----

----

**UNITED      STATES**

**SECURITIES      AND EXCHANGE COMMISSION**

**Washington,      D.C. 20549**

**FORM      10-Q**

| (Mark                One) |                                                                                                                                  |
|---------------------------|---------------------------------------------------------------------------------------------------------------------------------------|
|                      |                                                                                                                                  |
| x                         | QUARTERLY                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE                ACT OF                1934  |
|                      |                                                                                                                                  |
|                      | For                the quarterly period ended September 30, 2007 Or                                                              |
|                      |                                                                                                                                  |
|  ̈                    | 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 November 5, 2007** |
|-----------------------------------------------------------------|--------|----------------------------------------------------|
| Class                A Common Stock ($0.01 par value per share) |   | 12,676,733                                         |
| Class                B Common Stock ($0.01 par value per share) |   | 544,671                                            |

----

----

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**OTELCO      INC.**

**FORM      10-Q**

**For      the three month period ended September 30, 2007**

**TABLE      OF CONTENTS**

| **PART                I**  | **FINANCIAL                INFORMATION**                                                                                                 |   |     |
|----------------------------|------------------------------------------------------------------------------------------------------------------------------------------|--------|----------|
| Item                1.     | Financial                Statements                                                                                                      |   |  2  |
|                       | Consolidated                Balance Sheets as of December 31, 2006 and September 30,                2007                                 |   |  2  |
|                       | Consolidated                Statements of Income for the three months and nine months ended September                30, 2006 and 2007   |   |  3  |
|                       | Consolidated                Statements of Changes in Stockholders’ Equity (Deficit) as of September                30, 2007        |   |  4  |
|                       | Consolidated                Statements of Cash Flows for the nine months ended September 30,                2006 and                2007 |   |  5  |
|                       | Notes                to Consolidated Financial Statements                                                                                |   |  6  |
| Item                2.     | Management’s                Discussion and Analysis of Financial Condition and Results of                Operations                |   |  14 |
| Item                3.     | Quantitative                and Qualitative Disclosures about Market Risk                                                                |   |  22 |
| Item                4.     | Controls                and Procedures                                                                                                   |   |  23 |
|                       |                                                                                                                                     |   |     |
| **PART                II** | **OTHER                INFORMATION**                                                                                                     |   |     |
| Item                6.     | Exhibits                                                                                                                                 |   |  23 |

----

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

**FORWARD-LOOKING      STATEMENTS**

----

**PART        1. FINANCIAL INFORMATION**

**Item        1. Financial Statements**

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

|                                                                                                                      |   |                              |        |                               |   |
|---------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------------|-------------|------------------------------------|--------|
|                                                                                                                      |   | **December                  31,** |        | **September                  30,** |   |
|                                                                                                                      |   | **2006**                          |        | **2007**                           |   |
| **Assets**                                                                                                                |   |                              |        | **(unaudited)**                    |   |
| Current                  assets                                                                                           |   |                              |        |                               |   |   |   |
| Cash                  and cash equivalents                                                                                |   | $                                 | 14,401,849  |                               | $      | 17,565,053 |   |
| Accounts                  receivable:                                                                                     |   |                              |        |                               |   |   |   |
| Due                  from subscribers, net of allowance for doubtful                                                      |   |                              |        |                               |   |   |   |
| accounts                  of $221,762 and $207,359 respectively                                                           |   |                              | 3,105,636   |                               |   | 2,870,450 |   |
| Unbilled                  receivables                                                                                     |   |                              | 2,324,213   |                               |   | 2,521,484 |   |
| Other                                                                                                                     |   |                              | 1,680,144   |                               |   | 2,068,639 |   |
| Materials                  and supplies                                                                                   |   |                              | 1,962,938   |                               |   | 1,926,254 |   |
| Prepaid                  expenses                                                                                         |   |                              | 1,062,947   |                               |   | 566,420 |   |
| Deferred                  income taxes                                                                                    |   |                              | 766,225     |                               |   | 832,946 |   |
| Total                  current assets                                                                                |   |                              | 25,303,952  |                               |   | 28,351,246 |   |
|                                                                                                                      |   |                              |        |                               |   |   |   |
| Property                  and equipment, net                                                                              |   |                              | 60,493,789  |                               |   | 55,415,315 |   |
| Goodwill                                                                                                                  |   |                              | 134,182,309 |                               |   | 134,570,435 |   |
| Intangible                  assets, net                                                                                   |   |                              | 11,340,806  |                               |   | 9,971,280 |   |
| Investments                                                                                                               |   |                              | 1,240,250   |                               |   | 1,213,246 |   |
| Deferred                  financing costs                                                                                 |   |                              | 6,652,393   |                               |   | 6,246,801 |   |
| Interest                  rate cap                                                                                        |   |                              | 4,542,160   |                               |   | 2,833,166 |   |
| Deferred                  charges                                                                                         |   |                              | 96,628      |                               |   | 60,186 |   |
| Total                  assets                                                                                        |   | $                                 | 243,852,287 |                               | $      | 238,661,675 |   |
|                                                                                                                      |   |                              |        |                               |   |   |   |
| **Liabilities                  and Stockholders' Equity**                                                                 |   |                              |        |                               |   |   |   |
| Current                  liabilities                                                                                      |   |                              |        |                               |   |   |   |
| Accounts                  payable                                                                                         |   | $                                 | 1,658,911   |                               | $      | 1,253,551 |   |
| Dividends                  payable                                                                                        |   |                              | 1,705,524   |                               |   | 2,234,274 |   |
| Accrued                  expenses                                                                                         |   |                              | 5,875,863   |                               |   | 7,068,675 |   |
| Advance                  billings and payments                                                                            |   |                              | 2,119,701   |                               |   | 2,085,730 |   |
| Customer                  deposits                                                                                        |   |                              | 197,496     |                               |   | 200,840 |   |
| Total                  Current Liabilities                                                                           |   |                              | 11,557,495  |                               |   | 12,843,070 |   |
|                                                                                                                      |   |                              |        |                               |   |   |   |
| Deferred                  income taxes                                                                                    |   |                              | 24,712,213  |                               |   | 24,778,934 |   |
| Other                  liabilities                                                                                        |   |                              | 187,037     |                               |   | 187,867 |   |
| Total                  deferred tax and other liabilities                                                            |   |                              | 24,899,250  |                               |   | 24,966,801 |   |
|                                                                                                                      |   |                              |        |                               |   |   |   |
| Long-term                  notes payable                                                                                  |   |                              | 201,075,498 |                               |   | 170,036,724 |   |
| Derivative                  liability                                                                                     |   |                              | 2,107,877   |                               |   | 1,383,679 |   |
| Class                  B common convertible to senior subordinated notes                                                  |   |                              | 4,085,033   |                               |   | 4,085,033 |   |
|                                                                                                                      |   |                              |        |                               |   |   |   |
| Stockholders'                  Equity                                                                                     |   |                              |        |                               |   |   |   |
| Class                  A Common Stock, $.01 par value-authorized 20,000,000                  shares;                      |   |                              |        |                               |   |   |   |
| issued                  and outstanding 12,676,733 shares                                                                 |   |                              | 96,767      |                               |   | 126,767 |   |
| Class                  B Common Stock, $.01 par value-authorized 800,000 shares;                  issued                  |   |                              |        |                               |   |   |   |
| and                  outstanding 544,671 shares                                                                           |   |                              | 5,447       |                               |   | 5,447 |   |
| Additional                  paid in capital                                                                               |   |                              | 284,041     |                               |   | 30,456,624 |   |
| Retained                  deficit                                                                                         |   |                              | (1,137,166  | )                                  |   | (5,154,673 | ) |
| Accumulated                  other comprehensive income                                                                   |   |                              | 878,045     |                               |   | (87,797 | ) |
| Total                  stockholders' equity                                                                          |   |                              | 127,134     |                               |   | 25,346,368 |   |
| Total                  liabilities and stockholders' equity                                                          |   | $                                 | 243,852,287 |                               | $      | 238,661,675 |   |
|                                                                                                                      |   |                              |        |                               |   |   |   |
| The                  accompanying notes are an integral part of these consolidated financial                  statements. |

