*Table          of Contents*

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**UNITED      STATES**

**SECURITIES      AND EXCHANGE COMMISSION**

**Washington,      D.C. 20549**

**FORM      10-Q**

| (Mark                One) |                                                                                                                                  |
|---------------------------|---------------------------------------------------------------------------------------------------------------------------------------|
|                      |                                                                                                                                  |
| ý                    | QUARTERLY                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE                ACT OF                1934  |
|                      | For                the quarterly period ended June 30, 2007 or                                                                   |
|                      |                                                                                                                                  |
|  ̈                    | TRANSITION                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE                ACT OF                1934 |
|                      | For                the transition period from to                                                                                      |

**OTELCO      INC. **

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

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**APPLICABLE      ONLY TO CORPORATE USERS:**

| **Class**                                                       |   | **Outstanding                at August 8, 2007** |          |
|-----------------------------------------------------------------|--------|--------------------------------------------------|---------------|
| Class                A Common Stock ($0.01 par value per share) |   |                                             | 12,676,733    |   |
| Class                B Common Stock ($0.01 par value per share) |   |                                             |  544,671 |   |

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*Table          of Contents*

**OTELCO      INC.**

**FORM      10-Q**

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

**TABLE      OF CONTENTS**

**PART      I FINANCIAL INFORMATION**

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

|   | Consolidated                Balance Sheets as of December 31, 2006 and June                30, 2007 |
|--------|-----------------------------------------------------------------------------------------------------|

|   | Consolidated                Statements of Income for the three months and six                months ended June 30, 2006 and                2007 |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------|

|   | Consolidated                Statements of Cash Flows for the three months and                six months ended June 30, 2006 and                2007 |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------|

|   | Notes                to Consolidated Financial                Statements |
|--------|--------------------------------------------------------------------------|

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

| Item                3. | Quantitative                and Qualitative Disclosures about Market                Risk |
|------------------------|------------------------------------------------------------------------------------------|

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

**PART      II OTHER INFORMATION**

| Item                4. | Submission                of Matters to a Vote of Security                Holders |
|------------------------|-----------------------------------------------------------------------------------|

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

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*Table          of Contents*

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

**FORWARD-LOOKING      STATEMENTS**

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*Table          of Contents*

**PART      1. FINANCIAL INFORMATION**

**Item      1. Financial Statements**

| **OTELCO                INC.****CONSOLIDATED                BALANCE SHEETS**                                                                            |   |
|---------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
|                                                                                                                                                    |   | **December                31,****2006** |   | **June                30,****2007** |   |
| **Assets**                                                                                                                                              |   |   |   | **(unaudited)** |   |
| Current                assets                                                                                                                           |   |   |   |   |   |
| Cash                and cash equivalents                                                                                                                |   | $ | 14,401,849 |   | $ | 16,116,971 |   |
| Accounts                receivable:                                                                                                                     |   |   |   |   |   |   |   |
| Due                from subscribers, net of allowance for doubtful accounts of $207,359                and                $206,343 respectively         |   |   | 3,105,636 |   |   | 2,650,306 |   |
| Unbilled                receivables                                                                                                                     |   |   | 2,324,213 |   |   | 2,504,002 |   |
| Other                                                                                                                                                   |   |   | 1,680,144 |   |   | 1,925,038 |   |
| Materials                and supplies                                                                                                                   |   |   | 1,962,938 |   |   | 1,748,999 |   |
| Prepaid                expenses                                                                                                                         |   |   | 1,062,947 |   |   | 774,530 |   |
| Deferred                income taxes                                                                                                                    |   |   | 766,225 |   |   | 832,946 |   |
| Total                current assets                                                                                                                     |   |   | 25,303,952 |   |   | 26,552,792 |   |
|                                                                                                                                                    |   |   |   |   |   |   |   |
| Property                and equipment, net                                                                                                              |   |   | 60,493,789 |   |   | 56,903,708 |   |
| Goodwill                                                                                                                                                |   |   | 134,182,309 |   |   | 134,570,435 |   |
| Intangible                assets, net                                                                                                                   |   |   | 11,340,806 |   |   | 10,427,789 |   |
| Investments                                                                                                                                             |   |   | 1,240,250 |   |   | 1,219,623 |   |
| Deferred                financing costs                                                                                                                 |   |   | 6,652,393 |   |   | 5,856,148 |   |
| Interest                rate cap                                                                                                                        |   |   | 4,542,160 |   |   | 4,305,773 |   |
| Deferred                charges                                                                                                                         |   |   | 96,628 |   |   | 237,654 |   |
| Total                assets                                                                                                                             |   | $ | 243,852,287 |   | $ | 240,073,922 |   |
|                                                                                                                                                    |   |   |   |   |   |   |   |
| **Liabilities                and Stockholders’ Equity (Deficit)**                                                                                 |   |   |   |   |   |   |   |
| Current                liabilities                                                                                                                      |   |   |   |   |   |   |   |
| Accounts                payable                                                                                                                         |   | $ | 1,658,911 |   | $ | 1,613,722 |   |
| Dividends                payable                                                                                                                        |   |   | 1,705,524 |   |   | 1,705,524 |   |
| Accrued                expenses                                                                                                                         |   |   | 5,875,863 |   |   | 5,954,465 |   |
| Advance                billings and payments                                                                                                            |   |   | 2,119,701 |   |   | 2,118,865 |   |
| Customer                deposits                                                                                                                        |   |   | 197,496 |   |   | 204,590 |   |
| Total                Current Liabilities                                                                                                                |   |   | 11,557,495 |   |   | 11,597,166 |   |
|                                                                                                                                                    |   |   |   |   |   |   |   |
| Deferred                income taxes                                                                                                                    |   |   | 24,712,213 |   |   | 24,778,934 |   |
| Other                liabilities                                                                                                                        |   |   | 187,037 |   |   | 173,127 |   |
| Total                deferred tax and other liabilities                                                                                                 |   |   | 24,899,250 |   |   | 24,952,061 |   |
|                                                                                                                                                    |   |   |   |   |   |   |   |
| Long-term                notes payable                                                                                                                  |   |   | 201,075,498 |   |   | 201,075,498 |   |
| Derivative                liability                                                                                                                     |   |   | 2,107,877 |   |   | 1,639,460 |   |
| Class                B common convertible to senior subordinated notes                                                                                  |   |   | 4,085,033 |   |   | 4,085,033 |   |
|                                                                                                                                                    |   |   |   |   |   |   |   |
| Stockholders’                Equity (Deficit)                                                                                                     |   |   |   |   |   |   |   |
| Class                A Common Stock, $.01 par value-authorized 20,000,000 shares; issued                and                outstanding 9,676,733 shares |   |   | 96,767 |   |   | 96,767 |   |
| Class                B Common Stock, $.01 par value-authorized 800,000 shares; issued                and                outstanding 544,671 shares      |   |   | 5,447 |   |   | 5,447 |   |
| Additional                paid in capital                                                                                                               |   |   | 284,041 |   |   | — |   |
| Retained                deficit                                                                                                                         |   |   | (1,137,166 | ) |   | (4,486,961 | ) |
| Accumulated                other comprehensive income                                                                                                   |   |   | 878,045 |   |   | 1,109,451 |   |
| Total                stockholders’ equity (deficit)                                                                                               |   |   | 127,134 |   |   | (3,275,296 | ) |
| Total                liabilities and stockholders’ equity (deficit)                                                                               |   | $ | 243,852,287 |   | $ | 240,073,922 |   |
|                                                                                                                                                    |
|                                                                                                                                                    |
| The                accompanying notes are an integral part of these consolidated financial                statements.                                   |

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*Table            of Contents*

