWARD-LOOKING      STATEMENTS**

----

**PART      1. FINANCIAL INFORMATION**

**Item      1. Financial Statements**

| **OTELCO                INC.****CONSOLIDATED                BALANCE SHEETS**                                                                            |   |
|---------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
|                                                                                                                                                    |   | **December                31,****2006** |   | **March                31,****2007** |   |
| **Assets**                                                                                                                                              |   |   |   | **(unaudited)** |   |
| Current                assets                                                                                                                           |   |   |   |   |   |
| Cash                and cash equivalents                                                                                                                |   | $ | 14,401,849 |   | $ | 10,641,424 |   |
| Accounts                receivable:                                                                                                                     |   |   |   |   |   |   |   |
| Due                from subscribers, net of allowance for doubtful accounts of $207,359                and $184,552 respectively                        |   |   | 3,105,636 |   |   | 2,740,587 |   |
| Unbilled                receivables                                                                                                                     |   |   | 2,324,213 |   |   | 2,410,991 |   |
| Other                                                                                                                                                   |   |   | 1,680,144 |   |   | 1,878,545 |   |
| Materials                and supplies                                                                                                                   |   |   | 1,962,938 |   |   | 2,020,599 |   |
| Prepaid                expenses                                                                                                                         |   |   | 1,062,947 |   |   | 804,447 |   |
| Deferred                income taxes                                                                                                                    |   |   | 766,225 |   |   | 832,946 |   |
| Total                current assets                                                                                                                     |   |   | 25,303,952 |   |   | 21,329,539 |   |
|                                                                                                                                                    |   |   |   |   |   |   |   |
| Property                and equipment, net                                                                                                              |   |   | 60,493,789 |   |   | 58,715,659 |   |
| Goodwill                                                                                                                                                |   |   | 134,182,309 |   |   | 134,403,170 |   |
| Intangible                assets, net                                                                                                                   |   |   | 11,340,806 |   |   | 10,884,297 |   |
| Investments                                                                                                                                             |   |   | 1,240,250 |   |   | 1,226,001 |   |
| Deferred                financing costs                                                                                                                 |   |   | 6,652,393 |   |   | 6,254,272 |   |
| Interest                rate cap                                                                                                                        |   |   | 4,542,160 |   |   | 3,922,585 |   |
| Deferred                charges                                                                                                                         |   |   | 96,628 |   |   | 89,896 |   |
| Total                assets                                                                                                                             |   | $ | 243,852,287 |   | $ | 236,825,419 |   |
|                                                                                                                                                    |   |   |   |   |   |   |   |
| **Liabilities                and Stockholders’ Equity (Deficit)**                                                                                 |   |   |   |   |   |   |   |
| Current                liabilities                                                                                                                      |   |   |   |   |   |   |   |
| Accounts                payable                                                                                                                         |   | $ | 1,658,911 |   | $ | 1,035,816 |   |
| Dividends                payable                                                                                                                        |   |   | 1,705,524 |   |   | - |   |
| Accrued                expenses                                                                                                                         |   |   | 5,875,863 |   |   | 3,511,889 |   |
| Advance                billings and payments                                                                                                            |   |   | 2,119,701 |   |   | 2,143,593 |   |
| Customer                deposits                                                                                                                        |   |   | 197,496 |   |   | 213,261 |   |
| Total                Current Liabilities                                                                                                                |   |   | 11,557,495 |   |   | 6,904,559 |   |
|                                                                                                                                                    |   |   |   |   |   |   |   |
| Deferred                income taxes                                                                                                                    |   |   | 24,712,213 |   |   | 24,778,934 |   |
| Other                liabilities                                                                                                                        |   |   | 187,037 |   |   | 180,082 |   |
| Total                deferred tax and other liabilities                                                                                                 |   |   | 24,899,250 |   |   | 24,959,016 |   |
|                                                                                                                                                    |   |   |   |   |   |   |   |
| Long-term                notes payable                                                                                                                  |   |   | 201,075,498 |   |   | 201,075,498 |   |
| Derivative                liability                                                                                                                     |   |   | 2,107,877 |   |   | 1,890,008 |   |
| Class                B common convertible to senior subordinated notes                                                                                  |   |   | 4,085,033 |   |   | 4,085,033 |   |
|                                                                                                                                                    |   |   |   |   |   |   |   |
| Stockholders’                Equity (Deficit)                                                                                                     |   |   |   |   |   |   |   |
| 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                                                                                                               |   |   | 284,041 |   |   | - |   |
| Retained                deficit                                                                                                                         |   |   | (1,137,166 | ) |   | (2,676,857 | ) |
| Accumulated                other comprehensive income                                                                                                   |   |   | 878,045 |   |   | 485,948 |   |
| Total                stockholders’ equity (deficit)                                                                                               |   |   | 127,134 |   |   | (2,088,695 | ) |
| Total                liabilities and stockholders’ equity (deficit)                                                                               |   | $ | 243,852,287 |   | $ | 236,825,419 |   |

