----

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**UNITED        STATES**

**SECURITIES      AND EXCHANGE COMMISSION**

**Washington,      D.C. 20549**

**FORM      10-Q**

| (Mark                One) |                                                                                                                                  |
|---------------------------|---------------------------------------------------------------------------------------------------------------------------------------|
|                      |                                                                                                                                  |
|  x                   | QUARTERLY                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE                ACT OF                1934  |
|                      |                                                                                                                                  |
|                      | For                the quarterly period ended March 31, 2008                                                                          |
|                      |                                                                                                                                  |
|                      | or                                                                                                                               |
|                      |                                                                                                                                  |
| o                         | TRANSITION                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE                ACT OF                1934 |
|                      |                                                                                                                                  |
|                      | For                the transition period from to                                                                                      |

| **OTELCO                INC.** |
|--------------------------------|

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

| (205)                625-3574                                                            |
|------------------------------------------------------------------------------------------|
| (Registrant’s                telephone number, including area                code) |

| N/A                                                                                                              |
|------------------------------------------------------------------------------------------------------------------|
| (Former                name, former address and former fiscal year, if changed since last                report) |

 No      o

**APPLICABLE      ONLY TO CORPORATE USERS:**

| **Class**                                                       |   | **Outstanding at May 7, 2008** |       |
|-----------------------------------------------------------------|--------|----------------------------------------------------|------------|
| Class                A Common Stock ($0.01 par value per share) |   |                                               | 12,676,733 |   |
| Class                B Common Stock ($0.01 par value per share) |   |                                               | 544,671    |   |

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**OTELCO      INC.**

**FORM      10-Q**

**For      the three month period ended March 31, 200**
**8**

**TABLE      OF CONTENTS**

|                                            |                                                                                                                                  |   | **Page** |
|-------------------------------------------------|---------------------------------------------------------------------------------------------------------------------------------------|--------|----------|
| **PART                I FINANCIAL INFORMATION** |                                                                                                                                  |   |
| Item                1.                          | Financial                Statements                                                                                                   |   | 2        |
|                                            | Consolidated                Balance Sheets as of December 31, 2007 and March 31, 2008                                                 |   | 2        |
|                                            | Consolidated                Statements of Operations for the Three Months Ended March 31, 2007                and                2008 |   | 3        |
|                                            | Consolidated                Statements of Cash Flows for the Three Months Ended March 31, 2007                and                2008 |   | 4        |
|                                            | Notes                to Consolidated Financial Statements                                                                             |   | 5        |
| Item                2.                          | Management’s                Discussion and Analysis of Financial Condition and Results of                Operations             |   | 11       |
| Item                3.                          | Quantitative                and Qualitative Disclosures about Market Risk                                                             |   | 17       |
| Item                4.                          | Controls                and Procedures                                                                                                |   | 18       |
|                                            |                                                                                                                                  |   |     |
| **PART                II OTHER INFORMATION**    |                                                                                                                                  |   |
| Item                6.                          | Exhibits                                                                                                                              |   | 18       |

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

**FORWARD-LOOKING      STATEMENTS**

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**PART      I. FINANCIAL INFORMATION**