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

|                                                                   |   | **Three                  months ended****June                  30,** |       | **Six                  months ended****June                  30,** |   |
|------------------------------------------------------------------------|--------|----------------------------------------------------------------------|------------|--------------------------------------------------------------------|--------|
|                                                                   |   | **2006**                                                             |       | **2007**                                                           |   | **2006** |   | **2007** |   |
| Revenues                                                               |   |                                                                 |       |                                                               |   |   |   |   |   |
| Local                  services                                        |   | $                                                                    | 4,290,057  |                                                               | $      | 6,530,615 |   | $ | 8,593,456 |   | $ | 12,879,111 |   |
| Network                  access                                        |   |                                                                 | 5,170,581  |                                                               |   | 6,140,830 |   |   | 10,315,636 |   |   | 12,578,418 |   |
| Cable                  television                                      |   |                                                                 | 538,565    |                                                               |   | 548,414 |   |   | 1,081,071 |   |   | 1,095,941 |   |
| Internet                                                               |   |                                                                 | 1,558,610  |                                                               |   | 2,859,407 |   |   | 3,081,047 |   |   | 5,679,704 |   |
| Transport                  services                                    |   |                                                                 | —    |                                                               |   | 1,038,936 |   |   | — |   |   | 2,057,419 |   |
| Total                  revenues                                        |   |                                                                 | 11,557,813 |                                                               |   | 17,118,202 |   |   | 23,071,210 |   |   | 34,290,593 |   |
| Operating                  expenses                                    |   |                                                                 |       |                                                               |   |   |   |   |   |   |   |   |   |
| Cost                  of services and products                         |   |                                                                 | 3,187,114  |                                                               |   | 6,534,399 |   |   | 6,361,801 |   |   | 12,805,456 |   |
| Selling,                  general and administrative expenses          |   |                                                                 | 1,481,324  |                                                               |   | 2,419,527 |   |   | 3,152,664 |   |   | 4,921,328 |   |
| Depreciation                  and amortization                         |   |                                                                 | 2,009,159  |                                                               |   | 3,775,623 |   |   | 3,977,500 |   |   | 7,404,714 |   |
| Total                  operating expenses                              |   |                                                                 | 6,677,597  |                                                               |   | 12,729,549 |   |   | 13,491,965 |   |   | 25,131,498 |   |
|                                                                   |   |                                                                 |       |                                                               |   |   |   |   |   |   |   |   |   |
| Income                  from operations                                |   |                                                                 | 4,880,216  |                                                               |   | 4,388,653 |   |   | 9,579,245 |   |   | 9,159,095 |   |
|                                                                   |   |                                                                 |       |                                                               |   |   |   |   |   |   |   |   |   |
| Other                  income (expense)                                |   |                                                                 |       |                                                               |   |   |   |   |   |   |   |   |   |
| Interest                  expense                                      |   |                                                                 | (4,584,505 | )                                                                  |   | (5,412,345 | ) |   | (9,133,980 | ) |   | (10,788,609 | ) |
| Change                  in fair value of derivative                    |   |                                                                 | 130,721    |                                                               |   | 250,549 |   |   | 310,462 |   |   | 468,417 |   |
| Other                  income                                          |   |                                                                 | 2,809,272  |                                                               |   | 165,581 |   |   | 2,996,511 |   |   | 447,033 |   |
| Total                  other expense                                   |   |                                                                 | (1,644,512 | )                                                                  |   | (4,996,215 | ) |   | (5,827,007 | ) |   | (9,873,159 | ) |
|                                                                   |   |                                                                 |       |                                                               |   |   |   |   |   |   |   |   |   |
| Income                  (loss) before income tax and accretion expense |   |                                                                 | 3,235,704  |                                                               |   | (607,562 | ) |   | 3,752,238 |   |   | (714,064 | ) |
|                                                                   |   |                                                                 |       |                                                               |   |   |   |   |   |   |   |   |   |
| Income                  tax (expense) benefit                          |   |                                                                 | (1,071,400 | )                                                                  |   | 502,981 |   |   | (1,232,610 | ) |   | 491,276 |   |
|                                                                        |   |                                                                 |       |                                                               |   |   |   |   |   |   |   |   |   |
| Income                  (loss) before accretion expense                |   |                                                                 | 2,164,304  |                                                               |   | (104,581 | ) |   | 2,519,628 |   |   | (222,788 | ) |
|                                                                   |   |                                                                 |       |                                                               |   |   |   |   |   |   |   |   |   |
| Accretion                  of Class B common convertible to senior     |   |                                                                 |       |                                                               |   |   |   |   |   |   |   |   |   |
| subordinated                  notes                                    |   |                                                                 | (110,731   | )                                                                  |   | — |   |   | (221,463 | ) |   | — |   |
| Net                  income (loss) available to common stockholders    |   | $                                                                    | 2,053,573  |                                                               | $      | (104,581 | ) | $ | 2,298,165 |   | $ | (222,788 | ) |
|                                                                   |   |                                                                 |       |                                                               |   |   |   |   |   |   |   |   |   |
| Weighted                  average shares outstanding:                  |   |                                                                 |       |                                                               |   |   |   |   |   |   |   |   |   |
| Basic                                                                  |   |                                                                 | 9,676,733  |                                                               |   | 9,676,733 |   |   | 9,676,733 |   |   | 9,676,733 |   |
| Diluted                                                                |   |                                                                 | 10,221,404 |                                                               |   | 10,221,404 |   |   | 10,221,404 |   |   | 10,221,404 |   |
|                                                                   |   |                                                                 |       |                                                               |   |   |   |   |   |   |   |   |   |
| Net                  income (loss) per share                           |   |                                                                 |       |                                                               |   |   |   |   |   |   |   |   |   |
| Basic                                                                  |   | $                                                                    | 0.21       |                                                               | $      | (0.01 | ) | $ | 0.24 |   | $ | (0.02 | ) |
| Diluted                                                                |   | $                                                                    | 0.20       |                                                               | $      | (0.03 | ) | $ | 0.22 |   | $ | (0.07 | ) |
|                                                                   |   |                                                                 |       |                                                               |   |   |   |   |   |   |   |   |   |
| Dividends                  declared per share                          |   | $                                                                    | 0.18       |                                                               | $      | 0.18 |   | $ | 0.35 |   | $ | 0.35 |   |
|                                                                   |   |                                                                 |       |                                                               |   |   |   |   |   |   |   |   |   |
|                                                                        |   |                                                                 |       |                                                               |   |   |   |   |   |   |   |   |   |

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*Table            of Contents*