----

| **OTELCO****CONSOLIDATED                STATEMENTS OF OPERATIONS**                  |   |
|-------------------------------------------------------------------------------------|--------|
| ** (unaudited)**                                                               |   |
|                                                                                     |   | **Three                months ended****March                31,** |   |
|                                                                                |   | **2006** |   | **2007** |   |
| Revenues                                                                            |   |   |   |   |   |
| Local                services                                                       |   | $ | 4,303,399 |   | $ | 6,348,496 |   |
| Network                access                                                       |   |   | 5,145,055 |   |   | 6,437,589 |   |
| Cable                television                                                     |   |   | 542,506 |   |   | 547,527 |   |
| Internet                                                                            |   |   | 1,522,437 |   |   | 2,820,298 |   |
| Transport                services                                                   |   |   | - |   |   | 1,018,483 |   |
| Total                revenues                                                       |   |   | 11,513,397 |   |   | 17,172,393 |   |
| Operating                expenses                                                   |   |   |   |   |   |   |   |
| Cost                of services and products                                        |   |   | 3,174,687 |   |   | 6,271,057 |   |
| Selling,                general and administrative expenses                         |   |   | 1,671,341 |   |   | 2,501,800 |   |
| Depreciation                and amortization                                        |   |   | 1,968,341 |   |   | 3,629,091 |   |
| Total                operating expenses                                             |   |   | 6,814,369 |   |   | 12,401,948 |   |
|                                                                                |   |   |   |   |   |   |   |
| Income                from operations                                               |   |   | 4,699,028 |   |   | 4,770,445 |   |
|                                                                                |   |   |   |   |   |   |   |
| Other                income (expense)                                               |   |   |   |   |   |   |   |
| Interest                expense                                                     |   |   | (4,549,475 | ) |   | (5,376,264 | ) |
| Change                in fair value of derivative                                   |   |   | 179,741 |   |   | 217,868 |   |
| Other                income                                                         |   |   | 187,239 |   |   | 281,449 |   |
| Total                other expense                                                  |   |   | (4,182,495 | ) |   | (4,876,947 | ) |
|                                                                                |   |   |   |   |   |   |   |
| Income                (loss) before income tax and accretion expense                |   |   | 516,533 |   |   | (106,502 | ) |
|                                                                                |   |   |   |   |   |   |   |
| Income                tax expense                                                   |   |   | (161,210 | ) |   | (11,705 | ) |
|                                                                                |   |   |   |   |   |   |   |
| Income                (loss) before accretion expense                               |   |   | 355,323 |   |   | (118,207 | ) |
|                                                                                |   |   |   |   |   |   |   |
| Accretion                of Class B common convertible to senior subordinated notes |   |   | (110,732 | ) |   | 0 |   |
|                                                                                |   |   |   |   |   |   |   |
| Net                income (loss) available to common stockholders                   |   | $ | 244,591 |   | $ | (118,207 | ) |
|                                                                                |   |   |   |   |   |   |   |
| Weighted                average shares outstanding:                                 |   |   |   |   |   |   |   |
| Basic                                                                               |   |   | 9,676,733 |   |   | 9,676,733 |   |
| Diluted                                                                             |   |   | 10,221,404 |   |   | 10,221,404 |   |
|                                                                                |   |   |   |   |   |   |   |
| Net                income (loss) per share                                          |   |   |   |   |   |   |   |
| Basic                                                                               |   | $ | 0.03 |   | $ | (0.01 | ) |
| Diluted                                                                             |   | $ | 0.02 |   | $ | (0.03 | ) |
|                                                                                |   |   |   |   |   |   |   |
| Dividends                declared per share                                         |   | $ | 0.18 |   | $ | 0.18 |   |

----

| **OTELCO****CONSOLIDATED                STATEMENTS OF CASH FLOWS**                                         |   |
|------------------------------------------------------------------------------------------------------------|--------|
| **(unaudited)**                                                                                            |   |
|                                                                                                       |   | **Three                months ended****March                31,** |   |
|                                                                                                       |   | **2006** |   | **2007** |   |
| Cash                flows from operating activities:                                                       |   |   |   |   |   |
| Net                income (loss)                                                                           |   | $ | 244,591 |   | $ | (118,207 | ) |
| Adjustments                to reconcile net income to cash flows from operating                activities: |   |   |   |   |   |   |   |
| Depreciation                                                                                               |   |   | 1,916,918 |   |   | 2,980,190 |   |
| Amortization                                                                                               |   |   | 51,424 |   |   | 648,901 |   |
| Interest                rate caplet                                                                        |   |   | 162,962 |   |   | 227,478 |   |
| Amortization                of loan cost                                                                   |   |   | 343,437 |   |   | 398,121 |   |
| Accretion                expense                                                                           |   |   | 110,732 |   |   | - |   |
| Change                in fair value of derivative liability                                                |   |   | (179,741 | ) |   | (217,868 | ) |
| Provision                for uncollectible revenue                                                         |   |   | 38,947 |   |   | 17,242 |   |
| Changes                in assets and liabilities, net of assets and liabilities                acquired:   |   |   |   |   |   |   |   |
| Accounts                receivables                                                                        |   |   | (31,976 | ) |   | (113,935 | ) |
| Material                and supplies                                                                       |   |   | 3,305 |   |   | (57,661 | ) |
| Prepaid                expenses and other assets                                                           |   |   | (9,089 | ) |   | 258,500 |   |
| Accounts                payable and accrued liabilities                                                    |   |   | 66,293 |   |   | (4,736,893 | ) |
| Advance                billings and payments                                                               |   |   | 49,130 |   |   | 23,892 |   |
| Other                liabilities                                                                           |   |   | 784 |   |   | 8,810 |   |
|                                                                                                       |   |   |   |   |   |   |   |
| Net                cash from operating activities                                                          |   |   | 2,767,717 |   |   | (681,430 | ) |
|                                                                                                       |   |   |   |   |   |   |   |
| Cash                flows from investing activities:                                                       |   |   |   |   |   |   |   |
| Acquisition                and construction of property and equipment                                      |   |   | (1,158,880 | ) |   | (1,374,914 | ) |
| Proceeds                from retirement of investment                                                      |   |   | 128,558 |   |   | 7,871 |   |
| Deferred                charges                                                                            |   |   | (14,890 | ) |   | (6,428 | ) |
|                                                                                                       |   |   |   |   |   |   |   |
| Net                cash from investing activities                                                          |   |   | (1,045,212 | ) |   | (1,373,471 | ) |
|                                                                                                       |   |   |   |   |   |   |   |
| Cash                flows from financing activities:                                                       |   |   |   |   |   |   |   |
| Cash                dividends paid                                                                         |   |   | (1,705,524 | ) |   | (1,705,524 | ) |
|                                                                                                       |   |   |   |   |   |   |   |
| Net                cash from financing activities                                                          |   |   | (1,705,524 | ) |   | (1,705,524 | ) |
|                                                                                                       |   |   |   |   |   |   |   |
| Net                increase (decrease) in cash and cash equivalents                                        |   |   | 16,981 |   |   | (3,760,425 | ) |
| Cash                and cash equivalents, beginning of period                                              |   |   | 5,569,233 |   |   | 14,401,849 |   |
|                                                                                                       |   |   |   |   |   |   |   |
| Cash                and cash equivalents, end of period                                                    |   | $ | 5,586,214 |   | $ | 10,641,424 |   |
| Supplemental                disclosures of cash flow information:                                          |   |   |   |   |   |   |   |
| Interest                paid                                                                               |   | $ | 4,046,312 |   | $ | 7,401,647 |   |
|                                                                                                       |   |   |   |   |   |   |   |
| Income                taxes paid (received)                                                                |   | $ | - |   | $ | (173,718 | ) |