**Item      1. Financial Statements**

**OTELCO      INC.**

**CONSOLIDATED      BALANCE SHEETS **

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|                                                                                                                                                     |   | **December 31,****2007** |        | **March 31,****2008** |   |
|----------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------------|-------------|----------------------------|--------|
|                                                                                                                                                     |   |                          |        | **(unaudited)**            |   |
| **Assets**                                                                                                                                               |   |                          |        |                       |   |
| Current                assets                                                                                                                            |   |                          |        |                       |   |
| Cash                and cash equivalents                                                                                                                 |   | $                             | 12,810,497  |                       | $      | 13,060,349 |   |
| Accounts                receivable:                                                                                                                      |   |                          |        |                       |   |   |   |
| Due                from subscribers, net of allowance for doubtful accounts of $257,862                and                $154,533, respectively         |   |                          | 2,753,451   |                       |   | 2,582,996 |   |
| Unbilled                receivables                                                                                                                      |   |                          | 2,616,867   |                       |   | 2,613,341 |   |
| Other                                                                                                                                                    |   |                          | 1,760,207   |                       |   | 1,895,040 |   |
| Materials                and supplies                                                                                                                    |   |                          | 1,991,724   |                       |   | 2,220,045 |   |
| Prepaid                expenses                                                                                                                          |   |                          | 1,149,180   |                       |   | 929,204 |   |
| Income                tax receivable                                                                                                                     |   |                          | 469,546     |                       |   | 214,440 |   |
| Deferred                income taxes                                                                                                                     |   |                          | 1,486,439   |                       |   | 1,486,439 |   |
| Total                current assets                                                                                                                      |   |                          | 25,037,911  |                       |   | 25,001,854 |   |
|                                                                                                                                                     |   |                          |        |                       |   |   |   |
| Property                and equipment, net                                                                                                               |   |                          | 54,610,355  |                       |   | 54,094,244 |   |
| Goodwill                                                                                                                                                 |   |                          | 134,570,435 |                       |   | 134,570,435 |   |
| Intangible                assets, net                                                                                                                    |   |                          | 9,514,772   |                       |   | 9,087,441 |   |
| Investments                                                                                                                                              |   |                          | 1,207,183   |                       |   | 1,200,805 |   |
| Deferred                financing costs                                                                                                                  |   |                          | 5,878,943   |                       |   | 5,506,116 |   |
| Interest                rate cap                                                                                                                         |   |                          | 1,510,951   |                       |   | 175,154 |   |
| Deferred                charges                                                                                                                          |   |                          | 155,573     |                       |   | 210,824 |   |
| Total                assets                                                                                                                              |   | $                             | 232,486,123 |                       | $      | 229,846,873 |   |
|                                                                                                                                                     |   |                          |        |                       |   |   |   |
| **Liabilities                and Stockholders’ Equity**                                                                                            |   |                          |        |                       |   |   |   |
| Current                liabilities                                                                                                                       |   |                          |        |                       |   |   |   |
| Accounts                payable                                                                                                                          |   | $                             | 2,058,989   |                       | $      | 1,949,632 |   |
| Accrued                expenses                                                                                                                          |   |                          | 3,716,880   |                       |   | 3,906,316 |   |
| Advance                billings and payments                                                                                                             |   |                          | 2,077,713   |                       |   | 2,094,662 |   |
| Customer                deposits                                                                                                                         |   |                          | 185,147     |                       |   | 194,412 |   |
| Total                current liabilities                                                                                                                 |   |                          | 8,038,729   |                       |   | 8,145,022 |   |
|                                                                                                                                                     |   |                          |        |                       |   |   |   |
| Deferred                income taxes                                                                                                                     |   |                          | 25,223,656  |                       |   | 25,223,656 |   |
| Advance                billings and payments                                                                                                             |   |                          | 797,498     |                       |   | 767,325 |   |
| Other                liabilities                                                                                                                         |   |                          | 183,756     |                       |   | 176,801 |   |
| Long-term                notes payable                                                                                                                   |   |                          | 170,019,705 |                       |   | 170,002,185 |   |
| Total                liabilities                                                                                                                         |   |                          | 204,263,344 |                       |   | 204,314,989 |   |
|                                                                                                                                                     |   |                          |        |                       |   |   |   |
| Derivative                liability                                                                                                                      |   |                          | 814,005     |                       |   | 798,437 |   |
| Class                B common convertible to senior subordinated notes                                                                                   |   |                          | 4,085,033   |                       |   | 4,085,033 |   |
|                                                                                                                                                     |   |                          |        |                       |   |   |   |
| Stockholders’                equity                                                                                                                |   |                          |        |                       |   |   |   |
| Class                A Common Stock, $.01 par value-authorized 20,000,000 shares; issued                and                outstanding 12,676,733 shares |   |                          | 126,767     |                       |   | 126,767 |   |
| Class                B Common Stock, $.01 par value-authorized 800,000 shares; issued                and                outstanding 544,671 shares       |   |                          | 5,447       |                       |   | 5,447 |   |
| Additional                paid in capital                                                                                                                |   |                          | 28,215,056  |                       |   | 25,980,782 |   |
| Retained                deficit                                                                                                                          |   |                          | (4,084,797  | )                          |   | (3,676,758 | ) |
| Accumulated                other comprehensive income (loss)                                                                                             |   |                          | (938,732    | )                          |   | (1,787,824 | ) |
| Total                stockholders’ equity                                                                                                          |   |                          | 23,323,741  |                       |   | 20,648,414 |   |
| Total                liabilities and stockholders’ equity                                                                                          |   | $                             | 232,486,123 |                       | $      | 229,846,873 |   |

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**OTELCO      INC.**

**CONSOLIDATED      STATEMENTS OF OPERATIONS **

----

**(unaudited)**

|                                                              |   | **Three months ended****March 31,** |       |
|-------------------------------------------------------------------|--------|----------------------------------------------------|------------|
|                                                              |   | **2007**                                           |       | **2008** |   |
| Revenues                                                          |   |                                               |       |   |   |
| Local                services                                     |   | $                                                  | 6,348,496  |   | $ | 6,726,190 |   |
| Network                access services                            |   |                                               | 6,437,589  |   |   | 6,437,654 |   |
| Cable                television services                          |   |                                               | 547,527    |   |   | 546,162 |   |
| Internet                services                                  |   |                                               | 2,820,298  |   |   | 3,001,466 |   |
| Transport                services                                 |   |                                               | 1,018,483  |   |   | 1,147,948 |   |
| Total                revenues                                     |   |                                               | 17,172,393 |   |   | 17,859,420 |   |
| Operating                expenses                                 |   |                                               |       |   |   |   |   |
| Cost                of services and products                      |   |                                               | 6,271,057  |   |   | 6,652,111 |   |
| Selling,                general and administrative expenses       |   |                                               | 2,501,800  |   |   | 2,693,983 |   |
| Depreciation                and amortization                      |   |                                               | 3,629,091  |   |   | 3,373,248 |   |
| Total                operating expenses                           |   |                                               | 12,401,948 |   |   | 12,719,342 |   |
|                                                              |   |                                               |       |   |   |   |   |
| Income                from operations                             |   |                                               | 4,770,445  |   |   | 5,140,078 |   |
|                                                              |   |                                               |       |   |   |   |   |
| Other                income (expense)                             |   |                                               |       |   |   |   |   |
| Interest                expense                                   |   |                                               | (5,376,264 | ) |   | (4,682,840 | ) |
| Change                in fair value of derivative                 |   |                                               | 217,868    |   |   | (240,905 | ) |
| Other                income                                       |   |                                               | 281,449    |   |   | 366,580 |   |
| Total                other expenses                               |   |                                               | (4,876,947 | ) |   | (4,557,165 | ) |
|                                                              |   |                                               |       |   |   |   |   |
| Income                (loss) before income tax                    |   |                                               | (106,502   | ) |   | 582,913 |   |
|                                                              |   |                                               |       |   |   |   |   |
| Income                tax expense                                 |   |                                               | (11,705    | ) |   | (174,874 | ) |
|                                                              |   |                                               |       |   |   |   |   |
| Net                income (loss) available to common stockholders |   | $                                                  | (118,207   | ) | $ | 408,039 |   |
|                                                              |   |                                               |       |   |   |   |   |
| Weighted                average shares outstanding:               |   |                                               |       |   |   |   |   |
| Basic                                                             |   |                                               | 9,676,733  |   |   | 12,676,733 |   |
| Diluted                                                           |   |                                               | 10,221,404 |   |   | 13,221,404 |   |
|                                                              |   |                                               |       |   |   |   |   |
| Net                income (loss) per share                        |   |                                               |       |   |   |   |   |
| Basic                                                             |   | $                                                  | (0.01      | ) | $ | 0.03 |   |
| Diluted                                                           |   | $                                                  | (0.03      | ) | $ | 0.03 |   |
|                                                              |   |                                               |       |   |   |   |   |
| Dividends                declared per share                       |   | $                                                  | 0.18       |   | $ | 0.18 |   |