----

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

|                                                                   |   | **Three                  months ended****September                  30,** |       | **Nine                  months ended****September                  30,** |   |
|------------------------------------------------------------------------|--------|---------------------------------------------------------------------------|------------|--------------------------------------------------------------------------|--------|
|                                                                   |   | **2006**                                                                  |       | **2007**                                                                 |   | **2006** |   | **2007** |   |
| Revenues                                                               |   |                                                                      |       |                                                                     |   |   |   |   |   |
| Local                  services                                        |   | $                                                                         | 6,363,046  |                                                                     | $      | 6,502,105 |   | $ | 14,956,503 |   | $ | 19,381,216 |   |
| Network                  access                                        |   |                                                                      | 6,533,743  |                                                                     |   | 6,612,250 |   |   | 16,849,379 |   |   | 19,190,669 |   |
| Cable                  television                                      |   |                                                                      | 550,914    |                                                                     |   | 547,044 |   |   | 1,631,985 |   |   | 1,642,985 |   |
| Internet                                                               |   |                                                                      | 2,765,643  |                                                                     |   | 2,867,381 |   |   | 5,846,691 |   |   | 8,547,085 |   |
| Transport                  services                                    |   |                                                                      | 923,625    |                                                                     |   | 1,065,521 |   |   | 923,625 |   |   | 3,122,940 |   |
| Total                  revenues                                        |   |                                                                      | 17,136,971 |                                                                     |   | 17,594,301 |   |   | 40,208,183 |   |   | 51,884,895 |   |
| Operating                  expenses                                    |   |                                                                      |       |                                                                     |   |   |   |   |   |   |   |   |   |
| Cost                  of services and products                         |   |                                                                      | 6,139,234  |                                                                     |   | 6,326,014 |   |   | 12,501,035 |   |   | 19,131,470 |   |
| Selling,                  general and administrative expenses          |   |                                                                      | 2,451,477  |                                                                     |   | 2,676,515 |   |   | 5,604,141 |   |   | 7,597,843 |   |
| Depreciation                  and amortization                         |   |                                                                      | 3,406,789  |                                                                     |   | 3,474,799 |   |   | 7,384,289 |   |   | 10,879,513 |   |
| Total                  operating expenses                              |   |                                                                      | 11,997,500 |                                                                     |   | 12,477,328 |   |   | 25,489,465 |   |   | 37,608,826 |   |
|                                                                   |   |                                                                      |       |                                                                     |   |   |   |   |   |   |   |   |   |
| Income                  from operations                                |   |                                                                      | 5,139,471  |                                                                     |   | 5,116,973 |   |   | 14,718,718 |   |   | 14,276,069 |   |
|                                                                   |   |                                                                      |       |                                                                     |   |   |   |   |   |   |   |   |   |
| Other                  income (expense)                                |   |                                                                      |       |                                                                     |   |   |   |   |   |   |   |   |   |
| Interest                  expense                                      |   |                                                                      | (5,623,615 | )                                                                        |   | (5,844,898 | ) |   | (14,757,595 | ) |   | (16,633,507 | ) |
| Change                  in fair value of derivative                    |   |                                                                      | 27,234     |                                                                     |   | 186,055 |   |   | 337,696 |   |   | 654,472 |   |
| Other                  income                                          |   |                                                                      | 201,506    |                                                                     |   | 268,356 |   |   | 3,198,013 |   |   | 715,389 |   |
| Total                  other expense                                   |   |                                                                      | (5,394,875 | )                                                                        |   | (5,390,487 | ) |   | (11,221,886 | ) |   | (15,263,646 | ) |
|                                                                   |   |                                                                      |       |                                                                     |   |   |   |   |   |   |   |   |   |
| Income                  (loss) before income tax and accretion expense |   |                                                                      | (255,404   | )                                                                        |   | (273,514 | ) |   | 3,496,832 |   |   | (987,577 | ) |
|                                                                   |   |                                                                      |       |                                                                     |   |   |   |   |   |   |   |   |   |
| Income                  tax (expense) benefit                          |   |                                                                      | 1,375      |                                                                     |   | (394,197 | ) |   | (1,231,235 | ) |   | 97,079 |   |
|                                                                   |   |                                                                      |       |                                                                     |   |   |   |   |   |   |   |   |   |
| Income                  (loss) before accretion expense                |   |                                                                      | (254,029   | )                                                                        |   | (667,711 | ) |   | 2,265,597 |   |   | (890,498 | ) |
|                                                                   |   |                                                                      |       |                                                                     |   |   |   |   |   |   |   |   |   |
| Accretion                  of Class B common convertible to senior     |   |                                                                      |       |                                                                     |   |   |   |   |   |   |   |   |   |
| subordinated                  notes                                    |   |                                                                      | (110,732   | )                                                                        |   | - |   |   | (332,195 | ) |   | - |   |
|                                                                   |   |                                                                      |       |                                                                     |   |   |   |   |   |   |   |   |   |
| Net                  income (loss) available to common stockholders    |   | $                                                                         | (364,761   | )                                                                        | $      | (667,711 | ) | $ | 1,933,402 |   | $ | (890,498 | ) |
|                                                                   |   |                                                                      |       |                                                                     |   |   |   |   |   |   |   |   |   |
| Weighted                  average shares outstanding:                  |   |                                                                      |       |                                                                     |   |   |   |   |   |   |   |   |   |
| Basic                                                                  |   |                                                                      | 9,676,733  |                                                                     |   | 12,546,298 |   |   | 9,676,733 |   |   | 10,643,766 |   |
| Diluted                                                                |   |                                                                      | 10,221,404 |                                                                     |   | 13,090,969 |   |   | 10,221,404 |   |   | 11,188,437 |   |
|                                                                   |   |                                                                      |       |                                                                     |   |   |   |   |   |   |   |   |   |
| Net                  income (loss) per share                           |   |                                                                      |       |                                                                     |   |   |   |   |   |   |   |   |   |
| Basic                                                                  |   | $                                                                         | (0.04      | )                                                                        | $      | (0.05 | ) | $ | 0.20 |   | $ | (0.08 | ) |
| Diluted                                                                |   | $                                                                         | (0.04      | )                                                                        | $      | (0.07 | ) | $ | 0.19 |   | $ | (0.14 | ) |
|                                                                   |   |                                                                      |       |                                                                     |   |   |   |   |   |   |   |   |   |
| Dividends                  declared per share                          |   | $                                                                         | 0.18       |                                                                     | $      | 0.18 |   | $ | 0.53 |   | $ | 0.53 |   |

| The                  accompanying notes are an integral part of these consolidated financial                  statements. |
|---------------------------------------------------------------------------------------------------------------------------|

----

| **OTELCO                INC.**                                                                         |
|--------------------------------------------------------------------------------------------------------|
| **Consolidated                Statements of Changes in Stockholders' Equity                (Deficit)** |
| **(unaudited)**                                                                                        |

