**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**WASHINGTON,
      D.C. 20549**




**FORM
      10-K/A**


**AMENDMENT
        NO. 2**




ý ANNUAL
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE


SECURITIES
      EXCHANGE ACT OF 1934





For
      the
      fiscal year ended December 31, 2006





OR





o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE


SECURITIES
      EXCHANGE ACT OF 1934





For
      the
      transition period from ____________ to ____________




Commission
      file number: **1-32362**




**OTELCO
      INC.**


(Exact
      name of registrant as specified in its charter)





**Delaware**
            
            **52-2126395**(State
                or other jurisdiction of
            
            (I.R.S.
                Employerincorporation
                or organization)
            
            Identification
                No.)**505
                Third Avenue East, Oneonta, Alabama**
            
            **35121**(Address
                of principal executive offices)
            
            (Zip
                Code)





**205-625-3574**


(Registrant’s
      telephone number, including area code)




**None**


(Former
      name, former address and former fiscal year, if changed since last
      report)




Securities
      registered pursuant to Section 12(b) of the Act:




Title
                of each class
            
            Name
                of each exchange on which registeredIncome
                Deposit Securities, each representing shares of Class A Common Stock,
                and
                Senior Subordinated Notes due 2019
            
            American
                Stock Exchange




Securities
      registered pursuant to Section 12(g) of the Act: None


Indicate
        by check mark if the registrant is a well-known seasoned issuer, as defined
        in
        Rule 405 of the Securities Act.
  Yes
o  No
x
  Indicate
          by check mark if the registrant is not required to file reports pursuant
          to
          Section 13 or Section 15(d) of the Exchange Act.


Yes
o  No
x












Indicate
        by check mark whether the registrant (1) has filed all reports required to
        be
        filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
        the
        preceding 12 months (or for such shorter period that the registrant was required
        to file such reports), and (2) has been subject to such filing requirements
        for
        the past 90 days.





Yes
x  No
o




Indicate
      by check mark if disclosure of delinquent filers pursuant to Item 405 of
      Regulation S-K is not contained herein, and will not be contained, to the best
      of registrant’s knowledge, in definitive proxy or information statements
      incorporated by reference in Part III of this Form 10-K or any amendment to
      this
      Form 10-K. o




Indicate
      by check mark whether the registrant is a large accelerated filer, an
      accelerated filer, or a non-accelerated filer. See definition of “accelerated
      filer and large accelerated filer” in Rule 12b-2 of the Exchange
      Act.




Large
      accelerated filer o    Accelerated
      filer x   Non-accelerated
      filer o




Indicate
        by check mark whether the registrant is a shell company (as defined in Rule
        12b-2 of the Exchange Act).




Yes
o  No
x




As
      of
      June 30, 2006, the aggregate market value of the registrant’s Income Deposit
      Securities (IDSs) held by non-affiliates of the registrant was $173.2 million
      based on the closing sale price as reported on the American Stock Exchange.
      Each
      IDS represents one share of Class A common stock, par value $0.01 per share,
      and
      $7.50 principal amount of senior subordinated notes due 2019. In determining
      the
      market value of the registrant’s IDSs held by non-affiliates, IDSs beneficially
      owned by directors, officers and holders of more than 10% of the registrant’s
      IDSs have been excluded. This determination of affiliate status is not
      necessarily a conclusive determination for other purposes.




As
      of
      March 9, 2007, the registrant had 9,676,333 shares of Class A Common Stock,
      par
      value $0.01 per share, and 544,671 shares of Class B Common Stock, par value
      $0.01 per share, outstanding.




**DOCUMENTS
      INCORPORATED BY REFERENCE**





Certain
      information required in Part III of this report is incorporated by reference
      from the registrant’s proxy statement to be filed pursuant to Regulation 14A
      with respect to the registrant’s 2007 annual meeting of
      stockholders.





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




**EXPLANATORY
      NOTE**


This
          Annual Report on Form 10-K/A is being filed to amend and restate “Item 8.
          Financial Statements and Supplementary Data” of our Annual Report on Form 10-K
          for the fiscal year ended December 31, 2006 to provide additional information
          in
          Note 8 to our consolidated financial statements pursuant to Rule 3-10 of
          Regulation S-X. In
          addition, we are amending and restating Item 15 to provide updated
          certifications from our Chief Executive Officer and Chief Financial Officer
          in
          accordance with applicable SEC rules. Except as discussed above, we have
          not modified or updated disclosure presented in the original Annual Report
          on
          Form 10-K. Accordingly, this Form 10-K/A does not reflect events occurred
          after
          the filing of the original Annual Report on Form 10-K or modify or update
          those
          disclosures affected by subsequent events. Accordingly, this Amendment
          No. 2 to
          our Form 10-K/A should be read in conjunction with Amendment No. 1 to our
          Form 10-K/A and periodic filings made with the SEC subsequent to the date
          of the
          filing of the original Annual Report on Form 10-K, including any amendments
          to
          those filings, as well as any Current Reports filed on Form 8-K subsequent
          to
          the date of the filing of the original Annual Report on Form
          10-K.


-
          1 -




PART II




**Item
      8.**  **Financial
      Statements and Supplementary Data**




**Report
      of Independent Registered Public Accounting Firm**




To
      the
      Board of Directors and Stockholders


of
      Otelco
      Inc.


Oneonta,
      Alabama




We
      have
      audited management’s assessment, included in the accompanying Management’s
      Report on Internal Control over Financial Reporting in Item 9A of Form
      10-K, that Otelco Inc. (the “Company”) maintained effective internal control
      over financial reporting as of December 31, 2006, based on criteria established
      in *Internal
      Control - Integrated Framework* issued
      by
      the Committee of Sponsoring Organizations of the Treadway Commission (the COSO
      criteria)”. The Company’s management is responsible for maintaining effective
      internal control over financial reporting and for its assessment of the
      effectiveness of internal control over financial reporting. Our responsibility
      is to express an opinion on management’s assessment and an opinion on the
      effectiveness of the company’s internal control over financial reporting based
      on our audit.




We
      conducted our audit in accordance with the standards of the Public Company
      Accounting Oversight Board (United States). Those standards require that we
      plan
      and perform the audit to obtain reasonable assurance about whether effective
      internal control over financial reporting was maintained in all material
      respects. Our audit included obtaining an understanding of internal control
      over
      financial reporting, evaluating management’s assessment, testing and evaluating
      the design and operating effectiveness of internal control, and performing
      such
      other procedures as we considered necessary in the circumstances. We believe
      that our audit provides a reasonable basis for our opinion.




A
      company’s internal control over financial reporting is a process designed to
      provide reasonable assurance regarding the reliability of financial reporting
      and the preparation of financial statements for external purposes in accordance
      with generally accepted accounting principles. A company’s internal control over
      financial reporting includes those policies and procedures that (1) pertain
      to
      the maintenance of records that, in reasonable detail, accurately and fairly
      reflect the transactions and dispositions of the assets of the company; (2)
      provide reasonable assurance that transactions are recorded as necessary to
      permit preparation of financial statements in accordance with generally accepted
      accounting principles, and that receipts and expenditures of the company are
      made only in accordance with authorizations of management and directors of
      the
      company; and (3) provide reasonable assurance regarding prevention or timely
      detection of unauthorized acquisition, use, or disposition of the company’s
      assets that could have a material effect on the financial
      statements.




Because
      of its inherent limitations, internal control over financial reporting may
      not
      prevent or detect misstatements. Also, projections of any evaluation of
      effectiveness to future periods are subject to the risk that controls may become
      inadequate because of changes in conditions, or that the degree of compliance
      with the policies or procedures may deteriorate.




In
      our
      opinion, management’s assessment that Otelco Inc. maintained effective internal
      control over financial reporting as of December 31, 2006, is fairly stated,
      in
      all material respects, based on the COSO criteria. Also in our opinion, Otelco
      Inc. maintained, in all material respects, effective internal control over
      financial reporting as of December 31, 2006, based on the COSO
      criteria.




We
      have
      also audited, in accordance with the standards of the Public Company Accounting
      Oversight Board (United States), the consolidated balance sheets of Otelco
      Inc.
      as of December 31, 2006 and 2005, and the related consolidated statements of
      income, stockholders’ equity, and cash flows for each of the three years in the
      period ended December 31, 2006 and our report dated February 28, 2007
      expressed an unqualified opinion thereon.





/s/
      BDO
      Seidman, LLP


Atlanta,
      Georgia


February
      28, 2007





-
          2 -




**Consolidated
      Financial Statements:**


**Page**Report
                    of Independent Registered Public Accounting Firm
                
                4Consolidated
                    Balance Sheets
                
                5Consolidated
                    Statements of Income
                
                6Consolidated
                    Statements of Changes in Stockholders’ Equity
                
                7Consolidated
                    Statements of Cash Flow
                
                8Notes
                    to Consolidated Financial Statements
                
                22





-
            3 -





**Report
      of Independent Registered Public Accounting Firm**




To
      the
      Board of Directors and Stockholders


of
      Otelco Inc.


Oneonta,
      Alabama




We
      have
      audited the accompanying consolidated balance sheets of Otelco Inc. as of
      December 31, 2006 and 2005 and the related consolidated statements of income,
      stockholders’ equity, and cash flows for each of the three years in the period
      ended December 31, 2006. These financial statements are the responsibility
      of
      the Company’s management. Our responsibility is to express an opinion on these
      financial statements based on our audits.




We
      conducted our audits in accordance with the standards of the Public Company
      Accounting Oversight Board (United States). Those standards require that we
      plan
      and perform the audit to obtain reasonable assurance about whether the financial
      statements are free of material misstatement. An audit includes examining,
      on a
      test basis, evidence supporting the amounts and disclosures in the financial
      statements, assessing the accounting principles used and significant estimates
      made by management, as well as evaluating the overall financial statement
      presentation. We believe that our audits provide a reasonable basis for our
      opinion.




In
      our
      opinion, the consolidated financial statements referred to above present fairly,
      in all material respects, the financial position of Otelco, Inc. at December
      31,
      2006 and 2005, and the results of its operations and its cash flows for each
      of
      the three years in the period ended December 31, 2006 **,** in
      conformity with accounting principles generally accepted in the United States
      of
      America.




We
      also
      have audited, in accordance with the standards of the Public Company Accounting
      Oversight Board (United States), the effectiveness of Otelco Inc.’s internal
      control over financial reporting as of December 31, 2006, based on criteria
      established in *Internal
      Control - Integrated Framework* issued
      by
      the Committee of Sponsoring Organizations of the Treadway Commission (COSO)
      and
      our report dated February 28, 2007 expressed an unqualified opinion
      thereon.