----

**OTELCO      INC.**

**CONSOLIDATED      STATEMENTS OF CASH FLOWS **

----

**(unaudited)**

|                                                                                                       |   | **Three months ended****March 31,** |       |
|------------------------------------------------------------------------------------------------------------|--------|----------------------------------------------------|------------|
|                                                                                                       |   | **2007**                                           |       | **2008** |   |
| Cash                flows from operating activities:                                                       |   |                                               |       |   |   |
| Net                income (loss)                                                                           |   | $                                                  | (118,207   | ) | $ | 408,039 |   |
| Adjustments                to reconcile net income to cash flows from operating                activities: |   |                                               |       |   |   |   |   |
| Depreciation                                                                                               |   |                                               | 2,980,190  |   |   | 2,756,265 |   |
| Amortization                                                                                               |   |                                               | 648,901    |   |   | 616,983 |   |
| Interest                rate caplet                                                                        |   |                                               | 227,478    |   |   | 230,232 |   |
| Amortization                of debt premium                                                                |   |                                               | -          |   |   | (17,520 | ) |
| Amortization                of loan costs                                                                  |   |                                               | 398,121    |   |   | 372,828 |   |
| Change                in fair value of derivative liability                                                |   |                                               | (217,868   | ) |   | 240,905 |   |
| Provision                for uncollectible revenue                                                         |   |                                               | 17,242     |   |   | 54,756 |   |
| Changes                in assets and liabilities, net of assets and liabilities                acquired:   |   |                                               |       |   |   |   |   |
| Accounts                receivables                                                                        |   |                                               | (113,935   | ) |   | (15,608 | ) |
| Material                and supplies                                                                       |   |                                               | (57,661    | ) |   | (228,321 | ) |
| Prepaid                expenses and other assets                                                           |   |                                               | 258,500    |   |   | 219,976 |   |
| Income                tax receivable                                                                       |   |                                               | -          |   |   | 255,106 |   |
| Accounts                payable and accrued liabilities                                                    |   |                                               | (3,031,369 | ) |   | 80,081 |   |
| Advance                billings and payments                                                               |   |                                               | 23,892     |   |   | (13,224 | ) |
| Other                liabilities                                                                           |   |                                               | 8,810      |   |   | 2,310 |   |
|                                                                                                       |   |                                               |       |   |   |   |   |
| Net                cash from operating activities                                                          |   |                                               | 1,024,094  |   |   | 4,962,808 |   |
|                                                                                                       |   |                                               |       |   |   |   |   |
| Cash                flows from investing activities:                                                       |   |                                               |       |   |   |   |   |
| Acquisition                and construction of property and equipment                                      |   |                                               | (1,374,914 | ) |   | (2,413,008 | ) |
| Proceeds                from retirement of investment                                                      |   |                                               | 7,871      |   |   | - |   |
| Deferred                charges                                                                            |   |                                               | (6,428     | ) |   | (65,674 | ) |
|                                                                                                       |   |                                               |       |   |   |   |   |
| Net                cash from investing activities                                                          |   |                                               | (1,373,471 | ) |   | (2,478,682 | ) |
|                                                                                                       |   |                                               |       |   |   |   |   |
| Cash                flows from financing activities:                                                       |   |                                               |       |   |   |   |   |
| Cash                dividends paid                                                                         |   |                                               | (3,411,048 | ) |   | (2,234,274 | ) |
|                                                                                                       |   |                                               |       |   |   |   |   |
| Net                cash from financing activities                                                          |   |                                               | (3,411,048 | ) |   | (2,234,274 | ) |
|                                                                                                       |   |                                               |       |   |   |   |   |
| Net                increase (decrease) in cash and cash equivalents                                        |   |                                               | (3,760,425 | ) |   | 249,852 |   |
| Cash                and cash equivalents, beginning of period                                              |   |                                               | 14,401,849 |   |   | 12,810,497 |   |
|                                                                                                       |   |                                               |       |   |   |   |   |
| Cash                and cash equivalents, end of period                                                    |   | $                                                  | 10,641,424 |   | $ | 13,060,349 |   |
| Supplemental                disclosures of cash flow information:                                          |   |                                               |       |   |   |   |   |
| Interest                paid                                                                               |   | $                                                  | 7,401,647  |   | $ | 4,222,443 |   |
|                                                                                                       |   |                                               |       |   |   |   |   |
| Income                taxes received                                                                       |   | $                                                  | (173,718   | ) | $ | (229,106 | ) |