----

**NOTES      TO CONSOLIDATED FINANCIAL STATEMENTS**

**(unaudited)**

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

**Basis      of Presentation and Principles of Consolidation**

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

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

----

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

|                                                                                                             |   | **Three                months ended****March                31,** |       |
|------------------------------------------------------------------------------------------------------------------|--------|-------------------------------------------------------------------|------------|
|                                                                                                             |   | **2006**                                                          |       | **2007** |   |
| 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 (loss) available to common stockholders                                                |   |                                                              | 244,591    |   |   | (118,207 | ) |
|                                                                                                             |   | $                                                                 | 0.03       |   | $ | (0.01 | ) |
| Net                Income (loss) per basic share                                                                 |   |                                                              |       |   |   |   |   |
|                                                                                                             |   |                                                              |       |   |   |   |   |
|                                                                                                             |   |                                                              |       |   |   |   |   |
| Net                income (loss) available to common stockholders                                                |   | $                                                                 | 244,591    |   | $ | (118,207 | ) |
| Plus:                Accretion expense of Class B common convertible to senior subordinated                notes |   |                                                              | 110,732    |   |   | 0 |   |
| Less:                Change in fair value of derivative                                                          |   |                                                              | (179,741   | ) |   | (217,868 | ) |
|                                                                                                             |   |                                                              |       |   |   |   |   |
| Net                income (loss) available for diluted shares                                                    |   | $                                                                 | 175,582    |   | $ | (336,075 | ) |
|                                                                                                             |   |                                                              |       |   |   |   |   |
| Net                income (loss) per diluted share                                                               |   | $                                                                 | 0.02       |   | $ | (0.03 | ) |

| **5.** | **Acquisition** |
|--------|-----------------|

----

| Cash                paid             |   | $      | 16,208,439 |   |
|--------------------------------------|--------|--------|------------|--------|
| Notes                payable assumed |   |   | 24,347,299 |   |
|                                 |   |   |       |   |
| Purchase                price        |   | $      | 40,555,738 |   |

|                                  |   | **July                3, 2006** |       |
|---------------------------------------|--------|---------------------------------|------------|
| Cash                                  |   | $                               | 208,399    |   |
| Other                current assets   |   |                            | 3,691,420  |   |
| Property                and equipment |   |                            | 20,180,158 |   |
| Intangible                assets      |   |                            | 10,700,606 |   |
| Goodwill                              |   |                            | 14,971,176 |   |
| Other                assets           |   |                            | 2,367,842  |   |
| Current                liabilities    |   |                            | (3,074,876 | ) |
| Other                liabilities      |   |                            | (8,488,987 | ) |
| Purchase                price         |   | $                               | 40,555,738 |   |

| ·                    | Term                loans of $120 million due July 3, 2011, consisting of an original                term                loan of $80 million, and an additional term loan of $40 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. |
|----------------------------------------------------|---------------------------------------------------------------------------------|

----

|                                        |   | **Unaudited****Three                months****ended****March                31, 2006** |       |
|---------------------------------------------|--------|----------------------------------------------------------------------------------------|------------|
| Revenues                                    |   | $                                                                                      | 17,365,460 |   |
| Income                from operations       |   |                                                                                   | 4,920,517  |   |
| Net                income                   |   |                                                                                   | 67,036     |   |
| Basic                net income per share   |   | $                                                                                      | 0.01       |   |
| Diluted                net income per share |   | $                                                                                      | 0.01       |   |

| **6.** | **Adoption                of FIN 48** |
|--------|---------------------------------------|

*Accounting for      Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109,      Accounting for Income Taxes*

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

----

**Otelco          Inc.**

**Notes        To Consolidated Financial Statements**

**Condensed          Consolidating Balance Sheet**

**March          31, 2007**

|                                                                     |   | Parent |         | Guarantor    |   | Non-Guarantor |   | Eliminations |        | Consolidated |   |
|--------------------------------------------------------------------------|--------|--------|--------------|--------------|--------|---------------|--------|--------------|-------------|--------------|--------|
|                                                                     |   |   |         | Subsidiaries |   | Subsidiaries  |   |         |        |         |   |
|                                                                     |   |   |         |         |   |          |   |         |        |         |   |
| ASSETS                                                                   |   |   |         |         |   |          |   |         |        |         |   |   |   |   |   |   |
|                                                                     |   |   |         |         |   |          |   |         |        |         |   |   |   |   |   |   |
| Current                  assets                                          |   |   |         |         |   |          |   |         |        |         |   |   |   |   |   |   |
| Cash                  and cash equivalents                               |   | $      | -            |         | $      | 10,630,629    |   | $            | 10,795      |         | $      | - |   | $ | 10,641,424 |   |
| Accounts                  receivable, net                                |   |   | 26,070       |         |   | 5,762,096     |   |         | 1,241,957   |         |   | - |   |   | 7,030,123 |   |
| Materials                  and supplies                                  |   |   | -            |         |   | 845,050       |   |         | 1,175,549   |         |   | - |   |   | 2,020,599 |   |
| Prepaid                  and other current assets                        |   |   | 67,667       |         |   | 686,695       |   |         | 50,085      |         |   | - |   |   | 804,447 |   |
| Deferred                  income taxes                                   |   |   | 832,946      |         |   | -             |   |         | -           |         |   | - |   |   | 832,946 |   |
| Intercompany                  receivables (payables)                     |   |   | (17,051,635  | )            |   | 34,107,375    |   |         | (17,055,740 | )            |   | - |   |   | - |   |
| Total                  current assets                                    |   |   | (16,124,952  | )            |   | 52,031,845    |   |         | (14,577,354 | )            |   | - |   |   | 21,329,539 |   |
|                                                                     |   |   |         |         |   |          |   |         |        |         |   |   |   |   |   |   |
| Property                  and equipment, net                             |   |   | -            |         |   | 41,822,122    |   |         | 16,893,537  |         |   | - |   |   | 58,715,659 |   |
| Goodwill                                                                 |   |   | -            |         |   | 136,339,810   |   |         | (1,936,640  | )            |   | - |   |   | 134,403,170 |   |
| Intangibles                  assets, net                                 |   |   | 5,123,211    |         |   | 2,184,641     |   |         | 3,576,445   |         |   | - |   |   | 10,884,297 |   |
| Investments                                                              |   |   | 1,000        |         |   | 899,814       |   |         | 325,187     |         |   | - |   |   | 1,226,001 |   |
| Other                  long-term assets                                  |   |   | 4,515,543    |         |   | 5,751,210     |   |         | -           |         |   | - |   |   | 10,266,753 |   |
|                                                                     |   |   |         |         |   |          |   |         |        |         |   |   |   |   |   |   |
| Total                  assets                                            |   | $      | (6,485,198   | )            | $      | 239,029,442   |   | $            | 4,281,175   |         | $      | - |   | $ | 236,825,419 |   |
|                                                                     |   |   |         |         |   |          |   |         |        |         |   |   |   |   |   |   |
|                                                                     |   |   |         |         |   |          |   |         |        |         |   |   |   |   |   |   |
|                                                                     |   |   |         |         |   |          |   |         |        |         |   |   |   |   |   |   |
| LIABILITIES                  AND STOCKHOLDERS' EQUITY                    |   |   |         |         |   |          |   |         |        |         |   |   |   |   |   |   |
|                                                                     |   |   |         |         |   |          |   |         |        |         |   |   |   |   |   |   |
| Current                  liabilities                                     |   |   |         |         |   |          |   |         |        |         |   |   |   |   |   |   |
| Accounts                  payables and accrued expenses                  |   | $      | 739,450      |         | $      | 2,403,385     |   | $            | 1,404,870   |         | $      | - |   | $ | 4,547,705 |   |
| Other                  current liabilities                               |   |   | -            |         |   | 2,267,282     |   |         | 89,572      |         |   | - |   |   | 2,356,854 |   |
| Total                  current liabilities                               |   |   | 739,450      |         |   | 4,670,667     |   |         | 1,494,442   |         |   | - |   |   | 6,904,559 |   |
|                                                                     |   |   |         |         |   |          |   |         |        |         |   |   |   |   |   |   |
| Deferred                  income taxes                                   |   |   | 4,728,411    |         |   | 17,544,383    |   |         | 2,506,140   |         |   | - |   |   | 24,778,934 |   |
| Other                  liabilities                                       |   |   | -            |         |   | 180,082       |   |         | -           |         |   | - |   |   | 180,082 |   |
| Long-term                  notes payables                                |   |   | 105,458,990  |         |   | 95,616,508    |   |         | -           |         |   | - |   |   | 201,075,498 |   |
| Derivative                  liability                                    |   |   | 1,890,008    |         |   | -             |   |         | -           |         |   | - |   |   | 1,890,008 |   |
| Class                  B common convertible to senior subordinated notes |   |   | 4,085,033    |         |   | -             |   |         | -           |         |   | - |   |   | 4,085,033 |   |
| Stockholders'                  equity (deficit)                          |   |   | (123,387,090 | )            |   | 121,017,802   |   |         | 280,593     |         |   | - |   |   | (2,088,695 | ) |
|                                                                     |   |   |         |         |   |          |   |         |        |         |   |   |   |   |   |   |
| Total                  liabilities and stockholders' equity (deficit)    |   | $      | (6,485,198   | )            | $      | 239,029,442   |   | $            | 4,281,175   |         | $      | - |   | $ | 236,825,419 |   |