/s/
      BDO
      Seidman, LLP


Atlanta,
      Georgia


February
        28, 2007, except for Note 8 which is as of June 25, 2007





-
            4 -





**OTELCO
      INC.**




**CONSOLIDATED
      BALANCE SHEETS**




**December
                31,****2005**
            
            **2006****Assets**Current
                assetsCash
                and cash equivalents
            
            $
            5,569,233
            
            $
            14,401,849Accounts
                receivable:Due
                from subscribers, net of allowance for doubtful accounts of $160,270
                and
                $207,359 respectively
            
            
            1,212,909
            
            
            3,105,636Unbilled
                receivables
            
            
            1,828,104
            
            
            2,324,213Other
            
            
            1,482,171
            
            
            1,680,144Materials
                and supplies
            
            
            932,861
            
            
            1,962,938Prepaid
                expenses
            
            
            504,256
            
            
            1,062,947Income
                tax receivables
            
            
            749,591
            
            
            —Deferred
                income taxes
            
            
            872,675
            
            
            766,225Total
                current assets
            
            
            13,151,800
            
            
            25,303,952Property
                and equipment, net
            
            
            44,555,611
            
            
            60,493,789Goodwill
            
            
            119,431,993
            
            
            134,182,309Intangible
                assets, net
            
            
            1,588,079
            
            
            11,340,806Investments
            
            
            1,108,249
            
            
            1,240,250Deferred
                financing costs
            
            
            6,971,610
            
            
            6,652,393Interest
                rate cap
            
            
            5,318,728
            
            
            4,542,160Deferred
                charges
            
            
            —
            
            
            96,628Total
                assets
            
            $
            192,126,070
            
            $
            243,852,287**Liabilities
                and Stockholders’ Equity**Current
                liabilitiesAccounts
                payable
            
            $
            1,106,114
            
            $
            1,658,911Dividends
                payable
            
            
            —
            
            
            1,705,524Accrued
                expenses
            
            
            1,692,841
            
            
            5,875,863Advance
                billings and payments
            
            
            1,204,680
            
            
            2,119,701Customer
                deposits
            
            
            213,524
            
            
            197,496Total
                Current Liabilities
            
            
            4,217,159
            
            
            11,557,495Deferred
                income taxes
            
            
            15,345,890
            
            
            24,712,213Other
                liabilities
            
            
            192,769
            
            
            187,037Total
                deferred tax and other liabilities
            
            
            15,538,659
            
            
            24,899,250Long-term
                notes payable
            
            
            161,075,498
            
            
            201,075,498Derivative
                liability
            
            
            1,830,095
            
            
            2,107,877Class
                B common convertible to senior subordinated notes
            
            
            3,655,454
            
            
            4,085,033Stockholders’
                EquityClass
                A Common Stock, $.01 par value-authorized 20,000,000 shares; issued
                and
                outstanding, 9,676,733 shares
            
            
            96,767
            
            
            96,767Class
                B Common Stock, $.01 par value-authorized 800,000 shares; issued
                and
                outstanding, 544,671 shares
            
            
            5,447
            
            
            5,447Additional
                paid in capital
            
            
            5,613,703
            
            
            284,041Retained
                deficit
            
            
            (805,731
            )
            
            (1,137,166
            )Accumulated
                other comprehensive income
            
            
            899,019
            
            
            878,045Total
                stockholders’ equity
            
            
            5,809,205
            
            
            127,134Total
                liabilities and stockholders’ equity
            
            $
            192,126,070
            
            $
            243,852,287




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





-
            5 -





**OTELCO
      INC.**




**CONSOLIDATED
      STATEMENTS OF INCOME**




**Years
                Ended December 31,****2004**
            
            **2005**
            
            **2006**RevenuesLocal
                services
            
            $
            16,657,356
            
            $
            17,445,233
            
            $
            21,523,406Network
                access
            
            
            16,602,572
            
            
            21,873,485
            
            
            23,481,490Cable
                television
            
            
            1,817,711
            
            
            2,086,854
            
            
            2,191,210Internet
            
            
            2,188,703
            
            
            5,566,650
            
            
            8,515,899Transport
                services
            
            
            —
            
            
            —
            
            
            1,877,387Total
                revenues
            
            
            37,266,342
            
            
            46,972,222
            
            
            57,589,392Operating
                expensesCost
                of services and products
            
            
            8,831,951
            
            
            12,611,499
            
            
            18,727,806Selling,
                general and administrative expenses
            
            
            7,676,496
            
            
            6,710,542
            
            
            8,277,449Depreciation
                and amortization
            
            
            6,100,376
            
            
            8,211,552
            
            
            10,781,333Total
                operating expenses
            
            
            22,608,823
            
            
            27,533,593
            
            
            37,786,588Income
                from operations
            
            
            14,657,519
            
            
            19,438,629
            
            
            19,802,804Other
                income (expense)Interest
                expense
            
            
            (4,806,787
            )
            
            (17,728,834
            )
            
            (20,082,037
            )Change
                in fair value of derivative
            
            
            —
            
            
            958,621
            
            
            (277,782
            )Other
                income
            
            
            223,104
            
            
            577,769
            
            
            3,358,860Total
                other expense
            
            
            (4,583,683
            )
            
            (16,192,444
            )
            
            (17,000,959
            )Income
                before income tax and accretion expense
            
            
            10,073,836
            
            
            3,246,185
            
            
            2,801,845Income
                tax expense
            
            
            (3,946,625
            )
            
            (1,011,675
            )
            
            (1,211,269
            )Income
                before accretion expense
            
            
            6,127,211
            
            
            2,234,510
            
            
            1,590,576Accretion
                of Class B common convertible to senior subordinated notes
            
            
            (13,348
            )
            
            (442,926
            )
            
            (429,579
            )Net
                income available to common stockholders
            
            $
            6,113,863
            
            $
            1,791,584
            
            $
            1,160,997Weighted
                average shares outstanding:Basic
            
            
            8,103,720
            
            
            9,676,733
            
            
            9,676,733Diluted
            
            
            8,607,455
            
            
            10,221,404
            
            
            10,221,404Basic
                net income per share
            
            $
            0.75
            
            $
            0.19
            
            $
            0.12Diluted
                net income per share
            
            $
            0.71
            
            $
            0.12
            
            $
            0.18Dividends
                declared per share
            
            $
            —
            
            $
            0.71
            
            $
            0.71





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





-
            6 -





**OTELCO
      INC.**




**CONSOLIDATED
      STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY**




**Members’**
            
            **Class
                A**
              **Common
                Stock**
            
            **Class
                B**
              **Common
                Stock**
            
            **Additional
                Paid**
            
            **Retained**
              **Earnings**
            
            **Accumulated
                Other**
              **Comprehensive**
            
            **Total
                Stockholders’****Equity**
            
            **Shares**
            
            **Amount**
            
            **Shares**
            
            **Amount**
            
            **In
                Capital**
            
            **(Deficit)**
            
            **Income**
            
            **Equity**Balance,
                December 31, 2003
            
            $
            39,000,010
            
            
            
            
            $
            —
            
            
            
            
            $
            —
            
            $
            —
            
            $
            14,918,412
            
            $
            —
            
            $
            53,918,422Comprehensive
              income:Net
                income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            6,113,863
            
            
            
            
            
            6,113,863Interest
                rate cap
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            45,135
            
            
            45,135Total
                comprehensive income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            6,158,998*Conversion
                Of Equity*Conversion
                of membership units into IDSs and Class B common
                stock
            
            
            (39,000,010
            )
            
            7,853,994
            
            
            78,540
            
            
            489,926
            
            
            4,899
            
            
            (22,866,228
            )
            
            —
            
            
            —
            
            
            (61,782,799
            )Embedded
                exchange feature of Class B common stock
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            —
            
            
            (2,572,611
            )
            
            —
            
            
            (2,572,611
            )Vesting
                and conversion into IDSs and Class B common stock of option
                shareholders
            
            
            
            
            
            200,847
            
            
            2,008
            
            
            12,537
            
            
            125
            
            
            (1,581,919
            )
            
            
            
            
            
            
            
            (1,579,786
            )Stock
                options exercised
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            3,391,168
            
            
            
            
            
            
            
            
            3,391,168Adjust
                for negative balance APIC
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            21,056,979
            
            
            (21,056,979
            )
            
            
            
            
            —*Acquisition
                of Mid Missouri*Issuance
                of IDSs and Class B common stock for acquisition and conversion of
                option holders
            
            
            
            
            
            856,234
            
            
            8,562
            
            
            53,413
            
            
            534
            
            
            6,884,642
            
            
            —
            
            
            —
            
            
            6,893,738Embedded
                exchange feature of Class B common stock
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (273,475
            )
            
            —
            
            
            —
            
            
            (273,475
            )*Initial
                Public Offering*Issuance
                of IDSs
            
            
            
            
            
            830,776
            
            
            8,308
            
            
            —
            
            
            —
            
            
            6,388,667
            
            
            —
            
            
            —
            
            
            6,396,975Repurchase
                and retirement of IDSs and Class B common stock
            
            
            
            
            
            (65,118
            )
            
            (651
            )
            
            (11,205
            )
            
            (111
            )
            
            (671,725
            )
            
            —
            
            
            —
            
            
            (672,487
            )Embedded
                exchange feature of Class B common stock
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            57,370
            
            
            —
            
            
            —
            
            
            57,370Discount
                on repurchase of shares
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            193,553
            
            
            
            
            
            
            
            
            193,553Capitalized
                transactions costs offset against proceeds of offering
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (143,232
            )
            
            —
            
            
            —
            
            
            (143,232
            )Balance,
                December 31, 2004
            
            $
            —
            
            
            9,676,733
            
            $
            96,767
            
            
            544,671
            
            $
            5,447
            
            $
            12,435,800
            
            $
            (2,597,315
            )
            $
            45,135
            
            $
            9,985,834Comprehensive
                income:Net
                Income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            1,791,584
            
            
            
            
            
            1,791,584Interest
                rate cap
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            853,884
            
            
            853,884Total
                comprehensive income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            2,645,468Dividends
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (6,822,097
            )
            
            
            
            
            
            
            
            (6,822,097
            )Balance,
                December 31, 2005
            
            $
            —
            
            
            9,676,733
            
            $
            96,767
            
            
            544,671
            
            $
            5,447
            
            $
            5,613,703
            
            $
            (805,731
            )
            $
            899,019
            
            $
            5,809,205Comprehensive
                income:Net
                Income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            1,160,997
            
            
            
            
            
            1,160,997Interest
                rate cap
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (20,974
            )
            
            (20,974
            )Total
                comprehensive income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            1,140,023Dividends
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (5,329,662
            )
            
            (1,492,432
            )
            
            
            
            
            (6,822,094
            )Balance,
                December 31, 2006
            
            $
            —
            
            
            9,676,733
            
            $
            96,767
            
            
            544,671
            
            $
            5,447
            
            $
            284,041
            
            $
            (1,137,166
            )
            $
            878,045
            
            $
            127,134




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





-
            7 -





**OTELCO
      INC.**




**CONSOLIDATED
      STATEMENTS OF CASH FLOWS**





**2004**
            
            **2005**
            
            **2006**Cash
                flows from operating activities:Net
                income
            
            $
            6,113,863
            
            $
            1,791,584
            
            $
            1,160,997Adjustments
                to reconcile net income to cash flows from operating
                activities:Depreciation
            
            
            5,837,033
            
            
            7,748,687
            
            
            9,527,319Amortization
            
            
            263,343
            
            
            462,865
            
            
            1,254,014Interest
                rate caplet
            
            
            —
            
            
            258,291
            
            
            755,594Amortization
                of loan costs
            
            
            1,128,095
            
            
            1,373,747
            
            
            1,627,960Stock
                based compensation expense
            
            
            1,493,985
            
            
            —
            
            
            —Accretion
                expense
            
            
            13,348
            
            
            442,924
            
            
            429,579Change
                in fair value of derivative
            
            
            —
            
            
            (958,621
            )
            
            277,782Gain
                on disposition of other assets
            
            
            —
            
            
            —
            
            
            (2,686,745
            )Provision
                for deferred income taxes
            
            
            3,042,751
            
            
            2,072,614
            
            
            983,786Provision
                for uncollectible revenue
            
            
            107,224
            
            
            124,367
            
            
            193,561Changes
                in assets and liabilities; net of assets and liabilities
                acquired:Accounts
                receivables
            
            
            214,940
            
            
            (61,126
            )
            
            (327,129
            )Material
                and supplies
            
            
            200,232
            
            
            107,049
            
            
            3,385Prepaid
                expenses and other assets
            
            
            (16,716
            )
            
            33,531
            
            
            (365,795
            )Income
                tax receivables
            
            
            —
            
            
            (749,591
            )
            
            1,037,395Accounts
                payable and accrued liabilities
            
            
            (28,271
            )
            
            (1,754,002
            )
            
            2,757,784Advance
                billings and payments
            
            
            (2,583
            )
            
            63,667
            
            
            (110,253
            )Other
                liabilities
            
            
            (23,014
            )
            
            (10,561
            )
            
            (22,029
            )Net
                cash from operating activities
            
            
            18,344,230
            
            
            10,945,425
            
            
            16,497,205Cash
                flows from investing activities:Purchase
                of interest rate cap
            
            
            (4,678,000
            )
            
            —
            
            
            —Deferred
                charges / acquisition
            
            
            —
            
            
            —
            
            
            (44,296
            )Acquisition
                and construction of property and equipment
            
            
            (3,261,177
            )
            
            (4,083,222
            )
            
            (5,618,295
            )Cash
                received from acquisition
            
            
            50,633
            
            
            —
            
            
            —Proceeds
                from retirement of investment
            
            
            116,334
            
            
            165,094
            
            
            3,224,913Cash
                paid for the purchase of Mid-Maine, net of cash acquired
            
            
            —
            
            
            —
            
            
            (16,000,040
            )Payments
                for the purchase of Mid-Missouri Holding Corp., net of cash
                acquired
            
            
            —
            
            
            29,683
            
            
            —Payment
                for the purchase of Page & Kiser Communications, Inc., net of cash
                acquired
            
            
            47,858
            
            
            252,418
            
            
            —Net
                cash from investing activities
            
            
            (7,724,352
            )
            