----

**NOTES      TO CONSOLIDATED FINANCIAL STATEMENTS**

**(unaudited)**

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

**Basis      of Presentation and Principles of Consolidation**

**Recent      Accounting Pronouncements**

* *
* *

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**2.          **
**Commitment          and Contingencies**

**3.**
**Derivative      and Hedge Activities**

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

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|                                                                              |   | **Three months ended****March 31,** |       |
|-----------------------------------------------------------------------------------|--------|----------------------------------------------------|------------|
|                                                                              |   | **2007**                                           |       | **2008** |   |
| Weighted                average common shares-basic                               |   |                                               | 9,676,733  |   |   | 12,676,733 |   |
|                                                                              |   |                                               |       |   |   |   |   |
| Effect                of dilutive securities                                      |   |                                               | 544,671    |   |   | 544,671 |   |
|                                                                              |   |                                               |       |   |   |   |   |
| Weighted-average                common shares and potential common shares-diluted |   |                                               | 10,221,404 |   |   | 13,221,404 |   |
|                                                                              |   |                                               |       |   |   |   |   |
| Net                income (loss) available to common stockholders                 |   |                                               | (118,207   | ) |   | 408,039 |   |
|                                                                              |   |                                               |       |   |   |   |   |
| Net                Income (loss) per basic share                                  |   | $                                                  | (0.01      | ) | $ | 0.03 |   |
|                                                                              |   |                                               |       |   |   |   |   |
| Net                income (loss) available to common stockholders                 |   | $                                                  | (118,207   | ) | $ | 408,039 |   |
| Less:                Change in fair value of B share derivative                   |   |                                               | (217,868   | ) |   | (15,568 | ) |
|                                                                              |   |                                               |       |   |   |   |   |
| Net                income (loss) available for diluted shares                     |   | $                                                  | (336,075   | ) | $ | 392,471 |   |
|                                                                              |   |                                               |       |   |   |   |   |
| Net                income (loss) per diluted share                                |   | $                                                  | (0.03      | ) | $ | 0.03 |   |

**5.**
**Fair      Value Measurements**

|                                           |   | **March 31, 2008** |       |
|------------------------------------------------|--------|------------------------------|------------|
|                                           |   | **Fair Value**          |       |   |   |   |   |   |   |
|                                           |   | **Measurements**             |       | **Level 1 ** |   | **Level 2 ** |   | **Level 3** |   |
| **Assets**                                     |   |                         |       |   |   |   |   |   |   |
| Cash                  and cash equivalents     |   | $                            | 13,060,349 |   | $ | 13,060,349 |   | $ | - |   | $ | - |   |
| Interest                  rate cap             |   |                         | 175,154    |   |   | - |   |   | 175,154 |   |   | - |   |
| Co-operative                  patronage shares |   |                         | 707,501    |   |   | - |   |   | - |   |   | 707,501 |   |
| Total                  assets                  |   |                         | 13,943,004 |   |   | 13,060,349 |   |   | 175,154 |   |   | 707,501 |   |
|                                           |   |                         |       |   |   |   |   |   |   |   |   |   |   |
| **Liabilities**                                |   |                         |       |   |   |   |   |   |   |   |   |   |   |
| Class                  B derivative            |   |                         | 798,437    |   |   | - |   |   | - |   |   | 798,437 |   |
| Total                  liabilities             |   | $                            | 798,437    |   | $ | - |   | $ | - |   | $ | 798,437 |   |