----

**Otelco        Inc.**

**Notes        to Consoldiated Financial Statements**

**Condensed          Consolidated Statement of Operations**

**For          the Three Months Ended March 31, 2007**

|                                                            |   |   |       | Guarantor    |   | Non-Guarantor |   |         |       |         |   |
|-----------------------------------------------------------------|--------|--------|------------|--------------|--------|---------------|--------|--------------|------------|--------------|--------|
|                                                            |   | Parent |       | Subsidiaries |   | Subsidiaries  |   | Eliminations |       | Consolidated |   |
|                                                            |   |   |       |         |   |     |   |         |       |         |   |
| Revenue                                                         |   | $      | 727,815    |         | $      | 15,287,319    |   | $            | 3,245,673  |         | $      | (2,088,414 | ) | $ | 17,172,393 |   |
| Operating                  expenses                             |   |   | (823,899   | )            |   | (11,236,178   | )      |         | (2,430,285 | )            |   | 2,088,414 |   |   | (12,401,948 | ) |
| Income                  from operations                         |   |   | (96,084    | )            |   | 4,051,141     |   |         | 815,388    |         |   | - |   |   | 4,770,445 |   |
| Other                  income (expense)                         |   |   | (3,711,167 | )            |   | (1,165,780    | )      |         | -          |         |   | - |   |   | (4,876,947 | ) |
| Income                  before income tax and accretion expense |   |   | (3,807,251 | )            |   | 2,885,361     |   |         | 815,388    |         |   | - |   |   | (106,502 | ) |
| Income                  tax expense                             |   |   | (11,705    | )            |   | -             |   |         | -          |         |   | - |   |   | (11,705 | ) |
| Accretion                  of class B common convertible        |   |   |       |         |   |          |   |         |       |         |   |   |   |   |   |   |
| to                  senior subordinated notes                   |   |   | -          |         |   | -             |   |         | -          |         |   | - |   |   | - |   |
|                                                            |   |   |       |         |   |          |   |         |       |         |   |   |   |   |   |   |
| Net                  income (loss) to common stockholders       |   | $      | (3,818,956 | )            | $      | 2,885,361     |   | $            | 815,388    |         | $      | - |   | $ | (118,207 | ) |

----

**Otelco          Inc.**

**Notes        to Consolidated Financial Statements**

**Condensed        Consolidating Statement of Cash Flows**

**For          the Three Months Ended March 31, 2007**

|                                                                  |   |   |       | Guarantor    |   | Non-Guarantor |   |         |       |         |   |
|-----------------------------------------------------------------------|--------|--------|------------|--------------|--------|---------------|--------|--------------|------------|--------------|--------|
|                                                                  |   | Parent |       | Subsidiaries |   | Subsidiaries  |   | Eliminations |       | Consolidated |   |
|                                                                  |   |   |       |         |   |          |   |         |       |         |   |
| Cash                  flows from operating activities:                |   |   |       |         |   |          |   |         |       |         |   |   |   |   |   |   |
| Net                  income (loss)                                    |   | $      | (3,818,956 | )            | $      | 2,885,361     |   | $            | 815,388    |         | $      | - |   | $ | (118,207 | ) |
| Adjustment                  to reconcile net income (loss)            |   |   |       |         |   |          |   |         |       |         |   |   |   |   |   |   |
| to                  cash flows from operating activities              |   |   | 341,197    |         |   | 2,584,933     |   |         | 1,127,934  |         |   | - |   |   | 4,054,064 |   |
| Changes                  in assets and liabilities, net of            |   |   |       |         |   |          |   |         |       |         |   |   |   |   |   |   |
| assets                  and liabilities acquired                      |   |   | 5,183,283  |         |   | (8,035,947    | )      |         | (1,764,623 | )            |   | - |   |   | (4,617,287 | ) |
| Cash                  flows from investing activities                 |   |   |       |         |   | (1,180,561    | )      |         | (192,910   | )            |   | - |   |   | (1,373,471 | ) |
| Cash                  flows from financing activities                 |   |   | (1,705,524 | )            |   | -             |   |         | -          |         |   | - |   |   | (1,705,524 | ) |
| Net                  increase (decrease) in cash and cash equivalents |   |   | -          |         |   | (3,746,214    | )      |         | (14,211    | )            |   | - |   |   | (3,760,425 | ) |
|                                                                  |   |   |       |         |   |          |   |         |       |         |   |   |   |   |   |   |
| Cash                  and cash equivalents, beginning of period       |   |   | -          |         |   | 14,376,843    |   |         | 25,006     |         |   | - |   |   | 14,401,849 |   |
|                                                                  |   |   |       |         |   |          |   |         |       |         |   |   |   |   |   |   |
| Cash                  and cash equivalents, end of period             |   | $      | -          |         | $      | 10,630,629    |   | $            | 10,795     |         | $      | - |   | $ | 10,641,424 |   |