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

|                                                                                                           |   | **Six                  months ended****June                  30,** |       |
|----------------------------------------------------------------------------------------------------------------|--------|--------------------------------------------------------------------|------------|
|                                                                                                           |   | **2006**                                                           |       | **2007** |   |
| Cash                  flows from operating activities:                                                         |   |                                                               |       |   |   |
| Net                  income (loss)                                                                             |   | $                                                                  | 2,298,165  |   | $ | (222,788 | ) |
| Adjustments                  to reconcile net income to cash flows from operating                  activities: |   |                                                               |       |   |   |   |   |
| Depreciation                                                                                                   |   |                                                               | 3,874,647  |   |   | 6,107,336 |   |
| Amortization                                                                                                   |   |                                                               | 102,853    |   |   | 1,297,378 |   |
| Interest                  rate caplet                                                                          |   |                                                               | 344,946    |   |   | 467,793 |   |
| Amortization                  of loan cost                                                                     |   |                                                               | 686,875    |   |   | 796,245 |   |
| Accretion                  expense                                                                             |   |                                                               | 221,463    |   |   | — |   |
| Change                  in fair value of derivative liability                                                  |   |                                                               | (310,462   | ) |   | (468,417 | ) |
| Provision                  for uncollectible revenue                                                           |   |                                                               | 60,903     |   |   | 78,231 |   |
| Gain                  on disposition of other assets                                                           |   |                                                               | (2,686,745 | ) |   | — |   |
| Changes                  in assets and liabilities; net of assets and liabilities                  acquired:   |   |                                                               |       |   |   |   |   |
| Accounts                  receivables                                                                     |   |                                                               | (358,856   | ) |   | (224,145 | ) |
| Material                  and supplies                                                                    |   |                                                               | (42,213    | ) |   | 59,352 |   |
| Prepaid                  expenses and other assets                                                        |   |                                                               | 66,930     |   |   | 288,417 |   |
| Accounts                  payable and accrued liabilities                                                 |   |                                                               | 1,461,447  |   |   | (1,716,412 | ) |
| Advance                  billings and payments                                                            |   |                                                               | (19,941    | ) |   | (836 | ) |
| Other                  liabilities                                                                        |   |                                                               | (5,158     | ) |   | (6,816 | ) |
| Net                  cash from operating activities                                                            |   |                                                               | 5,694,854  |   |   | 6,455,338 |   |
|                                                                                                           |   |                                                               |       |   |   |   |   |
| Cash                  flows from investing activities:                                                         |   |                                                               |       |   |   |   |   |
| Acquisition                  and construction of property and equipment                                        |   |                                                               | (1,968,233 | ) |   | (2,875,642 | ) |
| Proceeds                  from retirement of investment                                                        |   |                                                               | 3,226,651  |   |   | 7,871 |   |
| Deferred                  charges                                                                              |   |                                                               | (85,940    | ) |   | (166,921 | ) |
|                                                                                                           |   |                                                               |       |   |   |   |   |
| Net                  cash from investing activities                                                            |   |                                                               | 1,172,478  |   |   | (3,034,692 | ) |
|                                                                                                           |   |                                                               |       |   |   |   |   |
| Cash                  flows from financing activities:                                                         |   |                                                               |       |   |   |   |   |
| Cash                  dividends paid                                                                           |   |                                                               | (3,411,048 | ) |   | (1,705,524 | ) |
|                                                                                                           |   |                                                               |       |   |   |   |   |
| Net                  cash from financing activities                                                            |   |                                                               | (3,411,048 | ) |   | (1,705,524 | ) |
|                                                                                                           |   |                                                               |       |   |   |   |   |
| Net                  increase in cash and cash equivalents                                                     |   |                                                               | 3,456,284  |   |   | 1,715,122 |   |
| Cash                  and cash equivalents, beginning of period                                                |   |                                                               | 5,569,233  |   |   | 14,401,849 |   |
|                                                                                                           |   |                                                               |       |   |   |   |   |
| Cash                  and cash equivalents, end of period                                                      |   | $                                                                  | 9,025,517  |   | $ | 16,116,971 |   |
|                                                                                                           |   |                                                               |       |   |   |   |   |
| Supplemental                  disclosures of cash flow information:                                            |   |                                                               |       |   |   |   |   |
| Interest                  paid                                                                                 |   | $                                                                  | 8,085,647  |   | $ | 9,547,279 |   |
|                                                                                                           |   |                                                               |       |   |   |   |   |
| Income                  taxes paid (received)                                                                  |   | $                                                                  | 40,000     |   | $ | (173,718 | ) |
|                                                                                                           |   |                                                               |       |   |   |   |   |
| Dividends                  declared but not paid                                                               |   | $                                                                  | —    |   | $ | 1,705,524 |   |
|                                                                                                           |   |                                                               |       |   |   |   |   |
|                                                                                                                |   |                                                               |       |   |   |   |   |

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*Table          of Contents*

**NOTES      TO CONSOLIDATED FINANCIAL STATEMENTS**

**(unaudited)**

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

**Basis      of Presentation and Principles of Consolidation**

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

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

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*Table          of Contents*

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

|                                                                |   | For                  the three months |       | For                  the six months |   |
|---------------------------------------------------------------------|--------|---------------------------------------|------------|-------------------------------------|--------|
|                                                                |   | ended                  June 30,       |       | ended                  June 30,     |   |
|                                                                |   | 2006                                  |       | 2007                                |   | 2006 |   | 2007 |   |
|                                                                |   |                                  |       |                                |   |   |   |   |   |
| Weighted                  average common shares-basic               |   |                                  | 9,676,733  |                                |   | 9,676,733 |   |   | 9,676,733 |   |   | 9,676,733 |   |
|                                                                |   |                                  |       |                                |   |   |   |   |   |   |   |   |   |
| Effect                  of dilutive securities                      |   |                                  | 544,671    |                                |   | 544,671 |   |   | 544,671 |   |   | 544,671 |   |
|                                                                |   |                                  |       |                                |   |   |   |   |   |   |   |   |   |
| Weighted-average                  common shares and potential       |   |                                  |       |                                |   |   |   |   |   |   |   |   |   |
| common                  shares-diluted                              |   |                                  | 10,221,404 |                                |   | 10,221,404 |   |   | 10,221,404 |   |   | 10,221,404 |   |
|                                                                |   |                                  |       |                                |   |   |   |   |   |   |   |   |   |
| Net                  income (loss) available to common stockholders |   | $                                     | 2,053,573  |                                | $      | (104,581 | ) | $ | 2,298,165 |   | $ | (222,788 | ) |
|                                                                |   |                                  |       |                                |   |   |   |   |   |   |   |   |   |
| Net                  income (loss) per basic share                  |   | $                                     | 0.21       |                                | $      | (0.01 | ) | $ | 0.24 |   | $ | (0.02 | ) |
|                                                                |   |                                  |       |                                |   |   |   |   |   |   |   |   |   |
| Net                  income (loss) available to common stockholders |   | $                                     | 2,053,573  |                                | $      | (104,581 | ) | $ | 2,298,165 |   | $ | (222,788 | ) |
| Plus:                  Accretion expense of Class B common          |   |                                  |       |                                |   |   |   |   |   |   |   |   |   |
| convertible                  to senior subordinated notes           |   |                                  | 110,732    |                                |   | — |   |   | 221,463 |   |   | — |   |
| Less:                  Change in fair value of derivative           |   |                                  | (130,721   | )                                   |   | (250,549 | ) |   | (310,462 | ) |   | (468,417 | ) |
|                                                                |   |                                  |       |                                |   |   |   |   |   |   |   |   |   |
| Net                  income (loss) available for diluted shares     |   | $                                     | 2,033,584  |                                | $      | (355,130 | ) | $ | 2,209,166 |   | $ | (691,205 | ) |
|                                                                |   |                                  |       |                                |   |   |   |   |   |   |   |   |   |
| Net                  income (loss) per diluted share                |   | $                                     | 0.20       |                                | $      | (0.03 | ) | $ | 0.22 |   | $ | (0.07 | ) |

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

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*Table          of Contents*

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

|                                    |   | **July                  3, 2006** |       |
|-----------------------------------------|--------|-----------------------------------|------------|
| Cash                                    |   | $                                 | 208,399    |   |
| Other                  current assets   |   |                              | 3,536,833  |   |
| Property                  and equipment |   |                              | 20,167,479 |   |
| Intangible                  assets      |   |                              | 10,700,606 |   |
| Goodwill                                |   |                              | 15,138,442 |   |
| Other                  assets           |   |                              | 2,367,842  |   |
| Current                  liabilities    |   |                              | (3,074,876 | ) |
| Other                  liabilities      |   |                              | (8,488,987 | ) |
| Purchase                  price         |   | $                                 | 40,555,738 |   |

|   | · | Term                loans of $120 million due July 3, 2011, consisting of an original                term                loan of $80 million, and an additional term loan of $40 million,                used to                finance the acquisition and related transaction costs and to provide                working capital for the Company and its subsidiaries and for other                corporate purposes; and |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | A                revolving loan commitment of up to $15                million. |
|--------|--------|---------------------------------------------------------------------------------|