----

**6.**
**Subsidiary      Guarantees**

**Otelco        Inc.**

**Condensed        Consolidating Balance Sheet**

**December        31, 2007**

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

----

**Otelco        Inc.**

**Condensed        Consolidating Balance Sheet**

**March 31,        2008**

|                                                                     |   |    |        | Guarantor    |    | Non-Guarantor                                                                                                |         |         |       |                     |    |
|--------------------------------------------------------------------------|--------|---------|-------------|--------------|---------|--------------------------------------------------------------------------------------------------------------|--------------|--------------|------------|--------------------------|---------|
|                                                                     |   | Parent  |        | Subsidiaries |    |         Subsidiaries         |         | Eliminations |       |  Consolidated  |    |
|                                                                     |   |    |        |         |    |                                                                                                         |         |         |       |                     |    |
| ASSETS                                                                   |   |    |        |         |    |                                                                                                         |         |         |       |                     |    |
|                                                                     |   |    |        |         |    |                                                                                                         |         |         |       |                     |    |
| Current                  assets                                          |   |    |        |         |    |                                                                                                         |         |         |       |                     |    |
| Cash                  and cash equivalents                               |   | $       | -           |         | $       | 13,048,577                                                                                                   |         | $            | 11,772     |                     | $       | - |   | $ | 13,060,349 |   |
| Accounts                  receivable, net                                |   |    | -           |         |    | 5,970,167                                                                                                    |         |         | 1,121,210  |                     |    | - |   |   | 7,091,377 |   |
| Materials                  and supplies                                  |   |    | -           |         |    | 1,026,573                                                                                                    |         |         | 1,193,472  |                     |    | - |   |   | 2,220,045 |   |
| Prepaid                  and other current assets                        |   |    | 88,225      |         |    | 687,867                                                                                                      |         |         | 153,112    |                     |    | - |   |   | 929,204 |   |
| Income                  tax receivables                                  |   |    | 214,440     |         |    | -                                                                                                            |         |         | -          |                     |    | - |   |   | 214,440 |   |
| Deferred                  income taxes                                   |   |    | 1,486,439   |         |    | -                                                                                                            |         |         | -          |                     |    | - |   |   | 1,486,439 |   |
| Investment                  in subsidiaries                              |   |    | 89,196,747  |         |    | -                                                                                                            |         |         | -          |                     |    | (89,196,747 | ) |   | - |   |
| Intercompany                  receivables                                |   |    | 65,134,881  |         |    | -                                                                                                            |         |         | -          |                     |    | (65,134,881 | ) |   | - |   |
| Total                  current assets                                    |   |    | 156,120,732 |         |    | 20,733,184                                                                                                   |         |         | 2,479,566  |                     |    | (154,331,628 | ) |   | 25,001,854 |   |
|                                                                     |   |    |        |         |    |                                                                                                         |         |         |       |                     |    |   |   |   |   |   |
| Property                  and equipment, net                             |   |    | -           |         |    | 39,450,571                                                                                                   |         |         | 14,643,673 |                     |    | - |   |   | 54,094,244 |   |
| Goodwill                                                                 |   |    | -           |         |    | 136,507,075                                                                                                  |         |         | (1,936,640 | )                        |    | - |   |   | 134,570,435 |   |
| Intangibles                  assets, net                                 |   |    | -           |         |    | 5,796,612                                                                                                    |         |         | 3,290,829  |                     |    | - |   |   | 9,087,441 |   |
| Investments                                                              |   |    | 1,000       |         |    | 874,445                                                                                                      |         |         | 325,360    |                     |    | - |   |   | 1,200,805 |   |
| Other                  long-term assets                                  |   |    | 6,391,465   |         |    | (499,371                                                                                                     | )            |         | -          |                     |    | - |   |   | 5,892,094 |   |
|                                                                     |   |    |        |         |    |                                                                                                         |         |         |       |                     |    |   |   |   |   |   |
| Total                  assets                                            |   | $       | 162,513,197 |         | $       | 202,862,516                                                                                                  |         | $            | 18,802,788 |                     | $       | (154,331,628 | ) | $ | 229,846,873 |   |
|                                                                     |   |    |        |         |    |                                                                                                         |         |         |       |                     |    |   |   |   |   |   |
| LIABILITIES                  AND STOCKHOLDERS' EQUITY                    |   |    |        |         |    |                                                                                                         |         |         |       |                     |    |   |   |   |   |   |
|                                                                     |   |    |        |         |    |                                                                                                         |         |         |       |                     |    |   |   |   |   |   |
| Current                  liabilities                                     |   |    |        |         |    |                                                                                                         |         |         |       |                     |    |   |   |   |   |   |
| Accounts                  payables and accrued expenses                  |   | $       | 1,845,275   |         | $       | 2,590,320                                                                                                    |         | $            | 1,420,353  |                     | $       | - |   | $ | 5,855,948 |   |
| Intercompany                  payables                                   |   |    | -           |         |    | 54,301,788                                                                                                   |         |         | 10,833,093 |                     |    | (65,134,881 | ) |   | - |   |
| Other                  current liabilities                               |   |    | -           |         |    | 2,203,731                                                                                                    |         |         | 85,343     |                     |    | - |   |   | 2,289,074 |   |
| Total                  current liabilities                               |   |    | 1,845,275   |         |    | 59,095,839                                                                                                   |         |         | 12,338,789 |                     |    | (65,134,881 | ) |   | 8,145,022 |   |
|                                                                     |   |    |        |         |    |                                                                                                         |         |         |       |                     |    |   |   |   |   |   |
| Deferred                  income taxes                                   |   |    | 5,397,329   |         |    | 15,241,738                                                                                                   |         |         | 4,584,589  |                     |    | - |   |   | 25,223,656 |   |
| Other                  liabilities                                       |   |    | -           |         |    | 944,126                                                                                                      |         |         | -          |                     |    | - |   |   | 944,126 |   |
| Long-term                  notes payables                                |   |    | 129,738,709 |         |    | 40,263,476                                                                                                   |         |         | -          |                     |    | - |   |   | 170,002,185 |   |
| Derivative                  liability                                    |   |    | 798,437     |         |    | -                                                                                                            |         |         | -          |                     |    | - |   |   | 798,437 |   |
| Class                  B common convertible to senior subordinated notes |   |    | 4,085,033   |         |    | -                                                                                                            |         |         | -          |                     |    | - |   |   | 4,085,033 |   |
| Stockholders'                  equity                                    |   |    | 20,648,414  |         |    | 87,317,337                                                                                                   |         |         | 1,879,410  |                     |    | (89,196,747 | ) |   | 20,648,414 |   |
|                                                                     |   |    |        |         |    |                                                                                                         |         |         |       |                     |    |   |   |   |   |   |
| Total                  liabilities and stockholders' equity              |   | $  | 162,513,197 |    | $  | 202,862,516                                                                                                  |    | $       | 18,802,788 |                | $  | (154,331,628 | )   | $ | 229,846,873 |   |