|                                                 |   |                            |       |                            |   |                       |   |         |    |              |   |              |   | **Accumulated** |       |       |   |
|------------------------------------------------------|--------|---------------------------------|------------|---------------------------------|--------|----------------------------|--------|--------------|---------|-------------------|--------|-------------------|--------|-----------------|------------|------------|--------|
|                                                 |   |                            |       |                            |   |                       |   |         |    |              |   |              |   | **Other**       |       |       |   |
|                                                 |   | **Class                A**      |       | **Class                B**      |   | **Additional**             |   | **Retained** |    | **Comprehensive** |   | **Total**         |   |
|                                                 |   | **Common                Stock** |       | **Common                Stock** |   | **Paid                In** |   | **Earnings** |    | **Income**        |   | **Stockholders'** |   |
|                                                 |   | **Shares**                      |       | **Amount**                      |   | **Shares**                 |   | **Amount**   |    | **Capital**       |   | **(Deficit)**     |   | **(loss)**      |       | **Equity** |   |
|                                                 |   |                            |       |                            |   |                       |   |         |    |              |   |              |   |            |       |       |   |
| Balance,                December 31, 2005            |   |                            | 9,676,733  |                            | $      | 96,767                     |   |         | 544,671 |              | $      | 5,447             |   | $               | 5,613,703  |       | $      | (805,731 | ) | $ | 899,019 |   | $ | 5,809,205 |   |
|                                                 |   |                            |       |                            |   |                       |   |         |    |              |   |              |   |            |       |       |   |   |   |   |   |   |   |   |   |
| Comprehensive                income:                 |   |                            |       |                            |   |                       |   |         |    |              |   |              |   |            |       |       |   |   |   |   |   |   |   |   |   |
| Net                income                            |   |                            |       |                            |   |                       |   |         |    |              |   |              |   |            |       |       |   | 244,594 |   |   |   |   |   | 244,594 |   |
| Interest                rate cap                     |   |                            |       |                            |   |                       |   |         |    |              |   |              |   |            |       |       |   |   |   |   | 876,453 |   |   | 876,453 |   |
| Total                comprehensive income            |   |                            |       |                            |   |                       |   |         |    |              |   |              |   |            |       |       |   |   |   |   |   |   |   | 1,121,047 |   |
|                                                 |   |                            |       |                            |   |                       |   |         |    |              |   |              |   |            |            |       |   |  |   |   |   |   |   |  |   |
| Dividends                declared                    |   |                            |       |                            |   |                       |   |         |    |              |   |              |   |            | (1,705,524 | )          |   |   |   |   |   |   |   | (1,705,524 | ) |
|                                                 |   |                            |       |                            |   |                       |   |         |    |              |   |              |   |            |       |       |   |   |   |   |   |   |   |   |   |
| Balance,                March 31, 2006               |   |                            | 9,676,733  |                            | $      | 96,767                     |   |         | 544,671 |              | $      | 5,447             |   | $               | 3,908,179  |       | $      | (561,137 | ) | $ | 1,775,472 |   | $ | 5,224,728 |   |
|                                                 |   |                            |       |                            |   |                       |   |         |    |              |   |              |   |            |       |       |   |   |   |   |   |   |   |   |   |
| Comprehensive                income:                 |   |                            |       |                            |   |                       |   |         |    |              |   |              |   |            |       |       |   |   |   |   |   |   |   |   |   |
| Net                income                            |   |                            |       |                            |   |                       |   |         |    |              |   |              |   |            |       |       |   | 2,053,574 |   |   |   |   |   | 2,053,574 |   |
| Interest                rate cap                     |   |                            |       |                            |   |                       |   |         |    |              |   |              |   |            |       |       |   |   |   |   | 610,139 |   |   | 610,139 |   |
| Total                comprehensive income            |   |                            |       |                            |   |                       |   |         |    |              |   |              |   |            |       |       |   |   |   |   |   |   |   | 2,663,713 |   |
|                                                 |   |                            |       |                            |   |                       |   |         |    |              |   |              |   |            |            |       |   |  |   |   |   |   |   |  |   |
| Dividends                declared                    |   |                            |       |                            |   |                       |   |         |    |              |   |              |   |            | (213,089   | )          |   | (1,492,437 | ) |   |   |   |   | (1,705,526 | ) |
|                                                 |   |                            |       |                            |   |                       |   |         |    |              |   |              |   |            |       |       |   |   |   |   |   |   |   |   |   |
| Balance,                June 30, 2006                |   |                            | 9,676,733  |                            | $      | 96,767                     |   |         | 544,671 |              | $      | 5,447             |   | $               | 3,695,090  |       | $      | - |   | $ | 2,385,611 |   | $ | 6,182,915 |   |
|                                                 |   |                            |       |                            |   |                       |   |         |    |              |   |              |   |            |       |       |   |   |   |   |   |   |   |   |   |
| Comprehensive                income:                 |   |                            |       |                            |   |                       |   |         |    |              |   |              |   |            |       |       |   |   |   |   |   |   |   |   |   |
| Net                income                            |   |                            |       |                            |   |                       |   |         |    |              |   |              |   |            |       |       |   | (364,761 | ) |   |   |   |   | (364,761 | ) |
| Interest                rate cap                     |   |                            |       |                            |   |                       |   |         |    |              |   |              |   |            |       |       |   |   |   |   | (1,454,244 | ) |   | (1,454,244 | ) |
| Total                comprehensive income            |   |                            |       |                            |   |                       |   |         |    |              |   |              |   |            |       |       |   |   |   |   |   |   |   | (1,819,005 | ) |
|                                                 |   |                            |       |                            |   |                       |   |         |    |              |   |              |   |            |            |       |   |  |   |   |  |   |   |  |   |
| Dividends                declared                    |   |                            |       |                            |   |                       |   |         |    |              |   |              |   |            | (1,705,524 | )          |   | - |   |   |   |   |   | (1,705,524 | ) |
|                                                 |   |                            |       |                            |   |                       |   |         |    |              |   |              |   |            |       |       |   |   |   |   |   |   |   |   |   |
| Balance,                September 30, 2006           |   |                            | 9,676,733  |                            | $      | 96,767                     |   |         | 544,671 |              | $      | 5,447             |   | $               | 1,989,566  |       | $      | (364,761 | ) | $ | 931,367 |   | $ | 2,658,386 |   |
|                                                 |   |                            |       |                            |   |                       |   |         |    |              |   |              |   |            |       |       |   |   |   |   |   |   |   |   |   |
| Comprehensive                income:                 |   |                            |       |                            |   |                       |   |         |    |              |   |              |   |            |       |       |   |   |   |   |   |   |   |   |   |
| Net                income                            |   |                            |       |                            |   |                       |   |         |    |              |   |              |   |            |       |       |   | (772,405 | ) |   |   |   |   | (772,405 | ) |
| Interest                rate cap                     |   |                            |       |                            |   |                       |   |         |    |              |   |              |   |            |       |       |   |   |   |   | (53,322 | ) |   | (53,322 | ) |
| Total                comprehensive income            |   |                            |       |                            |   |                       |   |         |    |              |   |              |   |            |       |       |   |   |   |   |   |   |   | (825,727 | ) |
|                                                 |   |                            |       |                            |   |                       |   |         |    |              |   |              |   |            |            |       |   |  |   |   |  |   |   |  |   |
| Dividends                declared                    |   |                            |       |                            |   |                       |   |         |    |              |   |              |   |            | (1,705,525 | )          |   | - |   |   |   |   |   | (1,705,525 | ) |
|                                                 |   |                            |       |                            |   |                       |   |         |    |              |   |              |   |            |       |       |   |   |   |   |   |   |   |   |   |
| Balance,                December 31, 2006            |   |                            | 9,676,733  |                            | $      | 96,767                     |   |         | 544,671 |              | $      | 5,447             |   | $               | 284,041    |       | $      | (1,137,166 | ) | $ | 878,045 |   | $ | 127,134 |   |
|                                                 |   |                            |       |                            |   |                       |   |         |    |              |   |              |   |            |       |       |   |   |   |   |   |   |   |   |   |
| Comprehensive                income:                 |   |                            |       |                            |   |                       |   |         |    |              |   |              |   |            |       |       |   |   |   |   |   |   |   |   |   |
| Net                income                            |   |                            |       |                            |   |                       |   |         |    |              |   |              |   |            |       |       |   | (118,207 | ) |   |   |   |   | (118,207 | ) |
| Interest                rate cap                     |   |                            |       |                            |   |                       |   |         |    |              |   |              |   |            |       |       |   |   |   |   | (392,097 | ) |   | (392,097 | ) |
| Total                comprehensive income            |   |                            |       |                            |   |                       |   |         |    |              |   |              |   |            |       |       |   |   |   |   |   |   |   | (510,304 | ) |
|                                                 |   |                            |       |                            |   |                       |   |         |    |              |   |              |   |            |            |       |   |  |   |   |  |   |   |  |   |
| Dividends                declared                    |   |                            |       |                            |   |                       |   |         |    |              |   |              |   |            | (284,041   | )          |   | (1,421,484 | ) |   |   |   |   | (1,705,525 | ) |
|                                                 |   |                            |       |                            |   |                       |   |         |    |              |   |              |   |            |       |       |   |   |   |   |   |   |   |   |   |
| Balance,                March 31, 2007               |   |                            | 9,676,733  |                            | $      | 96,767                     |   |         | 544,671 |              | $      | 5,447             |   | $               | -          |       | $      | (2,676,857 | ) | $ | 485,948 |   | $ | (2,088,695 | ) |
|                                                 |   |                            |       |                            |   |                       |   |         |    |              |   |              |   |            |       |       |   |   |   |   |   |   |   |   |   |
| Comprehensive                income:                 |   |                            |       |                            |   |                       |   |         |    |              |   |              |   |            |       |       |   |   |   |   |   |   |   |   |   |
| Net                income                            |   |                            |       |                            |   |                       |   |         |    |              |   |              |   |            |       |       |   | (104,581 | ) |   |   |   |   | (104,581 | ) |
| Interest                rate cap                     |   |                            |       |                            |   |                       |   |         |    |              |   |              |   |            |       |       |   |   |   |   | 623,503 |   |   | 623,503 |   |
| Total                comprehensive income            |   |                            |       |                            |   |                       |   |         |    |              |   |              |   |            |       |       |   |   |   |   |   |   |   | 518,922 |   |
|                                                 |   |                            |       |                            |   |                       |   |         |    |              |   |              |   |            |            |       |   |  |   |   |  |   |   |  |   |
| Dividends                declared                    |   |                            |       |                            |   |                       |   |         |    |              |   |              |   |            | -          |       |   | (1,705,524 | ) |   |   |   |   | (1,705,524 | ) |
|                                                 |   |                            |       |                            |   |                       |   |         |    |              |   |              |   |            |       |       |   |   |   |   |   |   |   |   |   |
| Balance,                June 30, 2007                |   |                            | 9,676,733  |                            | $      | 96,767                     |   |         | 544,671 |              | $      | 5,447             |   | $               | -          |       | $      | (4,486,962 | ) | $ | 1,109,451 |   | $ | (3,275,297 | ) |
|                                                 |   |                            |       |                            |   |                       |   |         |    |              |   |              |   |            |       |       |   |   |   |   |   |   |   |   |   |
| Comprehensive                income:                 |   |                            |       |                            |   |                       |   |         |    |              |   |              |   |            |       |       |   |   |   |   |   |   |   |   |   |
| Net                income (loss)                     |   |                            |       |                            |   |                       |   |         |    |              |   |              |   |            |       |       |   | (667,711 | ) |   |   |   |   | (667,711 | ) |
| Interest                rate cap                     |   |                            |       |                            |   |                       |   |         |    |              |   |              |   |            |       |       |   |   |   |   | (1,197,248 | ) |   | (1,197,248 | ) |
| Total                comprehensive income            |   |                            |       |                            |   |                       |   |         |    |              |   |              |   |            |       |       |   |   |   |   |   |   |   | (1,864,959 | ) |
|                                                 |   |                            |       |                            |   |                       |   |         |    |              |   |              |   |            |            |       |   |  |   |   |  |   |   |  |   |
| Dividends                declared                    |   |                            |       |                            |   |                       |   |         |    |              |   |              |   |            | (2,234,274 | )          |   | - |   |   |   |   |   | (2,234,274 | ) |
|                                                 |   |                            |       |                            |   |                       |   |         |    |              |   |              |   |            |       |       |   |   |   |   |   |   |   |   |   |
| Subsequent                Public Offering            |   |                            |       |                            |   |                       |   |         |    |              |   |              |   |            |       |       |   |   |   |   |   |   |   |   |   |
| Issuance                of IDSs                      |   |                            | 3,000,000  |                            |   | 30,000                     |   |         | -       |              |   | -                 |   |            | 34,998,584 |       |   | - |   |   | - |   |   | 35,028,584 |   |
|                                                 |   |                            |       |                            |   |                       |   |         |    |              |   |              |   |            |       |       |   |   |   |   |   |   |   |   |   |
| Capitalized                transactions costs offset |   |                            |       |                            |   |                       |   |         |    |              |   |              |   |            |       |       |   |   |   |   |   |   |   |   |   |
| against                proceeds of offering          |   |                            |       |                            |   |                       |   |         |    |              |   |              |   |            | (2,307,686 | )          |   | - |   |   | - |   |   | (2,307,686 | ) |
|                                                 |   |                            |       |                            |   |                       |   |         |    |              |   |              |   |            |       |       |   |   |   |   |   |   |   |   |   |
| Balance,                September 30, 2007           |   |                            | 12,676,733 |                            | $      | 126,767                    |   |         | 544,671 |              | $      | 5,447             |   | $               | 30,456,624 |       | $      | (5,154,673 | ) | $ | (87,797 | ) |   | 25,346,368 |   |

| The                accompanying notes are an integral part of these consolidated financial                statements. |
|-----------------------------------------------------------------------------------------------------------------------|