----

*Table          of Contents*

|                                          |   | **Unaudited**                           |       | **Unaudited**                         |   |
|-----------------------------------------------|--------|-----------------------------------------|------------|---------------------------------------|--------|
|                                          |   | **Three                  months ended** |       | **Six                  months ended** |   |
|                                          |   | **June                  30, 2006**      |       | **June                  30, 2006**    |   |
| Revenues                                      |   | $                                       | 17,062,776 |                                  | $      | 34,428,236 |   |
| Income                  from operations       |   |                                    | 3,962,257  |                                  |   | 8,882,774 |   |
| Net                  income                   |   |                                    | 1,388,731  |                                  |   | 1,455,767 |   |
| Basic                  net income per share   |   | $                                       | 0.14       |                                  | $      | 0.15 |   |
| Diluted                  net income per share |   | $                                       | 0.14       |                                  | $      | 0.14 |   |

| **6.** | **Subsequent                events** |
|--------|--------------------------------------|

| **7.** | **Guarantor** |
|--------|---------------|

----

*Table          of Contents*

| **Condensed                  Consolidating Balance Sheet** |
|------------------------------------------------------------|
| **June                  30, 2007**                         |

|                                                                     |   |   |        | Guarantor    |   | Non-Guarantor |   |         |       |         |   |
|--------------------------------------------------------------------------|--------|--------|-------------|--------------|--------|---------------|--------|--------------|------------|--------------|--------|
|                                                                     |   | Parent |        | Subsidiaries |   | Subsidiaries  |   | Eliminations |       | Consolidated |   |
|                                                                     |   |   |        |         |   |     |   |         |       |         |   |
| ASSETS                                                                   |   |   |        |         |   |     |   |         |       |         |   |
|                                                                     |   |   |        |         |   |     |   |         |       |         |   |
| Current                  assets                                          |   |   |        |         |   |     |   |         |       |         |   |
| Cash                  and cash equivalents                               |   | $      | —     |         | $      | 16,082,629    |   | $            | 34,342     |         | $      | — |   | $ | 16,116,971 |   |
| Accounts                  receivable, net                                |   |   | 46,548      |         |   | 5,960,563     |   |         | 1,072,235  |         |   | — |   |   | 7,079,346 |   |
| Materials                  and supplies                                  |   |   | —     |         |   | 800,582       |   |         | 948,417    |         |   | — |   |   | 1,748,999 |   |
| Prepaid                  and other current assets                        |   |   | 46,175      |         |   | 680,163       |   |         | 48,192     |         |   | — |   |   | 774,530 |   |
| Deferred                  income taxes                                   |   |   | 832,946     |         |   | —       |   |         | —    |         |   | — |   |   | 832,946 |   |
| Investment                  in subsidiaries                              |   |   | 82,548,846  |         |   | —       |   |         | —    |         |   | (82,548,846 | ) |   | — |   |
| Intercompany                  receivables                                |   |   | 23,860,587  |         |   | —       |   |         | —    |         |   | (23,860,587 | ) |   | — |   |
| Total                  current assets                                    |   |   | 107,335,102 |         |   | 23,523,937    |   |         | 2,103,186  |         |   | (106,409,433 | ) |   | 26,552,792 |   |
|                                                                     |   |   |        |         |   |          |   |         |       |         |   |   |   |   |   |   |
| Property                  and equipment, net                             |   |   | —     |         |   | 40,717,500    |   |         | 16,186,208 |         |   | — |   |   | 56,903,708 |   |
| Goodwill                                                                 |   |   | —     |         |   | 136,507,075   |   |         | (1,936,640 | )            |   | — |   |   | 134,570,435 |   |
| Intangibles                  assets, net                                 |   |   | —     |         |   | 6,925,852     |   |         | 3,501,937  |         |   | — |   |   | 10,427,789 |   |
| Investments                                                              |   |   | 1,000       |         |   | 893,436       |   |         | 325,187    |         |   | — |   |   | 1,219,623 |   |
| Other                  long-term assets                                  |   |   | 9,841,590   |         |   | 557,985       |   |         | —    |         |   | — |   |   | 10,399,575 |   |
| Total                  assets                                            |   | $      | 117,177,692 |         | $      | 209,125,785   |   | $            | 20,179,878 |         | $      | (106,409,433 | ) | $ | 240,073,922 |   |
|                                                                     |   |   |        |         |   |          |   |         |       |         |   |   |   |   |   |   |
| LIABILITIES                  AND STOCKHOLDERS' EQUITY (DEFICIT)          |   |   |        |         |   |          |   |         |       |         |   |   |   |   |   |   |
|                                                                     |   |   |        |         |   |          |   |         |       |         |   |   |   |   |   |   |
| Current                  liabilities                                     |   |   |        |         |   |          |   |         |       |         |   |   |   |   |   |   |
| Accounts                  payables and accrued expenses                  |   | $      | 4,541,094   |         | $      | 2,998,410     |   | $            | 1,734,207  |         | $      | — |   | $ | 9,273,711 |   |
| Intercompany                  payables                                   |   |   | —     |         |   | 8,657,058     |   |         | 15,203,529 |         |   | (23,860,587 | ) |   | — |   |
| Other                  current liabilities                               |   |   | —     |         |   | 2,217,342     |   |         | 106,113    |         |   | — |   |   | 2,323,455 |   |
| Total                  current liabilities                               |   |   | 4,541,094   |         |   | 13,872,810    |   |         | 17,043,849 |         |   | (23,860,587 | ) |   | 11,597,166 |   |
|                                                                     |   |   |        |         |   |          |   |         |       |         |   |   |   |   |   |   |
| Deferred                  income taxes                                   |   |   | 4,728,411   |         |   | 17,544,383    |   |         | 2,506,140  |         |   | — |   |   | 24,778,934 |   |
| Other                  liabilities                                       |   |   | —     |         |   | 173,127       |   |         | —    |         |   | — |   |   | 173,127 |   |
| Long-term                  notes payables                                |   |   | 105,458,990 |         |   | 95,616,508    |   |         | —    |         |   | — |   |   | 201,075,498 |   |
| Derivative                  liability                                    |   |   | 1,639,460   |         |   | —       |   |         | —    |         |   | — |   |   | 1,639,460 |   |
| Class                  B common convertible to senior subordinated notes |   |   | 4,085,033   |         |   | —       |   |         | —    |         |   | — |   |   | 4,085,033 |   |
| Stockholders'                  equity (deficit)                          |   |   | (3,275,296  | )            |   | 81,918,957    |   |         | 629,889    |         |   | (82,548,846 | ) |   | (3,275,296 | ) |
| Total                  liabilities and stockholders' equity (deficit)    |   | $      | 117,177,692 |         | $      | 209,125,785   |   | $            | 20,179,878 |         | $      | (106,409,433 | ) | $ | 240,073,922 |   |
|                                                                     |   |   |        |         |   |          |   |         |       |         |   |   |   |   |   |   |