            (3,636,027
            )
            
            (18,437,718
            )Cash
                flows from financing activities:Cash
                dividends paid
            
            
            —
            
            
            (6,822,097
            )
            
            (5,116,572
            )Proceeds
                from long-term notes payable
            
            
            88,500,000
            
            
            —
            
            
            40,000,000Loan
                origination costs and transaction costs
            
            
            (8,060,735
            )
            
            (324,613
            )
            
            237,000Repayment
                of long-term notes payable
            
            
            (99,787,468
            )
            
            —
            
            
            (24,347,299
            )Repurchase
                and retirement of IDSs and Class B common stock
            
            
            (1,090,503
            )
            
            —
            
            
            —Proceeds
                from issuances of Income Deposit Securities
            
            
            13,718,298
            
            
            —
            
            
            —Direct
                cost of initial public offering
            
            
            (143,232
            )
            
            —
            
            
            —Net
                cash from financing activities
            
            
            (6,863,640
            )
            
            (7,146,710
            )
            
            10,773,129Net
                increase in cash and cash equivalents
            
            
            3,756,238
            
            
            162,688
            
            
            8,832,616Cash
                and cash equivalents, beginning of period
            
            
            1,650,307
            
            
            5,406,545
            
            
            5,569,233Cash
                and cash equivalents, end of period
            
            $
            5,406,545
            
            $
            5,569,233
            
            $
            14,401,849Supplemental
                disclosures of cash flow information:Interest
                paid
            
            $
            3,114,381
            
            $
            16,343,237
            
            $
            14,284,165Income
                taxes paid (received)
            
            $
            1,581,026
            
            $
            (651,536
            )
            $
            (698,336
            )Dividends
                declared but not paid
            
            $
            —
            
            $
            —
            
            $
            1,705,524Supplemental
                disclosures of noncash financing activities:Issuance
                of IDSs and assumption of notes payable in connection with
                acquisition
            
            $
            30,540,774
            
            $
            —
            
            $
            —Issuance
                of IDSs in connection with option plan
            
            $
            3,391,168
            
            $
            —
            
            $
            —Embedded
                exchange feature of Class B common stock
            
            $
            2,788,716
            
            $
            —
            
            $
            —





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




-
            8 -





**1.**  **Summary
      of Significant Accounting Policies**




***Nature
      of Business***




Otelco’s
      principal line of business is providing local telephone service, network access,
      transport, digital high-speed and dial-up Internet access, cable television
      and
      other telephone related services. The principal markets for these services
      are
      local residential and business customers residing in and adjacent to the
      exchanges the Company serves in rural Alabama, Maine and Missouri and along
      the
      Interstate 95 corridor in Maine. The Company offers various communications
      services that are sold to economically similar customers in a comparable manner
      of distribution. The Company views, manages and evaluates the results of its
      operations from the various communications services as one company and therefore
      has identified one reporting segment as it relates to providing segment
      information




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




The
      consolidated financial statements include the accounts of Otelco Inc. (the
      “Company”), its wholly owned subsidiaries Otelco Telecommunications LLC (“OTC”),
      Otelco Telephone LLC (“OTP”), Hopper Holding Company, Inc. (“HHC”), and Brindlee
      Holdings LLC (“BH”), Page & Kiser Communications, Inc. (“PKC”), and
      Mid-Missouri Holding Corporation (“MMH”), and Mid-Maine Communications, Inc.
      (“MMeT”). HHC’s wholly owned subsidiary is Hopper Telecommunications Company,
      Inc. (“HTC”). BH’s wholly owned subsidiary is Brindlee Mountain Telephone
      Company, Inc. (“BMTC”). PKC’s wholly owned subsidiary is Blountsville Telephone
      company, Inc. (“BTC”). MMH’s wholly owned subsidiary is Mid-Missouri Telephone
      Company (“MMT”). MMT is the sole stockholder of Imagination, Inc. MMeT’s wholly
      owned subsidiaries are Mid-Maine Telecom, Inc. (“MMTI”) and Mid-Maine TelPlus
      (“MMTP”). The accompanying consolidated financial statements include the
      accounts of the Company and all of the aforesaid subsidiaries after elimination
      of all material intercompany balances and transactions.




***Use
      of Estimates***




The
      Company prepares its consolidated financial statements in accordance with
      accounting principles generally accepted in the United States of America, which
      require management to make estimates and assumptions that affect the reported
      amounts of assets, liabilities, revenues and expenses and disclosure of
      contingent assets and liabilities. The estimates and assumptions used in the
      accompanying consolidated financial statements are based upon management’s
      evaluation of the relevant facts and circumstances as of the date of the
      financial statements. Actual results may differ from the estimates and
      assumptions used in preparing the accompanying consolidated financial
      statements.




Significant
      accounting estimates include the recoverability of goodwill and long-term
      assets.




***Regulatory
      Accounting***




The
      Company follows the accounting for regulated enterprises prescribed by Statement
      of Financial Accounting Standards (SFAS) No. 71, *Accounting
      for the Effects of Certain Types of Regulations* or SFAS
      71. This accounting practice recognizes the economic effects of rate regulation
      by recording costs and a return on investment as such amounts are recovered
      through rates authorized by regulatory authorities. Accordingly, SFAS 71
      requires the Company to depreciate telecommunications property and equipment
      over the useful lives approved by regulators, which could be different than
      the
      useful lives that would otherwise be determined by management. SFAS 71 also
      requires deferral of certain costs and obligations based upon approvals received
      from regulators to permit recovery of such amounts in future years. Criteria
      that would give rise to the discontinuance of accounting in accordance with
      SFAS
      71 include (1) increasing competition restricting the ability of the Company
      to
      establish prices that allow it to recover specific costs and (2) significant
      changes in the manner in which rates are set by regulators from cost-based
      regulation to another form of regulation. The Company periodically reviews
      the
      criteria to determine whether the continuing application of SFAS 71 is
      appropriate.




-
          9 -




The
      Company is subject to reviews and audits by regulatory agencies. The effect
      of
      these reviews and audits, if any, will be recorded in the period in which they
      become known and determinable.




***Intangible
      Assets and Goodwill***




Intangible
      assets consist primarily of the value of customer related intangibles and
      non-compete agreements. Goodwill represents the excess of total acquisition
      cost
      over the assigned value of net identifiable tangible and intangible assets
      acquired through various business combinations. Due to the regulatory accounting
      required by SFAS 71, the Company did not record acquired regulated
      telecommunications property and equipment at fair value as required by SFAS
      No.141, *Business
      Combinations* .
      In
      accordance with 47 CFR 32.2000, the federal regulation governing acquired
      telecommunications property and equipment, such property and equipment is
      accounted for at original cost, and depreciation and amortization of property
      and equipment acquired is credited to accumulated depreciation. For the
      acquisition of MMeT, property has been marked to fair value in accordance with
      SFAS No. 141, resulting in a plant acquisition adjustment for MMTI in 2006.
      The
      Company has acquired identifiable intangible assets associated with the
      territories it serves through its acquisitions of various companies, including
      a
      non-compete agreement with the former CEO of an acquired business. Any excess
      of
      the total purchase price over the amounts assigned to tangible and definable
      assets is recorded as goodwill.




Effective
      January 1, 2002, the Company adopted SFAS No. 142, *Goodwill
      and Other Intangible Assets* ,
      which
      establishes accounting and reporting standards for intangible assets and
      goodwill. SFAS 142 requires that goodwill and intangible assets with indefinite
      useful lives no longer be amortized, but rather tested for impairment at least
      annually or in the event that triggers an impairment event. SFAS 142 also
      requires that intangible assets with definite useful lives be amortized over
      their respective estimated useful lives and reviewed for impairment in
      accordance with SFAS No. 144, *Accounting
      for the Impairment or Disposal of Long-Lived Assets* .
      The
      Company performs its annual assessment of impairment each January.




The
      Company performs a quarterly review of its identified intangible assets to
      determine if facts and circumstances exist which indicate that the useful life
      is shorter than originally estimated or that the carrying amount of assets
      may
      not be recoverable. If such facts and circumstances do exist, the Company
      assesses the recoverability of identified intangible assets by comparing the
      projected undiscounted net cash flows associated with the related asset or
      group
      of assets over their remaining lives against their respective carrying amounts.
      Impairment, if any, is based on the excess of the carrying amount over the
      fair
      value of those assets.




***Revenue
      Recognition***




Local
      service. Revenue for monthly recurring local services is billed in advance
      to a
      portion of the Company’s customers and in arrears to the balance of the
      customers. The Company records revenue for charges that have not yet been
      invoiced to its customers as unbilled revenue when services are rendered. The
      Company records revenue billed in advance as advance billings and defers
      recognition until such revenue is earned. Long distance service is billed to
      customers in arrears based on actual usage except when it is included in service
      bundles. The Company records unbilled long distance revenue as unbilled revenue
      when services are rendered. In bundles, unlimited usage is billed in arrears
      at
      a flat rate.




Network
      access services. Network access revenue is derived from several sources. Revenue
      for interstate access services is received through tariffed access charges
      filed
      by the National Exchange Carrier Association (“NECA”) with the Federal
      Communications Commission (“FCC”) on behalf of the NECA member companies. These
      access charges are billed by the Company to interstate interexchange carriers
      and pooled with like-revenues from all NECA member companies. A portion of
      the
      pooled access charge revenue received by the Company is based upon its actual
      cost of providing interstate access service, plus a return on the investment
      dedicated to providing that service. The balance of the pooled access charge
      revenue received by the Company is based upon the nationwide average schedule
      costs of providing interstate access services. Revenue for intrastate/intraLATA
      access service is received under a Primary Carrier Plan. These access charges
      are billed by the Company to the primary intraLATA interexchange carriers using
      tariffed access rates filed with the Alabama Public Service Commission (“APSC”),
      the Missouri Public Service Commission (“MPSC”) and the Maine Public Utilities
      Commission (“MPUC”) and are retained by the Company. Revenue for the
      intrastate/interLATA access service is received through tariffed access charges
      as filed with the APSC, MPSC and MPUC. These access charges are billed to the
      interLATA interchange carriers and are retained by the Company. Revenue for
      terminating and originating long distance service is received through charges
      for providing usage of the local exchange network. Toll revenues are recognized
      when services are rendered.




-
          10 -




Cable
      television, Internet and transport services. Cable television, Internet and
      transport service revenues are recognized when services are rendered.




***Cash
      and Cash Equivalents***




The
      Company considers all highly liquid investments purchased with an original
      maturity of three months or less to be cash equivalents.




***Accounts
      Receivable***




The
      Company extends credit to its commercial and residential customers based upon
      a
      written credit policy. Service interruption is the primary vehicle for
      controlling losses. Accounts receivable are recorded at the invoiced amount
      and
      do not bear interest. The allowance for doubtful accounts is the Company’s best
      estimate for the amount of probable credit losses in the Company’s existing
      accounts receivable. The Company establishes an allowance for doubtful accounts
      based upon factors surrounding the credit risk of specific customers, historical
      trends, and other information. Receivable balances are reviewed on an aged
      basis
      and account balances are charged off against the allowance after all means
      of
      collection have been exhausted and the potential for recovery is considered
      remote.




***Materials
      and Supplies***




Materials
      and supplies are stated at the lower of cost or market value. Cost is determined
      using an average cost basis.




***Property
      and Equipment***




Regulated
      property and equipment is stated at original cost. Unregulated property and
      equipment purchased through acquisitions is stated at its fair value at the
      date
      of acquisition. Expenditures for improvements that significantly add to
      productive capacity or extend the useful life of an asset are capitalized.
      Expenditures for maintenance and repairs are expensed when incurred.
      Depreciation is computed principally using the straight-line method over useful
      lives determined by the APSC, MPSC and MPUC as discussed above.




***Long-Lived
      Assets***




The
      Company reviews its long-lived assets for impairment at each balance sheet
      date
      and whenever events or changes in circumstances indicate that the carrying
      amount of an asset should be assessed. To determine if an impairment exists,
      the
      Company estimates the future undiscounted cash flows expected to result from
      the
      use of the asset being reviewed for impairment. If the sum of these expected
      future cash flows is less than the carrying amount of the asset, the Company
      recognizes an impairment loss in accordance with SFAS No. 144, *Accounting
      for the Impairment or Disposal of Long-Lived Assets.* The
      amount of the impairment recognized is determined by estimating the fair value
      of the assets and recording a loss for the excess of the carrying value over
      the
      fair value.