----

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

|                                                                                                                      |   | **Nine                  months ended****September                  30,** |        |
|---------------------------------------------------------------------------------------------------------------------------|--------|--------------------------------------------------------------------------|-------------|
|                                                                                                                      |   | **2006**                                                                 |        | **2007** |   |
| Cash                  flows from operating activities:                                                                    |   |                                                                     |        |   |   |
| Net                  income (loss)                                                                                        |   | $                                                                        | 1,933,402   |   | $ | (890,498 | ) |
| Adjustments                  to reconcile net income to cash flows from operating                  activities:            |   |                                                                     |        |   |   |   |   |
| Depreciation                                                                                                              |   |                                                                     | 6,390,925   |   |   | 8,933,812 |   |
| Amortization                                                                                                              |   |                                                                     | 578,904     |   |   | 1,945,696 |   |
| Interest                  rate caplet                                                                                     |   |                                                                     | 543,321     |   |   | 673,425 |   |
| Amortization                  of debt premium                                                                             |   |                                                                     | -           |   |   | (16,533 | ) |
| Amortization                  of loan cost                                                                                |   |                                                                     | 1,311,927   |   |   | 2,233,495 |   |
| Accretion                  expense                                                                                        |   |                                                                     | 332,195     |   |   | - |   |
| Change                  in fair value of derivative                                                                       |   |                                                                     | (337,695    | ) |   | (654,472 | ) |
| Provision                  for uncollectible revenue                                                                      |   |                                                                     | 123,979     |   |   | 114,979 |   |
| Gain                  on disposition of other assets                                                                      |   |                                                                     | (2,686,745  | ) |   | - |   |
| Changes                  in assets and liabilities; net of assets and liabilities                  acquired:              |   |                                                                     |        |   |   |   |   |
| Accounts                  receivables                                                                                |   |                                                                     | (155,522    | ) |   | (642,120 | ) |
| Material                  and supplies                                                                               |   |                                                                     | (20,652     | ) |   | (117,903 | ) |
| Income                  tax receivable                                                                               |   |                                                                     | 287,804     |   |   | - |   |
| Prepaid                  expenses and other assets                                                                   |   |                                                                     | 101,675     |   |   | 496,527 |   |
| Accounts                  payable and accrued liabilities                                                            |   |                                                                     | 4,888,886   |   |   | (1,002,997 | ) |
| Advance                  billings and payments                                                                       |   |                                                                     | 1,888       |   |   | (33,971 | ) |
| Other                  liabilities                                                                                   |   |                                                                     | (3,860      | ) |   | 4,174 |   |
|                                                                                                                      |   |                                                                     |        |   |   |   |   |
|  Net                  cash from operating activities                                                                 |   |                                                                     | 13,290,432  |   |   | 11,043,614 |   |
|                                                                                                                      |   |                                                                     |        |   |   |   |   |
| Cash                  flows from investing activities:                                                                    |   |                                                                     |        |   |   |   |   |
| Acquisition                  and construction of property and equipment                                                   |   |                                                                     | (3,662,910  | ) |   | (4,386,579 | ) |
| Proceeds                  from retirement of investment                                                                   |   |                                                                     | 3,226,651   |   |   | 7,871 |   |
| Payment                  for the purchase of Mid-Maine Commuincations, Inc.,                                              |   |                                                                     |        |   |   |   |   |
| net                  of cash acquired                                                                                     |   |                                                                     | (15,905,248 | ) |   | - |   |
| Deferred                  charges                                                                                         |   |                                                                     | (67,921     | ) |   | (2,033 | ) |
|                                                                                                                      |   |                                                                     |        |   |   |   |   |
|  Net                  cash from investing activities                                                                 |   |                                                                     | (16,409,428 | ) |   | (4,380,741 | ) |
|                                                                                                                      |   |                                                                     |        |   |   |   |   |
| Cash                  flows from financing activities:                                                                    |   |                                                                     |        |   |   |   |   |
| Cash                  dividends paid                                                                                      |   |                                                                     | (3,411,048  | ) |   | (3,411,048 | ) |
| Direct                  cost of subsequent public offering                                                                |   |                                                                     | -           |   |   | (2,307,686 | ) |
| Repayment                  of long-term debt                                                                              |   |                                                                     | (24,347,299 | ) |   | (55,353,032 | ) |
| Loan                  origination costs                                                                                   |   |                                                                     | -           |   |   | (1,827,903 | ) |
| Proceeds                  from long-term notes payable                                                                    |   |                                                                     | 40,000,000  |   |   | - |   |
| Proceeds                  from issuance of IDS                                                                            |   |                                                                     | -           |   |   | 59,400,000 |   |
|                                                                                                                      |   |                                                                     |        |   |   |   |   |
|  Net                  cash from financing activities                                                                 |   |                                                                     | 12,241,653  |   |   | (3,499,669 | ) |
|                                                                                                                      |   |                                                                     |        |   |   |   |   |
| Net                  increase in cash and cash equivalents                                                                |   |                                                                     | 9,122,657   |   |   | 3,163,204 |   |
| Cash                  and cash equivalents, beginning of period                                                           |   |                                                                     | 5,569,233   |   |   | 14,401,849 |   |
|                                                                                                                      |   |                                                                     |        |   |   |   |   |
| Cash                  and cash equivalents, end of period                                                                 |   | $                                                                        | 14,691,890  |   | $ | 17,565,053 |   |
|                                                                                                                      |   |                                                                     |        |   |   |   |   |
| Supplemental                  disclosures of cash flow information:                                                       |   |                                                                     |        |   |   |   |   |
| Interest                  paid                                                                                            |   | $                                                                        | 12,130,902  |   | $ | 13,878,086 |   |
|                                                                                                                      |   |                                                                     |        |   |   |   |   |
| Income                  taxes paid (received)                                                                             |   | $                                                                        | (262,632    | ) | $ | (153,468 | ) |
|                                                                                                                      |   |                                                                     |        |   |   |   |   |
| Dividends                  declared but not paid                                                                          |   | $                                                                        | 1,705,524   |   | $ | 2,234,274 |   |
|                                                                                                                      |   |                                                                     |        |   |   |   |   |
|                                                                                                                      |   |                                                                     |        |   |   |   |   |
| The                  accompanying notes are an integral part of these consolidated financial                  statements. |

----

**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.**
**Income      Deposit Securities Issued **

| Receipts                                                   |   |   |       |
|------------------------------------------------------------|--------|--------|------------|
| Proceeds                  from issuance of IDS units       |   | $      | 59,400,000 |   |
| Disbursements                                              |   |   |            |   |
| Direct                  cost of subsequent public offering |   |   | 2,307,686  |   |
| Principal                  repayment of long-term debt     |   |   | 55,353,032 |   |
| Loan                  origination costs                    |   |   | 1,827,903  |   |
| Total                                                      |   |   | 59,488,621 |   |
| Net                  disbursements                         |   | $      | (88,621    | ) |

----

**4.**
**Derivative      and Hedge Activities**

**5.**
**Income      (loss) per Common Share and Potential Common Share**

|                                                                |   | For                  the three months |       | For                  the nine months |   |
|---------------------------------------------------------------------|--------|---------------------------------------|------------|--------------------------------------|--------|
|                                                                |   | ended                  September 30,  |       | ended                  September 30, |   |
|                                                                |   | 2006                                  |       | 2007                                 |   | 2006 |   | 2007 |   |
|                                                                |   |                                  |       |                                 |   |   |   |   |   |
| Weighted                  average common shares-basic               |   |                                  | 9,676,733  |                                 |   | 12,546,298 |   |   | 9,676,733 |   |   | 10,643,766 |   |
|                                                                |   |                                  |       |                                 |   |   |   |   |   |   |   |   |   |
| Effect                  of dilutive securities                      |   |                                  | 544,671    |                                 |   | 544,671 |   |   | 544,671 |   |   | 544,671 |   |
|                                                                |   |                                  |       |                                 |   |   |   |   |   |   |   |   |   |
| Weighted-average                  common shares and potential       |   |                                  |       |                                 |   |   |   |   |   |   |   |   |   |
| common                  shares-diluted                              |   |                                  | 10,221,404 |                                 |   | 13,090,969 |   |   | 10,221,404 |   |   | 11,188,437 |   |
|                                                                |   |                                  |       |                                 |   |   |   |   |   |   |   |   |   |
| Net                  income (loss) available to common stockholders |   | $                                     | (364,761   | )                                    | $      | (667,711 | ) | $ | 1,933,402 |   | $ | (890,498 | ) |
|                                                                |   |                                  |       |                                 |   |   |   |   |   |   |   |   |   |
| Net                  income (loss) per basic share                  |   | $                                     | (0.04      | )                                    | $      | (0.05 | ) | $ | 0.20 |   | $ | (0.08 | ) |
|                                                                |   |                                  |       |                                 |   |   |   |   |   |   |   |   |   |
| Net                  income (loss) available to common stockholders |   | $                                     | (364,761   | )                                    | $      | (667,711 | ) | $ | 1,933,402 |   | $ | (890,498 | ) |
| Plus:                  Accretion expense of Class B common          |   |                                  |       |                                 |   |   |   |   |   |   |   |   |   |
| convertible                  to senior subordinated notes           |   |                                  | -          |                                 |   | - |   |   | 332,195 |   |   | - |   |
| Less:                  Change in fair value of derivative           |   |                                  | -          |                                 |   | (186,055 | ) |   | (337,696 | ) |   | (654,472 | ) |
|                                                                |   |                                  |       |                                 |   |   |   |   |   |   |   |   |   |
| Net                  income (loss) available for diluted shares     |   | $                                     | (364,761   | )                                    | $      | (853,766 | ) | $ | 1,927,901 |   | $ | (1,544,970 | ) |
|                                                                |   |                                  |       |                                 |   |   |   |   |   |   |   |   |   |
| Net                  income (loss) per diluted share                |   | $                                     | (0.04      | )                                    | $      | (0.07 | ) | $ | 0.19 |   | $ | (0.14 | ) |

----

**6.**
**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   |   |                            | 3,536,833  |   |
| Property                and equipment |   |                            | 20,167,479 |   |
| Intangible                assets      |   |                            | 10,700,606 |   |
| Goodwill                              |   |                            | 15,138,442 |   |
| 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**                           |       | **Unaudited**                           |   |
|------------------------------------------------------|--------|-----------------------------------------|------------|-----------------------------------------|--------|
|                                                 |   | **Three                  months ended** |       | **Nine                  months ended**  |   |
|                                                 |   | **September                  30, 2006** |       | **September                  30, 2006** |   |
| Revenues                                             |   | $                                       | 17,309,107 |                                    | $      | 51,737,343 |   |
| Income                  from operations              |   |                                    | 5,123,399  |                                    |   | 14,006,173 |   |
| Net                  income (loss)                   |   |                                    | (392,426   | )                                       |   | 1,063,341 |   |
| Basic                  net income (loss) per share   |   | $                                       | (0.04      | )                                       | $      | 0.11 |   |
| Diluted                  net income (loss) per share |   | $                                       | (0.04      | )                                       | $      | 0.10 |   |