**Otelco        Inc.**

**Condensed        Consolidated Statement of Operations**

**For        the 3 Months Ended March 31, 2007**

|                                                            |   |   |       | Guarantor    |   | Non-Guarantor                                                                                                |    |         |       |         |   |
|-----------------------------------------------------------------|--------|--------|------------|--------------|--------|--------------------------------------------------------------------------------------------------------------|---------|--------------|------------|--------------|--------|
|                                                            |   | Parent |       | Subsidiaries |   |         Subsidiaries         |    | Eliminations |       | Consolidated |   |
|                                                            |   |   |       |         |   |                                                                                                         |    |         |       |         |   |
| Revenue                                                         |   | $      | 727,815    |         | $      | 15,287,319                                                                                                   |    | $            | 3,245,673  |         | $      | (2,088,414 | )  | $ | 17,172,393 |   |
| Operating                  expenses                             |   |   | (823,899   | )            |   | (11,236,178                                                                                                  | )  |         | (2,430,285 | )       |   | 2,088,414 |   |   | (12,401,948 | ) |
| Income                  from operations                         |   |   | (96,084    | )            |   | 4,051,141                                                                                                    |    |         | 815,388    |         |   | - |   |   | 4,770,445 |   |
| Other                  income (expense)                         |   |   | (3,711,167 | )            |   | (1,165,780                                                                                                   | )       |         | -          |         |   | - |   |   | (4,876,947 | ) |
| Earnings                  from subsidiaries                     |   |   | 3,700,749  |         |   | -                                                                                                            |    |         | -          |         |   | (3,700,749 | ) |   | - |   |
| Income                  before income tax and accretion expense |   |   | (106,502   | )            |   | 2,885,361                                                                                                    |    |         | 815,388    |         |   | (3,700,749 | ) |   | (106,502 | ) |
| Income                  tax expense                             |   |   | (11,705    | )            |   | -                                                                                                            |    |         | -          |         |   | - |   |   | (11,705 | ) |
|                                                            |   |   |       |         |   |                                                                                                         |    |         |       |         |   |   |   |   |   |   |
| Net                  income (loss) to common stockholders       |   | $      | (118,207   | )       | $      | 2,885,361                                                                                                    |    | $            | 815,388    |         | $      | (3,700,749 | ) | $ | (118,207 | ) |

----

**Otelco        Inc.**

**Condensed        Consolidated Statement of Operations**

**For        the Three Months Ended March 31, 2008**

|                                                      |   |   |       | Guarantor    |   | Non-Guarantor                                                            |    |         |       |         |   |
|-----------------------------------------------------------|--------|--------|------------|--------------|--------|--------------------------------------------------------------------------|---------|--------------|------------|--------------|--------|
|                                                      |   | Parent |       | Subsidiaries |   |      Subsidiaries      |    | Eliminations |       | Consolidated |   |
|                                                      |   |   |       |         |   |                                                                     |    |         |       |         |   |
| Revenue                                                   |   | $      | 809,189    |         | $      | 16,187,931                                                               |    | $            | 3,158,204  |         | $      | (2,295,904 | ) | $ | 17,859,420 |   |
| Operating                  expenses                       |   |   | (809,189   | )       |   | (11,769,304                                                              | )       |         | (2,436,753 | )            |   | 2,295,904 |   |   | (12,719,342 | ) |
| Income                  from operations                   |   |   | -          |         |   | 4,418,627                                                                |    |         | 721,451    |         |   | - |   |   | 5,140,078 |   |
| Other                  income (expense)                   |   |   | (4,447,486 | )       |   | (109,603                                                                 | )  |         | (76        | )       |   | - |   |   | (4,557,165 | ) |
| Earnings                  from subsidiaries               |   |   | 5,030,399  |         |   | -                                                                        |    |         | -          |         |   | (5,030,399 | )  |   | - |   |
| Income                  before income tax                 |   |   | 582,913    |         |   | 4,309,024                                                                |    |         | 721,375    |         |   | (5,030,399 | ) |   | 582,913 |   |
| Income                  tax expense                       |   |   | (174,874   | )            |   | -                                                                        |    |         | -          |         |   | - |   |   | (174,874 | ) |
|                                                      |   |   |       |         |   |                                                                     |    |         |       |         |   |   |   |   |   |   |
| Net                  income (loss) to common stockholders |   | $      | 408,039    |         | $      | 4,309,024                                                                |    | $            | 721,375    |         | $      | (5,030,399 | )  | $ | 408,039 |   |