***Deferred
      Financing Costs***




Deferred
      financing and loan costs consist of debt issuance costs incurred in obtaining
      long-term financing, which are amortized over the life of the related debt.
      Amortization of deferred financing and loan costs is classified as “Interest
      expense”.




-
          11 -




***Derivative
      Financial Instruments***




Derivative
      financial instruments are accounted for under SFAS No. 133, *Accounting
      for Derivative Instruments and*  *Hedging
      Activities* as
      amended, or SFAS 133. Under SFAS 133, all derivatives are recorded on the
      balance sheet as assets or liabilities and measured at fair value. The embedded
      exchange feature of the Class B common stock is accounted for as a derivative
      liability and was adjusted to fair value as of December 21, 2004 at the time
      of
      our initial public offering with an offsetting entry to retained earnings.
      This
      liability will be adjusted to estimated fair value on each subsequent balance
      sheet date until the shares are converted with the offset to other non-operating
      income or expense. In addition, the company has an effective hedge of its
      interest rates - see Note 8.




We
      are
      exposed to the market risk of adverse changes in interest rates. On December
      21,
      2004, the Company purchased an interest rate cap with a notional amount of
      $80
      million, cap rate of 3.0%, and a termination date of December 21, 2009. The
      interest rate cap is used to lock in a maximum interest expense of 6.25% on
      $80
      million of our senior debt through the cap’s maturity. The interest rate cap is
      an effective hedge in offsetting the potential variability of interest rates
      and
      all critical terms of the interest rate cap are identical to the debt it hedges.
      Changes in the fair value of the interest rate cap are not included in earnings
      but are reported as a component of accumulated other comprehensive income.
      The
      cost of the interest rate cap is expensed as interest over the effective life
      of
      the hedge in accordance with its quarterly future value at the date of
      inception. Under our amended and restated credit agreement we are required
      to
      have interest rate protection on half of our $120 million in senior debt through
      July 3, 2008. This rate cap meets that requirement.




***Income
      Taxes***




The
      Company accounts for income taxes using the asset and liability approach in
      accordance with SFAS No. 109, *Accounting
      for Income Taxes* or
      SFAS
      109. The asset and liability approach requires the recognition of deferred
      tax
      liabilities and assets for the expected future tax consequences of temporary
      differences between the carrying amounts and the tax basis of assets and
      liabilities. A valuation allowance is provided when it is more likely than
      not
      that some portion or all of the deferred tax assets will not be
      realized.




The
      provision for income taxes consists of an amount for the taxes currently payable
      and a provision for the tax consequences deferred to future
      periods.




***Fair
      Value of Financial Instruments***




The
      carrying value of the Company’s financial instruments, including cash and cash
      equivalents, accounts receivable, accounts payable and long-term notes payable
      approximate their net book value as of December 31, 2005 and 2006.




***Comprehensive
      Income***




Comprehensive
      income equals net income plus other comprehensive income. Other comprehensive
      income refers to revenue, expenses, gains and losses, which are reflected in
      the
      retained earnings but excluded from net income.




***Option-Based
      Compensation***




Until
      December 21, 2004, the Company had one member unit-based employee compensation
      plan, which is described more fully in Note 14. The Company accounted for its
      plan under the intrinsic value recognition and measurement principles of
      Accounting Principles Board (“APB”) Opinion No. 25 (“APB 25”), *Accounting
      for Stock Issued to Employees,* or APB
      25 and related interpretation. On December 21, 2004, under the terms of the
      plan, a change in ownership caused the options to fully vest. The options under
      this plan were converted into IDSs and the plan was terminated.




-
          12 -




***Income
      per Common Share***




The
      Company computes net income per Class A common share in accordance with the
      provision of SFAS No. 128, *“Earnings
      per Share”* or SFAS
      128. Under the provision of SFAS 128, basic and diluted income per share is
      computed by dividing net income available to stockholders by the weighted
      average number of common shares and common share equivalents outstanding during
      the period. Basic income per common share excludes the effect of potentially
      dilutive securities, while diluted income per common share reflects the
      potential dilution that would occur if securities or other contracts to issue
      common shares were exercised for, converted into or otherwise resulted in the
      issuance of common shares. Net income is adjusted for accretion and derivative
      liability in calculating diluted earnings.




***Recent
      Accounting Pronouncements***




On
      June
      13, 2006, the FASB issued FIN 48, “Accounting for Uncertainty in Income Taxes -
      an interpretation of FASB Statement No. 109, Accounting for Income Taxes”, FIN
      48, which clarifies the accounting for uncertainty in income taxes. FIN 48
      prescribes a recognition threshold and measurement attribute for the financial
      statement recognition and measurement of a tax position taken or expected to
      be
      taken in a tax return. FIN 48 also provides guidance on derecognition,
      classification, interest and penalties, accounting in interim periods and
      disclosure. This pronouncement is effective for years beginning after December
      15, 2006. We have not completed our evaluation of the impact of this
      pronouncement and do not anticipate that it will have a material impact on
      the
      Company.




On
      September 15, 2006, the FASB adopted SFAS No. 157, “Fair Value Measures”, SFAS
      157. It provides clarification on the definition and use of the fair value
      of
      assets and liabilities. We have evaluated the impact of this pronouncement
      and
      will apply it when accounting for future acquisitions beginning in
      2008.




On
      February 15, 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
      Financial Assets and Financial Liabilities,” SFAS 159. It permits all entities
      to choose to elect, at specified election dates, to measure eligible financial
      instruments at fair value. An entity shall report gains and losses on items
      for
      which the fair value options has been elected in earnings at each subsequent
      reporting date, and recognize upfront costs and fees related to those items
      in
      earnings as incurred and not deferred. SFAS 159 applies to fiscal years
      beginning after November 15, 2007, with early adoption permitted for an entity
      that has also elected to apply the provisions of SFAS 157. An entity is
      prohibited from retroactively applying SFAS 159 unless it chooses early
      adoption. SFAS 159 also applies to eligible items existing at November 15,
      2007.
      We are evaluating the impact of this pronouncement and do not anticipate that
      it
      will have a material impact on the Company.




***Reclassifications***




Certain
      items in prior year’s consolidated financial statements have been reclassified
      to conform with 2006 presentation. Amortization of loan cost has been
      reclassified to “Interest expense” from “Depreciation and amortization” in
      the
      amount of $1,128,095 and $1,373,747 for 2004 and 2005
      respectively.




**2.** **Initial
      Public Offering**




On
      December 16, 2004, the SEC declared the Company’s Income Deposit Securities
      (IDSs) registration effective and public trading of the Company’s IDSs
      commenced. Prior to the closing of the offering, the Company converted from
      a
      Delaware limited liability company to a Delaware corporation and changed its
      name to Otelco Inc. Certain activities occurred simultaneously with the
      offering, including a recapitalization of debt, our equity conversion to a
      Delaware corporation, the acquisition of Mid-Missouri Telephone Company and
      offering IDSs to the public.




IDSs
      are
      securities consisting of Class A common stock and senior subordinated notes.
      Each IDS represents:




·
            one
                share of our Class A common stock;
                and




-
          13 -




·
            a
                13% senior subordinated note with a $7.50 principal
                amount.




The
      initial public offering closed on December 21, 2004. The offering consisted
      of:





·
            9,331,513
                IDSs, representing 9,331,513 shares of Class A common stock and
                $69,986,348 aggregate principal amount of senior subordinated notes,
                at an
                initial public offering price of $15.20 per IDS (comprised of $7.70
                allocated per share of Class A common stock and $7.50 allocated per
                senior
                subordinated note); and




·
            $8,500,000
                aggregate principal amount of senior subordinated notes sold separately
                (not in the form of IDSs).




A
      summary
      of the Class A common stock associated with the IDSs included in the public
      offering follows:


Shares
                  sold by existing equity investors
              
              
              7,828,224Shares
                  sold in conjunction with overallotment by exisiting equity investors
              
              
              672,513Shares
                  sold by the Company
              
              
              830,776Shares
                  sold in initial public offering
              
              
              9,331,513Shares
                  retained by existing equity investors and employees
              
              
              345,220Total
                  Class A outstanding
              
              
              9,676,733




Net
      proceeds from the 830,776 shares sold by the Company of $12,627,795 were
      allocated to the senior subordinated notes portion of the IDSs and the Class
      A
      common stock portion in amounts of $6,230,820 and $6,338,667, respectively,
      based on the fair value of these instruments.





Included
      in the 9,331,513 IDSs were 8,054,841 shares of Class A common stock and 502,463
      shares of Class B common stock, which represented our conversion from a Delaware
      limited liability company to a Delaware corporation and the conversion of our
      2,512,699 outstanding membership interests and 97,365 outstanding options to
      acquire membership interests. We recorded $60,411,308 to reflect the senior
      subordinated notes portion of the IDSs at fair value.





In
      conjunction with the public offering, the Company acquired Mid-Missouri in
      a
      business combination accounted for based on the purchase method of accounting
      under SFAS 141. The Company issued 856,234 shares of Class A common stock and
      53,413 shares of Class B common stock and assumed $16,714,140 in notes payable
      for a total purchase price of $30,540,774. As part of the acquisition, the
      Company also issued 5,527 IDS for the vesting of Mid-Missouri’s option
      plan.





Class
      A
      and Class B common stock carry identical voting rights. In conjunction with
      our
      public offering, we amended our articles of incorporation to prohibit
      participation in dividends and other distributions to our Class B holders.
      Each
      outstanding share of our common stock will carry one vote per share and all
      classes of common stock will vote as a single class on all matters presented
      to
      the stockholders for a vote.





Class
      B
      common stock will be exchangeable on a one-for-one basis for IDSs at the
      holder’s option, upon our liquidation or during specified period beginning
      December 21, 2006 subject to certain conditions. The conditions to such exchange
      include a financial test related to Adjusted EBITDA (as such term is defined
      in
      the indenture governing the notes). After December 21, 2009, the Adjusted EBITDA
      test will no longer apply and the Class B common stock will be exchangeable
      for
      IDSs at the option of the holder subject only to the satisfaction of the other
      conditions to such exchange.





The
      Class
      A and Class B common stock was recorded at the carryover basis of existing
      investor’s equity. We recorded a $21,056,979 reduction to retained earnings to
      eliminate deficiency in additional paid-in capital resulting from the
      conversion.




-
          14 -




At
      issuance, the Company discounted to present value the potential debt issuance
      on
      conversion of Class B common stock to IDSs for two years at a discount rate
      equal to the interest rate on the senior subordinated notes. We recorded
      $3,212,528 to reflect the initial allocation of Class B common stock to the
      potential debt issuance upon conversion to IDSs. At December 31, 2006 the senior
      subordinated notes payable associated with the Class B common stock is recorded
      at full value in the mezzanine section of the consolidated balance
      sheets.





As
      previously described, the holders of Class B common stock have the right to
      exchange their shares for IDSs. This exchange right is an embedded derivative
      feature that is required to be separately accounted for as a liability and
      measured at fair value. In connection with the issuance of Class B common stock,
      the Company has reflected the initial fair value of the exchange right as a
      long-term liability and reduction of retained earnings and additional paid
      in
      capital of $2,788,716. The derivative is not considered a hedge and thus does
      not qualify for hedge accounting under SFAS 133. The Company adjusts on a
      quarterly basis the derivative liability to fair value with a corresponding
      gain
      or loss recorded in other income (expenses) in the consolidated statements
      of
      income.





A
      summary
      of shares issued by activity is provided. The impact of conversion of options
      is
      included in our conversion and the purchase of Mid-Missouri. The repurchase
      and
      retirement of IDSs and Class B common stock shown below was associated with
      the
      tax impact of the cashless exercise of management options as part of the
      existing option plan. All options were valued at fair market when issued, no
      options were backdated, and all options were converted on December 21,
      2004.