----

**Otelco          Inc.**

**Notes        To Consolidated Financial Statements**

**Condensed        Consolidating Balance Sheet**

**December          31, 2006**

|                                                                     |   | Parent |         | Guarantor    |   | Non-Guarantor |   | Eliminations |        | Consolidated |   |
|--------------------------------------------------------------------------|--------|--------|--------------|--------------|--------|---------------|--------|--------------|-------------|--------------|--------|
|                                                                     |   |   |         | Subsidiaries |   | Subsidiaries  |   |         |        |         |   |
|                                                                     |   |   |         |         |   |          |   |         |        |         |   |
| ASSETS                                                                   |   |   |         |         |   |          |   |         |        |         |   |   |   |   |   |   |
|                                                                     |   |   |         |         |   |          |   |         |        |         |   |   |   |   |   |   |
| Current                  assets                                          |   |   |         |         |   |          |   |         |        |         |   |   |   |   |   |   |
| Cash                  and cash equivalents                               |   | $      | -            |         | $      | 14,376,843    |   | $            | 25,006      |         | $      | - |   | $ | 14,401,849 |   |
| Accounts                  receivable, net                                |   |   | 21,028       |         |   | 6,050,195     |   |         | 1,038,770   |         |   | - |   |   | 7,109,993 |   |
| Materials                  and supplies                                  |   |   | -            |         |   | 847,045       |   |         | 1,115,893   |         |   | - |   |   | 1,962,938 |   |
| Prepaid                  and other current assets                        |   |   | 3,487        |         |   | 1,006,316     |   |         | 53,144      |         |   | - |   |   | 1,062,947 |   |
| Deferred                  income taxes                                   |   |   | 766,225      |         |   | -             |   |         | -           |         |   | - |   |   | 766,225 |   |
| Intercompany                  receivables (payables)                     |   |   | (7,613,619   | )            |   | 26,350,164    |   |         | (18,736,545 | )            |   | - |   |   | - |   |
| Total                  current assets                                    |   |   | (6,822,879   | )            |   | 48,630,563    |   |         | (16,503,732 | )            |   | - |   |   | 25,303,952 |   |
|                                                                     |   |   |         |         |   |          |   |         |        |         |   |   |   |   |   |   |
| Property                  and equipment, net                             |   |   | -            |         |   | 42,745,710    |   |         | 17,748,079  |         |   | - |   |   | 60,493,789 |   |
| Goodwill                                                                 |   |   | -            |         |   | 136,118,949   |   |         | (1,936,640  | )            |   | - |   |   | 134,182,309 |   |
| Intangibles                  assets, net                                 |   |   | 5,454,799    |         |   | 2,235,052     |   |         | 3,650,955   |         |   | - |   |   | 11,340,806 |   |
| Investments                                                              |   |   | 1,000        |         |   | 914,093       |   |         | 325,157     |         |   | - |   |   | 1,240,250 |   |
| Other                  long-term assets                                  |   |   | 5,135,118    |         |   | 6,156,063     |   |         | -           |         |   | - |   |   | 11,291,181 |   |
|                                                                     |   |   |         |         |   |          |   |         |        |         |   |   |   |   |   |   |
| Total                  assets                                            |   | $      | 3,768,038    |         | $      | 236,800,430   |   | $            | 3,283,819   |         | $      | - |   | $ | 243,852,287 |   |
|                                                                     |   |   |         |         |   |          |   |         |        |         |   |   |   |   |   |   |
|                                                                     |   |   |         |         |   |          |   |         |        |         |   |   |   |   |   |   |
|                                                                     |   |   |         |         |   |          |   |         |        |         |   |   |   |   |   |   |
| LIABILITIES                  AND STOCKHOLDERS' EQUITY                    |   |   |         |         |   |          |   |         |        |         |   |   |   |   |   |   |
|                                                                     |   |   |         |         |   |          |   |         |        |         |   |   |   |   |   |   |
| Current                  liabilities                                     |   |   |         |         |   |          |   |         |        |         |   |   |   |   |   |   |
| Accounts                  payables and accrued expenses                  |   | $      | 4,924,962    |         | $      | 3,081,839     |   | $            | 1,233,497   |         | $      | - |   | $ | 9,240,298 |   |
| Other                  current liabilities                               |   |   | -            |         |   | 2,238,188     |   |         | 79,009      |         |   | - |   |   | 2,317,197 |   |
| Total                  current liabilities                               |   |   | 4,924,962    |         |   | 5,320,027     |   |         | 1,312,506   |         |   | - |   |   | 11,557,495 |   |
|                                                                     |   |   |         |         |   |          |   |         |        |         |   |  |   |   |   |   |
| Deferred                  income taxes                                   |   |   | 4,661,690    |         |   | 17,544,383    |   |         | 2,506,140   |         |   | - |   |   | 24,712,213 |   |
| Other                  liabilities                                       |   |   | -            |         |   | 187,037       |   |         | -           |         |   | - |   |   | 187,037 |   |
| Long-term                  notes payables                                |   |   | 105,458,990  |         |   | 95,616,508    |   |         | -           |         |   | - |   |   | 201,075,498 |   |
| Derivative                  liability                                    |   |   | 2,107,877    |         |   | -             |   |         | -           |         |   | - |   |   | 2,107,877 |   |
| Class                  B common convertible to senior subordinated notes |   |   | 4,085,033    |         |   | -             |   |         | -           |         |   | - |   |   | 4,085,033 |   |
| Stockholders'                  equity (deficit)                          |   |   | (117,470,514 | )            |   | 118,132,445   |   |         | (534,797    | )            |   | - |   |   | 127,134 |   |
|                                                                     |   |   |         |         |   |          |   |         |        |         |   |   |   |   |   |   |
| Total                  liabilities and stockholders' equity (deficit)    |   | $      | 3,768,038    |         | $      | 236,800,400   |   | $            | 3,283,849   |         | $      | - |   | $ | 243,852,287 |   |