**7.          **
**Long-Term          Debt**

----

|                                                                                                      |   | December                  31, |        | September                  30, |   |
|-----------------------------------------------------------------------------------------------------------|--------|-------------------------------|-------------|--------------------------------|--------|
|                                                                                                      |   | 2006                          |        | 2007                           |   |
| Term                  credit facility, General Electric Capital Corporation;                              |   |                          |        |                           |   |   |   |
| variable                  interest rate of 8.62% and 7.11% at December 31, 2006 and                       |   |                          |        |                           |   |   |   |
| September                  30, 2007, respectively. There are no principal payments.                       |   |                          |        |                           |   |   |   |
| Interest                  payments are due on the last day of each LIBOR period or                  at    |   |                          |        |                           |   |   |   |
| three                  month intervals, whichever date comes first. Interest rate is                  the |   |                          |        |                           |   |   |   |
| index                  rate plus the applicable term loan index margin or the                             |   |                          |        |                           |   |   |   |
| applicable                  LIBOR rate plus the applicable term loan LIBOR margin.                        |   |                          |        |                           |   |   |   |
| On                  July 3, 2007, the Company repaid $55,353,032 in senior                  debt          |   |                          |        |                           |   |   |   |
| with                  the proceeds from its offering of 3,000,000 Income Deposit                          |   |                          |        |                           |   |   |   |
| Securities                  (IDS). The unpaid balance will be due on July 3, 2011                         |   | $                             | 120,000,000 |                           | $      | 64,646,968 |   |
|                                                                                                      |   |                          |        |                           |   |   |   |
| 13%                  Senior subordinated notes, due 2019; interest payments                               |   |                          |        |                           |   |   |   |
| are                  due quarterly. On July 3, 2007, the Company sold                                     |   |                          |        |                           |   |   |   |
| 3,000,000                  IDS units that included $22,500,000 in senior                                  |   |                          |        |                           |   |   |   |
| subordinated                  debt and, $1,830,791 in premium paid for                                    |   |                          |        |                           |   |   |   |
| debt.                  Premium amortization for the three months ended                                    |   |                          |        |                           |   |   |   |
| September                  30, 2007 was $16,533                                                           |   |                          | 72,575,498  |                           |   | 96,889,756 |   |
|                                                                                                      |   |                          |        |                           |   |   |   |
| 13%                  Senior subordinated notes, held seperately, due 2019;                                |   |                          |        |                           |   |   |   |
| interest                  payments are due quarterly                                                      |   |                          | 8,500,000   |                           |   | 8,500,000 |   |
| Total                  long-term notes payable                                                            |   | $                             | 201,075,498 |                           | $      | 170,036,724 |   |
|                                                                                                      |   |                          |        |                           |   |   |   |
| Less:                  current portion                                                                    |   |                          | -           |                           |   | - |   |
|                                                                                                      |   |                          |        |                           |   |   |   |
| Long-term                  notes payable                                                                  |   | $                             | 201,075,498 |                           | $      | 170,036,724 |   |

| 2007       |   | $      | -           |   |
|------------|--------|--------|-------------|--------|
| 2008       |   |   | -           |   |
| 2009       |   |   | -           |   |
| 2010       |   |   | -           |   |
| 2011       |   |   | 64,646,968  |   |
| Thereafter |   |   | 105,389,756 |   |
| Total      |   | $      | 170,036,724 |   |

----

**8.           Subsidiary **
**Guarantees**

| **Otelco                  Inc.**                           |
|------------------------------------------------------------|
| **Condensed                  Consolidating Balance Sheet** |
| **September                  30, 2007**                    |

|                                                                     |   |   |        | Guarantor    |   |  Non-Guarantor |   |         |       |         |   |
|--------------------------------------------------------------------------|--------|--------|-------------|--------------|--------|---------------------|--------|--------------|------------|--------------|--------|
|                                                                     |   | Parent |        | Subsidiaries |   |  Subsidiaries  |   | Eliminations |       | Consolidated |   |
|                                                                     |   |   |        |         |   |           |   |         |       |         |   |
| ASSETS                                                                   |   |   |        |         |   |           |   |         |       |         |   |
|                                                                     |   |   |        |         |   |           |   |         |       |         |   |
| Current                  assets                                          |   |   |        |         |   |           |   |         |       |         |   |
| Cash                  and cash equivalents                               |   | $      | -           |         | $      | 17,519,402          |   | $            | 45,651     |         | $      | - |   | $ | 17,565,053 |   |
| Accounts                  receivable, net                                |   |   | 60,801      |         |   | 6,147,411           |   |         | 1,252,361  |         |   | - |   |   | 7,460,573 |   |
| Materials                  and supplies                                  |   |   | -           |         |   | 917,626             |   |         | 1,008,628  |         |   | - |   |   | 1,926,254 |   |
| Prepaid                  and other current assets                        |   |   | 24,684      |         |   | 489,506             |   |         | 52,230     |         |   | - |   |   | 566,420 |   |
| Deferred                  income taxes                                   |   |   | 832,946     |         |   | -                   |   |         | -          |         |   | - |   |   | 832,946 |   |
| Investment                  in subsidiaries                              |   |   | 86,453,730  |         |   | -                   |   |         | -          |         |   | (86,453,730 | ) |   | - |   |
| Intercompany                  receivables                                |   |   | 75,109,153  |         |   | -                   |   |         | -          |         |   | (75,109,153 | ) |   | - |   |
| Total                  current assets                                    |   |   | 162,481,314 |         |   | 25,073,945          |   |         | 2,358,870  |         |   | (161,562,883 | ) |   | 28,351,246 |   |
|                                                                     |   |   |        |         |   |                |   |         |       |         |   |   |   |   |   |   |
| Property                  and equipment, net                             |   |   | -           |         |   | 39,792,759          |   |         | 15,622,556 |         |   | - |   |   | 55,415,315 |   |
| Goodwill                                                                 |   |   | -           |         |   | 136,507,075         |   |         | (1,936,640 | )            |   | - |   |   | 134,570,435 |   |
| Intangibles                  assets, net                                 |   |   | -           |         |   | 6,543,852           |   |         | 3,427,428  |         |   | - |   |   | 9,971,280 |   |
| Investments                                                              |   |   | 1,000       |         |   | 887,059             |   |         | 325,187    |         |   | - |   |   | 1,213,246 |   |
| Other                  long-term assets                                  |   |   | 9,643,677   |         |   | (503,524            | )      |         | -          |         |   | - |   |   | 9,140,153 |   |
|                                                                     |   |   |        |         |   |                |   |         |       |         |   |   |   |   |   |   |
| Total                  assets                                            |   | $      | 172,125,991 |         | $      | 208,301,166         |   | $            | 19,797,401 |         | $      | (161,562,883 | ) | $ | 238,661,675 |   |
|                                                                     |   |   |        |         |   |                |   |         |       |         |   |   |   |   |   |   |
| LIABILITIES                  AND STOCKHOLDERS' EQUITY (DEFICIT)          |   |   |        |         |   |                |   |         |       |         |   |   |   |   |   |   |
|                                                                     |   |   |        |         |   |                |   |         |       |         |   |   |   |   |   |   |
| Current                  liabilities                                     |   |   |        |         |   |                |   |         |       |         |   |   |   |   |   |   |
| Accounts                  payables and accrued expenses                  |   | $      | 6,809,252   |         | $      | 2,269,080           |   | $            | 1,478,168  |         | $      | - |   | $ | 10,556,500 |   |
| Intercompany                  payables                                   |   |   | -           |         | $      | 60,874,788          |   |         | 14,234,365 |         |   | (75,109,153 | ) |   | - |   |
| Other                  current liabilities                               |   |   | -           |         |   | 2,189,472           |   |         | 97,098     |         |   | - |   |   | 2,286,570 |   |
| Total                  current liabilities                               |   |   | 6,809,252   |         |   | 65,333,340          |   |         | 15,809,631 |         |   | (75,109,153 | ) |   | 12,843,070 |   |
|                                                                     |   |   |        |         |   |                |   |         |       |         |   |   |   |   |   |   |
| Deferred                  income taxes                                   |   |   | 4,728,411   |         |   | 17,544,383          |   |         | 2,506,140  |         |   | - |   |   | 24,778,934 |   |
| Other                  liabilities                                       |   |   | -           |         |   | 187,867             |   |         | -          |         |   | - |   |   | 187,867 |   |
| Long-term                  notes payables                                |   |   | 129,773,248 |         |   | 40,263,476          |   |         | -          |         |   | - |   |   | 170,036,724 |   |
| Derivative                  liability                                    |   |   | 1,383,679   |         |   | 0                   |   |         | -          |         |   | - |   |   | 1,383,679 |   |
| Class                  B common convertible to senior subordinated notes |   |   | 4,085,033   |         |   | 0                   |   |         | -          |         |   | - |   |   | 4,085,033 |   |
| Stockholders'                  equity (deficit)                          |   |   | 25,346,368  |         |   | 84,972,100          |   |         | 1,481,630  |         |   | (86,453,730 | ) |   | 25,346,368 |   |
|                                                                     |   |   |        |         |   |                |   |         |       |         |   |   |   |   |   |   |
| Total                  liabilities and stockholders' equity (deficit)    |   | $      | 172,125,991 |         | $      | 208,301,166         |   | $            | 19,797,401 |         | $      | (161,562,883 | ) | $ | 238,661,675 |   |

----

| **Otelco                  Inc.**                           |
|------------------------------------------------------------|
| **Condensed                  Consolidating Balance Sheet** |
| **December                  31, 2006**                     |

|                                                                     |   |   |        | Guarantor    |   |  Non-Guarantor |   |         |       |         |   |
|--------------------------------------------------------------------------|--------|--------|-------------|--------------|--------|---------------------|--------|--------------|------------|--------------|--------|
|                                                                     |   | Parent |        | Subsidiaries |   |  Subsidiaries  |   | Eliminations |       | Consolidated |   |
|                                                                     |   |   |        |         |   |           |   |         |       |         |   |
| 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 |   |
| Investment                  in subsidiaries                              |   |   | 75,751,926  |         |   | -                   |   |         | -          |         |   | (75,751,926 | ) |   | - |   |
| Intercompany                  receivables                                |   |   | 34,232,103  |         |   | -                   |   |         | -          |         |   | (34,232,103 | ) |   | - |   |
| Total                  current assets                                    |   |   | 110,774,769 |         |   | 22,280,399          |   |         | 2,232,813  |         |   | (109,984,029 | ) |   | 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                                 |   |   | 0           |         |   | 7,689,851           |   |         | 3,650,955  |         |   | - |   |   | 11,340,806 |   |
| Investments                                                              |   |   | 1,000       |         |   | 914,063             |   |         | 325,187    |         |   | - |   |   | 1,240,250 |   |
| Other                  long-term assets                                  |   |   | 10,589,917  |         |   | 701,264             |   |         | -          |         |   | - |   |   | 11,291,181 |   |
|                                                                     |   |   |        |         |   |                |   |         |       |         |   |   |   |   |   |   |
| Total                  assets                                            |   | $      | 121,365,686 |         | $      | 210,450,236         |   | $            | 22,020,394 |         | $      | (109,984,029 | ) | $ | 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 |   |
| Intercompany                  payables                                   |   |   | -           |         |   | 15,495,558          |   |         | 18,736,545 |         |   | (34,232,103 | ) |   | - |   |
| Other                  current liabilities                               |   |   | -           |         |   | 2,238,188           |   |         | 79,009     |         |   | - |   |   | 2,317,197 |   |
| Total                  current liabilities                               |   |   | 4,924,962   |         |   | 20,815,585          |   |         | 20,049,051 |         |   | (34,232,103 | ) |   | 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)                          |   |   | 127,134     |         |   | 76,286,723          |   |         | (534,797   | )            |   | (75,751,926 | ) |   | 127,134 |   |
|                                                                     |   |   |        |         |   |                |   |         |       |         |   |   |   |   |   |   |
| Total                  liabilities and stockholders' equity (deficit)    |   | $      | 121,365,686 |         | $      | 210,450,236         |   | $            | 22,020,394 |         | $      | (109,984,029 | ) | $ | 243,852,287 |   |