Class
                  A
              
              Class
                  BConversion
                  to Delaware Corporation
              
              
              8,054,841
              
              
              502,463Acquisition
                  of Mid-Missouri
              
              
              856,234
              
              
              53,413Company
                  offered shares
              
              
              830,776
              
              
              -Repurchase
                  of shares
              
              
              (65,118
              )
              
              (11,205)Shares
                  outstanding
              
              
              9,676,733
              
              
              544,671





During
      2004, the Company incurred costs related to the offering. These costs were
      for
      the public offering, expenses of the selling shareholders and cost of obtaining
      the new credit facility and senior subordinated notes. In conjunction with
      the
      public offering, costs related to the debt were capitalized; costs related
      to
      the offering were charged to additional paid in capital; and the costs
      associated with the selling shareholders were expensed in the consolidated
      statements of income. The following table depicts all costs related to the
      public offering except the purchase of the interest rate cap which is accounted
      for separately:


Costs
                  related to long term notes payable and capitalized
              
              $
              8,060,735Costs
                  related to selling shareholders and expensed
              
              
              1,526,138Costs
                  related to the Company and charged to APIC
              
              
              143,232Total
                  costs
              
              $
              9,730,105




-
          15 -




After
      the
      underwriters’ discount of $1.0 million, net proceeds to the Company from the
      sale of IDSs and the senior subordinated notes sold separately were $20.1
      million. On December 21, 2004 the Company also obtained a new credit facility
      of
      $80.0 million. The net proceeds of the IPO, together with $6.4 million of cash
      on hand, and the new credit facility were used to:


Repay
                  existing indebtedness
              
              $
              92.0
                  millionPurchase
                  interest rate cap
              
              $
              4.7
                  millionFees
                  and expenses
              
              $
              8.7
                  millionRepurchase
                  IDSs and Class B common stock
              
              $
              1.1
                  million




Also
      as
      part of this offering, 8,500,737 IDSs were sold by certain selling shareholders
      of the Company, for which the Company received no proceeds.




**3.** **Acquisitions**




On
      July
      3, 2006, the Company acquired 100% of the outstanding common stock of MMeT
      through a merger of MMeT with MM Merger Corp, with MMeT as the surviving
      wholly-owned subsidiary. MMeT owns 100% of two subsidiaries, MMTI and MMTP.
      MMeT
      provides telecommunications solutions, including voice, data and Internet
      services, to residential and business customers in portions of Maine and extends
      Otelco into the New England market.




The
      acquisition agreement of MMeT was $37,750,000 plus transaction costs. The
      purchase price was $40,555,738, including transaction costs and the assumed
      notes payable of $24,347,299 which were paid off at closing. The excess of
      the
      purchase price over the market value of assets and liabilities is reflected
      as
      goodwill of $14,889,559. The goodwill related to the acquisition is not
      deductible for tax purposes. The aggregate consideration paid for the
      acquisition was as follows:


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




The
      allocation of the net purchase price for the MMeT acquisition was as
      follows:


July
                  3, 2006Cash
              
              $
              208,399Other
                  current assets
              
              
              3,867,982Property
                  and equipment
              
              
              20,180,158Intangible
                  assets
              
              
              10,700,606Goodwill
              
              
              14,750,314Other
                  assets
              
              
              2,367,842Current
                  liabilities
              
              
              (3,030,576
              )Other
                  liabilities
              
              
              (8,488,987
              )Purchase
                  price
              
              $
              40,555,738




Property
      and equipment have depreciation lives consistent with those shown in Note 5.
      The
      intangible assets at time of acquisition included regulated and unregulated
      customer based assets fair value at $8.8 million which had remaining lives
      of 25
      years and a non-competition agreement fair valued at $1.8 million which had
      a
      remaining life of 2 years.




-
          16 -




Concurrent
      with the closing of the acquisition, the Company entered into an amended and
      restated credit agreement, dated as of July 3, 2006, to amend and restate the
      credit agreement, dated as of December 21, 2004, by and among Otelco and the
      other credit parties to the agreement and General Electric Capital Corporation
      as a lender and agent for the lenders. The credit facilities under the amended
      and restated credit agreement are comprised of:




·
            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.




The
      term
      loan facility was fully drawn concurrent with closing. Interest rates applicable
      to the term loan and any revolving loans are an index rate plus 2.25% or LIBOR
      plus 3.25%. In addition, there are fees associated with undrawn revolver
      balances and certain annual fees. The Company has an $80 million interest rate
      cap through December 16, 2009 which caps LIBOR plus 3.25% margin at
      6.25%.




The
      acquisition was accounted for using the purchase method of accounting and
      accordingly, the accompanying financial statements include the financial
      position and results of operations from the date of acquisition.




The
      following unaudited pro forma information presents the combined results of
      operations of the Company as though the acquisition of MMeT had occurred at
      the
      beginning of the preceding year. The results include certain adjustments,
      including increased interest expense on notes payable and increased amortization
      expense related to intangible assets. The pro forma financial information does
      not necessarily reflect the results of operations had the acquisition been
      completed at the beginning of the period or those which may be obtained in
      the
      future.




**Unaudited**2005
              
              2006Revenues
              
              $
              69,053,427
              
              $
              69,118,553Income
                  from operations
              
              
              20,286,654
              
              
              19,090,260Net
                  income
              
              
              769,869
              
              
              290,936Basic
                  net income per share
              
              $
              0.08
              
              $
              0.03Diluted
                  net income per share
              
              $
              0.08
              
              $
              0.03




**4.** **Goodwill
      and Intangible Assets**




In
      June
      2001, FASB issued SFAS No. 142, *Goodwill
      and Other Intangible Assets* ,
      or SFAS
      142. SFAS 142 requires that in periods beginning after December 15, 2001,
      goodwill shall no longer be amortized. Instead, goodwill shall be tested for
      impairment. The Company adopted SFAS 142 in 2002 and ceased amortizing goodwill,
      and performs an annual impairment test to determine whether the carrying value
      of goodwill exceeds its fair market value. Based on the results of its
      impairment test, the Company does not believe that there is an impairment of
      the
      goodwill balance at December 31, 2005 or 2006, respectively.




Intangible
      assets are summarized as follows:




December
                  31, 2005
              
              December
                  31, 2006Carrying
                  Value
              
              AccumulatedAmortization
              
              NetValue
              
              Carrying
                  Value
              
              AccumulatedAmortization
              
              NetValueCustomer
                  relationships
              
              $
              1,800,000
              
              $
              (211,916
              )
              $
              1,588,084
              
              $
              10,553,440
              
              $
              (592,701
              )
              $
              9,960,739Non
                  competition
              
              
              -
              
              
              -
              
              
              -
              
              $
              1,840,090
              
              $
              (460,022
              )
              $
              1,380,068Total
              
              $
              1,800,000
              
              $
              (211,916
              )
              $
              1,588,084
              
              $
              12,393,530
              
              $
              (1,052,723
              )
              $
              11,340,807




-
          17 -




These
      intangible assets have a range of 2 to 25 years of useful lives. The following
      table presents current and expected amortization expense of the existing
      intangible assets as of December 31, 2006 for each of the following
      periods:




Aggregate
                amortization expense:For
                the year ended December 31, 2004
            
            $
            263,343For
                the year ended December 31, 2005
            
            
            462,865For
                the year ended December 31, 2006
            
            $
            1,254,014


Expected
        amortization expense for the years ending December 31,




2007
              
              $
              1,475,8972008
              
              
              1,015,8742009
              
              
              555,8522010
              
              
              555,8522011
              
              
              553,268Thereafter
              
              
              7,184,064Total
              
              $
              11,340,807




The
      Company utilized the Emerging Issues Task Force Issue No.95-3 (EITF 95-3) in
      2005 in accounting for a change in pension liability associated with its
      purchase of BTC. At the time of acquisition, a liability was established for
      the
      transition of BTC employees from a multi-employer pension plan to the Company’s
      401k plan. The exit cost was revalued by an outside actuary during 2005, leading
      to the business decision that it was not economically feasible to transfer
      the
      employees as originally planned. The liability was reversed and the offset
      was a
      reduction to goodwill associated with the BTC purchase since the amount actually
      incurred was less than the original liability.




-
          18 -




**5.** **Property
      and Equipment**




A
      summary
      of property and equipment from operations is shown as follows:


Estimated
              
              December
                  31,Life
              
              2005
              
              2006Land
              
              
              
              
              $
              772,399
              
              $
              850,257Building
                  and improvements
              
              
              20-40
              
              
              6,961,203
              
              
              8,480,551Telephone
                  equipment
              
              
              6-20
              
              
              92,122,002
              
              
              133,572,157Cable
                  television equipment
              
              
              7
              
              
              5,571,788
              
              
              5,706,003Furniture
                  and equipment
              
              
              8-14
              
              
              1,379,306
              
              
              1,996,877Vehicles
              
              
              7-9
              
              
              3,133,743
              
              
              3,895,058Computer
                  software equipment
              
              
              5-7
              
              
              2,950,946
              
              
              8,629,616Internet
                  equipment
              
              
              5
              
              
              2,146,725
              
              
              2,584,652Total
                  property, plant and equipment
              
              
              
              
              
              115,038,112
              
              
              165,715,171Accumulated
                  depreciation
              
              
              
              
              
              (70,482,501
              )
              
              (105,221,382
              )Net
                  property, plant and equipment
              
              
              
              
              $
              44,555,611
              
              $
              60,493,789




The
      Company’s composite depreciation rate for property and equipment was 12.1%,
      17.4% and 19.0% in 2004, 2005 and 2006, respectively. Depreciation expense
      from
      operations for the years ended December 31, 2004, 2005 and 2006 was $5,837,033,
      $7,748,687 and $9,527,319, respectively.




**6.** **Other
      Accounts Receivable**




Other
      accounts receivable consist of the following:


December
                  31,2005
              
              2006Carrier
                  access bills receivable
              
              $
              980,294
              
              $
              1,015,850Receivables
                  from Alabama Service Fund
              
              
              461,729
              
              
              462,338Other
                  miscellaneous
              
              
              40,148
              
              
              201,956$
              1,482,171
              
              $
              1,680,144





-
            19 -





**7.** **Investments**




Investments
      consist of the following:


December
                  31,2005
              
              2006Investment
                  in CoBank stock
              
              $
              106,049
              
              $
              659,978Investment
                  in Rural Telephone Bank (Class C stock)
              
              
              435,858
              
              
              -Rental
                  property
              
              
              550,700
              
              
              525,191Other
                  miscellaneous
              
              
              15,642
              
              
              55,081$
              1,108,249
              
              $
              1,240,250




The
      investments in CoBank stock and Rural Telephone Bank Class C stock are carried
      at historical cost due to no readily determinable fair value for those
      instruments being available. These investments are patronage certificates that
      represent ownership in the financial institutions (CoBank and Rural Telephone
      Bank) where the Company has, or in the past, had debt. These certificates yield
      dividends on an annual basis, and the investment is redeemed ratably subsequent
      to the repayment of the debt by the respective financial institution. In
      connection with the acquisition of MMeT, the purchase price allocation included
      investment in CoBank stock. Rural Telephone Bank stock was redeemed by the
      U.S.
      Department of Agriculture in 2006 as part of dissolving the bank leading to
      a
      one-time gain of $2.7 million recorded in other income in the consolidated
      statements of income.




**8.** **Long-Term
      Debt**




The
      Company amended and restated its term credit facility of December 21, 2004
      on
      July 3, 2006, increasing the balance due from $80,000,000 to $120,000,000 and
      changing its maturity for December 21, 2009 to July 3, 2011.




-
          20 -


Long-term
      notes payable consists of the following:


December
                  31,2005
              
              2006Term
                  credit facility, General Electric Captial Corporation;variable
                  interest rate of 6.53% and 8.62% at Decemberer 31, 2005
                  and2006,
                  respectively. There are no principal payments. Interestpayments
                  are due on the last day of each LIBOR period or at threemonth
                  intervals, whichever date comes first. Interest rate is
                  theindex
                  rate plus the applicable term loan index margin of 2.25%or
                  the applicable LIBOR rate plus the applicable term loan
                  LIBORmargin
                  of 3.5%. The unpaid balance will be due onJuly
                  3, 2011.
              
              $
              80,000,000
              
              $
              120,000,00013%
                  Senior subordinated notes, due 2019; interest paymentsare
                  due quarterly
              
              
              72,575,498
              
              
              72,575,49813%
                  Senior subordinated notes, held seperately, due 2019;interest
                  payments are due quarterly
              
              
              8,500,000
              
              
              8,500,000Total
                  long-term notes payable
              
              $
              161,075,498
              
              $
              201,075,498Less:
                  current portion
              
              
              -
              
              
              -Long-term
                  notes payable
              
              $
              161,075,498
              
              $
              201,075,498




Associated
      with these long-term notes payable, the Company wrote off $1.0 million in
      deferred financing costs associated with the payoff of the CoBank notes payable
      on December 21, 2004 and capitalized $8.1 million in deferred financing costs
      associated with the new credit facility and the 13% senior subordinated notes.
      On July 3, 2006 an additional $1,545,743 in deferred financing costs was
      capitalized. The credit facility is secured by the total assets of the
      Company.