----

*Table          of Contents*

| **Condensed                  Consolidating Balance Sheet** |
|------------------------------------------------------------|
| **December                  31, 2006**                     |

|                                                                     |   |   |        | Guarantor    |   |  Non-Guarantor |   |         |       |         |   |
|--------------------------------------------------------------------------|--------|--------|-------------|--------------|--------|---------------------|--------|--------------|------------|--------------|--------|
|                                                                     |   | Parent |        | Subsidiaries |   |  Subsidiaries  |   | Eliminations |       | Consolidated |   |
|                                                                     |   |   |        |         |   |           |   |         |       |         |   |
| ASSETS                                                                   |   |   |        |         |   |           |   |         |       |         |   |
|                                                                     |   |   |        |         |   |           |   |         |       |         |   |
| Current                  assets                                          |   |   |        |         |   |           |   |         |       |         |   |
| Cash                  and cash equivalents                               |   | $      | —     |         | $      | 14,376,843          |   | $            | 25,006     |         | $      | — |   | $ | 14,401,849 |   |
| Accounts                  receivable, net                                |   |   | 21,028      |         |   | 6,050,195           |   |         | 1,038,770  |         |   | — |   |   | 7,109,993 |   |
| Materials                  and supplies                                  |   |   | —     |         |   | 847,045             |   |         | 1,115,893  |         |   | — |   |   | 1,962,938 |   |
| Prepaid                  and other current assets                        |   |   | 3,487       |         |   | 1,006,316           |   |         | 53,144     |         |   | — |   |   | 1,062,947 |   |
| Deferred                  income taxes                                   |   |   | 766,225     |         |   | —             |   |         | —    |         |   | — |   |   | 766,225 |   |
| Investment                  in subsidiaries                              |   |   | 75,751,926  |         |   | —             |   |         | —    |         |   | (75,751,926 | ) |   | — |   |
| Intercompany                  receivables                                |   |   | 34,232,103  |         |   | —             |   |         | —    |         |   | (34,232,103 | ) |   | — |   |
| Total                  current assets                                    |   |   | 110,774,769 |         |   | 22,280,399          |   |         | 2,232,813  |         |   | (109,984,029 | ) |   | 25,303,952 |   |
|                                                                     |   |   |        |         |   |                |   |         |       |         |   |   |   |   |   |   |
| Property                  and equipment, net                             |   |   | —     |         |   | 42,745,710          |   |         | 17,748,079 |         |   | — |   |   | 60,493,789 |   |
| Goodwill                                                                 |   |   | —     |         |   | 136,118,949         |   |         | (1,936,640 | )            |   | — |   |   | 134,182,309 |   |
| Intangibles                  assets, net                                 |   |   | 0           |         |   | 7,689,851           |   |         | 3,650,955  |         |   | — |   |   | 11,340,806 |   |
| Investments                                                              |   |   | 1,000       |         |   | 914,063             |   |         | 325,187    |         |   | — |   |   | 1,240,250 |   |
| Other                  long-term assets                                  |   |   | 10,589,917  |         |   | 701,264             |   |         | —    |         |   | — |   |   | 11,291,181 |   |
| Total                  assets                                            |   | $      | 121,365,686 |         | $      | 210,450,236         |   | $            | 22,020,394 |         | $      | (109,984,029 | ) | $ | 243,852,287 |   |
|                                                                     |   |   |        |         |   |                |   |         |       |         |   |   |   |   |   |   |
|                                                                     |   |   |        |         |   |                |   |         |       |         |   |   |   |   |   |   |
| LIABILITIES                  AND STOCKHOLDERS' EQUITY                    |   |   |        |         |   |                |   |         |       |         |   |   |   |   |   |   |
|                                                                     |   |   |        |         |   |                |   |         |       |         |   |   |   |   |   |   |
| Current                  liabilities                                     |   |   |        |         |   |                |   |         |       |         |   |   |   |   |   |   |
| Accounts                  payables and accrued expenses                  |   | $      | 4,924,962   |         | $      | 3,081,839           |   | $            | 1,233,497  |         | $      | — |   | $ | 9,240,298 |   |
| Intercompany                  payables                                   |   |   | —     |         |   | 15,495,558          |   |         | 18,736,545 |         |   | (34,232,103 | ) |   | — |   |
| Other                  current liabilities                               |   |   | —     |         |   | 2,238,188           |   |         | 79,009     |         |   | — |   |   | 2,317,197 |   |
| Total                  current liabilities                               |   |   | 4,924,962   |         |   | 20,815,585          |   |         | 20,049,051 |         |   | (34,232,103 | ) |   | 11,557,495 |   |
|                                                                     |   |   |        |         |   |                |   |         |       |         |   |  |   |   |   |   |
| Deferred                  income taxes                                   |   |   | 4,661,690   |         |   | 17,544,383          |   |         | 2,506,140  |         |   | — |   |   | 24,712,213 |   |
| Other                  liabilities                                       |   |   | —     |         |   | 187,037             |   |         | —    |         |   | — |   |   | 187,037 |   |
| Long-term                  notes payables                                |   |   | 105,458,990 |         |   | 95,616,508          |   |         | —    |         |   | — |   |   | 201,075,498 |   |
| Derivative                  liability                                    |   |   | 2,107,877   |         |   | —             |   |         | —    |         |   | — |   |   | 2,107,877 |   |
| Class                  B common convertible to senior subordinated notes |   |   | 4,085,033   |         |   | —             |   |         | —    |         |   | — |   |   | 4,085,033 |   |
| Stockholders'                  equity (deficit)                          |   |   | 127,134     |         |   | 76,286,723          |   |         | (534,797   | )            |   | (75,751,926 | ) |   | 127,134 |   |
| Total                  liabilities and stockholders' equity (deficit)    |   | $      | 121,365,686 |         | $      | 210,450,236         |   | $            | 22,020,394 |         | $      | (109,984,029 | ) | $ | 243,852,287 |   |

| **Condensed                  Consolidated Statement of Operations**            |
|--------------------------------------------------------------------------------|
| **For                  the Three Months Ended June 30,                  2007** |

|                                                            |   |   |       | Guarantor    |   |  Non-Guarantor |   |         |       |         |   |
|-----------------------------------------------------------------|--------|--------|------------|--------------|--------|---------------------|--------|--------------|------------|--------------|--------|
|                                                            |   | Parent |       | Subsidiaries |   |  Subsidiaries  |   | Eliminations |       | Consolidated |   |
|                                                            |   |   |       |         |   |           |   |         |       |         |   |
|                                                            |   |   |       |         |   |           |   |         |       |         |   |
| Revenue                                                         |   | $      | 760,071    |         | $      | 15,581,804          |   | $            | 2,918,105  |         | $      | (2,141,780 | ) | $ | 17,118,200 |   |
| Operating                  expenses                             |   |   | (663,987   | )            |   | (11,638,546         | )      |         | (2,568,797 | )            |   | 2,141,780 |   |   | (12,729,550 | ) |
| Income                  from operations                         |   |   | 96,084     |         |   | 3,943,258           |   |         | 349,308    |         |   | — |   |   | 4,388,650 |   |
| Other                  income (expense)                         |   |   | (3,799,817 | )            |   | (1,196,384          | )      |         | (11        | )            |   | — |   |   | (4,996,212 | ) |
| Earnings                  from subsidiaries                     |   |   | 3,096,171  |         |   | —             |   |         | —    |         |   | (3,096,171 | ) |   | — |   |
| Income                  before income tax and accretion expense |   |   | (607,562   | )            |   | 2,746,874           |   |         | 349,297    |         |   | (3,096,171 | ) |   | (607,562 | ) |
| Income                  tax expense                             |   |   | 502,981    |         |   | —             |   |         | —    |         |   | — |   |   | 502,981 |   |
| Accretion                  of class B common convertible        |   |   |       |         |   |                |   |         |       |         |   |   |   |   |   |   |
| to                  senior subordinated notes                   |   |   | —    |         |   | —             |   |         | —    |         |   | — |   |   | — |   |
| Net                  income (loss) to common stockholders       |   | $      | (104,581   | )            | $      | 2,746,874           |   | $            | 349,297    |         | $      | (3,096,171 | ) | $ | (104,581 | ) |