| **Otelco                  Inc.**                                                    |
|-------------------------------------------------------------------------------------|
| **Condensed                  Consolidated Statement of Income**                     |
| **For                  the Three Months Ended September 30,                  2007** |

|                                                            |   |   |       | Guarantor    |   |  Non-Guarantor |   |         |       |         |   |
|-----------------------------------------------------------------|--------|--------|------------|--------------|--------|---------------------|--------|--------------|------------|--------------|--------|
|                                                            |   | Parent |       | Subsidiaries |   |  Subsidiaries  |   | Eliminations |       | Consolidated |   |
|                                                            |   |   |       |         |   |           |   |         |       |         |   |
|                                                            |   |   |       |         |   |           |   |         |       |         |   |
| Revenue                                                         |   | $      | 728,372    |         | $      | 15,719,069          |   | $            | 3,301,431  |         | $      | (2,154,570 | ) | $ | 17,594,302 |   |
| Operating                  expenses                             |   |   | (728,372   | )            |   | (11,453,838         | )      |         | (2,449,688 | )            |   | 2,154,570 |   |   | (12,477,328 | ) |
| Income                  from operations                         |   |   | -          |         |   | 4,265,231           |   |         | 851,743    |         |   | - |   |   | 5,116,974 |   |
| Other                  income (expense)                         |   |   | (4,178,399 | )            |   | (1,212,087          | )      |         | (1         | )            |   | - |   |   | (5,390,487 | ) |
| Earnings                  from subsidiaries                     |   |   | 3,904,886  |         |   | -                   |   |         | -          |         |   | (3,904,886 | ) |   | - |   |
| Income                  before income tax and accretion expense |   |   | (273,513   | )            |   | 3,053,144           |   |         | 851,742    |         |   | (3,904,886 | ) |   | (273,513 | ) |
| Income                  tax expense                             |   |   | (394,197   | )            |   | -                   |   |         | -          |         |   | - |   |   | (394,197 | ) |
| Accretion                  of class B common convertible        |   |   |       |         |   |                |   |         |       |         |   |   |   |   |   |   |
| to                  senior subordinated notes                   |   |   | -          |         |   | -                   |   |         | -          |         |   | - |   |   | - |   |
|                                                            |   |   |       |         |   |                |   |         |       |         |   |   |   |   |   |   |
| Net                  income (loss) to common stockholders       |   | $      | (667,710   | )            | $      | 3,053,144           |   | $            | 851,742    |         | $      | (3,904,886 | ) | $ | (667,710 | ) |

----

| **Otelco                  Inc.**                                                |
|---------------------------------------------------------------------------------|
| **Condensed                  Consolidated Statement of Income**                 |
| **For                  the 3 Months Ended September 30,                  2006** |

|                                                            |   |   |       | Guarantor    |   | Non-Guarantor |   |         |       |         |   |
|-----------------------------------------------------------------|--------|--------|------------|--------------|--------|---------------|--------|--------------|------------|--------------|--------|
|                                                            |   | Parent |       | Subsidiaries |   | Subsidiaries  |   | Eliminations |       | Consolidated |   |
|                                                            |   |   |       |         |   |          |   |         |       |         |   |
|                                                            |   |   |       |         |   |          |   |         |       |         |   |
| Revenue                                                         |   | $      | 674,130    |         | $      | 15,288,099    |   | $            | 2,998,694  |         | $      | (1,823,950 | ) | $ | 17,136,973 |   |
| Operating                  expenses                             |   |   | (584,787   | )            |   | (10,835,769   | )      |         | (2,400,894 | )            |   | 1,823,950 |   |   | (11,997,500 | ) |
| Income                  from operations                         |   |   | 89,343     |         |   | 4,452,330     |   |         | 597,800    |         |   | - |   |   | 5,139,473 |   |
| Other                  income (expense)                         |   |   | (3,187,114 | )            |   | (2,258,166    | )      |         | 50,403     |         |   | - |   |   | (5,394,877 | ) |
| Earnings                  from subsidiaries                     |   |   | 3,286,918  |         |   | -             |   |         | -          |         |   | (3,286,918 | ) |   | - |   |
| Income                  before income tax and accretion expense |   |   | 189,147    |         |   | 2,194,164     |   |         | 648,203    |         |   | (3,286,918 | ) |   | (255,404 | ) |
| Income                  tax expense                             |   |   | (443,176   | )            |   | 444,551       |   |         | -          |         |   | - |   |   | 1,375 |   |
| Accretion                  of class B common convertible        |   |   |       |         |   |               |   |         |       |         |   |   |   |   |   |   |
| to                  senior subordinated notes                   |   |   | (110,732   | )            |   | -             |   |         | -          |         |   | - |   |   | (110,732 | ) |
|                                                            |   |   |       |         |   |               |   |         |       |         |   |   |   |   |   |   |
| Net                  income (loss) to common stockholders       |   | $      | (364,761   | )            | $      | 2,638,715     |   | $            | 648,203    |         | $      | (3,286,918 | ) | $ | (364,761 | ) |

| **Otelco                  Inc.**                                  |   |
|-------------------------------------------------------------------|--------|
| **Condensed                  Consolidated Statement of Income**   |   |
| **For                  the Nine Months Ended September 30, 2007** |   |

|                                                            |   |   |        | Guarantor    |   | Non-Guarantor |   |         |       |         |   |
|-----------------------------------------------------------------|--------|--------|-------------|--------------|--------|---------------|--------|--------------|------------|--------------|--------|
|                                                            |   | Parent |        | Subsidiaries |   | Subsidiaries  |   | Eliminations |       | Consolidated |   |
|                                                            |   |   |        |         |   |          |   |         |       |         |   |
|                                                            |   |   |        |         |   |          |   |         |       |         |   |
| Revenue                                                         |   | $      | 2,216,258   |         | $      | 46,588,191    |   | $            | 9,465,209  |         | $      | (6,384,763 | ) | $ | 51,884,895 |   |
| Operating                  expenses                             |   |   | (2,216,258  | )            |   | (34,328,561   | )      |         | (7,448,770 | )            |   | 6,384,763 |   |   | (37,608,826 | ) |
| Income                  from operations                         |   |   | -           |         |   | 12,259,630    |   |         | 2,016,439  |         |   | - |   |   | 14,276,069 |   |
| Other                  income (expense)                         |   |   | (11,689,383 | )            |   | (3,574,251    | )      |         | (12        | )            |   | - |   |   | (15,263,646 | ) |
| Earnings                  from subsidiaries                     |   |   | 10,701,806  |         |   | -             |   |         | -          |         |   | (10,701,806 | ) |   | - |   |
| Income                  before income tax and accretion expense |   |   | (987,577    | )            |   | 8,685,379     |   |         | 2,016,427  |         |   | (10,701,806 | ) |   | (987,577 | ) |
| Income                  tax expense                             |   |   | 97,079      |         |   | -             |   |         | -          |         |   | - |   |   | 97,079 |   |
| Accretion                  of class B common convertible        |   |   |        |         |   |          |   |         |       |         |   |   |   |   |   |   |
| to                  senior subordinated notes                   |   |   | -           |         |   | -             |   |         | -          |         |   | - |   |   | - |   |
|                                                            |   |   |        |         |   |          |   |         |       |         |   |   |   |   |   |   |
| Net                  income (loss) to common stockholders       |   | $      | (890,498    | )            | $      | 8,685,379     |   | $            | 2,016,427  |         | $      | (10,701,806 | ) | $ | (890,498 | ) |

| **Otelco                  Inc.**                                  |   |
|-------------------------------------------------------------------|--------|
| **Condensed                  Consolidated Statement of Income**   |   |
| **For                  the Nine Months Ended September 30, 2006** |   |

|                                                            |   |   |       | Guarantor    |   | Non-Guarantor |   |         |        |         |   |
|-----------------------------------------------------------------|--------|--------|------------|--------------|--------|---------------|--------|--------------|-------------|--------------|--------|
|                                                            |   | Parent |       | Subsidiaries |   | Subsidiaries  |   | Eliminations |        | Consolidated |   |
|                                                            |   |   |       |         |   |          |   |         |        |         |   |
| Revenue                                                         |   | $      | 1,931,388  |         | $      | 36,936,655    |   | $            | 6,166,168   |         | $      | (4,826,028 | ) | $ | 40,208,183 |   |
| Operating                  expenses                             |   |   | (1,932,694 | )            |   | (24,007,582   | )      |         | (4,375,217  | )            |   | 4,826,028 |   |   | (25,489,465 | ) |
| Income                  from operations                         |   |   | (1,306     | )            |   | 12,929,073    |   |         | 1,790,951   |         |   | - |   |   | 14,718,718 |   |
| Other                  income (expense)                         |   |   | (9,435,791 | )            |   | (1,836,498    | )      |         | 50,403.0000 |         |   | - |   |   | (11,221,886 | ) |
| Earnings                  from subsidiaries                     |   |   | 13,378,480 |         |   | -             |   |         | -           |         |   | (13,378,480 | ) |   | - |   |
| Income                  before income tax and accretion expense |   |   | 3,941,383  |         |   | 11,092,575    |   |         | 1,841,354   |         |   | (13,378,480 | ) |   | 3,496,832 |   |
| Income                  tax expense                             |   |   | (1,675,786 | )            |   | 444,551       |   |         | -           |         |   | - |   |   | (1,231,235 | ) |
| Accretion                  of class B common convertible        |   |   |       |         |   |               |   |         |        |         |   |   |   |   |   |   |
| to                  senior subordinated notes                   |   |   | (332,195   | )            |   | -             |   |         | -           |         |   | - |   |   | (332,195 | ) |
|                                                            |   |   |       |         |   |               |   |         |        |         |   |   |   |   |   |   |
| Net                  income (loss) to common stockholders       |   | $      | 1,933,402  |         | $      | 11,537,126    |   | $            | 1,841,354   |         | $      | (13,378,480 | ) | $ | 1,933,402 |   |