The
      Company has a revolving credit facility of $15,000,000 available as of December
      21, 2004. There was no balance as of December 31, 2005 and 2006. The interest
      rate is the index rate plus a 2.25% margin or LIBOR rate, plus a 3.25% margin,
      whichever is applicable. The Company pays a commitment fee of 0.50% per annum,
      payable quarterly in arrears, on the unused portion of the revolver loan. The
      commitment fee expense was $117,500, and $95,104 for the years ended December
      31, 2005 and 2006, respectively.




Maturities
      of long-term debt for the next five years are as follows:


2007
              
              $
              -2008
              
              
              -2009
              
              
              -2010
              
              
              -2011
              
              
              120,000,000Thereafter
              
              
              81,075,498Total
              
              $
              201,075,498




The
      above
      schedule of maturities of long-term debt excludes the $4.1 million liquidation
      value of Class B common shares convertible into senior subordinated notes in
      the
      mezzanine section of consolidated balance sheet.




-
          21 -




The
      Company’s various long-term notes payable agreements contain certain financial
      covenants that require the maintenance of certain levels and ratios of working
      capital and equity to total assets as well as certain coverage ratios associated
      with debt service and fixed charges. As of December 31, 2005 and 2006,
      respectively, the Company was in compliance with all financial
      covenants.




The
      Company has no independent assets or operations separate from its operating
      subsidiaries. The guarantees of its senior subordinated notes by five of its
      seven operating subsidiaries are full and unconditional, joint and several.
      The
      operating subsidiaries have no independent long-term notes payable. There are
      no
      significant restrictions on the ability of the Company to obtain funds from
      its
      operating subsidiaries by dividend or loan. In 2004, the impact of the
      non-guarantor subsidiaries of the parent was minor. The following condensed
      consolidated financial information is provided for the guarantor entities for
      the years ended December 31, 2005 and 2006:




**Otelco
                    Inc.****Notes
                    To Consolidated Financial Statements****Condensed
                    Consolidating Balance Sheet****December
                    31, 2006**Guarantor
                
                Non-GuarantorParent
                
                Subsidiaries
                
                Subsidiaries
                
                Eliminations
                
                ConsolidatedASSETSCurrent
                    assetsCash
                    and cash equivalents
                
                $
                —
                
                $
                14,376,843
                
                $
                25,006
                
                $
                —
                
                $
                14,401,849Accounts
                    receivable, net
                
                
                21,028
                
                
                6,050,195
                
                
                1,038,770
                
                
                —
                
                
                7,109,993Materials
                    and supplies
                
                
                —
                
                
                847,045
                
                
                1,115,893
                
                
                —
                
                
                1,962,938Prepaid
                    and other current assets
                
                
                3,487
                
                
                1,006,316
                
                
                53,144
                
                
                —
                
                
                1,062,947Deferred
                    income taxes
                
                
                766,225
                
                
                —
                
                
                —
                
                
                —
                
                
                766,225Investments
                    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
                )
                
                25,303,952Property
                    and equipment, net
                
                
                —
                
                
                42,745,710
                
                
                17,748,079
                
                
                —
                
                
                60,493,789Goodwill
                
                
                —
                
                
                136,118,949
                
                
                (1,936,640
                )
                
                —
                
                
                134,182,309Intangibles
                    assets, net
                
                
                —
                
                
                7,689,851
                
                
                3,650,955
                
                
                —
                
                
                11,340,806Investments
                
                
                1,000
                
                
                914,093
                
                
                325,157
                
                
                —
                
                
                1,240,250Other
                    long-term assets
                
                
                10,589,917
                
                
                701,264
                
                
                —
                
                
                —
                
                
                11,291,181Total
                    assets
                
                $
                121,365,686
                
                $
                210,450,236
                
                $
                22,020,394
                
                $
                (109,984,029
                )
                $
                243,852,287LIABILITIES
                    AND STOCKHOLDERS' EQUITYCurrent
                    liabilitiesAccounts
                    payables and accrued expenses
                
                $
                4,924,962
                
                $
                3,081,839
                
                $
                1,233,497
                
                $
                —
                
                $
                9,240,298Intercompany
                  payables
                
                
                —
                
                
                15,495,558
                
                
                18,736,545
                
                
                (34,232,103
                )
                
                —Other
                    current liabilities
                
                
                —
                
                
                2,238,188
                
                
                79,009
                
                
                —
                
                
                2,317,197Total
                    current liabilities
                
                
                4,924,962
                
                
                20,815,585
                
                
                20,049,051
                
                
                (34,232,103
                )
                
                11,557,495Deferred
                    income taxes
                
                
                4,661,690
                
                
                17,544,383
                
                
                2,506,140
                
                
                —
                
                
                24,712,213Other
                    liabilities
                
                
                —
                
                
                187,037
                
                
                —
                
                
                —
                
                
                187,037Long-term
                    notes payables
                
                
                105,458,990
                
                
                95,616,508
                
                
                —
                
                
                —
                
                
                201,075,498Derivative
                    liability
                
                
                2,107,877
                
                
                —
                
                
                —
                
                
                —
                
                
                2,107,877Class
                    B common convertible to senior subordinated notes
                
                
                4,085,033
                
                
                —
                
                
                —
                
                
                —
                
                
                4,085,033Stockholders'
                    equity (deficit)
                
                
                127,134
                
                
                76,286,723
                
                
                (534,797
                )
                
                (75,751,926
                )
                
                127,134Total
                    liabilities and stockholders' equity (deficit)
                
                $
                121,365,686
                
                $
                210,450,236
                
                $
                22,020,394
                
                $
                (109,984,029
                )
                $
                243,852,287




-
          22 -




**Otelco
                      Inc.****Notes
                      to Consoldiated Financial Statements****Condensed
                      Consolidated Statement of Operations****For
                      the Year End December 31, 2006**Guarantor
                  
                  Non-GuarantorParent
                  
                  Subsidiaries
                  
                  Subsidiaries
                  
                  Eliminations
                  
                  ConsolidatedRevenue
                  
                  $
                  2,614,748
                  
                  $
                  52,518,931
                  
                  $
                  9,245,580
                  
                  $
                  (6,789,867
                  )
                  $
                  57,589,392Operating
                      expenses
                  
                  
                  (2,614,747
                  )
                  
                  (35,161,253
                  )
                  
                  (6,800,455
                  )
                  
                  6,789,867
                  
                  
                  (37,786,588
                  )Income
                      from operations
                  
                  
                  1
                  
                  
                  17,357,678
                  
                  
                  2,445,125
                  
                  
                  —
                  
                  
                  19,802,804Other
                      income (expense)
                  
                  
                  (13,993,334
                  )
                  
                  (3,074,764
                  )
                  
                  67,139
                  
                  
                  —
                  
                  
                  (17,000,959
                  )Earnings
                    from subsidiaries
                  
                  
                  9,510,843
                  
                  
                  —
                  
                  
                  —
                  
                  
                  (9,510,843
                  )
                  
                  —Income
                      before income tax and accretion expense
                  
                  
                  (4,482,490
                  )
                  
                  14,282,914
                  
                  
                  2,512,264
                  
                  
                  (9,510,843
                  )
                  
                  2,801,845Income
                      tax expense
                  
                  
                  6,073,066
                  
                  
                  (6,198,285
                  )
                  
                  (1,086,050
                  )
                  
                  —
                  
                  
                  (1,211,269
                  )Accretion
                      of class B common convertibleto
                      senior subordinated notes
                  
                  
                  (429,579
                  )
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  (429,579
                  )Net
                      income (loss) to common stockholders
                  
                  $
                  1,160,997
                  
                  $
                  8,084,629
                  
                  $
                  1,426,214
                  
                  $
                  (9,510,843
                  )
                  $
                  1,160,997


-
          23 -




**Otelco
                    Inc.****Notes
                    to Consolidated Financial Statements****Condensed
                    Consolidating Statement of Cash Flows****For
                    the Twelve Months Ended December 31, 2006**Guarantor
                
                Non-GuarantorParent
                
                Subsidiaries
                
                Subsidiaries
                
                Eliminations
                
                ConsolidatedCash
                    flows from operating activities:Net
                    income (loss)
                
                $
                1,160,997
                
                $
                8,084,629
                
                $
                1,426,214
                
                $
                (9,510,843
                )
                $
                1,160,997Adjustment
                    to reconcile net income (loss)to
                    cash flows from operating activities
                
                
                3,491,185
                
                
                6,401,396
                
                
                2,470,269
                
                
                —
                
                
                12,362,850Changes
                    in assets and liabilities, net ofassets
                    and liabilities acquired
                
                
                10,331,192
                
                
                (13,389,268
                )
                
                6,031,434
                
                
                —
                
                
                2,973,358Cash
                    flows from investing activities
                
                
                (1,148,696
                )
                
                (7,884,555
                )
                
                (9,960,205
                )
                
                555,738
                
                
                (18,437,718
                )Cash
                    flows from financing activities
                
                
                (4,879,573
                )
                
                15,652,702
                
                
                —
                
                
                —
                
                
                10,773,129Net
                    increase (decrease) in cash and cash equivalents
                
                
                8,955,105
                
                
                8,864,904
                
                
                (32,288
                )
                
                (8,955,105
                )
                
                8,832,616Cash
                    and cash equivalents, beginning of period
                
                
                —
                
                
                5,511,939
                
                
                57,294
                
                
                —
                
                
                5,569,233Cash
                    and cash equivalents, end of period
                
                $
                —
                
                $
                14,376,843
                
                $
                25,006
                
                $
                —
                
                $
                14,401,849




-
          24 -




**Otelco
                    Inc.****Notes
                    To Consolidated Financial Statements****Condensed
                    Consolidating Balance Sheet****December
                    31, 2005**Guarantor
                
                Non-GuarantorParent
                
                Subsidiaries
                
                Subsidiaries
                
                Eliminations
                
                ConsolidatedASSETSCurrent
                    assetsCash
                    and cash equivalents
                
                $
                —
                
                $
                5,511,939
                
                $
                57,294
                
                $
                —
                
                $
                5,569,233Accounts
                    receivable, net
                
                
                13,506
                
                
                4,062,305
                
                
                447,373
                
                
                —
                
                
                4,523,184Materials
                    and supplies
                
                
                —
                
                
                908,556
                
                
                24,305
                
                
                —
                
                
                932,861Prepaid
                    and other current assets
                
                
                799,499
                
                
                424,587
                
                
                29,761
                
                
                —
                
                
                1,253,847Deferred
                    income taxes
                
                
                872,675
                
                
                —
                
                
                —
                
                
                —
                
                
                872,675Investment
                  in
                  subsidiaries
                
                
                65,685,346
                
                
                —
                
                
                —
                
                
                (65,685,346
                )
                
                —Intercompany
                    receivables
                
                
                41,282,498
                
                
                —
                
                
                —
                
                
                (41,282,498
                )
                
                —Total
                    current assets
                
                
                108,653,524
                
                
                10,907,387
                
                
                558,733
                
                
                (106,967,844
                )
                
                13,151,800Property
                    and equipment, net
                
                
                —
                
                
                33,023,888
                
                
                11,531,723
                
                
                —
                
                
                44,555,611Goodwill
                
                
                —
                
                
                116,355,199
                
                
                3,076,794
                
                
                —
                
                
                119,431,993Intangibles
                    assets, net
                
                
                —
                
                
                (5
                )
                
                1,588,084
                
                
                —
                
                
                1,588,079Investments
                
                
                1,000
                
                
                1,090,719
                
                
                16,530
                
                
                —
                
                
                1,108,249Other
                    long-term assets
                
                
                12,290,338
                
                
                —
                
                
                —
                
                
                —
                
                
                12,290,338Total
                    assets
                
                $
                120,944,862
                
                $
                161,377,188
                
                $
                16,771,864
                
                $
                (106,967,844
                )
                $
                192,126,070LIABILITIES
                    AND STOCKHOLDERS' EQUITYCurrent
                    liabilitiesAccounts
                    payables and accrued expenses
                
                $
                171,396
                
                $
                2,556,960
                
                $
                70,599
                
                $
                —
                
                $
                2,798,955Intercompany
                  payables
                
                
                —
                
                
                24,776,573
                
                
                16,505,925
                
                
                (41,282,498
                )
                