----

*Table          of Contents*

| **Condensed                  Consolidated Statement of Operations**            |
|--------------------------------------------------------------------------------|
| **For                  the Three Months Ended June 30,                  2006** |

|                                                            |   |   |       | Guarantor    |   |  Non-Guarantor |   |         |      |         |   |
|-----------------------------------------------------------------|--------|--------|------------|--------------|--------|---------------------|--------|--------------|-----------|--------------|--------|
|                                                            |   | Parent |       | Subsidiaries |   |  Subsidiaries  |   | Eliminations |      | Consolidated |   |
|                                                            |   |   |       |         |   |           |   |         |      |         |   |
|                                                            |   |   |       |         |   |           |   |         |      |         |   |
| Revenue                                                         |   | $      | 628,629    |         | $      | 10,925,401          |   | $            | 1,521,502 |         | $      | (1,517,719 | ) | $ | 11,557,813 |   |
| Operating                  expenses                             |   |   | (573,707   | )            |   | (6,633,619          | )      |         | (987,990  | )            |   | 1,517,719 |   |   | (6,677,597 | ) |
| Income                  from operations                         |   |   | 54,922     |         |   | 4,291,782           |   |         | 533,512   |         |   | — |   |   | 4,880,216 |   |
| Other                  income (expense)                         |   |   | (3,184,933 | )            |   | 1,540,419           |   |         | —   |         |   | — |   |   | (1,644,514 | ) |
| Earnings                  from subsidiaries                     |   |   | 6,365,713  |         |   | —             |   |         | —   |         |   | (6,365,713 | ) |   | — |   |
| Income                  before income tax and accretion expense |   |   | 3,235,702  |         |   | 5,832,201           |   |         | 533,512   |         |   | (6,365,713 | ) |   | 3,235,702 |   |
| Income                  tax expense                             |   |   | (1,071,400 | )            |   | —             |   |         | —   |         |   | — |   |   | (1,071,400 | ) |
| Accretion                  of class B common convertible        |   |   |       |         |   |                     |   |         |      |         |   |   |   |   |   |   |
| to                  senior subordinated notes                   |   |   | (110,732   | )            |   | —             |   |         | —   |         |   | — |   |   | (110,732 | ) |
| Net                  income (loss) to common stockholders       |   | $      | 2,053,570  |         | $      | 5,832,201           |   | $            | 533,512   |         | $      | (6,365,713 | ) | $ | 2,053,570 |   |
|                                                            |   |   |       |         |   |                |   |         |      |         |   |   |   |   |   |   |

| **Condensed                  Consolidated Statement of Operations**          |
|------------------------------------------------------------------------------|
| **For                  the Six Months Ended June 30,                  2007** |

|                                                            |   |   |       | Guarantor    |   |  Non-Guarantor |   |         |       |         |   |
|-----------------------------------------------------------------|--------|--------|------------|--------------|--------|---------------------|--------|--------------|------------|--------------|--------|
|                                                            |   | Parent |       | Subsidiaries |   |  Subsidiaries  |   | Eliminations |       | Consolidated |   |
|                                                            |   |   |       |         |   |           |   |         |       |         |   |
|                                                            |   |   |       |         |   |           |   |         |       |         |   |
| Revenue                                                         |   | $      | 1,487,886  |         | $      | 30,869,122          |   | $            | 6,163,778  |         | $      | (4,230,193 | ) | $ | 34,290,593 |   |
| Operating                  expenses                             |   |   | (1,487,886 | )            |   | (22,874,723         | )      |         | (4,999,082 | )            |   | 4,230,193 |   |   | (25,131,498 | ) |
| Income                  from operations                         |   |   | —    |         |   | 7,994,399           |   |         | 1,164,696  |         |   | — |   |   | 9,159,095 |   |
| Other                  income (expense)                         |   |   | (7,510,984 | )            |   | (2,362,164          | )      |         | (11        | )            |   | — |   |   | (9,873,159 | ) |
| Earnings                  from subsidiaries                     |   |   | 6,796,920  |         |   | —             |   |         | —    |         |   | (6,796,920 | ) |   | — |   |
| Income                  before income tax and accretion expense |   |   | (714,064   | )            |   | 5,632,235           |   |         | 1,164,685  |         |   | (6,796,920 | ) |   | (714,064 | ) |
| Income                  tax expense                             |   |   | 491,276    |         |   | —             |   |         | —    |         |   | — |   |   | 491,276 |   |
| Accretion                  of class B common convertible        |   |   |       |         |   |                |   |         |       |         |   |   |   |   |   |   |
| to                  senior subordinated notes                   |   |   | —    |         |   | —             |   |         | —    |         |   | — |   |   | — |   |
| Net                  income (loss) to common stockholders       |   | $      | (222,788   | )            | $      | 5,632,235           |   | $            | 1,164,685  |         | $      | (6,796,920 | ) | $ | (222,788 | ) |
|                                                            |   |   |       |         |   |                |   |         |       |         |   |   |   |   |   |   |

| **Condensed                    Consolidated Statement of Operations**            |
|----------------------------------------------------------------------------------|
| **For                    the Six Months Ended June 30,                    2006** |

|                                                              |   |   |       | Guarantor    |   |  Non-Guarantor |   |         |       |         |   |
|-------------------------------------------------------------------|--------|--------|------------|--------------|--------|---------------------|--------|--------------|------------|--------------|--------|
|                                                              |   | Parent |       | Subsidiaries |   |  Subsidiaries  |   | Eliminations |       | Consolidated |   |
|                                                              |   |   |       |         |   |           |   |         |       |         |   |
|                                                              |   |   |       |         |   |           |   |         |       |         |   |
| Revenue                                                           |   | $      | 1,257,258  |         | $      | 21,648,556          |   | $            | 3,167,474  |         | $      | (3,002,078 | ) | $ | 23,071,210 |   |
| Operating                    expenses                             |   |   | (1,347,907 | )            |   | (13,171,813         | )      |         | (1,974,323 | )            |   | 3,002,078 |   |   | (13,491,965 | ) |
| Income                    from operations                         |   |   | (90,649    | )            |   | 8,476,743           |   |         | 1,193,151  |         |   | — |   |   | 9,579,245 |   |
| Other                    income (expense)                         |   |   | (6,248,677 | )            |   | 421,668             |   |         | —    |         |   | — |   |   | (5,827,009 | ) |
| Earnings                    from subsidiaries                     |   |   | 10,091,562 |         |   | —             |   |         | —    |         |   | (10,091,562 | ) |   | — |   |
| Income                    before income tax and accretion expense |   |   | 3,752,236  |         |   | 8,898,411           |   |         | 1,193,151  |         |   | (10,091,562 | ) |   | 3,752,236 |   |
| Income                    tax expense                             |   |   | (1,232,610 | )            |   | —             |   |         | —    |         |   | — |   |   | (1,232,610 | ) |
| Accretion                    of class B common convertible        |   |   |       |         |   |                     |   |         |       |         |   |   |   |   |   |   |
| to                    senior subordinated notes                   |   |   | (221,463   | )            |   | —             |   |         | —    |         |   | — |   |   | (221,463 | ) |
| Net                    income (loss) to common stockholders       |   | $      | 2,298,163  |         | $      | 8,898,411           |   | $            | 1,193,151  |         | $      | (10,091,562 | ) | $ | 2,298,163 |   |
|                                                              |   |   |       |         |   |                |   |         |       |         |   |   |   |   |   |   |