----

| **Otelco                  Inc.**                                                   |
|------------------------------------------------------------------------------------|
| **Condensed                  Consolidating Statement of Cash Flows**               |
| **For                  the Nine Months Ended September 30,                  2007** |

|                                                                  |   |   |        | Guarantor    |   |  Non-Guarantor |   |         |       |         |   |
|-----------------------------------------------------------------------|--------|--------|-------------|--------------|--------|---------------------|--------|--------------|------------|--------------|--------|
|                                                                  |   | Parent |        | Subsidiaries |   |  Subsidiaries  |   | Eliminations |       | Consolidated |   |
|                                                                  |   |   |        |         |   |           |   |         |       |         |   |
| Cash                  flows from operating activities:                |   |   |        |         |   |           |   |         |       |         |   |
| Net                  income (loss)                                    |   | $      | (890,498    | )            | $      | 8,685,379           |   | $            | 2,016,427  |         | $      | (10,701,806 | ) | $ | (890,498 | ) |
| Adjustment                  to reconcile net income (loss)            |   |   |        |         |   |                |   |         |       |         |   |   |   |   |   |   |
| to                  cash flows from operating activities              |   |   | 1,054,855   |         |   | 8,863,229           |   |         | 3,312,318  |         |   | - |   |   | 13,230,402 |   |
| Changes                  in assets and liabilities, net of            |   |   |        |         |   |                |   |         |       |         |   |   |   |   |   |   |
| assets                  and liabilities acquired                      |   |   | (41,288,005 | )            |   | 44,410,203          |   |         | (4,418,488 | )            |   | - |   |   | (1,296,290 | ) |
| Cash                  flows from investing activities                 |   |   | (121,090    | )            |   | (3,370,039          | )      |         | (889,612   | )            |   | - |   |   | (4,380,741 | ) |
| Cash                  flows from financing activities                 |   |   | 41,244,738  |         |   | (55,446,213         | )      |         | -          |         |   | 10,701,806 |   |   | (3,499,669 | ) |
| Net                  increase (decrease) in cash and cash equivalents |   |   | -           |         |   | 3,142,559           |   |         | 20,645     |         |   | - |   |   | 3,163,204 |   |
|                                                                  |   |   |        |         |   |                |   |         |       |         |   |   |   |   |   |   |
| Cash                  and cash equivalents, beginning of period       |   |   | -           |         |   | 14,376,843          |   |         | 25,006     |         |   | - |   |   | 14,401,849 |   |
|                                                                  |   |   |        |         |   |                |   |         |       |         |   |   |   |   |   |   |
| Cash                  and cash equivalents, end of period             |   | $      | -           |         | $      | 17,519,402          |   | $            | 45,651     |         | $      | - |   | $ | 17,565,053 |   |

| **Otelco                  Inc.**                                                   |
|------------------------------------------------------------------------------------|
| **Condensed                  Consolidating Statement of Cash Flows**               |
| **For                  the Nine Months Ended September 30,                  2006** |

|                                                                  |   |   |        | Guarantor    |   | Non-Guarantor |   |         |       |         |   |
|-----------------------------------------------------------------------|--------|--------|-------------|--------------|--------|---------------|--------|--------------|------------|--------------|--------|
|                                                                  |   | Parent |        | Subsidiaries |   | Subsidiaries  |   | Eliminations |       | Consolidated |   |
|                                                                  |   |   |        |         |   |          |   |         |       |         |   |
| Cash                  flows from operating activities:                |   |   |        |         |   |          |   |         |       |         |   |
| Net                  income (loss)                                    |   | $      | 1,933,402   |         | $      | 11,537,126    |   | $            | 1,841,354  |         | $      | (13,378,480 | ) | $ | 1,933,402 |   |
| Adjustment                  to reconcile net income (loss)            |   |   |        |         |   |          |   |         |       |         |   |   |   |   |   |   |
| to                  cash flows from operating activities              |   |   | 1,568,132   |         |   | 3,359,112     |   |         | 1,748,073  |         |   | - |   |   | 6,675,317 |   |
| Changes                  in assets and liabilities, net of            |   |   |        |         |   |          |   |         |       |         |   |   |   |   |   |   |
| assets                  and liabilities acquired                      |   |   | 13,749,947  |         |   | (14,537,997   | )      |         | 5,884,224  |         |   | - |   |   | 5,096,174 |   |
| Cash                  flows from investing activities                 |   |   | (461,953    | )            |   | (6,893,747    | )      |         | (9,468,189 | )            |   | - |   |   | (16,823,889 | ) |
| Cash                  flows from financing activities                 |   |   | (16,789,528 | )            |   | 15,652,701    |   |         | -          |         |   | 13,378,480 |   |   | 12,241,653 |   |
| Net                  increase (decrease) in cash and cash equivalents |   |   | -           |         |   | 9,117,195     |   |         | 5,462      |         |   | - |   |   | 9,122,657 |   |
|                                                                  |   |   |        |         |   |          |   |         |       |         |   |   |   |   |   |   |
| Cash                  and cash equivalents, beginning of period       |   |   | -           |         |   | 5,511,939     |   |         | 57,294     |         |   | - |   |   | 5,569,233 |   |
|                                                                  |   |   |        |         |   |          |   |         |       |         |   |   |   |   |   |   |
| Cash                  and cash equivalents, end of period             |   | $      | -           |         | $      | 14,629,134    |   | $            | 62,756     |         | $      | - |   | $ | 14,691,890 |   |

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

**Overview**

***General***

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***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                will begin offering high definition and digital video recording services                in Alabama in fourth quarter 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***

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| **Subscriber                Metrics** |
|---------------------------------------|

|                                                    |   |   |   |   |   | March                31, |   | June                30, |   | September                30, |   |
|----------------------------------------------------|--------|--------|--------|--------|--------|--------------------------|--------|-------------------------|--------|------------------------------|--------|
|                                               |   | 2005   |   | 2006   |   | 2007                     |   | 2007                    |   | 2007                         |   |
| Access                line equivalents (1):        |   |   |   |   |   |                     |   |                    |   |                         |   |
| Residential                access lines       |   |   | 24,541 |   |   | 29,832                   |   |                    | 29,789 |                         |   | 29,483 |   |   | 29,156 |   |
| Business                access lines          |   |   | 8,036  |   |   | 22,171                   |   |                    | 22,577 |                         |   | 23,537 |   |   | 24,122 |   |
|  Access                lines                  |   |   | 32,577 |   |   | 52,003                   |   |                    | 52,366 |                         |   | 53,020 |   |   | 53,278 |   |
| Digital                high-speed lines       |   |   | 6,314  |   |   | 11,951                   |   |                    | 12,960 |                         |   | 13,353 |   |   | 13,845 |   |
|                                               |   |   |   |   |   |                     |   |                    |   |                         |   |   |   |   |   |   |
|  Total                access line equivalents |   |   | 38,891 |   |   | 63,954                   |   |                    | 65,326 |                         |   | 66,373 |   |   | 67,123 |   |
|                                               |   |   |   |   |   |                     |   |                    |   |                         |   |   |   |   |   |   |
| Long                distance customers             |   |   | 14,438 |   |   | 21,370                   |   |                    | 22,066 |                         |   | 22,358 |   |   | 22,420 |   |
| Cable                television customers          |   |   | 4,220  |   |   | 4,188                    |   |                    | 4,211  |                         |   | 4,187 |   |   | 4,170 |   |
| Dial-up                Internet customers          |   |   | 12,149 |   |   | 19,587                   |   |                    | 18,313 |                         |   | 17,220 |   |   | 16,263 |   |