**Otelco        Inc.**

**Condensed        Consolidating Statement of Cash Flows**

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

|                                                                                                                            |   |   |       | Guarantor    |   | Non-Guarantor                                                            |    |         |       |         |   |
|---------------------------------------------------------------------------------------------------------------------------------|--------|--------|------------|--------------|--------|--------------------------------------------------------------------------|---------|--------------|------------|--------------|--------|
|                                                                                                                            |   | Parent |       | Subsidiaries |   |      Subsidiaries      |    | Eliminations |       | Consolidated |   |
|                                                                                                                            |   |   |       |         |   |                                                                     |    |         |       |         |   |
| Cash                  flows from operating activities:                                                                          |   |   |       |         |   |                                                                     |    |         |       |         |   |
| Net                  income (loss)                                                                                              |   | $      | (118,207   | )       | $      | 2,885,361                                                                |    | $            | 815,388    |         | $      | (3,700,749 | ) | $ | (118,207 | ) |
| Adjustment                        to reconcile net income (loss) to cash flows from operating                        activities |   |   | 341,197    |         |   | 2,584,933                                                                |    |         | 1,127,934  |         |   | - |   |   | 4,054,064 |   |
| Changes                        in assets and liabilities, net of assets and liabilities                        acquired         |   |   | 3,477,759  |         |   | (4,624,899                                                               | )       |         | (1,764,623 | )            |   | - |   |   | (2,911,763 | ) |
| Net                  cash provided by operating activities                                                                      |   |   | 3,700,749  |         |   | 845,395                                                                  |    |         | 178,699    |         |   | (3,700,749 | )  |   | 1,024,094 |   |
| Cash                  flows from investing activities                                                                           |   |   | (289,701   | )            |   | (4,591,609                                                               | )  |         | (192,910   | )       |   | 3,700,749 |   |   | (1,373,471 | ) |
| Cash                  flows from financing activities                                                                           |   |   | (3,411,048 | )            |   | -                                                                        |    |         | -          |         |   | - |   |   | (3,411,048 | ) |
| Net                  increase (decrease) in cash and cash equivalents                                                           |   |   | -          |         |   | (3,746,214                                                               | )       |         | (14,211    | )            |   | - |   |   | (3,760,425 | ) |
|                                                                                                                            |   |   |       |         |   |                                                                     |    |         |       |         |   |   |   |   |   |   |
| Cash                  and cash equivalents, beginning of period                                                                 |   |   | -          |         |   | 14,376,843                                                               |    |         | 25,006     |         |   | - |   |   | 14,401,849 |   |
|                                                                                                                            |   |   |       |         |   |                                                                     |    |         |       |         |   |   |   |   |   |   |
| Cash                  and cash equivalents, end of period                                                                       |   | $      | -          |         | $      | 10,630,629                                                               |    | $            | 10,795     |         | $      | - |   | $ | 10,641,424 |   |

**Otelco        Inc.**

**Condensed        Consolidating Statement of Cash Flows**

**For        the Three Months Ended March 31, 2008**

|                                                                                                                            |   |   |       | Guarantor    |   | Non-Guarantor                                                            |   |         |       |         |   |
|---------------------------------------------------------------------------------------------------------------------------------|--------|--------|------------|--------------|--------|--------------------------------------------------------------------------|--------|--------------|------------|--------------|--------|
|                                                                                                                            |   | Parent |       | Subsidiaries |   |      Subsidiaries      |   | Eliminations |       | Consolidated |   |
|                                                                                                                            |   |   |       |         |   |                                                                     |   |         |       |         |   |
| Cash                  flows from operating activities:                                                                          |   |   |       |         |   |                                                                     |   |         |       |         |   |
| Net                  income (loss)                                                                                              |   | $      | 408,039    |         | $      | 4,309,024                                                                |   | $            | 721,375    |         | $      | (5,030,399 | ) | $ | 408,039 |   |
| Adjustment                        to reconcile net income (loss) to cash flows from operating                        activities |   |   | 826,444    |         |   | 2,377,692                                                                |   |         | 1,050,313  |         |   | - |   |   | 4,254,449 |   |
| Changes                        in assets and liabilities, net of assets and liabilities                        acquired         |   |   | 6,077,419  |         |   | (4,034,364                                                               | )      |         | (1,742,735 | )       |   | - |   |   | 300,320 |   |
| Net                  cash provided by operating activities                                                                      |   |   | 7,311,902  |         |   | 2,652,352                                                                |   |         | 28,953     |         |   | (5,030,399 | )  |   | 4,962,808 |   |
| Cash                  flows from investing activities                                                                           |   |   | (47,229    | )       |   | (2,311,449                                                               | )      |         | (120,004   | )            |   | - |   |   | (2,478,682 | ) |
| Cash                  flows from financing activities                                                                           |   |   | (7,264,673 | )            |   | -                                                                        |   |         | -          |         |   | 5,030,399 |   |   | (2,234,274 | ) |
| Net                  increase (decrease) in cash and cash equivalents                                                           |   |   | -          |         |   | 340,903                                                                  |   |         | (91,051    | )            |   | - |   |   | 249,852 |   |
|                                                                                                                            |   |   |       |         |   |                                                                     |   |         |       |         |   |   |   |   |   |   |
| Cash                  and cash equivalents, beginning of period                                                                 |   |   | -          |         |   | 12,707,674                                                               |   |         | 102,823    |         |   | - |   |   | 12,810,497 |   |
|                                                                                                                            |   |   |       |         |   |                                                                     |   |         |       |         |   |   |   |   |   |   |
| Cash                  and cash equivalents, end of period                                                                       |   | $      | -          |         | $      | 13,048,577                                                               |   | $            | 11,772     |         | $      | - |   | $ | 13,060,349 |   |

----

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

**Overview**

***General***

***Revenue      Sources***

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

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

|  | · | *Cable                television services.*                We                offer a variety of digital cable television services to a portion                of our                telephone service territory in Alabama and Missouri where we are                the                incumbent cable provider. Our offering includes high definition,                digital                video recording and pay-per-view services in                Alabama. |
|--|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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