----

*Table          of Contents*

| **Condensed                  Consolidating Statement of Cash Flows**         |
|------------------------------------------------------------------------------|
| **For                  the Six Months Ended June 30,                  2007** |

|                                                                  |   |   |       | Guarantor    |   |  Non-Guarantor |   |         |       |         |   |
|-----------------------------------------------------------------------|--------|--------|------------|--------------|--------|---------------------|--------|--------------|------------|--------------|--------|
|                                                                  |   | Parent |       | Subsidiaries |   |  Subsidiaries  |   | Eliminations |       | Consolidated |   |
|                                                                  |   |   |       |         |   |           |   |         |       |         |   |
| Cash                  flows from operating activities:                |   |   |       |         |   |           |   |         |       |         |   |
| Net                  income (loss)                                    |   | $      | (222,788   | )            | $      | 5,632,235           |   | $            | 1,164,685  |         | $      | (6,796,920 | ) | $ | (222,788 | ) |
| Adjustment                  to reconcile net income (loss)            |   |   |       |         |   |                |   |         |       |         |   |   |   |   |   |   |
| to                  cash flows from operating activities              |   |   | 662,554    |         |   | 5,309,769           |   |         | 2,306,241  |         |   | — |   |   | 8,278,564 |   |
| Changes                  in assets and liabilities, net of            |   |   |       |         |   |                |   |         |       |         |   |   |   |   |   |   |
| assets                  and liabilities acquired                      |   |   | 8,213,916  |         |   | (6,902,671          | )      |         | (2,911,683 | )            |   | — |   |   | (1,600,438 | ) |
| Cash                  flows from investing activities                 |   |   | (151,238   | )            |   | (2,333,547          | )      |         | (549,907   | )            |   | — |   |   | (3,034,692 | ) |
| Cash                  flows from financing activities                 |   |   | (8,502,444 | )            |   | —             |   |         | —    |         |   | 6,796,920 |   |   | (1,705,524 | ) |
| Net                  increase (decrease) in cash and cash equivalents |   |   | —    |         |   | 1,705,786           |   |         | 9,336      |         |   | — |   |   | 1,715,122 |   |
|                                                                  |   |   |       |         |   |                |   |         |       |         |   |   |   |   |   |   |
| Cash                  and cash equivalents, beginning of period       |   |   | —    |         |   | 14,376,843          |   |         | 25,006     |         |   | — |   |   | 14,401,849 |   |
| Cash                  and cash equivalents, end of period             |   | $      | —    |         | $      | 16,082,629          |   | $            | 34,342     |         | $      | — |   | $ | 16,116,971 |   |
|                                                                  |   |   |       |         |   |                |   |         |       |         |   |   |   |   |   |   |

| **Condensed                  Consolidating Statement of Cash Flows**         |
|------------------------------------------------------------------------------|
| **For                  the Six Months Ended June 30,                  2006** |

|                                                                  |   |   |        | Guarantor    |   | Non-Guarantor |   |         |       |         |   |
|-----------------------------------------------------------------------|--------|--------|-------------|--------------|--------|---------------|--------|--------------|------------|--------------|--------|
|                                                                  |   | Parent |        | Subsidiaries |   | Subsidiaries  |   | Eliminations |       | Consolidated |   |
|                                                                  |   |   |        |         |   |          |   |         |       |         |   |
| Cash                  flows from operating activities:                |   |   |        |         |   |          |   |         |       |         |   |
| Net                  income (loss)                                    |   | $      | 2,298,163   |         | $      | 8,898,411     |   | $            | 1,193,151  |         | $      | (10,091,562 | ) | $ | 2,298,163 |   |
| Adjustment                  to reconcile net income (loss)            |   |   |        |         |   |          |   |         |       |         |   |   |   |   |   |   |
| to                  cash flows from operating activities              |   |   | 942,821     |         |   | 587,238       |   |         | 764,421    |         |   | — |   |   | 2,294,480 |   |
| Changes                  in assets and liabilities, net of            |   |   |        |         |   |          |   |         |       |         |   |   |   |   |   |   |
| assets                  and liabilities acquired                      |   |   | 10,347,566  |         |   | (7,502,212    | )      |         | (1,743,143 | )            |   | — |   |   | 1,102,211 |   |
| Cash                  flows from investing activities                 |   |   | (85,940     | )            |   | 1,475,176     |   |         | (216,758   | )            |   | — |   |   | 1,172,478 |   |
| Cash                  flows from financing activities                 |   |   | (13,502,610 | )            |   | —       |   |         | —    |         |   | 10,091,562 |   |   | (3,411,048 | ) |
| Net                  increase (decrease) in cash and cash equivalents |   |   | —     |         |   | 3,458,613     |   |         | (2,329     | )            |   | — |   |   | 3,456,284 |   |
|                                                                  |   |   |        |         |   |          |   |         |       |         |   |   |   |   |   |   |
| Cash                  and cash equivalents, beginning of period       |   |   | —     |         |   | 5,511,939     |   |         | 57,294     |         |   | — |   |   | 5,569,233 |   |
| Cash                  and cash equivalents, end of period             |   | $      | —     |         | $      | 8,970,552     |   | $            | 54,965     |         | $      | — |   | $ | 9,025,517 |   |

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*Table          of Contents*

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

**Overview**

***General***

***Revenue      Sources***

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

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

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

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

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

***Access      Line and Customer Trends***

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*Table          of Contents*

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

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

----

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

***Our      Rate and Pricing Structure***

***Categories      of Operating Expenses***

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*Table          of Contents*

*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 June 30,**   |    |  **Six                  Months Ended June 30,**   |   |
|--------------------------------------------------------------------|--------|--------------------------------------------------------------------|---------|------------------------------------------------------------------|--------|
|                                                               |   |  **2006**                                                     |    | **2007**                                                         |   | **2006** |   | **2007** |   |
| Revenues                                                           |   |                                                          |    |                                                        |   |    |   |    |   |
| Local                  services                                    |   |                                                               | 37.1    | %                                                                |   | 38.1 | % |   | 37.2 | % |   | 37.5 | % |
| Network                  access                                    |   |                                                               | 44.7    |                                                             |   | 35.9 |   |   | 44.7 |   |   | 36.7 |   |
| Cable                  television                                  |   |                                                               | 4.7     |                                                             |   | 3.2 |   |   | 4.7 |   |   | 3.2 |   |
| Internet                                                           |   |                                                               | 13.5    |                                                             |   | 16.7 |   |   | 13.4 |   |   | 16.6 |   |
| Transport                  services                                |   |                                                               | — |                                                             |   | 6.1 |   |   | — |   |   | 6.0 |   |
|  Total                  revenues                              |   |                                                               | 100.0   | %                                                                |   | 100.0 | % |   | 100.0 | % |   | 100.0 | % |
| Operating                  expenses                                |   |                                                               |    |                                                             |   |   |   |   |   |   |   |   |   |
| Cost                  of services and products                     |   |                                                               | 27.6    | %                                                                |   | 38.2 | % |   | 27.6 |   |   | 37.3 |   |
| Selling,                  general and administrative expenses      |   |                                                               | 12.8    |                                                             |   | 14.1 |   |   | 13.7 |   |   | 14.4 |   |
| Depreciation                  and amortization                     |   |                                                               | 17.4    |                                                             |   | 22.1 |   |   | 17.2 |   |   | 21.6 |   |
|  Total                  operating expenses                    |   |                                                               | 57.8    |                                                             |   | 74.4 |   |   | 58.5 |   |   | 73.3 |   |
|                                                               |   |                                                               |    |                                                             |   |   |   |   |   |   |   |   |   |
| Income                  from operations                            |   |                                                               | 42.2    |                                                             |   | 25.6 |   |   | 41.5 |   |   | 26.7 |   |
|                                                               |   |                                                               |    |                                                             |   |   |   |   |   |   |   |   |   |
| Other                  income (expense)                            |   |                                                               |    |                                                             |   |   |   |   |   |   |   |   |   |
| Interest                  expense                                  |   |                                                               | (39.7   | )                                                                |   | (31.6 | ) |   | (39.6 | ) |   | (31.5 | ) |
| Change                  in fair value of derivative                |   |                                                               | 1.2     |                                                             |   | 1.5 |   |   | 1.3 |   |   | 1.4 |   |
| Other                  income                                      |   |                                                               | 24.3    |                                                             |   | 0.9 |   |   | 13.0 |   |   | 1.3 |   |
|  Total                  other expense                         |   |                                                               | (14.2   | )                                                                |   | (29.2 | ) |   | (25.3 | ) |   | (28.8 | ) |
|                                                               |   |                                                               |    |                                                             |   |   |   |   |   |   |   |   |   |
| Income                  before income taxes                        |   |                                                               | 28.0    |                                                             |   | (3.6 | ) |   | 16.2 |   |   | (2.1 | ) |
|                                                               |   |                                                               |    |                                                             |   |   |   |   |   |   |   |   |   |
| Income                  tax expense                                |   |                                                               | (9.3    | )                                                                |   | 3.0 |   |   | (5.3 | ) |   | 1.4 |   |
|                                                               |   |                                                               |    |                                                             |   |   |   |   |   |   |   |   |   |
| Income                  before accretion expense                   |   |                                                               | 18.7    |                                                             |   | (0.6 | ) |   | 10.9 |   |   | (0.7 | ) |
|                                                               |   |                                                               |    |                                                             |   |   |   |   |   |   |   |   |   |
| Accretion                  of Class B common convertible to senior |   |                                                               |    |                                                             |   |   |   |   |   |   |   |   |   |
| subordinated                  notes                                |   |                                                               | (0.9    | )                                                                |   | 0.0 |   |   | (0.9 | ) |   | — |   |
| Net                  income available to common stockholders       |   |                                                               | 17.8    | %                                                                |   | (0.6 | )% |   | 10.0 | % |   | (0.7 | )% |