----

**Otelco          Inc.**

**Notes        To Consolidated Financial Statements**

**Condensed        Consolidating Balance Sheet**

**March          31, 2006**

|                                                                     |   | Parent |         | Guarantor    |   | Non-Guarantor |   | Eliminations |        | Consolidated |   |
|--------------------------------------------------------------------------|--------|--------|--------------|--------------|--------|---------------|--------|--------------|-------------|--------------|--------|
|                                                                     |   |   |         | Subsidiaries |   | Subsidiaries  |   |         |        |         |   |
|                                                                     |   |   |         |         |   |          |   |         |        |         |   |
| ASSETS                                                                   |   |   |         |         |   |          |   |         |        |         |   |   |   |   |   |   |
|                                                                     |   |   |         |         |   |          |   |         |        |         |   |   |   |   |   |   |
| Current                  assets                                          |   |   |         |         |   |          |   |         |        |         |   |   |   |   |   |   |
| Cash                  and cash equivalents                               |   | $      | -            |         | $      | 5,455,136     |   | $            | 131,078     |         |   | - |   | $ | 5,586,214 |   |
| Accounts                  receivable, net                                |   |   | 30,340       |         |   | 4,026,161     |   |         | 459,714     |         |   | - |   |   | 4,516,215 |   |
| Materials                  and supplies                                  |   |   | -            |         |   | 905,129       |   |         | 24,427      |         |   | - |   |   | 929,556 |   |
| Prepaid                  and other current assets                        |   |   | 828,087      |         |   | 394,041       |   |         | 40,808      |         |   | - |   |   | 1,262,936 |   |
| Deferred                  income taxes                                   |   |   | 872,675      |         |   | -             |   |         | -           |         |   | - |   |   | 872,675 |   |
| Intercompany                  receivables (payables)                     |   |   | (5,848,169   | )            |   | 21,301,951    |   |         | (15,453,782 | )            |   | - |   |   | - |   |
| Total                  current assets                                    |   |   | (4,117,067   | )            |   | 32,082,418    |   |         | (14,797,755 | )            |   | - |   |   | 13,167,596 |   |
|                                                                     |   |   |         |         |   |          |   |         |        |         |   |   |   |   |   |   |
| Property                  and equipment, net                             |   |   | -            |         |   | 32,552,463    |   |         | 11,251,488  |         |   | - |   |   | 43,803,951 |   |
| Goodwill                                                                 |   |   | -            |         |   | 116,355,199   |   |         | 3,076,794   |         |   | - |   |   | 119,431,993 |   |
| Intangibles                  assets, net                                 |   |   | 6,628,173    |         |   | (6,628,173    | )      |         | 1,536,655   |         |   | - |   |   | 1,536,655 |   |
| Investments                                                              |   |   | 1,000        |         |   | 955,783       |   |         | 16,530      |         |   | - |   |   | 973,313 |   |
| Other                  long-term assets                                  |   |   | 6,047,109    |         |   | 6,628,173     |   |         | -           |         |   | - |   |   | 12,675,282 |   |
|                                                                     |   |   |         |         |   |          |   |         |        |         |   |   |   |   |   |   |
| Total                  assets                                            |   | $      | 8,559,215    |         | $      | 181,945,863   |   | $            | 1,083,712   |         |   | - |   | $ | 191,588,790 |   |
|                                                                     |   |   |         |         |   |          |   |         |        |         |   |   |   |   |   |   |
|                                                                     |   |   |         |         |   |          |   |         |        |         |   |   |   |   |   |   |
|                                                                     |   |   |         |         |   |          |   |         |        |         |   |   |   |   |   |   |
| LIABILITIES                  AND STOCKHOLDERS' EQUITY                    |   |   |         |         |   |          |   |         |        |         |   |   |   |   |   |   |
|                                                                     |   |   |         |         |   |          |   |         |        |         |   |   |   |   |   |   |
| Current                  liabilities                                     |   |   |         |         |   |          |   |         |        |         |   |   |   |   |   |   |
| Accounts                  payables and accrued expenses                  |   | $      | 251,887      |         | $      | 2,393,885     |   | $            | 219,476     |         |   | - |   | $ | 2,865,248 |   |
| Other                  current liabilities                               |   |   | -            |         |   | 1,463,437     |   |         | 12,912      |         |   | - |   |   | 1,476,349 |   |
| Total                  current liabilities                               |   |   | 251,887      |         |   | 3,857,322     |   |         | 232,388     |         |   | - |   |   | 4,341,597 |   |
|                                                                     |   |   |         |         |   |          |   |         |        |         |   |   |   |   |   |   |
| Deferred                  income taxes                                   |   |   | 4,019,721    |         |   | 9,173,477     |   |         | 2,152,692   |         |   | - |   |   | 15,345,890 |   |
| Other                  liabilities                                       |   |   | -            |         |   | 184,538       |   |         | -           |         |   | - |   |   | 184,538 |   |
| Long-term                  notes payables                                |   |   | 105,458,990  |         |   | 55,616,508    |   |         | -           |         |   | - |   |   | 161,075,498 |   |
| Derivative                  liability                                    |   |   | 1,650,353    |         |   | -             |   |         | -           |         |   | - |   |   | 1,650,353 |   |
| Class                  B common convertible to senior subordinated notes |   |   | 3,766,186    |         |   | -             |   |         | -           |         |   | - |   |   | 3,766,186 |   |
| Stockholders'                  equity (deficit)                          |   |   | (106,587,922 | )            |   | 113,114,018   |   |         | (1,301,368  | )            |   | - |   |   | 5,224,728 |   |
|                                                                     |   |   |         |         |   |          |   |         |        |         |   |   |   |   |   |   |
| Total                  liabilities and stockholders' equity (deficit)    |   | $      | 8,559,215    |         | $      | 181,945,863   |   | $            | 1,083,712   |         |   | - |   | $ | 191,588,790 |   |