                —Other
                    current liabilities
                
                
                —
                
                
                1,414,547
                
                
                3,657
                
                
                —
                
                
                1,418,204Total
                    current liabilities
                
                
                171,396
                
                
                28,748,080
                
                
                16,580,181
                
                
                (41,282,498
                )
                
                4,217,159Deferred
                    income taxes
                
                
                4,019,721
                
                
                9,173,477
                
                
                2,152,692
                
                
                —
                
                
                15,345,890Other
                    liabilities
                
                
                —
                
                
                192,768
                
                
                —
                
                
                —
                
                
                192,768Long-term
                    notes payables
                
                
                105,458,990
                
                
                55,616,508
                
                
                —
                
                
                —
                
                
                161,075,498Derivative
                    liability
                
                
                1,830,095
                
                
                —
                
                
                —
                
                
                —
                
                
                1,830,095Class
                    B common convertible to senior subordinated notes
                
                
                3,655,454
                
                
                —
                
                
                —
                
                
                —
                
                
                3,655,454Stockholders'
                    equity (deficit)
                
                
                5,809,206
                
                
                67,646,355
                
                
                (1,961,009
                )
                
                (65,685,346
                )
                
                5,809,206Total
                    liabilities and stockholders' equity (deficit)
                
                $
                120,944,862
                
                $
                161,377,188
                
                $
                16,771,864
                
                $
                (106,967,844
                )
                $
                192,126,070




-
          25 -




**Otelco
                    Inc.****Notes
                    to Consoldiated Financial Statements****Condensed
                    Consolidated Statement of Operations****For
                    the Year End December 31, 2005**Guarantor
                
                Non-GuarantorParent
                
                Subsidiaries
                
                Subsidiaries
                
                Eliminations
                
                ConsolidatedRevenue
                
                $
                2,563,989
                
                $
                43,270,099
                
                $
                6,884,179
                
                $
                (5,746,045
                )
                $
                46,972,222Operating
                    expenses
                
                
                (2,808,682
                )
                
                (26,460,876
                )
                
                (4,010,080
                )
                
                5,746,045
                
                
                (27,533,593
                )Income
                    from operations
                
                
                (244,693
                )
                
                16,809,223
                
                
                2,874,099
                
                
                —
                
                
                19,438,629Other
                    income (expense)
                
                
                (12,722,108
                )
                
                (3,473,876
                )
                
                3,540
                
                
                —
                
                
                (16,192,444
                )Earnings
                  from subsidiaries
                
                
                10,391,026
                
                
                —
                
                
                —
                
                
                (10,391,026
                )
                
                —Income
                    before income tax and accretion expense
                
                
                (2,575,775
                )
                
                13,335,347
                
                
                2,877,639
                
                
                (10,391,026
                )
                
                3,246,185Income
                    tax expense
                
                
                4,810,285
                
                
                (4,694,211
                )
                
                (1,127,749
                )
                
                —
                
                
                (1,011,675
                )Accretion
                    of class B common convertibleto
                    senior subordinated notes
                
                
                (442,926
                )
                
                —
                
                
                —
                
                
                —
                
                
                (442,926
                )Net
                    income (loss) to common stockholders
                
                $
                1,791,584
                
                $
                8,641,136
                
                $
                1,749,890
                
                $
                (10,391,026
                )
                $
                1,791,584




-
          26 -




**Otelco
                    Inc.****Notes
                    to Consolidated Financial Statements****Condensed
                    Consolidating Statement of Cash Flows****For
                    the Twelve Months Ended December 31,
                    2005**Guarantor
                
                Non-GuarantorParent
                
                Subsidiaries
                
                Subsidiaries
                
                Eliminations
                
                ConsolidatedCash
                    flows from operating activities:Net
                    income (loss)
                
                $
                1,791,584
                
                $
                8,641,136
                
                $
                1,749,890
                
                $
                (10,391,026
                )
                $
                1,791,584Adjustment
                    to reconcile net income (loss)to
                    cash flows from operating activities
                
                
                3,049,429
                
                
                7,158,418
                
                
                1,317,027
                
                
                —
                
                
                11,524,874Changes
                    in assets and liabilities, net ofassets
                    and liabilities acquired
                
                
                12,696,724
                
                
                (12,492,317
                )
                
                (2,575,440
                )
                
                —
                
                
                (2,371,033
                )Cash
                    flows from investing activities
                
                
                —
                
                
                (2,973,404
                )
                
                (662,623
                )
                
                —
                
                
                (3,636,027
                )Cash
                    flows from financing activities
                
                
                (7,146,711
                )
                
                1
                
                
                —
                
                
                —
                
                
                (7,146,710
                )Net
                    increase (decrease) in cash and cash equivalents
                
                
                10,391,026
                
                
                333,834
                
                
                (171,146
                )
                
                (10,391,026
                )
                
                162,688Cash
                    and cash equivalents, beginning of period
                
                
                —
                
                
                5,178,105
                
                
                228,440
                
                
                —
                
                
                5,406,545Cash
                    and cash equivalents, end of period
                
                $
                —
                
                $
                5,511,939
                
                $
                57,294
                
                $
                —
                
                $
                5,569,233




-
          27 -




**9.** **Income
      Taxes**




Deferred
      income taxes are provided for certain temporary differences principally due
      to
      the use of accelerated depreciation for income tax purposes. Such deferred
      taxes
      are credited to income as the related temporary differences
      reverse.




Income
      tax expense for the years ended December 31, 2004, 2005 and 2006 is summarized
      below.


For
                  the years ended2004
              
              2005
              
              2006Federal
                  incomeCurrent
              
              $
              777,594
              
              $
              (940,443
              )
              $
              134,177Deferred
              
              
              2,657,080
              
              
              1,789,674
              
              
              819,045Total
                  federal tax expense
              
              
              3,434,674
              
              
              849,231
              
              
              953,222State
                  incomeCurrent
              
              
              126,280
              
              
              27,085
              
              
              13,559Deferred
              
              
              385,671
              
              
              135,359
              
              
              244,488Total
                  state tax expense
              
              
              511,951
              
              
              162,444
              
              
              258,047Total
                  tax expense
              
              $
              3,946,625
              
              $
              1,011,675
              
              $
              1,211,269




Total
      income tax expense from operations was different than that computed by applying
      U.S. federal income tax rates to income from operations before income taxes
      for
      the years ended December 31, 2004, 2005 and 2006. The reasons for the
      differences are presented below.


For
                  the years ended December2004
              
              2005
              
              2006Federal
                  income tax at statutory rate
              
              
              34
              %
              
              
              34
              %
              
              
              34
              %Federal
                  income tax (provision) at statutory rate
              
              $
              3,425,104
              
              
              $
              1,103,704
              
              
              $
              952,626New
                  deductible IPO cost
              
              
              518,887
              
              
              
              -
              
              
              
              -Change
                  in fair value of derivative
              
              
              -
              
              
              
              (325,931
              )
              
              
              97,900State
                  income tax (provision), net offederal
                  income tax effects
              
              
              337,888
              
              
              
              79,568
              
              
              
              170,311Other
              
              
              (335,254
              )
              
              
              154,334
              
              
              
              (9,568
              )Provision
                  for income taxes
              
              $
              3,946,625
              
              
              $
              1,011,675
              
              
              $
              1,211,269Effective
                  income tax rate
              
              
              39.2
              %
              
              
              31.1
              %
              
              
              43.2
              %




The
      Company purchased MMHC as described in Note 2, which resulted in incremental
      net
      deferred tax liabilities of approximately $2.2 million that are included in
      the
      consolidated balance sheet at December 31, 2004.




As
      of
      December 31, 2006, the Company has state net operating loss carry-forwards
      of
      approximately $1.9 million for tax purposes, which will be available to offset
      future taxable income. If not used, these carry-forwards will expire between
      2020 and 2026.




In
      connection with the acquisition of MMeT, the purchase price allocation included
      deferred tax liabilities of $8,488,987.




-
          28 -




The
      tax
      effects of temporary differences that give rise to significant portions of
      the
      deferred tax assets and deferred tax liabilities as of December 31, 2005 and
      2006 are presented below:


December
                  31,2005
              
              2006Deferred
                  tax liabilities:Amortization
              
              $
              (9,297,930
              )
              $
              (12,457,601
              )Depreciation
              
              $
              (6,047,960
              )
              $
              (8,876,879
              )Amortized
                  intangibles
              
              
              -
              
              
              (3,377,733
              )Total
                  deferred tax liabilities
              
              $
              (15,345,890
              )
              $
              (24,712,213
              )Deferred
                  tax assets:Deferred
                  Compensation
              
              $
              160,724
              
              $
              228,348Amortized
                  intangibles
              
              
              353,249
              
              
              -State
                  net operating loss carryforwards
              
              
              92,093
              
              
              97,274Advance
                  payments
              
              
              199,133
              
              
              260,514Other
              
              
              67,476
              
              
              180,089Total
                  deferred tax assets
              
              $
              872,675
              
              $
              766,225Net
                  deferred tax liability
              
              $
              (14,473,215
              )
              $
              (23,945,988
              )




The
      income tax receivable of $749,591 at December 31, 2005 results primarily from
      the carryback of the Company’s projected 2005 federal net operating loss of $2.1
      million to 2003 and 2004.




**10.** **Employee
      Benefit Program**




Employees
      of OTC, HTC, BMTC and MMHC participate in a defined contribution savings plan
      under Section 401(k) of the Internal Revenue Code, which is sponsored by the
      Company. The terms of the plan provide for an elective contribution from
      employees up to 15% of their annual compensation not to exceed $13,000, $14,000
      and $15,000 for 2004, 2005, and 2006, respectively. The Company matches the
      employee’s contribution up to 6% of the employee’s annual compensation. In
      addition, the Company made a discretionary contribution for each employee equal
      to 1.7 % of their annual compensation for 2003 and 2004. No discretionary
      contribution was made in 2005 or 2006. For the years ended December 31, 2004,
      2005 and 2006, the total expense associated with this plan was $265,366,
      $391,418 and $385,718, respectively.




The
      employees of BTC participate in a multi-employer Retirement and Security Program
      (“RSP”) as a defined benefit plan and a Savings Plan (“SP”) provided through the
      National Telecommunications Cooperative Association. Participation in the RSP
      requires a minimum contribution of 1% from the employees. The Company
      contributes 15.1% for every participating employee. SP is a defined contribution
      savings plan under Section 401(k) of the Internal Revenue Code to which the
      Company contributes 1% of pre-tax employee earnings and the employee can make
      additional voluntary contributions as desired with no additional Company
      contribution. For the years ended December 31, 2004, 2005 and 2006 the total
      expense associated with these plans was $95,721, $108,007 and $102,641,
      respectively.




Employees
      of MMeT participate in a defined contribution savings plan under Section 401(k)
      of the Internal Revenue code, which is sponsored by the Company. Terms of the
      plan provide for an elective contribution from employees not to exceed $15,000
      for 2006. The Company matches the employee’s contribution up to 4.5% of the
      employee’s annual compensation. For the period ending July 3, 2006 to December
      31, 2006, the total expense associated with this plan was $65,062.




**11.** **Income
      per Common Share and Potential Common Share**




Basic
      income per common share is computed by dividing net income by the
      weighted-average number of shares outstanding for the period. Diluted income
      per
      common share reflects the potential dilution that could occur if the Class
      B
      common stock were exercised into IDSs. Class B common stock is convertible
      on a
      one-for-one basis into IDSs, each of which includes a Class A common share.
      For
      periods prior to our conversion, membership units were treated on an as if
      converted basis into Class A and Class B common shares.