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*Table          of Contents*

***Three      months and six months ended June 30, 2007 compared to three months and six      months ended June 30, 2006***

*Total      Revenues. *

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

|                                |   | **Three                  Months Ended June 30,** |    | **Change** |   |
|-------------------------------------|--------|--------------------------------------------------|---------|------------|--------|
|                                |   | **2006**                                         |    | **2007**   |   | **Amount** |   | **Percent** |   |
|                                     |   |  (dollars                  in thousands)    |    |
| Local                  service      |   | $                                                | 4,290   |       | $      | 6,531 |   | $ | 2,241 |   |   | 52.2 | % |
| Network                  access     |   |                                             | 5,171   |       |   | 6,141 |   |   | 970 |   |   | 18.8 |   |
| Cable                  television   |   |                                             | 538     |       |   | 548 |   |   | 10 |   |   | 1.9 |   |
| Internet                            |   |                                             | 1,559   |       |   | 2,859 |   |   | 1,300 |   |   | 83.4 |   |
| Transport                  Services |   |                                             | — |       |   | 1,039 |   |   | 1,039 |   |   | — |   |
| Total                               |   | $                                                | 11,558  |       | $      | 17,118 |   | $ | 5,560 |   |   | 48.1 |   |

----

*Table          of Contents*

*For      the six months ended June 30, 2007 and 2006*

|                                |   | **Six                  Months Ended June 30,** |    | **Change** |   |
|-------------------------------------|--------|------------------------------------------------|---------|------------|--------|
|                                |   | **2006**                                       |    | **2007**   |   | **Amount** |   | **Percent** |   |
|                                     |   |  (dollars                  in thousands)  |    |
| Local                  service      |   | $                                              | 8,593   |       | $      | 12,879 |   | $ | 4,286 |   |   | 49.9 | % |
| Network                  access     |   |                                           | 10,316  |       |   | 12,579 |   |   | 2,263 |   |   | 21.9 |   |
| Cable                  television   |   |                                           | 1,081   |       |   | 1,096 |   |   | 15 |   |   | 1.4 |   |
| Internet                            |   |                                           | 3,081   |       |   | 5,680 |   |   | 2,599 |   |   | 84.4 |   |
| Transport                  services |   |                                           | — |       |   | 2,057 |   |   | 2,057 |   |   | — |   |
| Total                               |   | $                                              | 23,071  |       | $      | 34,291 |   | $ | 11,220 |   |   | 48.6 |   |

*Operating      expenses. *

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

|                                                          |   | **Three                  Months Ended June 30,** |   | **Change** |   |
|---------------------------------------------------------------|--------|--------------------------------------------------|--------|------------|--------|
|                                                          |   | **2006**                                         |   | **2007**   |   | **Amount** |   | **Percent** |   |
|                                                          |   | (dollars                  in thousands)          |   |
| Cost                  of services                             |   | $                                                | 3,187  |       | $      | 6,534 |   | $ | 3,347 |   |   | 105.0 | % |
| Selling,                  general and administrative expenses |   |                                             | 1,482  |       |   | 2,420 |   |   | 938 |   |   | 63.3 |   |
| Depreciation                  and amortization                |   |                                             | 2,009  |       |   | 3,776 |   |   | 1,767 |   |   | 88.0 |   |
| Total                                                         |   | $                                                | 6,678  |       | $      | 12,730 |   | $ | 6,052 |   |   | 90.6 |   |
|                                                          |   |                                             |   |       |   |   |   |   |   |   |   |   |   |

----

*Table          of Contents*

*For      the six months ended June 30, 2007 and 2006*

|                                                          |   | **Six                  Months Ended June 30,** |   | **Change** |   |
|---------------------------------------------------------------|--------|------------------------------------------------|--------|------------|--------|
|                                                          |   | **2006**                                       |   | **2007**   |   | **Amount** |   | **Percent** |   |
|                                                               |   | (dollars                  in thousands)        |   |
| Cost                  of services                             |   | $                                              | 6,362  |       | $      | 12,805 |   | $ | 6,443 |   |   | 101.3 | % |
| Selling,                  general and administrative expenses |   |                                           | 3,153  |       |   | 4,921 |   |   | 1,768 |   |   | 56.1 |   |
| Depreciation                  and amortization                |   |                                           | 3,977  |       |   | 7,405 |   |   | 3,428 |   |   | 86.2 |   |
| Total                                                         |   | $                                              | 13,492 |       | $      | 25,131 |   | $ | 11,639 |   |   | 86.3 |   |
|                                                          |   |                                           |   |       |   |   |   |   |   |   |   |   |   |

*Interest      expense. *

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

----

*Table          of Contents*

*Other      income. *

*Income      taxes. *

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

*Net      income (loss). *

**Liquidity      and Capital Resources**

----

*Table          of Contents*

**Subsequent      Events**

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

**Item      4. Controls and Procedures**

**PART      II OTHER INFORMATION**

**Item      4. Submission of Matters to a Vote of Security      Holders**

|                                  |   | **Votes                  For** |      | **Votes                  Withheld** |   |
|---------------------------------------|--------|--------------------------------|-----------|-------------------------------------|--------|
|                                  |   |                           |      |                                |   |
| Howard                  J. Haug       |   |                           | 9,279,566 |                                |   | 118,312 |   |
| Stephen                  P. McCall    |   |                           | 9,289,293 |                                |   | 108,585 |   |
| William                  F. Reddersen |   |                           | 9,277,983 |                                |   | 119,895 |   |

|                                                        |   | **Votes                  For** |      | **Votes                  Against** |   | **Abstain** |   | **Broker                  Non-Vote** |   |
|-------------------------------------------------------------|--------|--------------------------------|-----------|------------------------------------|--------|-------------|--------|--------------------------------------|--------|
|                                                        |   |                           |      |                               |   |        |   |                                 |   |
| Ratification                  of appointment of independent |   |                           |           |                               |   |             |   |                                 |        |   |   |   |   |
| registered                  public accounting firm          |   |                           | 9,308,840 |                               |   | 34,421      |   |                                 | 54,617 |   |   | 0 |   |

**Item.      6. Exhibits**

Exhibit      Index

----

*Table          of Contents*

**Signatures**

|                              |                                                                                                           |                                                     |
|-----------------------------------|----------------------------------------------------------------------------------------------------------------|----------------------------------------------------------|
|                              | **OTELCO              INC.**                                                                                   |
|                         |                                                                                                      |                                                |
| Date:              August 9, 2007 | By:                                                                                                  | /s/ Curtis              L.              Garner, Jr. |
|                              |                                                                                                                |
|                              | Name: Curtis                L. Garner, Jr.Title:                   Chief Financial Officer |

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*Table          of Contents*

**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 |

----