----

**Otelco          Inc.**

**Notes          to Consoldiated Financial Statements**

**Condensed          Consolidated Statement of Operations**

**For          the Three Months Ended March 31, 2006**

|                                                              |   |   |       | Guarantor    |   | Non-Guarantor |   |         |      |         |   |
|-------------------------------------------------------------------|--------|--------|------------|--------------|--------|---------------|--------|--------------|-----------|--------------|--------|
|                                                              |   | Parent |       | Subsidiaries |   | Subsidiaries  |   | Eliminations |      | Consolidated |   |
|                                                              |   |   |       |         |   |          |   |         |      |         |   |
|                                                              |   |   |       |         |   |          |   |         |      |         |   |
| Revenue                                                           |   | $      | 628,629    |         | $      | 10,723,155    |   | $            | 1,645,972 |         | $      | (1,484,359 | ) | $ | 11,513,397 |   |
| Operating                    expenses                             |   |   | (774,199   | )            |   | (6,538,197    | )      |         | (986,332  | )            |   | 1,484,359 |   |   | (6,814,369 | ) |
| Income                    from operations                         |   |   | (145,570   | )            |   | 4,184,958     |   |         | 659,640   |         |   | - |   |   | 4,699,028 |   |
| Other                    income (expense)                         |   |   | (3,063,744 | )            |   | (1,118,751    | )      |         | -         |         |   | - |   |   | (4,182,495 | ) |
| Income                    before income tax and accretion expense |   |   | (3,209,314 | )            |   | 3,066,207     |   |         | 659,640   |         |   | - |   |   | 516,533 |   |
| Income                    tax expense                             |   |   | (161,210   | )            |   | -             |   |         | -         |         |   | - |   |   | (161,210 | ) |
| Accretion                    of class B common convertible        |   |   |       |         |   |               |   |         |      |         |   |   |   |   |   |   |
| to                    senior subordinated notes                   |   |   | (110,732   | )            |   | -             |   |         | -         |         |   | - |   |   | (110,732 | ) |
|                                                              |   |   |       |         |   |               |   |         |      |         |   |   |   |   |   |   |
| Net                    income (loss) to common stockholders       |   | $      | (3,481,256 | )            | $      | 3,066,207     |   | $            | 659,640   |         | $      | - |   | $ | 244,591 |   |

----

**Otelco          Inc.**

**Notes        to Consolidated Financial Statements**

**Condensed        Consolidating Statement of Cash Flows**

**For          the Three Months Ended March 31, 2006**

|                                                                  |   |   |       | Guarantor    |   | Non-Guarantor |   |         |     |         |   |
|-----------------------------------------------------------------------|--------|--------|------------|--------------|--------|---------------|--------|--------------|----------|--------------|--------|
|                                                                  |   | Parent |       | Subsidiaries |   | Subsidiaries  |   | Eliminations |     | Consolidated |   |
|                                                                  |   |   |       |         |   |          |   |         |     |         |   |
| Cash                  flows from operating activities:                |   |   |       |         |   |          |   |         |     |         |   |   |   |   |   |   |
| Net                  income (loss)                                    |   | $      | (3,481,256 | )            | $      | 3,066,207     |   | $            | 659,640  |         | $      | - |   | $ | 244,591 |   |
| Adjustment                  to reconcile net income (loss)            |   |   |       |         |   |          |   |         |     |         |   |   |   |   |   |   |
| to                  cash flows from operating activities              |   |   | 437,389    |         |   | 1,626,910     |   |         | 380,380  |         |   | - |   |   | 2,444,679 |   |
| Changes                  in assets and liabilities, net of            |   |   |       |         |   |          |   |         |     |         |   |   |   |   |   |   |
| assets                  and liabilities acquired                      |   |   | 4,764,281  |         |   | (3,821,571    | )      |         | (864,263 | )            |   | - |   |   | 78,447 |   |
| Cash                  flows from investing activities                 |   |   | (14,890    | )            |   | (928,349      | )      |         | (101,973 | )            |   | - |   |   | (1,045,212 | ) |
| Cash                  flows from financing activities                 |   |   | (1,705,524 | )            |   | -             |   |         | -        |         |   | - |   |   | (1,705,524 | ) |
| Net                  increase (decrease) in cash and cash equivalents |   |   | -          |         |   | (56,803       | )      |         | 73,784   |         |   | - |   |   | 16,981 |   |
|                                                                  |   |   |       |         |   |          |   |         |     |         |   |   |   |   |   |   |
| Cash                  and cash equivalents, beginning of period       |   |   | -          |         |   | 5,511,939     |   |         | 57,294   |         |   | - |   |   | 5,569,233 |   |
|                                                                  |   |   |       |         |   |          |   |         |     |         |   |   |   |   |   |   |
| Cash                  and cash equivalents, end of period             |   | $      | -          |         | $      | 5,455,136     |   | $            | 131,078  |         | $      | - |   | $ | 5,586,214 |   |

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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, long distance services,                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 in our local                communities. A growing portion of our subscribers take bundled service                plans which include multiple services including domestic long distance                services. |
|----------------------------------------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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

| ·                    | *Cable                television services.*                We                offer basic, digital and pay per view cable television services to                a                portion of our telephone service territory in Alabama and Missouri.                We                expect to add high definition and DVR services in Alabama later in                2007. |
|----------------------------------------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·                    | *Internet                services.*                We                receive revenues from monthly recurring charges for dial-up and digital                high-speed Internet access, including dial-up customers throughout                the                State of Maine and in areas surrounding our Missouri service                area. |
|----------------------------------------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·                    | *Transport.*                We                receive monthly recurring revenues for the rental of fiber to transport                data and other telecommunications services in                Maine. |
|----------------------------------------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

***Access      Line and Customer Trends***

----

|                                          |   | **Year                Ended December 31,** |   | **March                31,** |   |
|-----------------------------------------------|--------|--------------------------------------------|--------|------------------------------|--------|
|                                          |   | **2005**                                   |   | **2006**                     |   | **2007** |   |
| Access                line equivalents (1):   |   |                                       |   |                         |   |   |   |   |   |   |
| Residential                access lines       |   |                                       | 24,541 |                         |   | 29,832 |   |   | 29,789 |   |
| Business                access lines          |   |                                       | 8,036  |                         |   | 22,171 |   |   | 22,577 |   |
| Access                lines                   |   |                                       | 32,577 |                         |   | 52,003 |   |   | 52,366 |   |
| Digital                high-speed lines       |   |                                       | 6,314  |                         |   | 11,951 |   |   | 12,960 |   |
| Total                access lines equivalents |   |                                       | 38,891 |                         |   | 63,594 |   |   | 65,326 |   |
|                                          |   |                                       |   |                         |   |   |   |   |   |   |
| Long                distance customers        |   |                                       | 14,438 |                         |   | 21,370 |   |   | 22,066 |   |
| Cable                television customers     |   |                                       | 4,220  |                         |   | 4,188 |   |   | 4,211 |   |
| Dial-up                Internet customers     |   |                                       | 12,149 |                         |   | 19,587 |   |   | 18,313 |   |