----

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

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

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

----

***Our      Rate and Pricing Structure***

**Categories      of Operating Expenses**

*Cost      of services and products. *

*Selling,      general and administrative expenses. *

*Depreciation      and amortization. *

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

----

***Results      of Operations***

|                                                              |   | **Three months ended****March 31,** |   |
|-------------------------------------------------------------------|--------|----------------------------------------------------|--------|
|                                                              |   | **2007**                                           |   | **2008** |   |
| Revenues                                                          |   |                                               |   |   |   |
| Local                services                                     |   |                                               | 37.0   | % |   | 37.7 | % |
| Network                access services                            |   |                                               | 37.5   |   |   | 36.0 |   |
| Cable                television services                          |   |                                               | 3.2    |   |   | 3.1 |   |
| Internet                services                                  |   |                                               | 16.4   |   |   | 16.8 |   |
| Transport                services                                 |   |                                               | 5.9    |   |   | 6.4 |   |
| Total                revenues                                     |   |                                               | 100.0  |   |   | 100.0 |   |
| Operating                expenses                                 |   |                                               |   |   |   |   |   |
| Cost                of services and products                      |   |                                               | 36.5   |   |   | 37.2 |   |
| Selling,                general and administrative expenses       |   |                                               | 14.6   |   |   | 15.1 |   |
| Depreciation                and amortization                      |   |                                               | 21.1   |   |   | 18.9 |   |
| Total                operating expenses                           |   |                                               | 72.2   |   |   | 71.2 |   |
|                                                              |   |                                               |   |   |   |   |   |
| Income                from operations                             |   |                                               | 27.8   |   |   | 28.8 |   |
|                                                              |   |                                               |   |   |   |   |   |
| Other                income (expense)                             |   |                                               |   |   |   |   |   |
| Interest                expense                                   |   |                                               | (31.3  | ) |   | (26.2 | ) |
| Change                in fair value of derivative                 |   |                                               | 1.3    |   |   | (1.4 | ) |
| Other                income                                       |   |                                               | 1.6    |   |   | 2.1 |   |
| Total                other expense                                |   |                                               | (28.4  | ) |   | (25.5 | ) |
|                                                              |   |                                               |   |   |   |   |   |
| Income                (loss) before income taxes                  |   |                                               | (0.6   | ) |   | 3.3 |   |
|                                                              |   |                                               |   |   |   |   |   |
| Income                tax expense                                 |   |                                               | (0.1   | ) |   | (1.0 | ) |
|                                                              |   |                                               |   |   |   |   |   |
| Net                income (loss) available to common stockholders |   |                                               | (0.7   | )% |   | 2.3 | % |

***Three      Months Ended March 31, 2008 Compared to Three Months Ended March 31,      2007***

*Total      revenues. *

*For      the three months ended March 31, 2007 and 2008*

|                                     |   | **Three Months Ended****March 31,** |   | **Change** |   |
|------------------------------------------|--------|----------------------------------------------------|--------|------------|--------|
|                                     |   | **2007**                                           |   | **2008**   |   | **Amount** |   | **Percent** |   |
|                                     |   | (dollars in thousands)                   |   |
| Local                services            |   | $                                                  | 6,348  |       | $      | 6,726 |   | $ | 378 |   |   | 6.0 | % |
| Network                access services   |   |                                               | 6,438  |       |   | 6,438 |   |   | - |   |   | - |   |
| Cable                television services |   |                                               | 548    |       |   | 546 |   |   | (2 | ) |   | (0.4 | ) |
| Internet                services         |   |                                               | 2,820  |       |   | 3,001 |   |   | 181 |   |   | 6.4 |   |
| Transport                services        |   |                                               | 1,018  |       |   | 1,148 |   |   | 130 |   |   | 12.8 |   |
| Total                                    |   | $                                                  | 17,172 |       | $      | 17,859 |   | $ | 687 |   |   | 4.0 |   |

----

*Operating      expenses. *

*For      the three months ended March 31, 2007 and 2008*

|                                                        |   | **Three Months Ended****March 31,** |   | **Change** |   |
|-------------------------------------------------------------|--------|----------------------------------------------------|--------|------------|--------|
|                                                        |   | **2007**                                           |   | **2008**   |   | **Amount** |   | **Percent** |   |
|                                                        |   | (dollars in thousands)                   |   |
| Cost                of services                             |   | $                                                  | 6,271  |       | $      | 6,652 |   | $ | 381 |   |   | 6.1 | % |
| Selling,                general and administrative expenses |   |                                               | 2,502  |       |   | 2,694 |   |   | 192 |   |   | 7.7 |   |
| Depreciation                and amortization                |   |                                               | 3,629  |       |   | 3,373 |   |   | (256 | ) |   | (7.1 | ) |
| Total                                                       |   | $                                                  | 12,402 |       | $      | 12,719 |   | $ | 317 |   |   | 2.6 |   |

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*Interest,      change in fair value of derivative, other income and taxes.*

*For      the three months ended March 31, 2007 and 2008*

|                                              |   | **Three Months Ended****March 31,** |   | **Change** |   |
|---------------------------------------------------|--------|----------------------------------------------------|--------|------------|--------|
|                                              |   | **2007**                                           |   | **2008**   |   | **Amount** |   | **Percent** |   |
|                                              |   | (dollars in thousands)                   |   |
| Interest                expense                   |   | $                                                  | (5,376 | )          | $      | (4,683 | ) | $ | (693 | ) |   | (12.9 | )% |
| Change                in fair value of derivative |   |                                               | 218    |       |   | (241 | ) |   | (459 | ) |   | (210.5 | ) |
| Other                income                       |   |                                               | 282    |       |   | 367 |   |   | 85 |   |   | 30.1 |   |
| Income                tax expense                 |   |                                               | (12    | )          |   | (175 | ) |   | 163 |   |   | 1358.3 |   |

*Interest      expense. *

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

*Other      income. *

*Income      taxes. *

*Net      income. *

**Liquidity      and Capital Resources**

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**Recent      Accounting Pronouncements**

**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:                May 9, 2008 | **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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