-
          29 -




A
      reconciliation of the common shares for the Company’s basic and diluted income
      per common share calculation is as follows:


For
                  the years ended December2004
              
              2005
              
              2006Weighted
                  average common shares at conversion
              
              
              8,103,720
              
              
              9,676,733
              
              
              9,676,733Effect
                  of dilutive securities
              
              
              503,735
              
              
              544,671
              
              
              544,671Weighted-average
                  common sharesand
                  potential common shares-diluted
              
              
              8,607,455
              
              
              10,221,404
              
              
              10,221,404Net
                  income available to commonshareholders
              
              $
              6,113,863
              
              $
              1,791,584
              
              $
              1,160,997Net
                  income per basic share
              
              $
              0.75
              
              $
              0.19
              
              $
              0.12Net
                  income available to commonstockholders
              
              $
              6,113,863
              
              $
              1,791,584
              
              $
              1,160,997Accretion
                  expense of Class B commonconvertible
                  to senior subordinated notes
              
              
              13,348
              
              
              442,926
              
              
              429,579Change
                  in fair value of derivative
              
              
              -
              
              
              (958,621
              )
              
              277,782Net
                  income available for diluted shares
              
              $
              6,127,211
              
              $
              1,275,889
              
              $
              1,868,358Net
                  income per diluted share
              
              $
              0.71
              
              $
              0.12
              
              $
              0.18




**12.** **Selected
      Quarterly Financial Data (unaudited)**


**First**
              
              **Second**
              
              **Third**
              
              **Fourth****Quarter**
              
              **Quarter**
              
              **Quarter**
              
              **Quarter**Fiscal
                  2005:Revenue
              
              $
              12,027,093
              
              $
              11,442,526
              
              $
              11,659,317
              
              $
              11,843,287Operating
                  income
              
              
              5,122,128
              
              
              4,871,447
              
              
              4,747,123
              
              
              4,697,931Net
                  income
              
              
              829,212
              
              
              616,359
              
              
              496,256
              
              
              (150,243
              )Net
                  income per share, basic
              
              
              0.09
              
              
              0.06
              
              
              0.05
              
              
              (0.02
              )Net
                  income per share, diluted
              
              
              0.06
              
              
              0.04
              
              
              0.03
              
              
              (0.01
              )Fiscal
                  2006:Revenue
              
              $
              11,513,397
              
              $
              11,557,813
              
              $
              17,136,972
              
              $
              17,381,212Operating
                  income
              
              
              4,699,029
              
              
              4,880,216
              
              
              5,139,472
              
              
              5,084,087Net
                  income
              
              
              244,592
              
              
              2,053,571
              
              
              (364,761
              )
              
              (772,405
              )Net
                  income per share, basic
              
              
              0.03
              
              
              0.21
              
              
              (0.04
              )
              
              (0.08
              )Net
                  income per share, diluted
              
              
              0.02
              
              
              0.18
              
              
              (0.03
              )
              
              (0.01
              )




**13.** **Option-based
      Compensation**




1999
      Option Plan




In
      1999
      the Company adopted an option plan that covers senior management and consultants
      of the Company. At the time our initial public offering on December 21, 2004,
      under the terms of the option plan, a change in ownership caused the options
      to
      fully vest. All options were converted to IDSs on a cashless exercise basis
      as
      allowed in the option plan and the plan was terminated. As of December 31,
      2004,
      there were no outstanding options.




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          30 -




Number
                  of
              
              Weighted
                  Average Exerciseunits
              
              PriceOutstanding
                  at December 31, 2000
              
              
              54,865
              
              $
              10.00Granted
              
              
              13,500
              
              
              25.20Exercised
              
              
              -
              
              
              -Outstanding
                  at December 31, 2001
              
              
              68,365
              
              
              13.00Granted
              
              
              14,500
              
              
              28.00Exercised
              
              
              -
              
              
              -Outstanding
                  at December 31, 2002
              
              
              82,865
              
              
              15.63Granted
              
              
              14,500
              
              
              36.00Exercised
              
              
              -
              
              
              -Outstanding
                  at December 31, 2003
              
              
              97,365
              
              $
              18.66Granted
              
              
              -
              
              
              -Exercised
                  12/21/04
              
              
              (97,365
              )
              $
              18.66Outstanding
                  at December 31, 2004
              
              
              -
              
              $
              -




The
      Company accounts for the option-based compensation plan based on variable
      accounting in accordance with APB 25. The option plan included a cashless
      exercise feature that allowed option holders to provide payment upon exercise
      of
      vested options in the form of cash, units or options for units. As a result
      of
      applying variable accounting, the Company recognized compensation expense net
      of
      tax in the amount of $908,343 for the period ended 2004 based on the estimated
      fair market value of a membership unit at each period.




The
      estimated fair market value of a membership unit for the year ended December
      31,
      2004 was determined based on using market comparable valuations for public
      companies in the same industry as the Company. Based on these comparable
      companies and their enterprise value to EBITDA multiples at each period, the
      Company calculated its enterprise value based on a range of enterprise value
      to
      EBITDA multiples supported by the comparable company metrics after taking into
      account an illiquidity discount. From enterprise value, the Company calculated
      the resulting equity value and value per unit to come up with a range of values
      per unit. The Company chose an estimated fair market value per unit from with
      this range.




**14.** **Related
      Party Transactions**




Two
      of
      the Company’s subsidiaries had advisory agreements with CEA Management Corp. and
      Seaport Capital, LLC (together “Seaport”). Prior to December 21, 2004 affiliates
      of Seaport owned approximately 68% of the Company. Under the agreements, Seaport
      furnished professional advisory services. This agreement was terminated on
      December 21, 2004 in conjunction with the initial public offering.




For
      the
      year ended December 31, 2004, Otelco Holdings paid Seaport $973,118 in advisory
      fees.




**15.** **Revenue
      Concentrations**




Revenues
      for interstate access services are based on reimbursement of costs and an
      allowed rate of return. Revenues of this nature are received from NECA in the
      form of monthly settlements. Such revenues amounted to 20.2%, 20.9%, and 17.7%
      of the Company’s total revenues from operations for the years ended December 31,
      2004, 2005 and 2006, respectively.




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          31 -




**16.** **Commitments
      and Contingencies**




From
      time
      to time, we may be involved in various claims, legal action and regulatory
      proceedings incidental to and in the ordinary course of business, including
      administrative hearings of the APSC, MPSC and MPUC relating primarily to rate
      making. Currently, none of the legal proceedings are expected to have a material
      adverse effect on our business.




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          32 -




PART
      IV




**Item
      15.**  **Exhibits,
      Financial Statement Schedules**




**(a)(1)** **Financial** **Statements**




Report
      of
      Independent Certified Public Accountants




Consolidated
      Balance Sheets




Consolidated
      Statements of Operations




Consolidated
      Statements of Changes in Stockholders’ Equity




Consolidated
      Statements of Cash Flow




Notes
      to
      Consolidated Financial Statements




**(a)(2)    Financial
      Statement Schedules**




None




**(a)(3)    Exhibits**




**Exhibit
                No.**
            
            **Description**2.1
            
            Agreement
                and Plan of Merger between MM Merger Corp. and Mid-Maine Communications,
                Inc. dated April 10, 2006 (filed as Exhibit 2.1 to the company’s current
                report on Form 8-K filed on April 10, 2006 and incorporated herein
                by
                reference)3.1
            
            Certificate
                of Incorporation of Otelco Inc. (filed as Exhibit 3.1 to the company’s
                Annual Report on Form 10-K for the year ended December 31, 2004 and
                incorporated herein by reference)3.2
            
            Third
                Amended and Restated By-laws of Otelco Inc.(filed as Exhibit 3.2
                to the
                company’s Annual Report on Form 10-K for the year ended December 31, 2004
                and incorporated herein by reference)4.1
            
            Indenture,
                dated as of December 21, 2004, among Otelco Inc., each subsidiary
                listed
                on the signature pages thereto and Wells Fargo Bank, National Association,
                as trustee, relating to the 13% Senior Subordinated Notes dues 2019
                (filed
                as Exhibit 4.1 to the company’s Annual Report on Form 10-K for the year
                ended December 31, 2004 and incorporated herein by
                reference)4.2
            
            Supplemental
              Indenture,
              dated as of July 3, 2006, by and among Mid-Maine Communications, Inc.,
              Mid-Maine TelPlus, the Existing Guarantors listed on the signature
              pages
              thereto, and Wells Fargo Bank, NA, as trustee (filed as Exhibit 10.2
              to the company’s Current Report on Form 8-K filed on July 5,
              2006 and incorporated herein by reference)4.3
            
            Form
                of 13% Senior Subordinated Note due 2019 (included in Exhibit
                4.1)4.4
            
            Investor
                Rights Agreement, dated December 21, 2004, among Otelco Inc., Seaport
                Capital Partners II, L.P., Seaport Investments, LLC, CEA Capital
                Partners
                USA, L.P., CEA Capital Partners USA CI, L.P., BancBoston Ventures
                Inc.,
                Mid−Missouri Parent LLC, Michael D. Weaver, Sean Reilly, Kevin Reilly
                and
                Sternberg Consulting Inc. (filed as Exhibit 4.3 to the company’s Annual
                Report on Form 10-K for the year ended December 31, 2004 and incorporated
                herein by reference)4.5
            
            Form
                of stock certificate for Class A common stock (filed as Exhibit 4.4
                to
                Amendment No. 4 to Registration Statement on Form S−1 (file no.
                333−115341) and incorporated herein by reference)4.6
            
            Form
                of global Income Deposit Security (filed as Exhibit 4.5 to Amendment
                No. 4
                to Registration Statement on Form S−1 (file no. 333−115341) and
                incorporated herein by reference)10.1
            
            Amended
                and Restated Credit Agreement, dated July 3, 2006, among Otelco Inc.,
                as
                Borrower, the other credit parties signatory thereto, as Credit Parties,
                the Lenders signatory thereto from time to time, as Lenders and General
                Electric Capital Corporation, as Administrative Agent and Lender
                and
                CoBank, ACB, as Syndication Agent and Lender (filed as Exhibit 10.1
                to the
                company’s Current Report on Form 8-K filed on July 5, 2006 and
                incorporated herein by reference)10.2
            
            Amended
                and Restated Employment Agreement, dated as of June 21, 2004, between
                Otelco Telephone LLC and Michael D. Weaver (filed as Exhibit 10.2
                to
                Amendment No. 1 to Registration Statement on Form S−1 (file no.
                333−115341) and incorporated herein by
                reference)*




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          33 -




10.3
              
              Employment
                  Agreement, dated as of June 9, 2004, between Otelco Telephone LLC
                  and
                  Curtis L. Garner, Jr. (filed as Exhibit 10.3 to Amendment No. 1
                  to
                  Registration Statement on Form S−1 (file no. 333−115341) and incorporated
                  herein by reference)*10.4
              
              Long-term
                  Incentive Compensation Plan approved May 12, 2005 (filed as Exhibit
                  10.4
                  to the company’s Quarterly Report on Form 10-Q for the quarter ended June
                  30, 2005 and incorporated herein by reference)*10.5
              
              Employment
                  Agreement, dated as of July 3, 2006, between Mid-Maine and Nicholas
                  A.
                  Winchester (filed as Exhibit 10.3 to the company’s Current Report on Form
                  8-K filed on July 5, 2006 and incorporated herein by
                  reference)*10.6
              
              Employment
                Agreement,
                dated as of August 24, 2006, between Otelco Inc. and Dennis Andrews
                (filed
                as Exhibit 10.1 to the company’s Current Report on Form 8-K filed
                on August 29, 2006 and incorporated herein by
                reference)*10.7
              
              Employment
                Agreement, dated as of November 15, 2006, between Otelco Inc. and
                Gary B.
                Romig (filed as Exhibit 10.1 to the company’s Current Report on Form 8-K
                filed on November 15, 2006 and incorporated herein by
                reference)*10.8
              
              Employment
                Agreement,
                dated as of November 15, 2006, between Otelco Inc. and Jerry C. Boles
                (filed as Exhibit 10.2 to the company’s Current Report on Form 8-K filed
                on November 15, 2006 and incorporated herein by
                reference)*12.1
              
              Computation
                of Ratio of Earnings to Fixed Charges (filed as Exhibit 12.1 to the
                Company's Annual Report on Form 10-K filed on March 15, 2007 and
                incorporated herein by reference)21.1
              
              List
                  of material subsidiaries of Otelco Inc. (filed as Exhibit 21.1
                  to the
                  company's Annual Report on Form 10-K/A filed on June 14, 2007 and
                  incorporated herein by reference)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 Officer31.2
              
              Certificate
                  pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities
                  Exchange
                  Act of 1934 of the Chief Financial Officer32.1
              
              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
                  Officer32.2
              
              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





*
      Management contract or compensatory plan or arrangement





-
            34 -





**Signatures**




Pursuant
        to the requirements of Section 13 or 15(d) of the Securities Exchange Act
        of 1934, the registrant has duly caused this report to be signed on its behalf
        by the undersigned, thereunto duly authorized, in the City of Oneonta, State
        of
        Alabama, on the 25th day
        of
        June, 2007.


OTELCO INC.BY:
            /S/ MICHAEL
              D. WEAVERMichael
                D. Weaver
              President
                and Chief Executive Officer




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            35 -