***Our      Rate and Pricing Structure***

**Categories      of Operating Expenses**

*Cost      of services and products. *

*Selling,      general and administrative expenses. *

----

*Depreciation      and amortization. *

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

***Results      of Operations***

|                                                                                |   | **Three                months ended****March                31,** |   |
|-------------------------------------------------------------------------------------|--------|-------------------------------------------------------------------|--------|
|                                                                                |   | **2006**                                                          |   | **2007** |   |
| Revenues                                                                            |   |                                                              |   |   |   |
| Local                service                                                        |   |                                                              | 37.4   | % |   | 37.0 | % |
| Network                access                                                       |   |                                                              | 44.7   |   |   | 37.5 |   |
| Cable                television                                                     |   |                                                              | 4.7    |   |   | 3.2 |   |
| Internet                                                                            |   |                                                              | 13.2   |   |   | 16.4 |   |
| Transport                                                                           |   |                                                              | 0.0    |   |   | 5.9 |   |
| Total                revenues                                                       |   |                                                              | 100.00 |   |   | 100.00 |   |
| Operating                expenses                                                   |   |                                                              |   |   |   |   |   |
| Cost                of services and products                                        |   |                                                              | 27.6   | % |   | 36.5 | % |
| Selling,                general and administrative expenses                         |   |                                                              | 14.5   |   |   | 14.6 |   |
| Depreciation                and amortization                                        |   |                                                              | 17.1   |   |   | 21.1 |   |
| Total                operating expenses                                             |   |                                                              | 59.2   |   |   | 72.2 |   |
|                                                                                |   |                                                              |   |   |   |   |   |
| Income                from operations                                               |   |                                                              | 40.8   |   |   | 27.8 |   |
|                                                                                |   |                                                              |   |   |   |   |   |
| Other                income (expense)                                               |   |                                                              |   |   |   |   |   |
| Interest                expense                                                     |   |                                                              | (39.5  | ) |   | (31.3 | ) |
| Change                in fair value of derivative                                   |   |                                                              | 1.6    |   |   | 1.3 |   |
| Other                income                                                         |   |                                                              | 1.6    |   |   | 1.6 |   |
| Total                other expense                                                  |   |                                                              | (36.3  | ) |   | (28.4 | ) |
|                                                                                |   |                                                              |   |   |   |   |   |
| Income                before income taxes                                           |   |                                                              | 4.5    |   |   | (0.6 | ) |
|                                                                                |   |                                                              |   |   |   |   |   |
| Income                tax expense                                                   |   |                                                              | (1.4   | ) |   | (0.1 | ) |
|                                                                                |   |                                                              |   |   |   |   |   |
| Income                before accretion expense                                      |   |                                                              | 3.1    |   |   | (0.7 | ) |
|                                                                                |   |                                                              |   |   |   |   |   |
| Accretion                of Class B common convertible to senior subordinated notes |   |                                                              | (1.0   | ) |   | 0.0 |   |
|                                                                                |   |                                                              |   |   |   |   |   |
| Net                income available to common stockholders                          |   |                                                              | 2.1    | % |   | (0.7 | )% |

***Three      months ended March 31, 2007 compared to three months ended March 31,      2006***

*Total      Revenues. *

----

*For      the three months ended March 31, 2007 and 2006*

|                              |   | **Three                Months Ended****March                31,** |   | **Change** |   |
|-----------------------------------|--------|-------------------------------------------------------------------|--------|------------|--------|
|                              |   | **2006**                                                          |   | **2007**   |   | **Amount** |   | **Percent** |   |
|                              |   | (dollars                in thousands)                             |   |
| Local                services     |   | $                                                                 | 4,303  |       | $      | 6,348 |   | $ | 2,045 |   |   | 47.5 | % |
| Network                access     |   |                                                              | 5,145  |       |   | 6,438 |   |   | 1,293 |   |   | 25.1 |   |
| Cable                television   |   |                                                              | 543    |       |   | 548 |   |   | 5 |   |   | 0.9 |   |
| Internet                          |   |                                                              | 1,522  |       |   | 2,820 |   |   | 1,298 |   |   | 85.2 |   |
| Transport                services |   |                                                              | -      |       |   | 1,018 |   |   | 1,018 |   |   | - |   |
| Total                             |   | $                                                                 | 11,513 |       | $      | 17,172 |   | $ | 5,659 |   |   | 49.2 |   |

*Operating      expenses. *

*For      the three months ended March 31, 2007 and 2006*

|                                                        |   | **Three                Months Ended****March                31,** |   | **Change** |   |
|-------------------------------------------------------------|--------|-------------------------------------------------------------------|--------|------------|--------|
|                                                        |   | **2006**                                                          |   | **2007**   |   | **Amount** |   | **Percent** |   |
|                                                        |   | (dollars                in thousands)                             |   |
| Cost                of services                             |   | $                                                                 | 3,175  |       | $      | 6,271 |   | $ | 3,096 |   |   | 97.5 | % |
| Selling,                general and administrative expenses |   |                                                              | 1,671  |       |   | 2,502 |   |   | 831 |   |   | 49.7 |   |
| Depreciation                and amortization                |   |                                                              | 1,968  |       |   | 3,629 |   |   | 1,661 |   |   | 84.4 |   |
| Total                                                       |   | $                                                                 | 6,814  |       | $      | 12,402 |   | $ | 5,588 |   |   | 82.0 |   |

----

*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 (loss). *

**Liquidity      and Capital Resources**

----

**Subsequent      Events**

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

**Item      4. Controls and Procedures**

**PART      II OTHER INFORMATION**

**Item.      6. Exhibits**

----

**Signatures**

| Date:                  June 14, 2007 | **OTELCO                  INC.**               |
|--------------------------------------|------------------------------------------------|
|                                 |                                           |
|                                 |                                           |
|                                 |                                           |
|                                 | By:                  /s/ Curtis L. Garner, Jr. |
|                                 | Curtis                  L. Garner, Jr.         |
|                                 | Chief                  Financial Officer       |

----

**EXHIBIT      INDEX**

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