***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 September 30,**   |   |  **Nine                  Months Ended September 30,**   |   |
|------------------------------------------------------------------------------------------------------------|--------|-------------------------------------------------------------------------|--------|------------------------------------------------------------------------|--------|
|                                                                                                       |   |  **2006**                                                          |   |  **2007**                                                         |   |  **2006** |   |  **2007** |   |
| Revenues                                                                                                   |   |                                                               |   |                                                              |   |    |   |    |   |
| Local                  services                                                                       |   |                                                                    | 37.1   | %                                                                      |   | 37.0 | % |   | 37.2 | % |   | 37.3 | % |
| Network                  access                                                                       |   |                                                                    | 38.1   |                                                                   |   | 37.6 |   |   | 41.9 |   |   | 37.0 |   |
| Cable                  television                                                                     |   |                                                                    | 3.2    |                                                                   |   | 3.1 |   |   | 4.1 |   |   | 3.2 |   |
| Internet                                                                                              |   |                                                                    | 16.2   |                                                                   |   | 16.3 |   |   | 14.5 |   |   | 16.5 |   |
| Transport                  services                                                                   |   |                                                                    | 5.4    |                                                                   |   | 6.0 |   |   | 2.3 |   |   | 6.0 |   |
|  Total                  revenues                                                                      |   |                                                                    | 100.0  | %                                                                      |   | 100.0 | % |   | 100.0 | % |   | 100.0 | % |
| Operating                  expenses                                                                        |   |                                                                    |   |                                                                   |   |   |   |   |   |   |   |   |   |
| Cost                  of services and products                                                        |   |                                                                    | 35.8   | %                                                                      |   | 36.0 | % |   | 31.1 |   |   | 36.9 |   |
| Selling,                  general and administrative expenses                                         |   |                                                                    | 14.3   |                                                                   |   | 15.2 |   |   | 13.9 |   |   | 14.6 |   |
| Depreciation                  and amortization                                                        |   |                                                                    | 19.9   |                                                                   |   | 19.7 |   |   | 18.4 |   |   | 21.0 |   |
|  Total                  operating expenses                                                            |   |                                                                    | 70.0   |                                                                   |   | 70.9 |   |   | 63.4 |   |   | 72.5 |   |
|                                                                                                       |   |                                                                    |   |                                                                   |   |   |   |   |   |   |   |   |   |
| Income                  from operations                                                               |   |                                                                    | 30.0   |                                                                   |   | 29.1 |   |   | 36.6 |   |   | 27.5 |   |
|                                                                                                       |   |                                                                    |   |                                                                   |   |   |   |   |   |   |   |   |   |
| Other                  income (expense)                                                                    |   |                                                                    |   |                                                                   |   |   |   |   |   |   |   |   |   |
| Interest                  expense                                                                     |   |                                                                    | (32.8  | )                                                                      |   | (33.2 | ) |   | (36.7 | ) |   | (32.1 | ) |
| Change                  in fair value of derivative                                                   |   |                                                                    | 0.1    |                                                                   |   | 1.0 |   |   | 0.8 |   |   | 1.3 |   |
| Other                  income                                                                         |   |                                                                    | 1.2    |                                                                   |   | 1.5 |   |   | 8.0 |   |   | 1.4 |   |
|  Total                  other expense                                                                 |   |                                                                    | (31.5  | )                                                                      |   | (30.7 | ) |   | (27.9 | ) |   | (29.4 | ) |
|                                                                                                       |   |                                                                    |   |                                                                   |   |   |   |   |   |   |   |   |   |
| Income                  before income taxes                                                           |   |                                                                    | (1.5   | )                                                                      |   | (1.6 | ) |   | 8.7 |   |   | (1.9 | ) |
|                                                                                                       |   |                                                                    |   |                                                                   |   |   |   |   |   |   |   |   |   |
| Income                  tax expense                                                                        |   |                                                                    | 0.0    |                                                                   |   | (2.2 | ) |   | (3.1 | ) |   | 0.2 |   |
|                                                                                                       |   |                                                                    |   |                                                                   |   |   |   |   |   |   |   |   |   |
| Income                  before accretion expense                                                           |   |                                                                    | (1.5   | )                                                                      |   | (3.8 | ) |   | 5.6 |   |   | (1.7 | ) |
|                                                                                                       |   |                                                                    |   |                                                                   |   |   |   |   |   |   |   |   |   |
| Accretion                    of Class B common convertible to senior subordinated                    notes |   |                                                                    | (0.6   | )                                                                      |   | 0.0 |   |   | (0.8 | ) |   | - |   |
|                                                                                                       |   |                                                                    |   |                                                                   |   |   |   |   |   |   |   |   |   |
| Net                  income available to common stockholders                                               |   |                                                                    | (2.1   | )%                                                                     |   | (3.8 | )% |   | 4.8 | % |   | (1.7 | )% |

***Three      months and nine months ended September 30, 2007 compared to three months and      nine months ended September 30, 2006***

*Total      Revenues. *

----

*For      the three months ended September 30, 2007 and 2006*

|                                |   | **Three                  Months Ended September 30,**                       |   | **Change** |   |
|-------------------------------------|--------|-----------------------------------------------------------------------------|--------|------------|--------|
|                                |   | **2006**                                                                    |   | **2007**   |   | **Amount** |   | **Percent** |   |
|                                |   | (dollars                  in thousands)       |   |
| Local                  service      |   | $                                                                           | 6,363  |       | $      | 6,502 |   | $ | 139 |   |   | 2.2 | % |
| Network                  access     |   |                                                                        | 6,534  |       |   | 6,612 |   |   | 78 |   |   | 1.2 |   |
| Cable                  television   |   |                                                                        | 551    |       |   | 547 |   |   | (4 | ) |   | (0.7 | ) |
| Internet                            |   |                                                                        | 2,766  |       |   | 2,867 |   |   | 101 |   |   | 3.7 |   |
| Transport                  Services |   |                                                                        | 923    |       |   | 1,066 |   |   | 143 |   |   | 15.5 |   |
| Total                               |   | $                                                                           | 17,137 |       | $      | 17,594 |   | $ | 457 |   |   | 2.7 |   |

*For      the nine months ended September 30, 2007 and 2006*

|                                |   | **Nine                  Months Ended September 30,** |   | **Change** |   |
|-------------------------------------|--------|------------------------------------------------------|--------|------------|--------|
|                                |   | **2006**                                             |   | **2007**   |   | **Amount** |   | **Percent** |   |
|                                |   | (dollars                  in thousands)              |   |
| Local                  service      |   | $                                                    | 14,957 |       | $      | 19,381 |   | $ | 4,424 |   |   | 29.6 | % |
| Network                  access     |   |                                                 | 16,849 |       |   | 19,191 |   |   | 2,342 |   |   | 13.9 |   |
| Cable                  television   |   |                                                 | 1,632  |       |   | 1,643 |   |   | 11 |   |   | 0.7 |   |
| Internet                            |   |                                                 | 5,847  |       |   | 8,547 |   |   | 2,700 |   |   | 46.2 |   |
| Transport                  services |   |                                                 | 923    |       |   | 3,123 |   |   | 2,200 |   |   | 238.4 |   |
| Total                               |   | $                                                    | 40,208 |       | $      | 51,885 |   | $ | 11,677 |   |   | 29.0 |   |

----

*Operating      expenses. *

*For      the three months ended September 30, 2007 and 2006*

|                                                          |   | **Three                  Months Ended September 30,** |   | **Change** |   |
|---------------------------------------------------------------|--------|-------------------------------------------------------|--------|------------|--------|
|                                                          |   | **2006**                                              |   | **2007**   |   | **Amount** |   | **Percent** |   |
|                                                          |   | (dollars                  in thousands)               |   |
| Cost                  of services                             |   | $                                                     | 6,139  |       | $      | 6,326 |   | $ | 187 |   |   | 3.0 | % |
| Selling,                  general and administrative expenses |   |                                                  | 2,451  |       |   | 2,676 |   |   | 225 |   |   | 9.2 |   |
| Depreciation                  and amortization                |   |                                                  | 3,407  |       |   | 3,475 |   |   | 68 |   |   | 2.0 |   |
| Total                                                         |   | $                                                     | 11,997 |       | $      | 12,477 |   | $ | 480 |   |   | 4.0 |   |

----

*For      the nine months ended September 30, 2007 and 2006*

|                                                          |   | **Nine                  Months Ended September 30,** |   | **Change**                              |   |
|---------------------------------------------------------------|--------|------------------------------------------------------|--------|-----------------------------------------|--------|
|                                                          |   | **2006**                                             |   | **2007**                                |   | **Amount** |   | **Percent** |   |
|                                                          |   |                                                 |   | (dollars                  in thousands) |   |   |   |
| Cost                  of services                             |   | $                                                    | 12,501 |                                    | $      | 19,131 |   | $ | 6,630 |   |   | 53.0 | % |
| Selling,                  general and administrative expenses |   |                                                 | 5,604  |                                    |   | 7,598 |   |   | 1,994 |   |   | 35.6 |   |
| Depreciation                  and amortization                |   |                                                 | 7,384  |                                    |   | 10,880 |   |   | 3,496 |   |   | 47.3 |   |
| Total                                                         |   | $                                                    | 25,489 |                                    | $      | 37,609 |   | $ | 12,120 |   |   | 47.5 |   |

*Interest      expense. *

*Change      in fair value of derivative. *

----

*Other      income. *

*Income      taxes. *

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

*Net      income (loss). *

**Liquidity        and Capital Resources**

----

|                                                           |   | Total  |        | Less                  than 1 Year |   | 1-3                  years |   | 3-5                  years |       | More                  than 5 years |   |
|----------------------------------------------------------------|--------|--------|-------------|-----------------------------------|--------|----------------------------|--------|----------------------------|------------|------------------------------------|--------|
| Amended                      and restated credit facility Term |   | $      | 64,646,968  |                              | $      | -                          |   | $                          | -          |                               | $      | 64,646,968 |   | $ | - |   |
| Revolver                  (1)                                  |   |   | -           |                              |   | -                          |   |                       | -          |                               |   | - |   |   | - |   |
| Senior                  subordinated notes(2)                  |   |   | 107,660,530 |                              |   | -                          |   |                       | -          |                               |   | - |   |   | 107,660,530 |   |
| Expected                  interest expense(3)                  |   |   | 184,826,577 |                              |   | 16,723,650                 |   |                       | 35,021,807 |                               |   | 31,611,070 |   |   | 101,470,050 |   |
| Total                  contractual cash obligations            |   | $      | 357,134,075 |                              | $      | 16,723,650                 |   | $                          | 35,021,807 |                               | $      | 96,258,038 |   | $ | 209,130,580 |   |

| (1) | We                have a $15.0 million revolving credit facility with a July 2011                maturity. No amounts were drawn on this facility on September 30,                2007 or during 2007. The company pays a commitment fee of 0.50% per                annum,                payable quarterly in arrears, on the unused portion of the revolver                loan. |
|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (2) | Includes                $4.1 million liquidation value of Class B common stock                convertible into senior subordinated notes and interest on those                notes                beginning December 21, 2009, the date they can be exchanged for IDSs                on a one-for-one basis without passing a financial test. If Class                B common                were to convert prior to this date, the annual interest on the senior                subordinated debt would be $0.5                million. |
|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (3) | Expected                interest payments to be made in future periods reflect anticipated                interest payments related to our $64.6 million senior credit facility                and our $107.7 million senior subordinated notes at 13.0%, including                those associated with our IDSs and those sold separately. Interest                on the                senior credit facility reflects a LIBOR three month rate of 5.20%                plus a                margin of 1.75% through November 30, 2007 and 2.0% thereafter, partially                offset by a 3% cap on three month LIBOR for $64.6 million under the                credit                facility through December 21, 2009. We have assumed in the presentation                above that we will hold the senior credit facility until maturity                in 2011                and the senior subordinated notes until maturity in 2019. No interest                payment is included for the revolving credit facility because of                the                variability and timing of advances and repayments                thereunder. |
|-----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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

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**Item      4. Controls and Procedures**

**PART      II OTHER INFORMATION**

**Item.      6. Exhibits**

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**Signatures**

|                                      |                                                                       |                                   |
|-------------------------------------------|----------------------------------------------------------------------------|----------------------------------------|
| Date:              November 7, 2007  | **OTELCO                INC.**                                             |
|                                 |                                                                  |                              |
|                                           | By:                                                              | /s/              Curtis L. Garner, Jr. |
|                                      | Curtis                L. Garner, Jr.Chief                Financial Officer |

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**EXHIBIT      INDEX**

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

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